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07/02/2011

For the week 6/27-7/1

[Posted 7:00 AM ET]

Wall Street, Washington and Europe

Talk about a relief rally. Stocks had their best week in two years, up 5%+ across the board, as Greece’s parliament stepped back from the brink and approved a new austerity program, as well as the tools to implement it, thus allowing the troika of the European Union, European Central Bank and International Monetary Fund to fork over the next $17 billion in cash that is part of Greece Bailout I. Greece will now be able to pay its debts through August. But, yes, this is kicking Greece’s inevitable default down the road. Come September, the troika will examine Greece’s books and determine whether it deserves even more cash. At this point it is also assumed the EU, ECB and IMF will have approved Greece Bailout II, which would seek to fund Greece through 2013, after which a new EU financial stability mechanism would take over the following year.

So the Ponzi scheme continues, but if you ever doubted global markets would have crashed had parliament not approved the austerity measures, think again about how far we then rallied and double it to the downside.

There are many details to be hashed out over the coming weeks and months, particularly with regard to Bailout II, which depending on how you measure it would provide Greece with another $120 billion plus.

But one detail being left out of the financial calculations is the attitude of the public in places like Germany, Finland and Austria, who are more than a bit tired of seeing their tax dollars going to help out what has proved to be a totally worthless and corrupt nation of lazy, spoiled, deceitful people. What I will continue to focus on, though, is Greece being part of the Balkans, as history has shown the region to be explosive in ways that were then crippling for the rest of the continent and beyond. Over time the sporadic protests in Greece will turn increasingly violent. What happens then is anyone’s guess given a fragile and unpopular ruling government.

For now, one of the options being worked out has French and German banks accepting a kind of ‘Brady bonds’ plan, this having been used to bail out Latin America over 20 years ago.

The banks would voluntarily extend half of the debt maturing over the coming three years into new 30-year bonds at 5.5% interest; the other half being refunded in cash (30%) and a zero coupon type security (20%) that would have a kicker if Greece’s economy grows beyond a target of, say, 2%.

But in the end, it’s still about Greece being able to enforce its austerity measures and collect taxes, and if the economy craters even worse than projected, needless to say tax revenue will also fall woefully short. And Greece is dependent on the proceeds from its massive privatization program of everything from the power monopoly to beaches.

Editorial / The Economist

“On June 29, with tear gas billowing around the rioters outside the Greek parliament, politicians in principle backed a new punishing austerity plan. As The Economist went to press, they were expected to implement the austerity plan in a second vote. That would open the way for the euro-zone countries to approve a second rescue package for Greece likely to be worth around $170 billion [Ed. including the remains of the first bailout].

“Alas, Greece’s austerity plan looks doomed to fail. It does too little to prevent the epic folly of Greece’s railways and other ruinous schemes. It will screw down too hard on ordinary Greeks, with new taxes, spending cuts and a rushed privatization scheme. And it will almost certainly condemn Greece to recession, strife and an eventual debt default….

“Making Greece’s economy work better would mean far greater changes to a dysfunctional state. That means defeating the unions, important allies for the politicians. It would also mean dismantling the system of patronage, on which politicians thrive. Whether you are after a government job, a license, or a favorable tax assessment, politicians are essential allies. Greece needs transparent and impartial rules, but politicians are not keen to limit the scope for dishing out favors. Anyway, Greece’s politicians reckon that so long as they pretend to fix their country, the EU will hand over the money whether the plan succeeds or not. After all, who wants to pull the plug on Greece if that risks contagion across the euro zone?

“Every quarter, before the euro zone countries and the IMF release the next tranche of aid, they must decide whether Greece is on track. Every quarter, it will become clearer that the answer is no.”

---

Turning to the U.S., aside from the massive rally in equities, there were some legitimate positive surprises in the form of far better than expected manufacturing data from the Chicago Purchasing Managers report and the national ISM reading for June. So these flew in the face of those concerned the “soft patch” was about to become something more. [I fall in the camp that the second half will disappoint.] Consumer spending for May, after all, was unchanged, and undoubtedly influenced by high oil prices. If we head back to $100 a barrel and $4.00 at the pump, that mindset will return. And the housing data remains putrid.

But a couple of things are coming up of particular note. First, next Friday’s employment report for June. If we see another number in the 50-60,000 range, like last time, that won’t be good. And then on July 11, Alcoa starts us off with earnings season and the succeeding three weeks will be packed with valuable information on the future direction of the economy and corporations’ plans for hiring.

The big item, however, potentially far bigger than Greece, is the Aug. 2 deadline for the U.S. debt ceiling. In discussing this, President Obama could not have been more obnoxious at his press conference on Wednesday, once again returning to his pathetic attack the rich spiel. 

At the same time, though, some of my fellow Republicans have to understand that any authentic deficit reduction program must contain some revenue enhancers as well as entitlement reform. Oklahoma Republican Senator Tom Coburn and Connecticut Independent Joe Lieberman introduced a plan, for example, that would raise the Medicare eligibility age to 67 from 65 and increase monthly premiums some and, as you’d expect, they were lambasted by both sides of the political aisle. 

And you know how last week I quoted North Dakota Democratic Senator Kent Conrad, who said any real deficit-reduction plan needs to be in the $4 trillion neighborhood over ten years, not $2 trillion, to be realistic? All I’m seeing the past few days is a plan that would come in under $2 trillion. This won’t work. I’m telling you…get ready for the Crash of 2012. 

And to those Republicans who think they can jerk around with the debt ceiling deadline, from what I understand, on Aug. 3, government workers and Social Security recipients would be among those who stop getting paid. Go ahead and say, ‘So what?’ Just be prepared for the consequences in terms of the overall economy. I’m all for reducing the government rolls further, and Social Security must be part of the solution, but Republicans will not enhance their 2012 chances if a large portion of the electorate stops getting their checks.

The thing is, our situation is so increasingly hopeless that unless our president gets his act together, as well as the congressional leadership, we’re doomed…pure and simple.

Consider the following from Lawrence Lindsey in an op-ed for the Wall Street Journal.

In discussing how existing deficit projections could skyrocket further…

“There are at least three major reasons for concern.

“First, a normalization of interest rates would upend any budgetary deal if and when one should occur. At present, the average cost of Treasury borrowing is 2.5%. The average over the last two decades was 5.7%. Should we ramp up to the higher number, annual interest expenses would be roughly $420 billion higher in 2014 and $700 billion higher in 2020….

“The second reason for concern is that official growth forecasts are much higher than what the academic consensus believes we should expect after a financial crisis. That consensus holds that economies tend to return to trend growth of about 2.5%, without ever recapturing what was lost in the downturn.

“But the president’s budget of February 2011 projects economic growth of 4% in 2012, 4.5% in 2013, and 4.2% in 2014. That budget also estimates that the 10-year budget cost of missing the growth estimate by just one point for one year is $750 billion. So, if we just grow at trend those three years, we will miss the president’s forecast by a cumulative 5.2 percentage points and – using the numbers provided in his budget – incur additional debt of $4 trillion….

“Third, it is increasingly clear that the long-run cost estimates of ObamaCare were well short of the mark because of the incentive employers will have under that plan to end private coverage and put employees on the public system. Health and Human Services Secretary Kathleen Sebelius has already issued 1,400 waivers from the act’s regulations for employers as large as McDonald’s to stop them from dumping their employees’ coverage.

“But a recent McKinsey survey, for example, found that 30% of employers with plans will likely take advantage of the system, with half of the more knowledgeable ones planning to do so. If this survey proves correct, the extra bill for taxpayers would be roughly $74 billion in 2014 rising to $85 billion in 2019, thanks to the subsidies provided to individuals and families purchasing coverage in the government’s insurance exchanges….

“Only serious long-term spending reduction in the entitlement area can begin to address the nation’s deficit and debt problems. It should no longer be credible for our elected officials to hide the need for entitlement reforms behind rosy economic and budgetary assumptions. And while we should all hope for a deal that cuts spending and raises the debt ceiling to avoid a possible default, bondholders should be under no illusions.”

Oh, it’s going to get interesting these next few weeks.   If the White House and Congress adopt a credible deficit-reduction plan, the markets will have every reason to rally further. That would be great. I’m not short.

But if this plan isn’t credible, with zero hope of the issue being readdressed until 2013, I’ve told you what we have to look forward to.

And if the debt ceiling is allowed to expire without action, if you are leaving it to the likes of Republican strategist Grover Norquist to tell you how markets would react, you’re nuts.

---

A note on commodities. I’ve been saying that the diversified CRB Index would finish the year below the 12/31/10 closing figure of 332.80 and we ended the quarter at 338.05 and finished the week at 336.71. Oil was among the items leading a rebound the past five days as the Greece crisis ebbed and the dollar weakened.

But wheat and corn were among those hit hard. Just to back up. Last May 28 in this space I discussed the dire crop report from the Agriculture Department, as prices were soaring, and added, “I would just emphasize that the picture can change quickly.” I then noted an anecdote from my farmer friends in the Oklahoma Panhandle, who in discussing the severe drought there, told me, “Yes it is dry but if you can believe it the wheat is not as bad as they are saying.” That was in an area that I told you had received a ¼-inch of rain in over 200 days before Karalee told me of two decent rains they had received in May.

Well, wouldn’t you know but this week the same folks at the Dept. of Agriculture told us that farmers planted 92 million acres of corn, 2% more than projected, and that stockpiles as of June 1 were 12% higher than forecast. Farmers also planted 3% more acres of spring wheat than projected, and inventories of same are now 5% more than initially estimated. So wheat tumbled, and corn outright crashed. Since reaching a record $8.00 a bushel on June 10, corn is down over 25% as it closed the week under $6.00.

I also saw this week that the Russian wheat crop should be normal this year after last year’s catastrophic drought. In 2010, Russia harvested 61 million tons but this year is now projected to reach 82-86 million, though here, as in the U.S., it’s still mostly about July’s weather.

Finally, regarding “quantitative easing, part deux,” or QE2, the program sure pumped asset prices since it was announced by Federal Reserve Chairman Ben Bernanke in Jackson Hole, Wyoming, end of last August. The prime purpose was to ensure the U.S. economy didn’t tip into “deflation,” and prices indeed rose. But in terms of helping housing recover it was an abysmal failure, not that I ever thought it would be a success, because while mortgage rates remained at historic lows, banks had pulled in their horns, big time, in terms of approving new mortgages, and for those even looking to refinance, there was the none too small issue of 25% or more of homeowners being underwater And, in actuality, the 10-year Treasury rose from 2.50% when Bernanke announced his program to nearly 3.20% by June 30; this despite the fact that the Fed purchased anywhere from 80% to 85% of the net Treasury issuance, according to various estimates by Wall Street economists. Now that QE2 is over, who is going to soak up a projected $94 billion each month?

True, the Fed will continue to buy Treasurys with the proceeds from the mortgage-backed and Treasury debt it owns, but that is estimated to result in about $15 billion worth of Fed buying a month, not the $75 billion or so it would be given earlier percentages.

Editorial / Washington Post

“(It) is hard to avoid the conclusion that this was, in the end, a holding action. QE2 was not so much an asset-buying program as a time-buying program – time for America’s households, firms and governments to deleverage and heal as best they could. QE2 is over and unlikely to be repeated; Mr. Bernanke was not kidding last August when he said, ‘Central bankers alone cannot solve the world’s problems.’ Meanwhile, the prospects of much more fiscal stimulus seem doubtful. For better or worse, the U.S. economy may be on its own.”

Street Bytes

--What a difference a week makes. The broad averages had their best week in two years, July 2009, as the Dow Jones rose 5.4% to 12582, the S&P 500 advanced 5.6% and Nasdaq soared 6.1% to 2816.

--U.S. Treasury Yields

6-mo. 0.10% 2-yr. 0.47% 10-yr. 3.18% 30-yr. 4.39%

Bonds tumbled, yields rose, on the ending of QE2 as well as the stronger than expected manufacturing data. The 10-year rose 31 basis points (0.31%) in its sharpest weekly rise since August 2009.

As an aside, Treasury Secretary Tim Geithner is now expected to leave after budget negotiations are wrapped up.

--The sexual assault case against Dominique Strauss-Kahn is falling apart as investigators question the credibility of the housekeeper on a number of levels, stemming in part from recorded conversations with a big drug dealer. There was, according to all the evidence, a sexual encounter, but the circumstances of it are now in doubt. DSK was released from house arrest and the entire case is in jeopardy. 

Ironically, Christine Lagarde was named the first female head of the International Monetary Fund this week, replacing DSK. It’s now her job to tackle Europe’s debt crisis. DSK’s political future in France is up in the air.

--Retiring Kansas City Federal Reserve Bank president Thomas Hoenig blasted Congress and U.S. monetary policy in a speech in Des Moines on Thursday. In part:

“We have this leveraged economy that we have used to build our growth over the last 10 to 15 years that we cannot carry forward,” adding that the longer interest rates are low, the more the economy will suffer when rates inevitably rise.

“You create certain fragilities in the economy that when you do have to reverse your position, in terms of interest rates, whenever that is, it becomes an increasing risk of shock to the economy, whether it’s your concerns about the stock market tanking or values of land being affected. When you artificially hold down interest rates or you artificially bring short-term tools to solve long-term problems, you get worse long-term problems.” [USA TODAY]

Hoenig also blasted Congress for not pursuing the recommendations of the Simpson-Bowles deficit reduction plan.

--China Premier Wen Jiabao said inflation would be capped at 5% as a result of the government’s tightening measures, though the full year target of 4% does not seem doable. As long as inflation has peaked, as would appear to be the case, China will escape any massive unrest. 

But the June PMI reading of 50.9 is yet further evidence of a slowdown here, while many are voicing concern about the regional banking sector and non-performing loans. Because of the health of the central government’s finances, I do not see this as a big issue, barring the slowdown tipping into something worse.

--Japan’s industrial production figure for May rose a strong 5.7% from April, the fastest pace in 50 years, actually, though this is because of the rebound off the March earthquake/tsunami lows. Nonetheless, business is increasingly optimistic when it comes to a third quarter rebound.

--U.S. auto sales in June were at their slowest pace in 12 months and generally disappointing as GM and Ford said sales rose 10% for the month, missing expectations, while Toyota’s and Honda’s each fell 21%. Nissan recorded an 11% gain, less than projected, while Chrysler topped forecasts, up 30%. The Japanese automakers were still severely impacted by the March 11 aftermath.

--Two weeks ago, the International Energy Agency, in conjunction with some leading politicians and central bankers, released 60 billion barrels of oil, or 2 million a day for 30 days, in an effort to bring oil prices down as a stimulus to the global economy. Oil then dropped to about $90 on West Texas Intermediate and today is back to $95. So the entire Free World is thinking, ‘What was that all about?’ In the U.S., falling inventories of crude and gasoline added price support the past week.

--The New York Times had an extensive report on the natural gas industry, written by Ian Urbina, which started out:

“Natural gas companies have been placing enormous bets on the wells they are drilling, saying they will deliver big profits and provide a vast new source of energy for the United States.

“But the gas may not be as easy and cheap to extract from shale formations deep underground as the companies are saying, according to hundreds of industry e-mails and internal documents and an analysis of data from thousands of wells.”

In a nutshell, “There is undoubtedly a vast amount of gas in the formations. The question remains how affordably it can be extracted….

“Also, the amount of gas produced by many of the successful wells is falling much faster than initially predicted by energy companies, making it more difficult for them to turn a profit over the long term.”

Urbina quotes an e-mail from a geologist at leading nat-gas producer Chesapeake thusly.

“Our engineers here project these wells out to 20-30 years of production and in my mind that has yet to be proven as viable. In fact I’m quite skeptical of it myself when you see the % decline in the first year of production.”

Chesapeake’s CEO, Aubrey McClendon, remains steadfastly bullish on the future for natural gas and his company, specifically, which is constantly under a microscope for the outrageous pay packages McClendon has awarded himself. For his part, he told employees “The Times story was obviously motivated by an anti-natural gas agenda.”

--Meanwhile, the Washington Post had a piece by Loennig, Stephens and Crites titled “Obama’s focus on visiting clean-tech companies raises questions.” As in major conflicts of interests.

“With trips that began two months after he took office, President Obama has devoted more than half of his out-of-town private-business visits to promoting a single industry: clean technology, which the president says will lead the nation back to economic prosperity….

“Obama’s unwavering focus has helped him fulfill a campaign pledge to push clean tech, from solar energy and wind power to electric vehicles. But it also has come with political exposure: By emphasizing a sector in which the risks are high, the president has prompted questions on Capitol Hill and from industry about the wisdom of his singular strategy and his political ties to some of the companies chosen for federal attention.

“The oil and gas industry, for example, has invested billions in energy innovation and job creation and could benefit from similar presidential attention, said Martin J. Durbin, executive vice president of the American Petroleum Institute.

“ ‘He’s missing an incredible opportunity he has to join with us to make a difference in economic growth, job creation, national security and clean technology,’ Durbin said. ‘If you went and added up the number of jobs at these clean-tech companies he visited, in all honesty, I think you’re going to find a very modest number of jobs.’”

One company under the microscope is Solyndra, a Silicon Valley solar company that ran into financial trouble after receiving a $535 million federal loan guarantee. Obama visited Solyndra’s factory in May 2020, “only weeks after it became public that independent auditors had questioned whether it could remain a ‘going concern.’”

One of the venture capitalists associated with Solyndra, George Kaiser, is a leading Obama fundraiser.

--The White House and Senate Democrats reached consensus on passing long-sought trade deals with South Korea, Panama and Colombia, but now it’s key Republicans who oppose them because the Democrats insist on extending an existing federal program to retrain American workers who lose jobs to foreign competition. Some Republicans balk at the added spending, now up to $575 million annually for this particular program.  Senate Republican leader Mitch McConnell said, “I’ve never voted against a trade agreement before, but if the administration were to embed a (Trade Adjustment Assistance) into the Korea trade agreement, I would be compelled to vote against it. I think this is making it needlessly complicated and contentious.”

These trade deals must be signed. It’s moments like these I wish we had one-party rule. [Half-kidding.]

--Back to Europe, one of those nations receiving a bailout, Portugal, reported that its budget deficit for the first quarter was 8.7% of GDP, which while less than the 9.2% recorded in the fourth quarter, is substantially higher than the 5.9% Portugal must reach by end of the year to satisfy its IMF and ECB requirements.

And in Britain, hundreds of thousands of union members walked out on Thursday, protesting cuts to their pensions, among other things, but it was largely peaceful. Succeeding demonstrations over the summer and fall may not be so.

--According to a New York Times/CBS News poll, nine in 10 Americans say homeownership is an important part of the American dream, but in assessing blame for the crash, 42% blame lenders, while 29% blame regulators. Only a handful of respondents blame the borrowers themselves for taking loans they could not afford. Also, only 36% approve of the job President Obama is doing to help the housing market, while 45% disapprove.

One-quarter say their home is underwater, which jives with national surveys using actual data.

--Speaking of housing, owing to Bank of America’s ill-timed acquisition of Countrywide Financial Corp. in 2008, BofA agreed to pay $8.5 billion to settle claims by investors, including asset managers PIMCO, Met-Life and BlackRock, that purchased mortgage-backed securities from Countrywide.

But BofA also has to swallow an additional $5.5 billion to buy back other defective mortgage securities in the future, plus it has taken a $6.6 billion hit for all manner of other reasons, including previous lawsuits, foreclosures and mortgage write-offs. The company now expects to report a loss of nearly $9 billion in the second quarter after the $20.6 billion in charges in CEO Brian Moynihan’s bid to finally put the Countrywide debacle behind him. [Moynihan had nothing to do with the acquisition, it being the responsibility of former CEO Ken Lewis.]

--As noted the past few weeks, trading volumes are meager on Wall Street, which is leading to layoffs. Firms from Credit Suisse, to Barclays, to Goldman Sachs are cutting back, including on the investment banking side. Most of the layoff announcements thus far only number in the hundreds, but unless the volume picks up (the average of which is down 30% from 2010’s second quarter), the figures will grow into the thousands. That said I suspect we’ll see a good pick up come August and September for a number of geopolitical reasons.

--According to various studies, workers are now paying about 24% of their health-care costs at larger companies. As one research executive told the Wall Street Journal, though, “Employers are concerned with the rising cost and they are aware at some point that they can’t just keep pushing this off to employees.” More and more companies are focusing on wellness and nutrition programs, but only 35% of these have seen an actual return on their investment.

--For only the second time in the last decade, California enacted a budget on time, this one $131 billion that erased a $25 billion deficit through adoption of a rosier revenue forecast. Should the state’s economy thus not grow as much as projected, further cuts to things like prisons and the universities will be required, as well as a cut in the school year. All state services, from education to health care, have already been cut severely.

--Lloyds Banking Group announced it would eliminate 15,000 jobs over two and a half years, which is on top of 28,000 previous cuts since 2008 as a result of the acquisition of HBOS. The unions are furious, but CEO Antonio Horta-Osorio said, “This bank is losing money. We have to get this bank supporting the UK economy, we have to get this bank profitable and we have to repay taxpayer support.”

--News Corp. paid $580 million for MySpace back in 2005. This week it sold it to advertising network Specific Media for $35 million. Not a great investment, as MySpace was left in the dust the past few years by Facebook and others. Today MySpace has a reported 80 million users vs. Facebook’s 700 million around the world. But one of the investors in Specific Media who will be at the forefront of the re-launch of MySpace is Justin Timberlake. Do not discount his star power and ability to singlehandedly bring the site back into the conversation.

--After just four years, and a major commitment, Campbell Soup is exiting Russia, with a spokesman saying, “Though Russia remains an attractive potential growth market, the results of the business have fallen short of original expectations.” Instead, the company looks to expand in emerging markets such as China.

What’s interesting is that Campbell did extensive research in Russia, conducting interviews with 10,000 consumers, but as one analyst put it, “Here, a housewife who cannot cook soup is not a proper housewife.” Campbell, however, positioned itself not as a facilitator in cooking homemade soups, but rather as a substitute. That was a mistake.

--I have said that those shorting China stocks, specifically those outfits peddling the research to hedge funds that then benefit from the negative reports, will one day get their comeuppance. Not all China stocks are frauds.

And so it was this week that short-selling firm Muddy Waters LLC and its founder, Carson Block, announced a bet against Shanghai-based Spreadtrum Communications Inc. The designer of chips for wireless devices plunged from about $12.50 to $8.50, before essentially finishing the day unchanged. Two days later, Spreadtrum was $15.75 and then finished the week at $17.20. Other analysts came to the defense of the Chinese company. Then Carson Block himself said, “If Spreadtrum has fantastic answers and everything is the way it should be and we misinterpreted these points as red flags, then the company’s transparency has improved and the stock is going to go up.”

--As reported by the Journal, “Some crane operators and related trades in New York City make upwards of $500,000 a year in pay, overtime and benefits, according to the Real Estate Board of New York, which represents the construction industry.

“The group says that some of the workers pulling down the biggest salaries at the World Trade Center aren’t even operating equipment. It says about 50 workers are in unnecessary positions, such as relief crane operators, mandated by the union contract.

“ ‘If you want to be paid for seven or eight hours, you should work for seven or eight hours,’ said Steve Spinola, president of the Real Estate Board.’”

It seems that while non-union workers make up 40% of the construction work force in this area, up from 10% during the 1970s, all crane operators are union members. While the hourly pay and benefits is $82 (vs. $39 in Washington, D.C.), “the real reason New York crane operators earn such big salaries is overtime and benefits. A relief crane operator working 56 hours of overtime per week for 52 weeks will earn $332,667 in overtime and $159,053 in overtime benefits at the World Trade Center.”

Builders pay a 30% premium for union labor.

--Brad K. wanted to make sure I noted the passing of George C. Ballas Sr., a Houston entrepreneur who invented one of the great time and physical labor savers, the Weed Eater, or weed whacker. Ballas got the idea for it while sitting in a car wash. As noted in an AP obituary:

“(Ballas) wondered whether the idea of spinning bristles, like the ones cleaning his car, could be applied to trimming grass and weeds in areas a lawnmower couldn’t reach.”

When I’m in a car wash, I’m wondering whether I’m really getting the premium undercarriage service I paid up for.

Ballas sold his invention to Emerson Electric for an undisclosed sum. He was 85.

--Finally, NYU professor and noted economist, Nouriel Roubini, “Dr. Doom,” is known for his wild parties and last Saturday, he threw yet another at his Greenwich Village mega-penthouse. As the New York Post’s Page Six reported:

“Roubini invited a crowd of models, lawyers and creative types to his pad, which is big enough to hold a world economic summit and boasts a new, giant Jacuzzi on the roof terrace. Guests greeted by an upbeat-looking Roubini at the 14-hour bash – which started at noon with a dip in the model-packed Jacuzzi…”

Had to stop there…this is just too much for me to process, never having received an invite. But good for you, Nouriel!

Foreign Affairs

Afghanistan: Ten days ago, President Obama gave a speech to the American people, laying out his strategy to withdraw 10,000 of the 33,000 surge force in Afghanistan by year end, with the other 23,000 coming out by September 2012, just in time for the election. He never spoke of “victory,” however, and in his press conference this week reiterated that it was, in the classical sense, never part of his goal.

But he did speak as if it was “Mission Accomplished,” yet in one week we had a horrific bombing at a hospital near the Afghan-Pakistan border that claimed at least 60 lives (and didn’t get the attention it deserved), as well as an inexcusable infiltration of the hilltop Intercontinental Hotel in Kabul by 8 Taliban militants who proceeded to kill at least 11 civilians, before NATO’s helicopter gunships were called in to end the siege.

The Afghan security forces at the hotel performed pathetically, by all accounts, with one witness, a former Afghan police captain, telling the Los Angeles Times that he saw some Afghan forces flee the hotel once fighting erupted.

For his part, President Hamid Karzai praised the Afghan response without mentioning that NATO and other foreign troops were the ones who ended it!

Back to the hospital bombing, this occurred in the very border region that Gen. David Petraeus (who this week was confirmed to take over for Leon Panetta at CIA, Panetta moving over to Defense to replace Robert Gates) had established as his next goal for pacification with the surge forces. That mission now looks increasingly dubious, through no fault of Petraeus’, as Obama takes away the general’s troops that he had urged be allowed to stay on until the mission is truly accomplished, at least through fighting season of 2012. 

Meanwhile, a Pew Research Center poll shows that 44% say Obama’s withdrawal plans are “about right,” while only 15% say they are “too hasty.” Republicans themselves are split 50/50 on the issue.

In other Afghan tidbits, there are reports that an alliance of warlords is forming against Karzai, and the Central Bank chief fled to the United States, where he has a home, saying his life was in danger for investigating fraud, including the case of Kabul Bank, which collapsed and was bailed out by the Afghan government last year.

Robert Kagan / The Weekly Standard…on Obama’s statement in his June 22 speech, “America, it is time to focus on nation building here at home.”

“The argument that the cost of the surge in Afghanistan undermines our ability to address our domestic problems is especially risible coming from this president. It would be one thing if cutting back in Afghanistan were part of a sweeping deficit-reduction plan where domestic programs and entitlements were getting the axe, too. It would still be a mistake. But at least it would be consistent.

“There is something appallingly cynical, however, in this president suggesting that the American fiscal crisis required overruling his military leadership and ordering a more rapid and therefore more dangerous drawdown in Afghanistan – this, after two and a half years of proposing spending on domestic programs that dwarfs the cost of the surge….

“Which brings us to the Republicans. They have not all covered themselves in glory this week. Some have been stalwarts in opposing the president’s plan, and for the right reasons. But some have been cautious, evidently worrying about the same polls that Obama is worrying about….

“The point is that 2012 will be an election about the economy, but it will also be an election about national security. The American people may tell pollsters they want to focus on domestic problems – they have said that many times in the past, as well – but they will also be looking to see who can be a reliable and strong commander in chief. Me-too-ing Obama or, worse, trying to outflank him on the dovish left will not serve any candidate well in the general election. National security until now has been a Republican advantage. To squander that advantage in these times of global danger would be worse than a blunder. It would be a crime.”

Bret Stephens / Wall Street Journal

“(Obama’s strategy) signals that the United States, like Britain before it, is a waning power. In his speech last week, Mr. Obama waxed eloquent on the point that ‘what sets America apart is not solely our power – it is the principles upon which our union was founded.’ Very true. But a nation that abandons to the Taliban those it was once committed to protect shows that it lacks power and principle alike.

“At the end of ‘Charlie Wilson’s War,’ the film quotes the late congressman saying: ‘These things happened. They were glorious and they changed the world…And then we f---ed up the endgame.’ To watch President Obama’s Afghan policy unfold is to understand exactly what Wilson meant.”

Iraq: Victory? 15 U.S. soldiers lost their lives here in June, the most for any single month since June 2009. Three were killed this week near the Iran border in a rocket attack on a U.S. base. Two things are happening of major concern. Moqtada al-Sadr is back and continues to warn of a return to violence if America prolongs its stay in Iraq beyond year end. This week Sadr also appeared to endorse suicide attacks.

The other concern is Iran’s increasing influence in terms of weaponry and training of Shiite militia groups by Iranian Revolutionary Guard Corps special forces. The rockets U.S. troops are coming under fire from are highly sophisticated and can only come from Iran. [Saturday’s New York Times, though, reports that Iraqis are beginning to fight back against the Iranian infiltration.]

Separately, Iraq’s two leading politicians, Prime Minister Nouri al-Maliki and Ayad Allawi, were to have been sharing power after the tight election of 15 months ago, but they still haven’t agreed on who should run the critical Interior and Defense Ministries. Allawi hasn’t even shown up in parliament once, as reported by the Times.

Iran: As rumors continue to swirl that President Ahmadinejad is on his last legs and will be forced to resign soon, understand this is not a good thing because it means the hardline clerics are winning the day.

And this week Iranian state television showed pictures of subterranean ballistic missile launch facilities in a clear show of force designed to blunt any thought of a Western or Israeli attack on Iran’s suspected nuclear weapons sites. State television said the launch facilities are linked to a central command unit. A leader in the Revolutionary Guard said, “[With] these facilities we are certain that we can confront unequal enemies and defend the Islamic Republic of Iran…The range of our missiles has been designed on the basis of the distance to the Zionist regime and U.S. bases in the Persian Gulf region.”

British Foreign Secretary William Hague told parliament on Wednesday:

“Iran has also been carrying out covert ballistic missile tests and rocket launches, including testing missiles capable of delivering a nuclear payload in contravention of U.N. [Security Council] Resolution 1929, and it has announced that it intends to triple its capacity to produce 20% enriched uranium.” Iran denied the claim. [Global Security Newswire]

For its part, Saudi Arabia weighed in. “We cannot live in a situation where Iran has nuclear weapons and we don’t. It’s as simple as that,” said a Kingdom official. “If Iran develops a nuclear weapon, that will be unacceptable to us and we will have to follow suit.”

Lastly, Iran continues to pressure Afghanistan and Pakistan to abandon any military alliances with the U.S.

Pakistan: Speaking of the latter, Islamabad ordered the CIA out of a desert airbase that the agency had been using to launch drone attacks against al Qaeda and the Taliban, taking the U.S. by surprise, though an official told the London Times, “operations against terrorists in Pakistan are continuing.” The CIA has been shifting some of them to Afghanistan, though any attack from there on Pakistani soil violates its sovereignty as relations deteriorate between our two governments.

Lebanon: It was February 2005 that former Lebanese prime minister Rafik Hariri was assassinated in a massive car bomb in Beirut that killed 22 others. Two months later I traveled to Beirut to see for myself what had happened and my hotel room at the Phoenicia overlooked the bomb crater. A year ago I traveled back there. Suffice it to say, few around the world have written more of the place than I have, save for my friend at the Daily Star, Michael Young, the preeminent expert on all things Lebanon.

So this week, finally, the U.N-authorized Special Tribunal for Lebanon, that has been investigating the murder lo these many years, fingered four men, all with ties to Hizbullah, though at last word the indictment remains sealed and thus further details are not out in the public sphere. [The Daily Star has nonetheless identified the four individuals.]

Rafik Hariri’s son, Saad, himself a former prime minister but now living in Paris because of an assassination plot against him should he return to Lebanon, issued this statement:

“Today, we witness together a distinctive historic moment in the political, judicial, security and moral life of Lebanon. I feel the beats in my heart embracing the hearts of all Lebanese who defended the cause of justice and refused to bargain on the blood of martyrs.

“We chose not to revenge or resent.   We relied on God and started a costly and long path towards justice and truth through a tribunal of international character with Lebanese judges that would provide evidence and give the accused, whoever they are, a chance to defend themselves.

“This progress in the course of justice and the Special Tribunal is for all the Lebanese without any exception, and it should be a turning point in the history of fighting organized political crime in Lebanon and the Arab world, just as we want it to be a focal point for uniting the Lebanese in the face of the factors of division and the attempts to disrupt the principles of national conciliation.

“The Lebanese government is invited politically, nationally, legally and morally, to implement Lebanon’s obligations towards the Special Tribunal for Lebanon and nobody has an excuse to escape from this responsibility.

“Lebanon has triumphed for international justice, and justice has triumphed for the souls of the martyrs. At this moment, I can only look towards the spirit of my father, martyr Prime Minister Rafik Hariri, and the spirits of the martyrs who fought for Lebanon, and tell them that your blood did not flow in vain, and that the truth has begun to see the light and justice is coming.”

Alas, few believe justice will ever be delivered. The four have had years to flee and will never be arrested and brought to trial. The new Lebanese government is dominated by Hizbullah, 18 of 30 cabinet seats.

There is also no doubt that the indictment will only heighten sectarian tensions in Lebanon, and at any moment, whether tomorrow or a year from now, Lebanon could blow. The situation is only worsened by events in Syria, as well as Iran’s power struggle, both of whom are Hizbullah’s benefactors.

Lebanon has 30 days to execute the arrest warrants. If the suspects are not arrested in that time, the STL will make public the indictment and summon the suspects to appear before the court.

This story has now officially entered a new phase and Hizbullah is in many respects increasingly cornered, but, again, it is also the ruling party in government. To be continued…

Libya: France said it has directly supplied weapons to Libyan rebel groups, becoming the first member of the NATO alliance to admit it is doing so. Britain then said it was supplying the rebels with non-lethal aid, such as flak jackets. Russia is complaining the French move goes against the UN Security Council resolution authorizing the use of force against Col. Gaddafi but not direct aid.

Syria: The London Times reported that Islamists have been attacking Syrian security forces in at least four towns under the guise of avenging protesters’ deaths, adding further uncertainty to the issue of just who would replace Bashar Assad if he stepped down or was overthrown. Friday saw the biggest demonstrations across the country since the uprising began. Security forces killed at least 20, according to reports.

Egypt: More than 1,000 were injured in renewed protests around Tahrir Square in Cairo, the worst violence since February. Protesters are demanding an end to emergency law and removal of the interior minister as the military is now seen as an obstacle to progress, rather than an ally of the pro-democracy forces. Needless to say, Egypt’s economy is in a shambles, tourism has dried up, and there are increasing reports that the Bedouin, who number some 400,000, are running roughshod in the Sinai.

At least a government study revealed that 67% of the people believe their country should maintain the peace treaty with Israel.

On the Israeli front, the Palestinians confirmed they will take the statehood issue to the U.N. General Assembly in September and base their claim on pre-1967 lines. This will not be good.

Russia: In a bizarre move, billionaire Mikhail Prokhorov (currently owner of the New Jersey Nets NBA team) took over the reins of the pro-business Right Cause party with plans to expand direct elections and encourage foreign investment, as well as to perhaps become prime minister. 

“Let’s forget the word ‘opposition,’” Prokhorov said. “This is a word linked to marginal parties that have lost their connection to reality long ago.

“There should be two parties of power, while there is only one now. We are only trying to group our forces, but United Russia has challenged us, and we should accept the challenge.”

The Moscow Times reported that Prokhorov addressed the party congress without notes and laid out a balanced platform. Earlier, Prokhorov had suggested he would run the party like he does his business empire, with an iron fist. According to Forbes, he has an estimated net worth of $18 billion and is the third richest in Russia.

Prokhorov also said that former Yukos CEO Mikhail Khodorkovsky and his associate, Platon Lebedev, should be freed on parole.

There are reports that President Medvedev will use Right Cause as his party base.

China: Friday represented the 90th anniversary of the Communist Party and President Hu Jintao warned his country faces severe “growing pains,” singling out the threat posed by corruption, though saying nothing about any sweeping political changes.

Hu said the anti-graft campaign was the key to “winning or losing public support and the life or death of the party.”

“Corruption will cost the party the support and trust of the people,” he said.

In a sign of the new China, the day before the country formally launched its high-speed rail line linking Beijing and Shanghai. The project was finished a year ahead of schedule.

Meanwhile, one of China’s most prominent dissidents, Hu Jia, was released after serving 3 ½ years on subversion charges. Hu’s release follows by days the freeing from detention of artist and activist Ai Weiwei, though it is far too early to say if the government is going to relax its policies on dissent.

Venezuela: I haven’t wanted to comment on President Hugo Chavez’s absence and trip to Cuba for medical attention because I just didn’t know the facts. Then this week, Chavez first appeared in video form on Cuban state television and appeared to be well as he chatted with buddy Fidel Castro.

Two days later Chavez told his people he is fighting cancer, discovered when he had emergency surgery for a pelvic abscess. Chavez admitted he made “a fundamental error” in not getting regular medical checkups.

The thing is, Chavez gave no idea how much longer he will be in Cuba, assuming he recovers, and there is growing debate whether he should delegate power to his vice president. The next presidential vote is February 2012.

It also turns out that it was Castro, according to reports, who forced Chavez to get a closer look into his ailments, which began with a bum knee.

So maybe we can give Castro his own reality show diagnosing crackpot leaders, of which the world is full of ‘em. Next up for Fidel…Robert Mugabe.

Denmark: This nation became the first in the European Union to restore 24-hour customs control, assuming parliament approves, as the uproar over rampant immigration grows, with France and Italy also gaining the right to institute temporary closings in an emergency. The whole point of the EU was to allow the free movements of goods and services across borders and that is now being called increasingly into question.

Random Musings

--New York Democratic Gov. Andrew Cuomo picked up a huge victory when New York’s Republican-led state Senate voted to permit same-sex marriages. Opponents vow to go on the attack as New York became the sixth state (along with the District of Columbia) to make the move to allow gay weddings. National polls continue to show increasing support for the cause.

From an economic standpoint, New York stands to pick up $180 million in economic activity as folks travel from all over to exchange their vows in the state and the Big Apple.

You also saw a flurry of stories in the wake of New York’s move and Cuomo’s victory of the governor suddenly appearing at the top of the list of 2016 Democratic presidential candidates. Just remember you heard it here first, long ago.

Frederic Dicker / New York Post…long-time follower of Albany:

“Gov. Andrew Cuomo completed his first legislative session Friday night with yet another breathtaking display of political skillfulness, the likes of which hasn’t been seen in the Capitol for at least 50 years.

“Cuomo’s first six months in office have, in fact, been nothing short of a grand slam of remarkable successes: a revolutionary redefinition of marriage, closing a $10 billion budget deficit without new taxes, a game-changing local property-tax cap, and sweeping ethics reform.

“This represents for long-dysfunctional Albany – once a national beacon of governmental creativity but in recent years a national joke – a tour de force of what leadership should be about.

“ ‘The governor has stolen all of the issues,’ conceded former state GOP Chairman William Powers, who helped orchestrate the defeat of Cuomo’s father, Gov. Mario Cuomo, in 1994.”

--At the start of the week, Michele Bachmann was riding the wave of a Des Moines Register poll that had her neck and neck with Mitt Romney, a statistical dead heat at 23-22. So Bachmann picked a good time to formally launch her campaign. 

But having been to Winterset, Iowa, four years ago to see the birthplace of John Wayne, I, too, was a bit mystified that Bachmann would confuse Winterset with Waterloo, Iowa, in evoking Wayne’s name. It just leaves you shaking your heard. On a different topic, Bachmann commented on the wishes of the media as they attempt to compare herself to Sarah Palin: “They want to see two girls come together and have a mud wrestling fight. And I’m not going to give it to ‘em.”

Seeing as I’m going to be at the Iowa State Fair next month, why not? It would be the perfect venue. Maybe before the tractor pull.

But Bachmann has her supporters.

Andrea Tantaros / New York Daily News

“Honesty is the best policy. In life, in politics and particularly when you’re running for President of the United States.

“It’s what the public craves and expects, and it’s a big reason why Rep. Michele Bachmann is quickly becoming the GOP dark horse in the 2012 election. Polls in Iowa show her right behind front-runner Mitt Romney.

“Why is Bachmann rising? Because rather than being all things to all people, Bachmann has decided to be herself, and she’s not hiding her views. ‘It’s the peace through strength Republicans, and I’m one of them. It’s fiscal conservatives, and I’m one of them, and it’s social conservatives, and I’m one of them. It’s the Tea Party movement, and I’m one of them,’ she remarked this week.

“In true Bachmann fashion, these words were candid and direct, and they’re making Obama supporters green with resentment. Or is it red?

“Whether you support her or not, Bachmann’s style is refreshing in a political landscape laden with canned responses, and it’s provoking a case of envy among Democrats. She isn’t going to straddle any fence. The left is desperate for a candidate who will do the same – and they know that President Obama can’t.

“From the Bush tax cuts to gay marriage, from drilling to spending, Obama has been on both sides of most major issues. The critique of Obama’s consistent inconsistency and failure to lead is a theme not just reserved for Republicans anymore.

“Former Rep. Cynthia McKinney (D-Ga.) blasted him on Libya: ‘I want to say categorically and very clearly that these policies of war…are not what the people of the United States stand for.’

“A recent headline in Politico notes that ‘Obama may be losing faith with Jewish voters,’ which is unsurprising given his hesitant support of Israel….Independents’ support for Obama is down from a 62% approval rating last month to 43% today (Associated Press), his lowest since June 2010. With women – a demographic that generally detests doublespeak – Obama’s approval rating is down 9 points from last month.

“Just last week, New York Times columnist Maureen Dowd skewered Obama by calling him ‘bi’ on the issues: ‘Our president likes to be on both sides at once…On some of the most important issues facing this nation, it is time for [him] to come out of the closet.’….

“With our economy sputtering, it’s critical to have a commander in chief who embraces candor, not candy coating.

“As Bachmann rightly pointed out, ‘Anyone who speaks their mind without trying to sugarcoat things is good for the country.’

“And anyone who doesn’t? Well, the country can decide.”

--Sarah Palin premiered her two-hour film, “The Undefeated,” in Iowa. She is also showing it in New Hampshire and South Carolina. Gee, I wonder why she chose these states?

But I also wonder why the film isn’t titled “The Quitter.” 

--New Jersey Republican Gov. Chris Christie is getting some deserved PR for his pension reform program, passed with the help of leading Democrats, but his approval rating in the state continues to slide. A Bloomberg New Jersey survey has his favorable at 43% (53% view him unfavorably), while teachers, his prime target, have a 76% favorable rating. Christie’s education-spending reductions were opposed by 65% and favored by only 31%.

And while it’s early, 51% of respondents said they wouldn’t pick Christie for the Nov. 2013 gubernatorial race.

The Bloomberg survey doesn’t specifically address his sometimes bullying tactics but no doubt that is hurting Christie with women. 

--Former Illinois Gov. Rod Blagojevich was finally found guilty of 17 counts of wire fraud, attempted extortion, bribery and all kinds of other stuff, this after his first trial resulted in a deadlocked jury on most counts. This is a big victory for U.S. attorney for the district, Patrick J. Fitzgerald, though Fitzgerald is not well-liked in some circles for pursuing the CIA leak case against Scooter Libby, former chief of staff for Vice President Dick Cheney.

--Political analyst Mark Halperin of Time magazine and MSNBC was suspended indefinitely after stating on air that President Obama was “kind of a d---“ in his press conference on Wednesday. Halperin thought the seven-second delay was in place. It turns out the button was not working.

--First Lady Michelle Obama was forced to defend her husband’s absence as she toured South Africa and Botswana. Obama hasn’t been to the continent since a 24-hour stop in Ghana in 2009.

--And here’s some info you’ll find nowhere else. A good friend of mine called on Friday to tell me of a meeting he had with a leading Goldman Sachs investment banker. The Goldman fellow had very recently played golf with Speaker of the House John Boehner. Boehner smoked one cigarette a hole, two on par-fives, but said of Michele Bachmann that she’s “crazy.” Speaking of his round with the president, Boehner said Obama was delightful to be with but when it comes to his presidency, Boehner said he has never seen a guy “more in over his head.” Obama is so far behind, Boehner added, he’ll never catch up.

--The hacker group Lulz Security suddenly announced it would disband under increasing pressure from international governments and security services, including the likes of the CIA and FBI. But Lulz, in its farewell message, urged other hackers to join the “revolution.” Most just expect Lulz itself to lay low a bit, then regroup and come back stronger than ever.

--Good lord…did you see how the astronauts on the International Space Station had to briefly evacuate Tuesday to two Soyuz spacecraft docked with the station over fear they would get hit by a piece of space debris that thankfully missed them. It was only the second time astronauts have sought shelter against a possible impact with space junk, while the station has had to maneuver around it 11 times. Repositioning is no easy task, either. As Daniel Michaels reports in the Wall Street Journal:

“Space junk is a growing threat to both manned and robotic spacecraft orbiting near Earth. More than 500,000 natural and artificial pieces of debris larger than a marble are estimated to be in orbit, of which 20,000 are large enough to be tracked from stations on Earth. NASA officials have said that a greater risk is posed by debris that cannot be tracked.”

--Speaking of junk, the Supreme Court, by a 7-2 margin, overturned a California law that forbade the sale of hyper-violent videogames to minors. Justice Antonin Scalia, in writing the decision, defended the First Amendment protections even for those activities deemed offensive. But Justice Clarence Thomas rejected Scalia’s reasoning, saying it undermined the authority of parents over their children. Justice Stephen Breyer was the other dissenter.

“In my view,” Breyer wrote, “the First Amendment does not disable government from helping parents make such a choice here.”

So for once we didn’t have the 5-4 conservative bench vote…the Justices were all over the place. Refreshing…only I side with Thomas and Breyer, though with reservations. 

The Wall Street Journal editorial board opined:

“Permit us to summarize our view of this case’s dilemma in non-legal language: What came first – the chicken or the egg? That is, what came first – the First Amendment or the descent of America’s culture?

“Is it the First Amendment’s fault that this stuff exists? Is it the First Amendment’s fault that someone sells and many millions buy videogames in which, as Justice Alito noted, players spend ‘hour upon hour controlling the actions of a character who guns down scores of innocent victims’? Or that allows players to re-enact the murders at Columbine High School, Virginia Tech or firing a bullet into President John F. Kennedy?

“This would be our short version of the opinion of Justice Scalia and the majority; Yes, U.S. culture today undeniably produces all manner of offensive filth. But that does not mean that the solution to rampant video violence lies with weakening the First Amendment and its broad protections. The majority ruled that the First Amendment’s strong base should remain as it is. We agree….

“The First Amendment stands on a sturdy base, for now. It may begin to crack, however, beneath the weight of cases like this….

“The same information technologies that produce this stuff can also cause deep outrage at the Court’s attempts to protect the First Amendment. The friends of free speech might consider doing more than they are now to vilify and stigmatize the cultural bilge that makes these basic protections seem increasingly indefensible to so many.”

[“More than 46 million American households have at least one video-game system, with the industry bringing in at least $18 billion in 2010.” Jesse J. Holland / AP]

--From Richard Alleyne / Irish Independent

“Transcendental meditation…can cut heart attack and stroke death rates by up to 50%, new research has found.

“The practice, which involves the continual repeating of a mantra, was found to reduce high blood pressure, cholesterol and thickening of the arteries. It also protects against diabetes.

“ ‘This is a seminal finding,’ said Dr. Norman Rosenthal of the American government’s National Institute of Mental Health. ‘The prevention of heart attack and stroke and actual lengthening of lifespan by an alternative treatment method is exceedingly rare, if not unprecedented. If Transcendental Meditation were a drug conferring so many benefits, it would be a billion-dollar blockbuster.’….

“Researchers at the Medical College of Wisconsin followed 201 men and women with an average age of 59 who suffered from the narrowing of arteries in their hearts for nine years.

“Half of the group were taught TM along with their normal treatment while the others just received advice on how to modify their diets and exercise routines.

“They found that those who regularly meditated reduced their chances of dying or having a heart attack or stroke by 47% compared with those who received traditional care.

“In those who were particularly enthusiastic about the meditation or unusually susceptible to stress, the results were even stronger.

“They showed a two-thirds reduction in chances of dying during the trial.”

Just had to include the above. Maybe it helps one or two of you. [20 minutes a day, twice a day, is the recommendation.]

---

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

God bless America on her birthday.
---

Gold closed at $1482
Oil, $94.94

Returns for the week 6/27-7/1

Dow Jones +5.4% [12582]
S&P 500 +5.6% [1339]
S&P MidCap +5.2%
Russell 2000 +5.3%
Nasdaq +6.1% [2816]

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

Dow Jones +8.7%
S&P 500 +6.5%
S&P MidCap +9.7%
Russell 2000 +7.2%
Nasdaq +6.1%

Bulls  39.8
Bears 26.9 [Source: Chartcraft / Investors Intelligence…I had a good comment here last time. Go back and look at it if you forgot.]

Have a great week. I appreciate your support.

Brian Trumbore



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Week in Review

07/02/2011

For the week 6/27-7/1

[Posted 7:00 AM ET]

Wall Street, Washington and Europe

Talk about a relief rally. Stocks had their best week in two years, up 5%+ across the board, as Greece’s parliament stepped back from the brink and approved a new austerity program, as well as the tools to implement it, thus allowing the troika of the European Union, European Central Bank and International Monetary Fund to fork over the next $17 billion in cash that is part of Greece Bailout I. Greece will now be able to pay its debts through August. But, yes, this is kicking Greece’s inevitable default down the road. Come September, the troika will examine Greece’s books and determine whether it deserves even more cash. At this point it is also assumed the EU, ECB and IMF will have approved Greece Bailout II, which would seek to fund Greece through 2013, after which a new EU financial stability mechanism would take over the following year.

So the Ponzi scheme continues, but if you ever doubted global markets would have crashed had parliament not approved the austerity measures, think again about how far we then rallied and double it to the downside.

There are many details to be hashed out over the coming weeks and months, particularly with regard to Bailout II, which depending on how you measure it would provide Greece with another $120 billion plus.

But one detail being left out of the financial calculations is the attitude of the public in places like Germany, Finland and Austria, who are more than a bit tired of seeing their tax dollars going to help out what has proved to be a totally worthless and corrupt nation of lazy, spoiled, deceitful people. What I will continue to focus on, though, is Greece being part of the Balkans, as history has shown the region to be explosive in ways that were then crippling for the rest of the continent and beyond. Over time the sporadic protests in Greece will turn increasingly violent. What happens then is anyone’s guess given a fragile and unpopular ruling government.

For now, one of the options being worked out has French and German banks accepting a kind of ‘Brady bonds’ plan, this having been used to bail out Latin America over 20 years ago.

The banks would voluntarily extend half of the debt maturing over the coming three years into new 30-year bonds at 5.5% interest; the other half being refunded in cash (30%) and a zero coupon type security (20%) that would have a kicker if Greece’s economy grows beyond a target of, say, 2%.

But in the end, it’s still about Greece being able to enforce its austerity measures and collect taxes, and if the economy craters even worse than projected, needless to say tax revenue will also fall woefully short. And Greece is dependent on the proceeds from its massive privatization program of everything from the power monopoly to beaches.

Editorial / The Economist

“On June 29, with tear gas billowing around the rioters outside the Greek parliament, politicians in principle backed a new punishing austerity plan. As The Economist went to press, they were expected to implement the austerity plan in a second vote. That would open the way for the euro-zone countries to approve a second rescue package for Greece likely to be worth around $170 billion [Ed. including the remains of the first bailout].

“Alas, Greece’s austerity plan looks doomed to fail. It does too little to prevent the epic folly of Greece’s railways and other ruinous schemes. It will screw down too hard on ordinary Greeks, with new taxes, spending cuts and a rushed privatization scheme. And it will almost certainly condemn Greece to recession, strife and an eventual debt default….

“Making Greece’s economy work better would mean far greater changes to a dysfunctional state. That means defeating the unions, important allies for the politicians. It would also mean dismantling the system of patronage, on which politicians thrive. Whether you are after a government job, a license, or a favorable tax assessment, politicians are essential allies. Greece needs transparent and impartial rules, but politicians are not keen to limit the scope for dishing out favors. Anyway, Greece’s politicians reckon that so long as they pretend to fix their country, the EU will hand over the money whether the plan succeeds or not. After all, who wants to pull the plug on Greece if that risks contagion across the euro zone?

“Every quarter, before the euro zone countries and the IMF release the next tranche of aid, they must decide whether Greece is on track. Every quarter, it will become clearer that the answer is no.”

---

Turning to the U.S., aside from the massive rally in equities, there were some legitimate positive surprises in the form of far better than expected manufacturing data from the Chicago Purchasing Managers report and the national ISM reading for June. So these flew in the face of those concerned the “soft patch” was about to become something more. [I fall in the camp that the second half will disappoint.] Consumer spending for May, after all, was unchanged, and undoubtedly influenced by high oil prices. If we head back to $100 a barrel and $4.00 at the pump, that mindset will return. And the housing data remains putrid.

But a couple of things are coming up of particular note. First, next Friday’s employment report for June. If we see another number in the 50-60,000 range, like last time, that won’t be good. And then on July 11, Alcoa starts us off with earnings season and the succeeding three weeks will be packed with valuable information on the future direction of the economy and corporations’ plans for hiring.

The big item, however, potentially far bigger than Greece, is the Aug. 2 deadline for the U.S. debt ceiling. In discussing this, President Obama could not have been more obnoxious at his press conference on Wednesday, once again returning to his pathetic attack the rich spiel. 

At the same time, though, some of my fellow Republicans have to understand that any authentic deficit reduction program must contain some revenue enhancers as well as entitlement reform. Oklahoma Republican Senator Tom Coburn and Connecticut Independent Joe Lieberman introduced a plan, for example, that would raise the Medicare eligibility age to 67 from 65 and increase monthly premiums some and, as you’d expect, they were lambasted by both sides of the political aisle. 

And you know how last week I quoted North Dakota Democratic Senator Kent Conrad, who said any real deficit-reduction plan needs to be in the $4 trillion neighborhood over ten years, not $2 trillion, to be realistic? All I’m seeing the past few days is a plan that would come in under $2 trillion. This won’t work. I’m telling you…get ready for the Crash of 2012. 

And to those Republicans who think they can jerk around with the debt ceiling deadline, from what I understand, on Aug. 3, government workers and Social Security recipients would be among those who stop getting paid. Go ahead and say, ‘So what?’ Just be prepared for the consequences in terms of the overall economy. I’m all for reducing the government rolls further, and Social Security must be part of the solution, but Republicans will not enhance their 2012 chances if a large portion of the electorate stops getting their checks.

The thing is, our situation is so increasingly hopeless that unless our president gets his act together, as well as the congressional leadership, we’re doomed…pure and simple.

Consider the following from Lawrence Lindsey in an op-ed for the Wall Street Journal.

In discussing how existing deficit projections could skyrocket further…

“There are at least three major reasons for concern.

“First, a normalization of interest rates would upend any budgetary deal if and when one should occur. At present, the average cost of Treasury borrowing is 2.5%. The average over the last two decades was 5.7%. Should we ramp up to the higher number, annual interest expenses would be roughly $420 billion higher in 2014 and $700 billion higher in 2020….

“The second reason for concern is that official growth forecasts are much higher than what the academic consensus believes we should expect after a financial crisis. That consensus holds that economies tend to return to trend growth of about 2.5%, without ever recapturing what was lost in the downturn.

“But the president’s budget of February 2011 projects economic growth of 4% in 2012, 4.5% in 2013, and 4.2% in 2014. That budget also estimates that the 10-year budget cost of missing the growth estimate by just one point for one year is $750 billion. So, if we just grow at trend those three years, we will miss the president’s forecast by a cumulative 5.2 percentage points and – using the numbers provided in his budget – incur additional debt of $4 trillion….

“Third, it is increasingly clear that the long-run cost estimates of ObamaCare were well short of the mark because of the incentive employers will have under that plan to end private coverage and put employees on the public system. Health and Human Services Secretary Kathleen Sebelius has already issued 1,400 waivers from the act’s regulations for employers as large as McDonald’s to stop them from dumping their employees’ coverage.

“But a recent McKinsey survey, for example, found that 30% of employers with plans will likely take advantage of the system, with half of the more knowledgeable ones planning to do so. If this survey proves correct, the extra bill for taxpayers would be roughly $74 billion in 2014 rising to $85 billion in 2019, thanks to the subsidies provided to individuals and families purchasing coverage in the government’s insurance exchanges….

“Only serious long-term spending reduction in the entitlement area can begin to address the nation’s deficit and debt problems. It should no longer be credible for our elected officials to hide the need for entitlement reforms behind rosy economic and budgetary assumptions. And while we should all hope for a deal that cuts spending and raises the debt ceiling to avoid a possible default, bondholders should be under no illusions.”

Oh, it’s going to get interesting these next few weeks.   If the White House and Congress adopt a credible deficit-reduction plan, the markets will have every reason to rally further. That would be great. I’m not short.

But if this plan isn’t credible, with zero hope of the issue being readdressed until 2013, I’ve told you what we have to look forward to.

And if the debt ceiling is allowed to expire without action, if you are leaving it to the likes of Republican strategist Grover Norquist to tell you how markets would react, you’re nuts.

---

A note on commodities. I’ve been saying that the diversified CRB Index would finish the year below the 12/31/10 closing figure of 332.80 and we ended the quarter at 338.05 and finished the week at 336.71. Oil was among the items leading a rebound the past five days as the Greece crisis ebbed and the dollar weakened.

But wheat and corn were among those hit hard. Just to back up. Last May 28 in this space I discussed the dire crop report from the Agriculture Department, as prices were soaring, and added, “I would just emphasize that the picture can change quickly.” I then noted an anecdote from my farmer friends in the Oklahoma Panhandle, who in discussing the severe drought there, told me, “Yes it is dry but if you can believe it the wheat is not as bad as they are saying.” That was in an area that I told you had received a ¼-inch of rain in over 200 days before Karalee told me of two decent rains they had received in May.

Well, wouldn’t you know but this week the same folks at the Dept. of Agriculture told us that farmers planted 92 million acres of corn, 2% more than projected, and that stockpiles as of June 1 were 12% higher than forecast. Farmers also planted 3% more acres of spring wheat than projected, and inventories of same are now 5% more than initially estimated. So wheat tumbled, and corn outright crashed. Since reaching a record $8.00 a bushel on June 10, corn is down over 25% as it closed the week under $6.00.

I also saw this week that the Russian wheat crop should be normal this year after last year’s catastrophic drought. In 2010, Russia harvested 61 million tons but this year is now projected to reach 82-86 million, though here, as in the U.S., it’s still mostly about July’s weather.

Finally, regarding “quantitative easing, part deux,” or QE2, the program sure pumped asset prices since it was announced by Federal Reserve Chairman Ben Bernanke in Jackson Hole, Wyoming, end of last August. The prime purpose was to ensure the U.S. economy didn’t tip into “deflation,” and prices indeed rose. But in terms of helping housing recover it was an abysmal failure, not that I ever thought it would be a success, because while mortgage rates remained at historic lows, banks had pulled in their horns, big time, in terms of approving new mortgages, and for those even looking to refinance, there was the none too small issue of 25% or more of homeowners being underwater And, in actuality, the 10-year Treasury rose from 2.50% when Bernanke announced his program to nearly 3.20% by June 30; this despite the fact that the Fed purchased anywhere from 80% to 85% of the net Treasury issuance, according to various estimates by Wall Street economists. Now that QE2 is over, who is going to soak up a projected $94 billion each month?

True, the Fed will continue to buy Treasurys with the proceeds from the mortgage-backed and Treasury debt it owns, but that is estimated to result in about $15 billion worth of Fed buying a month, not the $75 billion or so it would be given earlier percentages.

Editorial / Washington Post

“(It) is hard to avoid the conclusion that this was, in the end, a holding action. QE2 was not so much an asset-buying program as a time-buying program – time for America’s households, firms and governments to deleverage and heal as best they could. QE2 is over and unlikely to be repeated; Mr. Bernanke was not kidding last August when he said, ‘Central bankers alone cannot solve the world’s problems.’ Meanwhile, the prospects of much more fiscal stimulus seem doubtful. For better or worse, the U.S. economy may be on its own.”

Street Bytes

--What a difference a week makes. The broad averages had their best week in two years, July 2009, as the Dow Jones rose 5.4% to 12582, the S&P 500 advanced 5.6% and Nasdaq soared 6.1% to 2816.

--U.S. Treasury Yields

6-mo. 0.10% 2-yr. 0.47% 10-yr. 3.18% 30-yr. 4.39%

Bonds tumbled, yields rose, on the ending of QE2 as well as the stronger than expected manufacturing data. The 10-year rose 31 basis points (0.31%) in its sharpest weekly rise since August 2009.

As an aside, Treasury Secretary Tim Geithner is now expected to leave after budget negotiations are wrapped up.

--The sexual assault case against Dominique Strauss-Kahn is falling apart as investigators question the credibility of the housekeeper on a number of levels, stemming in part from recorded conversations with a big drug dealer. There was, according to all the evidence, a sexual encounter, but the circumstances of it are now in doubt. DSK was released from house arrest and the entire case is in jeopardy. 

Ironically, Christine Lagarde was named the first female head of the International Monetary Fund this week, replacing DSK. It’s now her job to tackle Europe’s debt crisis. DSK’s political future in France is up in the air.

--Retiring Kansas City Federal Reserve Bank president Thomas Hoenig blasted Congress and U.S. monetary policy in a speech in Des Moines on Thursday. In part:

“We have this leveraged economy that we have used to build our growth over the last 10 to 15 years that we cannot carry forward,” adding that the longer interest rates are low, the more the economy will suffer when rates inevitably rise.

“You create certain fragilities in the economy that when you do have to reverse your position, in terms of interest rates, whenever that is, it becomes an increasing risk of shock to the economy, whether it’s your concerns about the stock market tanking or values of land being affected. When you artificially hold down interest rates or you artificially bring short-term tools to solve long-term problems, you get worse long-term problems.” [USA TODAY]

Hoenig also blasted Congress for not pursuing the recommendations of the Simpson-Bowles deficit reduction plan.

--China Premier Wen Jiabao said inflation would be capped at 5% as a result of the government’s tightening measures, though the full year target of 4% does not seem doable. As long as inflation has peaked, as would appear to be the case, China will escape any massive unrest. 

But the June PMI reading of 50.9 is yet further evidence of a slowdown here, while many are voicing concern about the regional banking sector and non-performing loans. Because of the health of the central government’s finances, I do not see this as a big issue, barring the slowdown tipping into something worse.

--Japan’s industrial production figure for May rose a strong 5.7% from April, the fastest pace in 50 years, actually, though this is because of the rebound off the March earthquake/tsunami lows. Nonetheless, business is increasingly optimistic when it comes to a third quarter rebound.

--U.S. auto sales in June were at their slowest pace in 12 months and generally disappointing as GM and Ford said sales rose 10% for the month, missing expectations, while Toyota’s and Honda’s each fell 21%. Nissan recorded an 11% gain, less than projected, while Chrysler topped forecasts, up 30%. The Japanese automakers were still severely impacted by the March 11 aftermath.

--Two weeks ago, the International Energy Agency, in conjunction with some leading politicians and central bankers, released 60 billion barrels of oil, or 2 million a day for 30 days, in an effort to bring oil prices down as a stimulus to the global economy. Oil then dropped to about $90 on West Texas Intermediate and today is back to $95. So the entire Free World is thinking, ‘What was that all about?’ In the U.S., falling inventories of crude and gasoline added price support the past week.

--The New York Times had an extensive report on the natural gas industry, written by Ian Urbina, which started out:

“Natural gas companies have been placing enormous bets on the wells they are drilling, saying they will deliver big profits and provide a vast new source of energy for the United States.

“But the gas may not be as easy and cheap to extract from shale formations deep underground as the companies are saying, according to hundreds of industry e-mails and internal documents and an analysis of data from thousands of wells.”

In a nutshell, “There is undoubtedly a vast amount of gas in the formations. The question remains how affordably it can be extracted….

“Also, the amount of gas produced by many of the successful wells is falling much faster than initially predicted by energy companies, making it more difficult for them to turn a profit over the long term.”

Urbina quotes an e-mail from a geologist at leading nat-gas producer Chesapeake thusly.

“Our engineers here project these wells out to 20-30 years of production and in my mind that has yet to be proven as viable. In fact I’m quite skeptical of it myself when you see the % decline in the first year of production.”

Chesapeake’s CEO, Aubrey McClendon, remains steadfastly bullish on the future for natural gas and his company, specifically, which is constantly under a microscope for the outrageous pay packages McClendon has awarded himself. For his part, he told employees “The Times story was obviously motivated by an anti-natural gas agenda.”

--Meanwhile, the Washington Post had a piece by Loennig, Stephens and Crites titled “Obama’s focus on visiting clean-tech companies raises questions.” As in major conflicts of interests.

“With trips that began two months after he took office, President Obama has devoted more than half of his out-of-town private-business visits to promoting a single industry: clean technology, which the president says will lead the nation back to economic prosperity….

“Obama’s unwavering focus has helped him fulfill a campaign pledge to push clean tech, from solar energy and wind power to electric vehicles. But it also has come with political exposure: By emphasizing a sector in which the risks are high, the president has prompted questions on Capitol Hill and from industry about the wisdom of his singular strategy and his political ties to some of the companies chosen for federal attention.

“The oil and gas industry, for example, has invested billions in energy innovation and job creation and could benefit from similar presidential attention, said Martin J. Durbin, executive vice president of the American Petroleum Institute.

“ ‘He’s missing an incredible opportunity he has to join with us to make a difference in economic growth, job creation, national security and clean technology,’ Durbin said. ‘If you went and added up the number of jobs at these clean-tech companies he visited, in all honesty, I think you’re going to find a very modest number of jobs.’”

One company under the microscope is Solyndra, a Silicon Valley solar company that ran into financial trouble after receiving a $535 million federal loan guarantee. Obama visited Solyndra’s factory in May 2020, “only weeks after it became public that independent auditors had questioned whether it could remain a ‘going concern.’”

One of the venture capitalists associated with Solyndra, George Kaiser, is a leading Obama fundraiser.

--The White House and Senate Democrats reached consensus on passing long-sought trade deals with South Korea, Panama and Colombia, but now it’s key Republicans who oppose them because the Democrats insist on extending an existing federal program to retrain American workers who lose jobs to foreign competition. Some Republicans balk at the added spending, now up to $575 million annually for this particular program.  Senate Republican leader Mitch McConnell said, “I’ve never voted against a trade agreement before, but if the administration were to embed a (Trade Adjustment Assistance) into the Korea trade agreement, I would be compelled to vote against it. I think this is making it needlessly complicated and contentious.”

These trade deals must be signed. It’s moments like these I wish we had one-party rule. [Half-kidding.]

--Back to Europe, one of those nations receiving a bailout, Portugal, reported that its budget deficit for the first quarter was 8.7% of GDP, which while less than the 9.2% recorded in the fourth quarter, is substantially higher than the 5.9% Portugal must reach by end of the year to satisfy its IMF and ECB requirements.

And in Britain, hundreds of thousands of union members walked out on Thursday, protesting cuts to their pensions, among other things, but it was largely peaceful. Succeeding demonstrations over the summer and fall may not be so.

--According to a New York Times/CBS News poll, nine in 10 Americans say homeownership is an important part of the American dream, but in assessing blame for the crash, 42% blame lenders, while 29% blame regulators. Only a handful of respondents blame the borrowers themselves for taking loans they could not afford. Also, only 36% approve of the job President Obama is doing to help the housing market, while 45% disapprove.

One-quarter say their home is underwater, which jives with national surveys using actual data.

--Speaking of housing, owing to Bank of America’s ill-timed acquisition of Countrywide Financial Corp. in 2008, BofA agreed to pay $8.5 billion to settle claims by investors, including asset managers PIMCO, Met-Life and BlackRock, that purchased mortgage-backed securities from Countrywide.

But BofA also has to swallow an additional $5.5 billion to buy back other defective mortgage securities in the future, plus it has taken a $6.6 billion hit for all manner of other reasons, including previous lawsuits, foreclosures and mortgage write-offs. The company now expects to report a loss of nearly $9 billion in the second quarter after the $20.6 billion in charges in CEO Brian Moynihan’s bid to finally put the Countrywide debacle behind him. [Moynihan had nothing to do with the acquisition, it being the responsibility of former CEO Ken Lewis.]

--As noted the past few weeks, trading volumes are meager on Wall Street, which is leading to layoffs. Firms from Credit Suisse, to Barclays, to Goldman Sachs are cutting back, including on the investment banking side. Most of the layoff announcements thus far only number in the hundreds, but unless the volume picks up (the average of which is down 30% from 2010’s second quarter), the figures will grow into the thousands. That said I suspect we’ll see a good pick up come August and September for a number of geopolitical reasons.

--According to various studies, workers are now paying about 24% of their health-care costs at larger companies. As one research executive told the Wall Street Journal, though, “Employers are concerned with the rising cost and they are aware at some point that they can’t just keep pushing this off to employees.” More and more companies are focusing on wellness and nutrition programs, but only 35% of these have seen an actual return on their investment.

--For only the second time in the last decade, California enacted a budget on time, this one $131 billion that erased a $25 billion deficit through adoption of a rosier revenue forecast. Should the state’s economy thus not grow as much as projected, further cuts to things like prisons and the universities will be required, as well as a cut in the school year. All state services, from education to health care, have already been cut severely.

--Lloyds Banking Group announced it would eliminate 15,000 jobs over two and a half years, which is on top of 28,000 previous cuts since 2008 as a result of the acquisition of HBOS. The unions are furious, but CEO Antonio Horta-Osorio said, “This bank is losing money. We have to get this bank supporting the UK economy, we have to get this bank profitable and we have to repay taxpayer support.”

--News Corp. paid $580 million for MySpace back in 2005. This week it sold it to advertising network Specific Media for $35 million. Not a great investment, as MySpace was left in the dust the past few years by Facebook and others. Today MySpace has a reported 80 million users vs. Facebook’s 700 million around the world. But one of the investors in Specific Media who will be at the forefront of the re-launch of MySpace is Justin Timberlake. Do not discount his star power and ability to singlehandedly bring the site back into the conversation.

--After just four years, and a major commitment, Campbell Soup is exiting Russia, with a spokesman saying, “Though Russia remains an attractive potential growth market, the results of the business have fallen short of original expectations.” Instead, the company looks to expand in emerging markets such as China.

What’s interesting is that Campbell did extensive research in Russia, conducting interviews with 10,000 consumers, but as one analyst put it, “Here, a housewife who cannot cook soup is not a proper housewife.” Campbell, however, positioned itself not as a facilitator in cooking homemade soups, but rather as a substitute. That was a mistake.

--I have said that those shorting China stocks, specifically those outfits peddling the research to hedge funds that then benefit from the negative reports, will one day get their comeuppance. Not all China stocks are frauds.

And so it was this week that short-selling firm Muddy Waters LLC and its founder, Carson Block, announced a bet against Shanghai-based Spreadtrum Communications Inc. The designer of chips for wireless devices plunged from about $12.50 to $8.50, before essentially finishing the day unchanged. Two days later, Spreadtrum was $15.75 and then finished the week at $17.20. Other analysts came to the defense of the Chinese company. Then Carson Block himself said, “If Spreadtrum has fantastic answers and everything is the way it should be and we misinterpreted these points as red flags, then the company’s transparency has improved and the stock is going to go up.”

--As reported by the Journal, “Some crane operators and related trades in New York City make upwards of $500,000 a year in pay, overtime and benefits, according to the Real Estate Board of New York, which represents the construction industry.

“The group says that some of the workers pulling down the biggest salaries at the World Trade Center aren’t even operating equipment. It says about 50 workers are in unnecessary positions, such as relief crane operators, mandated by the union contract.

“ ‘If you want to be paid for seven or eight hours, you should work for seven or eight hours,’ said Steve Spinola, president of the Real Estate Board.’”

It seems that while non-union workers make up 40% of the construction work force in this area, up from 10% during the 1970s, all crane operators are union members. While the hourly pay and benefits is $82 (vs. $39 in Washington, D.C.), “the real reason New York crane operators earn such big salaries is overtime and benefits. A relief crane operator working 56 hours of overtime per week for 52 weeks will earn $332,667 in overtime and $159,053 in overtime benefits at the World Trade Center.”

Builders pay a 30% premium for union labor.

--Brad K. wanted to make sure I noted the passing of George C. Ballas Sr., a Houston entrepreneur who invented one of the great time and physical labor savers, the Weed Eater, or weed whacker. Ballas got the idea for it while sitting in a car wash. As noted in an AP obituary:

“(Ballas) wondered whether the idea of spinning bristles, like the ones cleaning his car, could be applied to trimming grass and weeds in areas a lawnmower couldn’t reach.”

When I’m in a car wash, I’m wondering whether I’m really getting the premium undercarriage service I paid up for.

Ballas sold his invention to Emerson Electric for an undisclosed sum. He was 85.

--Finally, NYU professor and noted economist, Nouriel Roubini, “Dr. Doom,” is known for his wild parties and last Saturday, he threw yet another at his Greenwich Village mega-penthouse. As the New York Post’s Page Six reported:

“Roubini invited a crowd of models, lawyers and creative types to his pad, which is big enough to hold a world economic summit and boasts a new, giant Jacuzzi on the roof terrace. Guests greeted by an upbeat-looking Roubini at the 14-hour bash – which started at noon with a dip in the model-packed Jacuzzi…”

Had to stop there…this is just too much for me to process, never having received an invite. But good for you, Nouriel!

Foreign Affairs

Afghanistan: Ten days ago, President Obama gave a speech to the American people, laying out his strategy to withdraw 10,000 of the 33,000 surge force in Afghanistan by year end, with the other 23,000 coming out by September 2012, just in time for the election. He never spoke of “victory,” however, and in his press conference this week reiterated that it was, in the classical sense, never part of his goal.

But he did speak as if it was “Mission Accomplished,” yet in one week we had a horrific bombing at a hospital near the Afghan-Pakistan border that claimed at least 60 lives (and didn’t get the attention it deserved), as well as an inexcusable infiltration of the hilltop Intercontinental Hotel in Kabul by 8 Taliban militants who proceeded to kill at least 11 civilians, before NATO’s helicopter gunships were called in to end the siege.

The Afghan security forces at the hotel performed pathetically, by all accounts, with one witness, a former Afghan police captain, telling the Los Angeles Times that he saw some Afghan forces flee the hotel once fighting erupted.

For his part, President Hamid Karzai praised the Afghan response without mentioning that NATO and other foreign troops were the ones who ended it!

Back to the hospital bombing, this occurred in the very border region that Gen. David Petraeus (who this week was confirmed to take over for Leon Panetta at CIA, Panetta moving over to Defense to replace Robert Gates) had established as his next goal for pacification with the surge forces. That mission now looks increasingly dubious, through no fault of Petraeus’, as Obama takes away the general’s troops that he had urged be allowed to stay on until the mission is truly accomplished, at least through fighting season of 2012. 

Meanwhile, a Pew Research Center poll shows that 44% say Obama’s withdrawal plans are “about right,” while only 15% say they are “too hasty.” Republicans themselves are split 50/50 on the issue.

In other Afghan tidbits, there are reports that an alliance of warlords is forming against Karzai, and the Central Bank chief fled to the United States, where he has a home, saying his life was in danger for investigating fraud, including the case of Kabul Bank, which collapsed and was bailed out by the Afghan government last year.

Robert Kagan / The Weekly Standard…on Obama’s statement in his June 22 speech, “America, it is time to focus on nation building here at home.”

“The argument that the cost of the surge in Afghanistan undermines our ability to address our domestic problems is especially risible coming from this president. It would be one thing if cutting back in Afghanistan were part of a sweeping deficit-reduction plan where domestic programs and entitlements were getting the axe, too. It would still be a mistake. But at least it would be consistent.

“There is something appallingly cynical, however, in this president suggesting that the American fiscal crisis required overruling his military leadership and ordering a more rapid and therefore more dangerous drawdown in Afghanistan – this, after two and a half years of proposing spending on domestic programs that dwarfs the cost of the surge….

“Which brings us to the Republicans. They have not all covered themselves in glory this week. Some have been stalwarts in opposing the president’s plan, and for the right reasons. But some have been cautious, evidently worrying about the same polls that Obama is worrying about….

“The point is that 2012 will be an election about the economy, but it will also be an election about national security. The American people may tell pollsters they want to focus on domestic problems – they have said that many times in the past, as well – but they will also be looking to see who can be a reliable and strong commander in chief. Me-too-ing Obama or, worse, trying to outflank him on the dovish left will not serve any candidate well in the general election. National security until now has been a Republican advantage. To squander that advantage in these times of global danger would be worse than a blunder. It would be a crime.”

Bret Stephens / Wall Street Journal

“(Obama’s strategy) signals that the United States, like Britain before it, is a waning power. In his speech last week, Mr. Obama waxed eloquent on the point that ‘what sets America apart is not solely our power – it is the principles upon which our union was founded.’ Very true. But a nation that abandons to the Taliban those it was once committed to protect shows that it lacks power and principle alike.

“At the end of ‘Charlie Wilson’s War,’ the film quotes the late congressman saying: ‘These things happened. They were glorious and they changed the world…And then we f---ed up the endgame.’ To watch President Obama’s Afghan policy unfold is to understand exactly what Wilson meant.”

Iraq: Victory? 15 U.S. soldiers lost their lives here in June, the most for any single month since June 2009. Three were killed this week near the Iran border in a rocket attack on a U.S. base. Two things are happening of major concern. Moqtada al-Sadr is back and continues to warn of a return to violence if America prolongs its stay in Iraq beyond year end. This week Sadr also appeared to endorse suicide attacks.

The other concern is Iran’s increasing influence in terms of weaponry and training of Shiite militia groups by Iranian Revolutionary Guard Corps special forces. The rockets U.S. troops are coming under fire from are highly sophisticated and can only come from Iran. [Saturday’s New York Times, though, reports that Iraqis are beginning to fight back against the Iranian infiltration.]

Separately, Iraq’s two leading politicians, Prime Minister Nouri al-Maliki and Ayad Allawi, were to have been sharing power after the tight election of 15 months ago, but they still haven’t agreed on who should run the critical Interior and Defense Ministries. Allawi hasn’t even shown up in parliament once, as reported by the Times.

Iran: As rumors continue to swirl that President Ahmadinejad is on his last legs and will be forced to resign soon, understand this is not a good thing because it means the hardline clerics are winning the day.

And this week Iranian state television showed pictures of subterranean ballistic missile launch facilities in a clear show of force designed to blunt any thought of a Western or Israeli attack on Iran’s suspected nuclear weapons sites. State television said the launch facilities are linked to a central command unit. A leader in the Revolutionary Guard said, “[With] these facilities we are certain that we can confront unequal enemies and defend the Islamic Republic of Iran…The range of our missiles has been designed on the basis of the distance to the Zionist regime and U.S. bases in the Persian Gulf region.”

British Foreign Secretary William Hague told parliament on Wednesday:

“Iran has also been carrying out covert ballistic missile tests and rocket launches, including testing missiles capable of delivering a nuclear payload in contravention of U.N. [Security Council] Resolution 1929, and it has announced that it intends to triple its capacity to produce 20% enriched uranium.” Iran denied the claim. [Global Security Newswire]

For its part, Saudi Arabia weighed in. “We cannot live in a situation where Iran has nuclear weapons and we don’t. It’s as simple as that,” said a Kingdom official. “If Iran develops a nuclear weapon, that will be unacceptable to us and we will have to follow suit.”

Lastly, Iran continues to pressure Afghanistan and Pakistan to abandon any military alliances with the U.S.

Pakistan: Speaking of the latter, Islamabad ordered the CIA out of a desert airbase that the agency had been using to launch drone attacks against al Qaeda and the Taliban, taking the U.S. by surprise, though an official told the London Times, “operations against terrorists in Pakistan are continuing.” The CIA has been shifting some of them to Afghanistan, though any attack from there on Pakistani soil violates its sovereignty as relations deteriorate between our two governments.

Lebanon: It was February 2005 that former Lebanese prime minister Rafik Hariri was assassinated in a massive car bomb in Beirut that killed 22 others. Two months later I traveled to Beirut to see for myself what had happened and my hotel room at the Phoenicia overlooked the bomb crater. A year ago I traveled back there. Suffice it to say, few around the world have written more of the place than I have, save for my friend at the Daily Star, Michael Young, the preeminent expert on all things Lebanon.

So this week, finally, the U.N-authorized Special Tribunal for Lebanon, that has been investigating the murder lo these many years, fingered four men, all with ties to Hizbullah, though at last word the indictment remains sealed and thus further details are not out in the public sphere. [The Daily Star has nonetheless identified the four individuals.]

Rafik Hariri’s son, Saad, himself a former prime minister but now living in Paris because of an assassination plot against him should he return to Lebanon, issued this statement:

“Today, we witness together a distinctive historic moment in the political, judicial, security and moral life of Lebanon. I feel the beats in my heart embracing the hearts of all Lebanese who defended the cause of justice and refused to bargain on the blood of martyrs.

“We chose not to revenge or resent.   We relied on God and started a costly and long path towards justice and truth through a tribunal of international character with Lebanese judges that would provide evidence and give the accused, whoever they are, a chance to defend themselves.

“This progress in the course of justice and the Special Tribunal is for all the Lebanese without any exception, and it should be a turning point in the history of fighting organized political crime in Lebanon and the Arab world, just as we want it to be a focal point for uniting the Lebanese in the face of the factors of division and the attempts to disrupt the principles of national conciliation.

“The Lebanese government is invited politically, nationally, legally and morally, to implement Lebanon’s obligations towards the Special Tribunal for Lebanon and nobody has an excuse to escape from this responsibility.

“Lebanon has triumphed for international justice, and justice has triumphed for the souls of the martyrs. At this moment, I can only look towards the spirit of my father, martyr Prime Minister Rafik Hariri, and the spirits of the martyrs who fought for Lebanon, and tell them that your blood did not flow in vain, and that the truth has begun to see the light and justice is coming.”

Alas, few believe justice will ever be delivered. The four have had years to flee and will never be arrested and brought to trial. The new Lebanese government is dominated by Hizbullah, 18 of 30 cabinet seats.

There is also no doubt that the indictment will only heighten sectarian tensions in Lebanon, and at any moment, whether tomorrow or a year from now, Lebanon could blow. The situation is only worsened by events in Syria, as well as Iran’s power struggle, both of whom are Hizbullah’s benefactors.

Lebanon has 30 days to execute the arrest warrants. If the suspects are not arrested in that time, the STL will make public the indictment and summon the suspects to appear before the court.

This story has now officially entered a new phase and Hizbullah is in many respects increasingly cornered, but, again, it is also the ruling party in government. To be continued…

Libya: France said it has directly supplied weapons to Libyan rebel groups, becoming the first member of the NATO alliance to admit it is doing so. Britain then said it was supplying the rebels with non-lethal aid, such as flak jackets. Russia is complaining the French move goes against the UN Security Council resolution authorizing the use of force against Col. Gaddafi but not direct aid.

Syria: The London Times reported that Islamists have been attacking Syrian security forces in at least four towns under the guise of avenging protesters’ deaths, adding further uncertainty to the issue of just who would replace Bashar Assad if he stepped down or was overthrown. Friday saw the biggest demonstrations across the country since the uprising began. Security forces killed at least 20, according to reports.

Egypt: More than 1,000 were injured in renewed protests around Tahrir Square in Cairo, the worst violence since February. Protesters are demanding an end to emergency law and removal of the interior minister as the military is now seen as an obstacle to progress, rather than an ally of the pro-democracy forces. Needless to say, Egypt’s economy is in a shambles, tourism has dried up, and there are increasing reports that the Bedouin, who number some 400,000, are running roughshod in the Sinai.

At least a government study revealed that 67% of the people believe their country should maintain the peace treaty with Israel.

On the Israeli front, the Palestinians confirmed they will take the statehood issue to the U.N. General Assembly in September and base their claim on pre-1967 lines. This will not be good.

Russia: In a bizarre move, billionaire Mikhail Prokhorov (currently owner of the New Jersey Nets NBA team) took over the reins of the pro-business Right Cause party with plans to expand direct elections and encourage foreign investment, as well as to perhaps become prime minister. 

“Let’s forget the word ‘opposition,’” Prokhorov said. “This is a word linked to marginal parties that have lost their connection to reality long ago.

“There should be two parties of power, while there is only one now. We are only trying to group our forces, but United Russia has challenged us, and we should accept the challenge.”

The Moscow Times reported that Prokhorov addressed the party congress without notes and laid out a balanced platform. Earlier, Prokhorov had suggested he would run the party like he does his business empire, with an iron fist. According to Forbes, he has an estimated net worth of $18 billion and is the third richest in Russia.

Prokhorov also said that former Yukos CEO Mikhail Khodorkovsky and his associate, Platon Lebedev, should be freed on parole.

There are reports that President Medvedev will use Right Cause as his party base.

China: Friday represented the 90th anniversary of the Communist Party and President Hu Jintao warned his country faces severe “growing pains,” singling out the threat posed by corruption, though saying nothing about any sweeping political changes.

Hu said the anti-graft campaign was the key to “winning or losing public support and the life or death of the party.”

“Corruption will cost the party the support and trust of the people,” he said.

In a sign of the new China, the day before the country formally launched its high-speed rail line linking Beijing and Shanghai. The project was finished a year ahead of schedule.

Meanwhile, one of China’s most prominent dissidents, Hu Jia, was released after serving 3 ½ years on subversion charges. Hu’s release follows by days the freeing from detention of artist and activist Ai Weiwei, though it is far too early to say if the government is going to relax its policies on dissent.

Venezuela: I haven’t wanted to comment on President Hugo Chavez’s absence and trip to Cuba for medical attention because I just didn’t know the facts. Then this week, Chavez first appeared in video form on Cuban state television and appeared to be well as he chatted with buddy Fidel Castro.

Two days later Chavez told his people he is fighting cancer, discovered when he had emergency surgery for a pelvic abscess. Chavez admitted he made “a fundamental error” in not getting regular medical checkups.

The thing is, Chavez gave no idea how much longer he will be in Cuba, assuming he recovers, and there is growing debate whether he should delegate power to his vice president. The next presidential vote is February 2012.

It also turns out that it was Castro, according to reports, who forced Chavez to get a closer look into his ailments, which began with a bum knee.

So maybe we can give Castro his own reality show diagnosing crackpot leaders, of which the world is full of ‘em. Next up for Fidel…Robert Mugabe.

Denmark: This nation became the first in the European Union to restore 24-hour customs control, assuming parliament approves, as the uproar over rampant immigration grows, with France and Italy also gaining the right to institute temporary closings in an emergency. The whole point of the EU was to allow the free movements of goods and services across borders and that is now being called increasingly into question.

Random Musings

--New York Democratic Gov. Andrew Cuomo picked up a huge victory when New York’s Republican-led state Senate voted to permit same-sex marriages. Opponents vow to go on the attack as New York became the sixth state (along with the District of Columbia) to make the move to allow gay weddings. National polls continue to show increasing support for the cause.

From an economic standpoint, New York stands to pick up $180 million in economic activity as folks travel from all over to exchange their vows in the state and the Big Apple.

You also saw a flurry of stories in the wake of New York’s move and Cuomo’s victory of the governor suddenly appearing at the top of the list of 2016 Democratic presidential candidates. Just remember you heard it here first, long ago.

Frederic Dicker / New York Post…long-time follower of Albany:

“Gov. Andrew Cuomo completed his first legislative session Friday night with yet another breathtaking display of political skillfulness, the likes of which hasn’t been seen in the Capitol for at least 50 years.

“Cuomo’s first six months in office have, in fact, been nothing short of a grand slam of remarkable successes: a revolutionary redefinition of marriage, closing a $10 billion budget deficit without new taxes, a game-changing local property-tax cap, and sweeping ethics reform.

“This represents for long-dysfunctional Albany – once a national beacon of governmental creativity but in recent years a national joke – a tour de force of what leadership should be about.

“ ‘The governor has stolen all of the issues,’ conceded former state GOP Chairman William Powers, who helped orchestrate the defeat of Cuomo’s father, Gov. Mario Cuomo, in 1994.”

--At the start of the week, Michele Bachmann was riding the wave of a Des Moines Register poll that had her neck and neck with Mitt Romney, a statistical dead heat at 23-22. So Bachmann picked a good time to formally launch her campaign. 

But having been to Winterset, Iowa, four years ago to see the birthplace of John Wayne, I, too, was a bit mystified that Bachmann would confuse Winterset with Waterloo, Iowa, in evoking Wayne’s name. It just leaves you shaking your heard. On a different topic, Bachmann commented on the wishes of the media as they attempt to compare herself to Sarah Palin: “They want to see two girls come together and have a mud wrestling fight. And I’m not going to give it to ‘em.”

Seeing as I’m going to be at the Iowa State Fair next month, why not? It would be the perfect venue. Maybe before the tractor pull.

But Bachmann has her supporters.

Andrea Tantaros / New York Daily News

“Honesty is the best policy. In life, in politics and particularly when you’re running for President of the United States.

“It’s what the public craves and expects, and it’s a big reason why Rep. Michele Bachmann is quickly becoming the GOP dark horse in the 2012 election. Polls in Iowa show her right behind front-runner Mitt Romney.

“Why is Bachmann rising? Because rather than being all things to all people, Bachmann has decided to be herself, and she’s not hiding her views. ‘It’s the peace through strength Republicans, and I’m one of them. It’s fiscal conservatives, and I’m one of them, and it’s social conservatives, and I’m one of them. It’s the Tea Party movement, and I’m one of them,’ she remarked this week.

“In true Bachmann fashion, these words were candid and direct, and they’re making Obama supporters green with resentment. Or is it red?

“Whether you support her or not, Bachmann’s style is refreshing in a political landscape laden with canned responses, and it’s provoking a case of envy among Democrats. She isn’t going to straddle any fence. The left is desperate for a candidate who will do the same – and they know that President Obama can’t.

“From the Bush tax cuts to gay marriage, from drilling to spending, Obama has been on both sides of most major issues. The critique of Obama’s consistent inconsistency and failure to lead is a theme not just reserved for Republicans anymore.

“Former Rep. Cynthia McKinney (D-Ga.) blasted him on Libya: ‘I want to say categorically and very clearly that these policies of war…are not what the people of the United States stand for.’

“A recent headline in Politico notes that ‘Obama may be losing faith with Jewish voters,’ which is unsurprising given his hesitant support of Israel….Independents’ support for Obama is down from a 62% approval rating last month to 43% today (Associated Press), his lowest since June 2010. With women – a demographic that generally detests doublespeak – Obama’s approval rating is down 9 points from last month.

“Just last week, New York Times columnist Maureen Dowd skewered Obama by calling him ‘bi’ on the issues: ‘Our president likes to be on both sides at once…On some of the most important issues facing this nation, it is time for [him] to come out of the closet.’….

“With our economy sputtering, it’s critical to have a commander in chief who embraces candor, not candy coating.

“As Bachmann rightly pointed out, ‘Anyone who speaks their mind without trying to sugarcoat things is good for the country.’

“And anyone who doesn’t? Well, the country can decide.”

--Sarah Palin premiered her two-hour film, “The Undefeated,” in Iowa. She is also showing it in New Hampshire and South Carolina. Gee, I wonder why she chose these states?

But I also wonder why the film isn’t titled “The Quitter.” 

--New Jersey Republican Gov. Chris Christie is getting some deserved PR for his pension reform program, passed with the help of leading Democrats, but his approval rating in the state continues to slide. A Bloomberg New Jersey survey has his favorable at 43% (53% view him unfavorably), while teachers, his prime target, have a 76% favorable rating. Christie’s education-spending reductions were opposed by 65% and favored by only 31%.

And while it’s early, 51% of respondents said they wouldn’t pick Christie for the Nov. 2013 gubernatorial race.

The Bloomberg survey doesn’t specifically address his sometimes bullying tactics but no doubt that is hurting Christie with women. 

--Former Illinois Gov. Rod Blagojevich was finally found guilty of 17 counts of wire fraud, attempted extortion, bribery and all kinds of other stuff, this after his first trial resulted in a deadlocked jury on most counts. This is a big victory for U.S. attorney for the district, Patrick J. Fitzgerald, though Fitzgerald is not well-liked in some circles for pursuing the CIA leak case against Scooter Libby, former chief of staff for Vice President Dick Cheney.

--Political analyst Mark Halperin of Time magazine and MSNBC was suspended indefinitely after stating on air that President Obama was “kind of a d---“ in his press conference on Wednesday. Halperin thought the seven-second delay was in place. It turns out the button was not working.

--First Lady Michelle Obama was forced to defend her husband’s absence as she toured South Africa and Botswana. Obama hasn’t been to the continent since a 24-hour stop in Ghana in 2009.

--And here’s some info you’ll find nowhere else. A good friend of mine called on Friday to tell me of a meeting he had with a leading Goldman Sachs investment banker. The Goldman fellow had very recently played golf with Speaker of the House John Boehner. Boehner smoked one cigarette a hole, two on par-fives, but said of Michele Bachmann that she’s “crazy.” Speaking of his round with the president, Boehner said Obama was delightful to be with but when it comes to his presidency, Boehner said he has never seen a guy “more in over his head.” Obama is so far behind, Boehner added, he’ll never catch up.

--The hacker group Lulz Security suddenly announced it would disband under increasing pressure from international governments and security services, including the likes of the CIA and FBI. But Lulz, in its farewell message, urged other hackers to join the “revolution.” Most just expect Lulz itself to lay low a bit, then regroup and come back stronger than ever.

--Good lord…did you see how the astronauts on the International Space Station had to briefly evacuate Tuesday to two Soyuz spacecraft docked with the station over fear they would get hit by a piece of space debris that thankfully missed them. It was only the second time astronauts have sought shelter against a possible impact with space junk, while the station has had to maneuver around it 11 times. Repositioning is no easy task, either. As Daniel Michaels reports in the Wall Street Journal:

“Space junk is a growing threat to both manned and robotic spacecraft orbiting near Earth. More than 500,000 natural and artificial pieces of debris larger than a marble are estimated to be in orbit, of which 20,000 are large enough to be tracked from stations on Earth. NASA officials have said that a greater risk is posed by debris that cannot be tracked.”

--Speaking of junk, the Supreme Court, by a 7-2 margin, overturned a California law that forbade the sale of hyper-violent videogames to minors. Justice Antonin Scalia, in writing the decision, defended the First Amendment protections even for those activities deemed offensive. But Justice Clarence Thomas rejected Scalia’s reasoning, saying it undermined the authority of parents over their children. Justice Stephen Breyer was the other dissenter.

“In my view,” Breyer wrote, “the First Amendment does not disable government from helping parents make such a choice here.”

So for once we didn’t have the 5-4 conservative bench vote…the Justices were all over the place. Refreshing…only I side with Thomas and Breyer, though with reservations. 

The Wall Street Journal editorial board opined:

“Permit us to summarize our view of this case’s dilemma in non-legal language: What came first – the chicken or the egg? That is, what came first – the First Amendment or the descent of America’s culture?

“Is it the First Amendment’s fault that this stuff exists? Is it the First Amendment’s fault that someone sells and many millions buy videogames in which, as Justice Alito noted, players spend ‘hour upon hour controlling the actions of a character who guns down scores of innocent victims’? Or that allows players to re-enact the murders at Columbine High School, Virginia Tech or firing a bullet into President John F. Kennedy?

“This would be our short version of the opinion of Justice Scalia and the majority; Yes, U.S. culture today undeniably produces all manner of offensive filth. But that does not mean that the solution to rampant video violence lies with weakening the First Amendment and its broad protections. The majority ruled that the First Amendment’s strong base should remain as it is. We agree….

“The First Amendment stands on a sturdy base, for now. It may begin to crack, however, beneath the weight of cases like this….

“The same information technologies that produce this stuff can also cause deep outrage at the Court’s attempts to protect the First Amendment. The friends of free speech might consider doing more than they are now to vilify and stigmatize the cultural bilge that makes these basic protections seem increasingly indefensible to so many.”

[“More than 46 million American households have at least one video-game system, with the industry bringing in at least $18 billion in 2010.” Jesse J. Holland / AP]

--From Richard Alleyne / Irish Independent

“Transcendental meditation…can cut heart attack and stroke death rates by up to 50%, new research has found.

“The practice, which involves the continual repeating of a mantra, was found to reduce high blood pressure, cholesterol and thickening of the arteries. It also protects against diabetes.

“ ‘This is a seminal finding,’ said Dr. Norman Rosenthal of the American government’s National Institute of Mental Health. ‘The prevention of heart attack and stroke and actual lengthening of lifespan by an alternative treatment method is exceedingly rare, if not unprecedented. If Transcendental Meditation were a drug conferring so many benefits, it would be a billion-dollar blockbuster.’….

“Researchers at the Medical College of Wisconsin followed 201 men and women with an average age of 59 who suffered from the narrowing of arteries in their hearts for nine years.

“Half of the group were taught TM along with their normal treatment while the others just received advice on how to modify their diets and exercise routines.

“They found that those who regularly meditated reduced their chances of dying or having a heart attack or stroke by 47% compared with those who received traditional care.

“In those who were particularly enthusiastic about the meditation or unusually susceptible to stress, the results were even stronger.

“They showed a two-thirds reduction in chances of dying during the trial.”

Just had to include the above. Maybe it helps one or two of you. [20 minutes a day, twice a day, is the recommendation.]

---

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

God bless America on her birthday.
---

Gold closed at $1482
Oil, $94.94

Returns for the week 6/27-7/1

Dow Jones +5.4% [12582]
S&P 500 +5.6% [1339]
S&P MidCap +5.2%
Russell 2000 +5.3%
Nasdaq +6.1% [2816]

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

Dow Jones +8.7%
S&P 500 +6.5%
S&P MidCap +9.7%
Russell 2000 +7.2%
Nasdaq +6.1%

Bulls  39.8
Bears 26.9 [Source: Chartcraft / Investors Intelligence…I had a good comment here last time. Go back and look at it if you forgot.]

Have a great week. I appreciate your support.

Brian Trumbore