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Week in Review

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11/12/2011

For the week 11/7-11/11

[Posted 6:00 AM ET]

Europe, Washington and Wall Street

I’ll switch things up this week and start with the conclusion. Europe will continue to stumble from crisis to crisis, the Continent needs growth and none is forthcoming, there is no backstop for the likes of Italy and Spain despite what the politicians said three weeks ago, and, longer term, there is zero cause for optimism.

Short-term the market remains nothing more than a casino, albeit more of a headline driven one than ever before, and who knows where stocks will go the final seven weeks of 2011? I don’t change my annual forecast and I’m stuck with 5% to 7% declines for the major averages and now we’re back up for the year, though we’ve learned these days seven weeks can be an eternity.

Just look at the last three. For the week ending Oct. 28, stocks soared around the world on optimism the European Union, European Central Bank and IMF had reached a comprehensive agreement to recapitalize the banks, slash Greece’s debt as part of Greek Bailout II, and super-charge the existing European Financial Stability Fund that was designed to backstop Greece, Ireland and Portugal while those little wieners, three of the PIIGS, I mean, got their acts together. The concern, though, was that markets move faster than ever these days and contagion would spread to Italy and Spain, which in the case of the former it did.

But first, after soaring the week ending Oct. 28, equity markets took it on the chin the week ending Nov. 4 because Greek Prime Minister Papandreou decided that the bailout agreement for his country of the week before needed to be voted on by the entire country first, a rather pissed off nation at that, witness all the rocks that have been displaced this year in Athens, plus everyone looked around and said, hey, that agreement between EU, ECB and IMF officials doesn’t really stand a chance of being implemented. Like how the heck do we finance this super-duper leveraged EFSF? Who is going to buy the bonds that would be issued? What kinds of guarantees are bondholders getting? And, in the case of Greece, just why am I, a holder of Greek crappola, getting a 50% haircut without being able to cash in my insurance (in the form of credit-default swaps)? 

But by the end of this week, one ending on Veterans Day, which formally marks the end of the stupidest war in the history of the planet, World War I, the war to end all wars, peace broke out across Europe anew, or at least in financial markets, as both Italy and Greece reached agreements (or were darn close to one in the case of the former) on new governments, both to be run by technocrats, which is purposefully not as exciting as Technicolor because this is serious business, you see.

In the case of Greece, a new prime minister was sworn in, Lucas Papademos, a respected (so they tell me, I never met the man myself) former vice-president of the European Central Bank.

“The Greek economy is facing huge problems despite the enormous efforts made,” he said the day before he was officially sworn in by a gang of Greek Orthodox priests in fancy robes that are probably worth more than all of Greece’s state-owned operations the government is charged with selling off these days combined.

“Greece is at a crucial crossroads…the course will not be easy, (but) the problems will be resolved faster…if there is unity, cooperation and wisdom,” Papademos said, he having an easier name to type than Papandreou, at least for yours truly.

Papademos and his unity government, which will contain the old finance minister, Evangelos Venizelos, now must implement the Oct. 26 Euro bailout, Greek Bailout II, that entitles Greece to 130bn euro ($179 billion) on top of the first Greek Bailout of 110bn euro, plus manage the voluntary debt swap that gives bondholders a 50% haircut. Additionally, new elections are to be held around Feb. 19. For at least taking the first steps in implementing the new bailout, Greece will finally be rewarded with an 8bn euro ($11 billion) loan installment from the first bailout that allows the government to pay its bills come mid-December at the latest. Otherwise, there is no money and we’ll all be locking our doors as a precaution against Greeks bearing rocks.

Oh, and Greece’s economy is supposed to contract a further 2.8% next year, after falling 5.5% in 2011, which is why the debt to GDP ratio in Greece is slated to approach 200% in 2012 before beginning to decline. 

As for Italy, with the senate here having passed a mandated package of austerity measures as called for by the EU and ECB, and with Prime Minister Sleazio Berlusconi having agreed to step down once the lower house ratifies the package on Saturday, Mario Monti, a former European commissioner, i.e., bureaucrat, will become prime minister. Markets rallied Friday on word Monti was the man.

But earlier in the week, boy was it touch and go in terms of Italy’s ability to take us all down.

You see, Italy has 1.9 trillion euro in sovereign debt, or a cool $2.6 trillion, and 300bn euro of it needs to be refinanced next year, for starters, so it would be nice if the government could do so at low interest rates. After all, the German 10-year bund is trading with a yield around 1.85% these days, that’s nice and low.

But Italy’s 10-year rocketed above 7.00% this week, almost touching 7.50% before closing Wednesday at 7.25%. Yikes, said global financial markets. Why that’s unsustainable! Or as Italian broadcaster Dick Vitale was heard to exclaim, “That’s Bailout City, baby!!!”

Thursday morning, though, the Italians sold $6.8 billion of 12-month bills at a yield of 6.08% and everyone breathed a sigh of relief. Forget the yield at auction for such an instrument last month was only 3.57%, and 1.90% a year ago, 6.08% was better than what folks expected.

Yes, friends, we’re just lurching from crisis to crisis, and there is no mechanism in place to deal with it all. The only thing that kept the Italian 10-year from shooting through the roof was first, the hoped for change in government, and second, the European Central Bank apparently buying gobs of Italian debt to drive the yield down to 6.53% by week end, though this can’t continue, as some of the below commentary spells out better than I can right now because my brain is nothing more than a disorderly pile of linguine after having to write about this mess for 18 months.

Yes, this was a week where IMF Managing Director Christine Lagarde told an audience that the world economy was headed for a “lost decade” unless nations acted together to counter the threats to growth.

“In our increasingly interconnected world, no country or region can go it alone,” she told a forum in Beijing. “There are dark clouds gathering in the global economy.”

Advanced economies, Lagarde said, have a “special responsibility” to restore confidence and lift growth, adding that her host, China, needed to boost domestic consumption, which as you’ll see shortly they’ve been doing a nice job of.

“If we do not act, and act together, we could enter a downward spiral of uncertainty, financial instability, and a collapse in global demand. Ultimately, we could face a lost decade of low growth and high unemployment,” at which point attendees ignored the shrimp cocktail and went straight to their rooms to hide under the covers.

And just to close the circle from my above opening, this was also a week where EU economic and monetary affairs commissioner Olli Rehn said “Growth has stalled in Europe and there is a risk of a new recession. There is a broad consensus on the necessary policy action. What we need now is unwavering implementation.”

Rehn’s staff at the European Commission lowered its growth forecast for the EU’s 27 economies to 0.6% in 2012 from an estimated 1.6% in 2011. The 17-nation eurozone is now expected to grow just 0.5% next year. Ergo, recession for a portion of this time is a certainty, probably starting in the current quarter. The U.K.’s retail sales for October, for example, declined a worse than expected 0.6%, while Spain reported its third-quarter GDP was unchanged over Q2, not what that place needs given its 21.5% unemployment rate. [Spain elects a new government on Nov. 20 as well.]

And it just needs to be said that Europe is already facing a massive credit crunch, particularly when it comes to small business, while I noted a number of weeks ago that the next real flashpoint is going to be Eastern Europe, a fact everyone else seemed to pick up on this past week. Eastern Europe relies heavily on Western European banks for credit and those banks are looking at mandated recapitalization efforts through next June that will lead to a further closing of the loan window at the worst possible time.

Further opinions…

Gideon Rachman / Financial Times

“As the European ship heads for the rocks, so the officers in charge are being thrown overboard….But while politicians may come and go, European leaders insist that one thing will remain neutral – the euro. No summit is complete without the ritualistic declaration that Europe will do ‘whatever it takes’ to preserve the single currency. But the repeated vows to save the euro betray a dangerous confusion.

“The euro is not an end in itself. The single currency is just an instrument, aimed at promoting economic prosperity and political harmony across Europe. As the evidence mounts that it is doing the precise opposite, it is time to think not about how to save the euro – but about how to scrap it, or at least allow the weakest members to leave.

“For reasons of pride, fear, ideology and personal survival, it is extremely hard for European leaders to accept that the euro is a large part of the problem. Instead they search for other explanations for the economic crisis. Countries have failed to stick to the rules. They have lied. Europe needs new political structures. The bazooka is not big enough. The markets are irrational. The people are revolting….

“The euro has helped both to create and sustain the crisis in Europe. First, it caused interest rates to plunge in southern Europe, encouraging countries such as Italy and Greece to go on a borrowing binge. Now the single currency rules out the options that postwar Italy and others traditionally used to cope with high levels of debt: inflation and devaluation of the currency. Neither policy was cost free, but they provided an alternative to the ‘internal devaluation’ (otherwise known as wage cuts and mass unemployment) that is currently being urged on Italy, Greece and much of southern Europe….

“Economic chaos in Greece is now being supplemented by political chaos. In Italy, meanwhile, borrowing costs go up and up – in a way that will soon make the country’s finances unsustainable. If Italy, the world’s seventh largest economy, applies to the EU bailout fund – or even to the IMF – there simply may not be enough money to meet its needs. It would be like an elephant getting into a life raft….

“Greece and Italy are not the only problems. Ireland and Portugal have already had to accept bailouts – and may be destabilized anew by the latest crisis. Spain’s vulnerability is clear. France has not balanced its budget since the 1970s and is fretting about its triple-A rating.”

Nouriel Roubini / Financial Times

‘With interest rates on its sovereign debt surging well above 7%, there is a rising risk that Italy may soon lose market access. Given that it is too-big-to-fail but also too-big-to-save, this could lead to a forced restructuring of its public debt of 1,900bn euro. That would partially address its ‘stock’ problem of large and unsustainable debt but it would not resolve its ‘flow’ problem, a large current account deficit, lack of external competitiveness and a worsening plunge in gross domestic product and economic activity.

“To resolve the latter, Italy may, like other periphery countries, need to exit the monetary union and go back to a national currency, thus triggering an effective break-up of the eurozone….

“(Once) a country that is illiquid loses its market credibility, it takes time – usually a year or so – to restore such credibility with appropriate policy actions. Therefore unless there is a lender of last resort that can buy the sovereign debt while credibility is not yet restored, an illiquid but solvent sovereign may turn out insolvent. In this scenario skeptical investors will push the sovereign spreads to a level where it either loses access to the markets or when the debt dynamic becomes unsustainable.

“So Italy and other illiquid, but solvent, sovereigns need a ‘big bazooka’ to prevent the self-fulfilling bad equilibrium of a run on the public debt. The trouble is, however, that there is no credible lender of last resort in the eurozone.

“One is urgently needed now. Eurobonds are out of the question as Germany is against them and they would require a change in treaties that would take years to approve. Quadrupling the eurozone bailout fund from 440bn euro to 2,000bn is a political non-starter in Germany and the ‘core’ countries. The European Central Bank could do the dirty job of backstopping Italy and Spain, but it does not want to do it as it would take a huge credit risk. It also cannot do it, as unlimited support of these countries would be obviously illegal and against the treaty no-bailout clause….

“Output now is in a vicious free fall. More austerity and reforms – that are necessary for medium-term sustainability – will make this recession worse….The recessionary deflation that Germany and the ECB are imposing on Italy and the other periphery countries will make the debt more unsustainable….

“The eurozone can survive with the debt restructuring and exit of a small country such as Greece or Portugal. But if Italy and/or Spain were to restructure and exit this would effectively be a break-up of the currency union. Unfortunately this slow-motion train wreck is now increasingly likely.

“Only if the ECB became an unlimited lender of last resort and cut policy rates to zero, combined with a fall in the value of the euro to parity with the dollar, plus a fiscal stimulus in Germany and the eurozone core while the periphery implements austerity, could we perhaps stop the upcoming disaster.”

Editorial / Wall Street Journal

“In the European economic crisis, all roads lead through Rome….

“In Italy, as in Greece, Spain and Portugal and eventually France, the welfare-entitlement state has hit a wall. Successive governments on the Continent, right and left, have financed generous entitlements with high taxes and towering piles of debt. Their economies have failed to grow fast enough to keep up, and last year the money started to run out. The reckoning has arrived….

“This is a crisis of the welfare state, and Italy is a model basket case. Mario Monti, who is tipped to lead a new government of technocrats, once described the Italian economy as a case of ‘self-inflicted strangulation.’ Government debt is 120% of GDP, making Italy the world’s third-largest borrower after the U.S. and Japan. Its economy last grew at more than 2% a year in 2000….

“But now hard choices can no longer be postponed. And the solution to Europe’s debt crisis must begin with reforming, if not dismantling the welfare state….

“The road from Rome may now lead to Paris, Madrid and other debt-ridden European countries. But this is no cause for U.S. chortling, because that same road also leads to Sacramento, Albany and Washington. America’s federal debt was 35.7% of GDP in 2007, but it was 61.3% last year and is rising on an Italian trajectory. The lesson of Italy, and most of the rest of Europe, is never to become a high-tax, slow-growth entitlement state, because the inevitable reckoning is nasty, brutish and not short.”

Nick Squires / Irish Independent

“Decades of turning a blind eye to endemic tax evasion, corruption, and dismal economic growth have sent Italy careening into its present crisis.

“The country may be renowned for global brands such as Ferrari, Gucci and Armani but the eurozone’s third-largest economy has been hobbled by the chronic failure of successive governments to enact reforms.

“On the streets of Rome, Italians may express relief and grim satisfaction that Mr. Berlusconi has announced his intention to resign, but many realize that the country’s problems extend far beyond the failings of the scandal-prone prime minister.

“Italy’s people know they have been sleepwalking into an economic abyss for years and must now pay the reckoning….

“The country’s dismally low growth is a consequence of corruption, a bloated bureaucracy, an overpaid and cosseted political class, stifling bureaucracy, low productivity and a third-rate educational system.

“On almost all those indices, the problems in the ‘Mezzogiorno,’ the sun-baked, Mafia-plagued south of Italy, are much more acute than in the wealthy north, highlighting a regional divide that has existed since unification in 1861, threatening to split the nation.

“Of the world’s top 200 universities, only one is Italian – Bologna University in the north....

“Italy also performs poorly in global rankings of transparency and competitiveness….

“Tax evasion is almost a national sport. Italians resent paying high taxes when they feel they get little in return – streets are potholed, hospitals are overcrowded, playgrounds for children are often smashed up and covered in graffiti and public transport is frequently shabby and outdated.

“And they have been set a terrible example – among the plethora of accusations that Mr. Berlusconi has faced in his many trials are those of tax fraud and false accounting.

“ ‘How do you expect Italians to respect the rules when the law is ignored by our politicians?’ said Alessio, 42, who sells T-shirts and souvenirs to tourists from a shop overlooking the Trevi Fountain….

“Seeing no prospects at home, young Italians are leaving in droves to seek better opportunities in Britain, the U.S., Australia and the Gulf, in an accelerating brain drain that will deprive the country of much-needed entrepreneurial talent….

“Italy’s fat cat politicians are also a drain on the public purse. The 945 members of the Senate and the Chamber of Deputies earn an average annual salary of 140,000 euro ($193,000) – almost twice as much as British MPs….

“They are chauffeured around in expensive Alfa Romeos, Maseratis and Audis with tinted windows.

“There are a staggering 30,000 of these executive cars and they cost the Italian taxpayer an estimated 2bn euro a year….

“So even with Berlusconi on his way out after 17 years at the heart of Italian politics, the prospects for meaningful change look distant.”

[Ed. Don’t change the system yet, my Italian friends. I’m thinking I might want to be a chauffeur there.]

Washington

It was a very light week in terms of economic data, as in the only releases of note were Thursday’s jobless claims report that came in at 390,000, better than expected and below the psychologically important 400K mark, and a better than expected reading on consumer sentiment that helped the equity markets out on Friday.

Otherwise, all eyes are on the supercommittee in Washington, that 12-member bipartisan congressional panel charged with coming up with at least $1.2 trillion in budget savings by November 23rd, after which Congress has until Dec. 23rd to act on it or allow automatic cuts of like amount, half from defense, to be put in place.

But as of this writing it seems clear the supercommittee will not act heroically and come up with the $3 or $4 trillion in savings that is really needed to put a dent in the ever-rising federal deficit. They either come up with $1.2 trillion, or let the automatic trigger mechanism take hold, before which there will be intense pressure to shelve the process because of the deep cuts to defense. It’s a joke, though a very bad one for the future of our country let alone financial markets.

Should the supercommittee fail to act…fail to come up with real cuts…I stick to my prediction of months ago that in 2012 we will have our budget moment, our Italy, in the form of a Crash, worse than this summer’s crashette. We already know that should Congress miss this opportunity (after President Obama missed his own in trashing Simpson-Bowles at the start of 2011), next year will go down as one of the ugliest, and destructive, political campaigns since 1860, and you know what followed that one.

I hope I’m proved wrong…that Congress will do the right thing at the last moment, but we’re already past the time when the Congressional Budget Office was supposed to be able to ‘score’ whatever the supercommittee comes up with before presenting it to the full Congress for debate.

Lastly, some news on China’s economy. Consumer prices for October rose at a 5.5% clip, far better than the 6.5% rate in July that spooked markets. Producer prices also came in at a less than expected increase of 5.0%, the smallest increase in a year. Critically, food costs rose 11.9%, which is still way too high but better than September’s 13.4% pace. The non-food inflation rate was only 2.7% for the month. None of this means the government is about to lower interest rates, but it is taking other steps to ease monetary policy and will likely do more before year end, such as reducing bank reserve requirements to encourage more lending, especially to small business. [A report on Friday revealed that lending had already picked up more than forecast in October.]

Additionally, retail sales rose a strong 17.2% in October, on the heels of September’s 17.7% rise. Imports for the month soared 28.7%, much higher than forecast, so domestic demand is rising, just as the West, and the Chinese government, wants it to. [Imports from the U.S. rose 20.5% in October.]

Conversely, exports rose only 15.9% in October, owing in no small part to Europe’s weakness. China’s exports to Europe increased just 7.5%. 

Lastly, industrial production in October rose 13.2% vs. a 13.8% gain in September, while car sales were at the slowest pace in five months and housing starts fell 1.3% from a year earlier. There are real signs the housing bubble has popped, as the government wanted, but now we have to watch the speed of the decline in prices and the first anecdotal evidence is a bit worrisome.

My large holding in Fujian reports earnings this week and I suspect I will be commenting extensively on this next time.

Street Bytes

--For the week, stocks finished mixed. The Dow Jones rose 1.4% to close at 12153, the S&P 500 added 0.8%, but Nasdaq finished down 0.3%. Nasdaq has declined 3 of the last 4 weeks while the Dow Jones has gained 3 of 4.

--U.S. Treasury Yields

6-mo. 0.02% 2-yr. 0.23% 10-yr. 2.06% 30-yr. 3.13%

Bonds were little changed, though the market was closed on Friday and thus didn’t have a chance to respond to Friday’s rally in European and U.S. equities.

--Federal Reserve Vice Chairman Janet Yellen said the central bank will be conducting its fourth round of stress tests on U.S. banks and whether they can withstand a recession.

“We are monitoring European developments very closely, and we will continue to do all that we can to mitigate the consequence of any adverse developments abroad on the U.S. financial system,” said Yellen.

--France was furious after Standard & Poor’s mistakenly suggested that it had downgraded France’s triple-A credit rating on Thursday, sparking a sell-off in French government bonds. S&P said that due to a technical error, a message was automatically disseminated to subscribers suggesting the change. Off with S&P’s heads!

--A USA TODAY analysis finds “Households have reduced debt by $549 billion since 2007, mostly by cutting mortgages through defaults and paying down credit cards. During that time, the federal government has added more than $4 trillion in debt, pushing the country’s total borrowing to a record $36.5 trillion, excluding the financial industry, according to the Federal Reserve.” [Dennis Cauchon / USA TODAY]

--A week ago, as I went to post, there were rumors the $600 million in lost MF Global customer cash had been found, though I hastened to add it was “too soon to say this was fact.” And, indeed, a week later regulators still don’t know exactly where the cash is. Said an official with the Commodity Futures Trading Commission, “Their books are a disaster.”

Michael Goodwin / New York Post

“Across the land the cry is heard: ‘String up the bankers. Make ‘em pay for America’s suffering.’

“In other precincts, other villains are targeted: ‘The real crooks are in government. They’re to blame for the disaster.’

“Humbly, I nominate a candidate to satisfy both appetites.

“Let Jon Corzine pay the piper for all our sins.

“Corzine is the perfect poster boy for what’s ailing America. He went from Wall Street to politics, then back to Wall Street, and left a trail of wreckage everywhere. Yet he keeps failing upward, raising at least $500,000 for President Obama this year amid talk he could be named Treasury secretary.

“Now he is under investigation for bringing down MF Global….

“Corzine used his connections to get the low-watt company admitted to the exclusive club of ‘primary dealers’ of government debt.

“He quickly borrowed billions and ramped up risky trading in European government bonds, assuming he could make a killing when they are bailed out. He can tell it to the judge and shareholders.

“Corzine first made a fortune as a Master of the Universe at Goldman Sachs before being pushed out in 1999. He took his gilt and, running as a liberal Democrat, bought himself a seat in the United States Senate from New Jersey. He quickly tired of Washington and bought the Jersey governor’s chair.

“All told, he spent about $100 million of his own cash on the two races, but that was a pittance next to the billions of taxpayer dough he wasted.

“He nearly drove the Garden State into bankruptcy before voters tossed him out after one miserable term.

“Republican Chris Christie defeated him and is winning bipartisan support for cleaning up the Corzine mess. Now the courts and G-men will have to clean up the MF Global mess.

“If he dodges prison, retirement would seem the smart bet for Corzine. And a welcome relief for America.”

On Friday, the brokerage’s bankruptcy trustee fired 1,066 employees, a figure that should be on Corzine’s tombstone. 

--General Motors, in a sign of the times, said it would probably shed more plants and workers in Western Europe owing to the continent’s debt crisis and looming recession. In particular, GM is looking to drastically cut back on its Opel-Vauxhall unit, where 8,300 jobs have already been eliminated. Overall, GM reported third-quarter earnings that were slightly better than expected, but it warned Q4 results would be flat due mostly to Europe.

--Friday, Bloomberg first reported that U.S. auto-safety regulators are looking into the safety of lithium-ion batteries that power electric vehicles after a Chevy Volt battery caught fire. Regulators have approached other automakers that sell vehicles with such batteries.

“The Volt caught fire while parked at a National Highway Traffic Safety Administration testing center in Wisconsin, three weeks after a side-impact crash test, said an agency official….

“The fire was severe enough to burn vehicles parked near the Volt, the agency official said. Investigators determined the battery was the source of the fire, the official said.”

Better not let the Volt fall into the hands of terrorists, I’m thinking. No one would think twice seeing it parked outside an embassy.

--The Dept. of Agriculture reported that China has become the top market for U.S. farm exports for the first time, surpassing Canada. For the fiscal year ending Sept. 30, U.S. exporters sold $20 billion in agricultural products to China. The mainland has been importing huge amounts of corn from the U.S., even though China is the second-largest corn grower in the world behind the land that spawned the Kardashians. Overall, U.S. farm exports were a record $137.4 billion this fiscal year and are expected to be a like amount in 2012. [Separately, the USDA said the nation’s corn crop will be the lowest in terms of yield per acre in eight years, though because farmers planted so much more last spring, the actual crop size will be the fourth-biggest in history.]

--Seven weeks to go and the broad-based CRB index of 19 commodities is still down on the year, per your editor’s prediction when the CRB peaked at 370…320.20 vs. a 12/31/10 close of 332.80…even as the price of oil has rebounded to nearly $100 and gold has recovered half of its loss from the highs.

--Libya’s interim oil minister said oil production should reach 700,000 barrels a day by year end, or half pre-revolution levels, but the post-Gaddafi environment is still fraught with tremendous uncertainty and there is no reason why any foreign company, outside the energy sector, would make new investments until the political situation becomes clearer. [I just saw a story, Sat. morning, that the militias started firing on each other today.]

--Meanwhile, the Obama administration announced this week that it would postpone until after the 2012 election a final decision on the proposed Canada-U.S. oil pipeline, another real profile in courage by a president not wanting to offend either his environmental base or union supporters who would benefit on the jobs front. Republicans can have a field day on this one. The White House says it needs the delay to reroute part of the pipeline to appease the environmentalists. The administration had previously said it would decide on the pipeline by year end.

--The European Union will overtake the United States as the world’s biggest oil importer in 2015, according to the International Energy Agency, owing to better fuel efficiency in the U.S. as well as increased domestic oil and gas production that even the Obama administration can’t stop.

But what cracks me up about the IEA’s periodic reports is their attempt to predict crude prices way in the future, like the latest call that oil will reach $120 a barrel in 2035. This is so freakin’ stupid. Why bother, IEA? [And of course if Iran is attacked, who knows how high the price of crude could soar? I still maintain, though, that in this instance right after the spike is the perfect time to ‘short’ the product and/or sector. Iran will not be able to close the Strait of Hormuz.]

--India reported its largest decline in domestic auto sales for October, off 23.8%, since December 2000. I’d say that’s a bit disconcerting.

--A.P. Moeller-Maersk A/S, the world’s biggest container shipping line, said it will lose money this year, lowering its initial forecast of a small profit as freight rates plunge. The whole freight business was yet another bubble in that the industry has added way too many ships, far more than demand warrants, at least today. Maersk said the global container fleet expanded by 224 vessels in the first nine months of the year. I’m assuming rats are also obtaining favorable passage rates.

--Speaking of rats, with Fannie Mae requesting an additional $7.8 billion from taxpayers after soured derivatives bets led to a loss of $5.1 billion for the recent quarter, Fannie has now hit us up for $111 billion, while sibling Freddie Mac is up to $72 billion. Well isn’t that special.

--Walt Disney Co. reported strong fiscal fourth-quarter earnings with net income up 30% over a year earlier. Revenue rose 7% as the media network division, including ESPN, continues to set viewership records. I was interested to see business was solid at Hong Kong Disneyland, which I went to a few years ago and was frankly very unimpressed, though I understand they’ve made improvements since then. 

--Cisco Systems reported revenues rose 4.7% in its latest quarter, better than expected, as CEO John Chambers said “the company is seeing stability in our switching portfolio.” Gross profit margins increased in this important segment as well.

--Adobe halted development of its Flash Player for mobile browsers, surrendering to Apple in the war over web standards. Adobe’s decision means web developers who now use Flash tools to produce content will instead move over to newer HTML5 technology, not that I have the slightest idea what this is, which is why I have my own tech support. 

By the way, I was told on Friday my Apple iPad app for StocksandNews isfinally on the way, sports fans. Like it might be available now. It probably behooves me to get an iPad myself, come to think of it.

--I apologize I just haven’t looked at the Olympus Corp. accounting scandal in Japan in great detail, but what I’ve read reeks of one of the all-time scams, whereby the company was way overpaying for small, basically bankrupt outfits that had zero to do with Olympus’ core business, first cameras and then a move into medical equipment, plus advisers on the deals were paid outrageously large fees. Then as the investments soured, the company tried to mask the losses. The entire board of directors is to be replaced and the whole scandal wouldn’t have been brought to light had the former CEO, Michael Woodford, not blown the whistle and given evidence to investigators in Britain and the U.S. For Japan, which likes to say its accounting is squeaky clean, this is a huge black eye on par with anything that has happened in the U.S., including Enron.

--Shares in Green Mountain Coffee Roasters Inc. traded at $115 on Sept. 20, less than two months ago. This week they closed at $43 after the company’s future earnings outlook disappointed the Street, this as hedge-fund manager David Einhorn questioned the company’s accounting, transparency and business practices. Green Mountain’s CEO denied the company has committed any wrongdoing.

--Jefferson County, Alabama, filed for bankruptcy in the largest such municipal filing in U.S. history, some $4 billion, though this was long expected. It eclipses the 1994 filing of Orange County, California, which had more population but less debt. Jefferson County’s problems were largely the result of a heavily-indebted effort to revamp its sewers. No word on whether they are now overflowing as a result of the action.  Good thing I live uphill from there.

--Toyota recalled 550,000 vehicles worldwide – mostly in the United States – over steering issues. They say that unless you’re driving on the Bonneville Salt Flats, this can be a real problem. The models involved are mostly from 2004 and 2005, and include Camry and Lexus brands. Otherwise, drive on!

--Thailand’s floodwaters encircled another two industrial parks east of Bangkok, though mass transit systems and central commercial districts remained dry (at least as I write). Among the latest firms threatened by the ongoing, slow-motion disaster are Unilever, Johnson & Johnson, Isuzu and Honda. Earlier, Toyota said it could no longer estimate the financial impact from the Thai floods, a move Honda previously announced as a result of flooding at a separate location. The issue now is what will next year’s rainy season bring? Will companies abandon Thailand permanently and move production elsewhere?

--Boeing’s new 787 Dreamliner made its first commercial flight from Tokyo to Hong Kong on October 26, an All Nippon Airways trip. But on Sunday, ANA had to make a second approach at a west Japan airport before landing after a glitch forced the pilot to manually deploy the main landing gear, the airline said. Huh. A spokesman for Boeing gave no explanation for the problem but said the company understood “the backup procedures worked as expected.” [AFP]

--According to Johnson Associates, which puts out a closely followed annual survey on compensation, Wall Street bonuses will fall 20% to 30% this year from a year ago, with the sharpest declines in trading and investment banking.

But writing in the New York Times, Professor Nassim Nicholas Taleb, who coined the phrase “Black Swan,” opines:

“I have a solution for the problem of bankers who take risks that threaten the general public: Eliminate bonuses….

“(It’s) time for a fundamental reform: Any person who works for a company that, regardless of its current financial health, would require a taxpayer-financed bailout if it failed, should not get a bonus, ever. In fact, all pay at systemically important financial institutions – big banks, but also some insurance companies and even huge hedge funds – should be strictly regulated.

“Critics like the Occupy Wall Street demonstrators decry the bonus system for its lack of fairness and its contribution to widening inequality. But the greater problem is that it provides an incentive to take risks. The asymmetric nature of the bonus (an incentive for success without a corresponding disincentive for failure) causes hidden risks to accumulate in the financial system and become a catalyst for disaster. This violates the fundamental rules of capitalism; Adam Smith himself was wary of the effect of limiting liability, a bedrock principle of the modern corporation.

“Bonuses are particularly dangerous because they invite bankers to game the system by hiding the risks of rare and hard-to-predict but consequential blow-ups, which I have called ‘black swan’ events….

“Consider that we trust military and homeland security personnel with our lives, yet we don’t give them lavish bonuses. They get promotions and the honor of a job well done if they succeed, and the severe disincentive of shame if they fail. For bankers, it is the opposite: a bonus if they make short-term profits and a bailout if they go bust. The question of talent is a red herring: Having worked with both groups, I can tell you that military and security people are not only more careful about safety, but also have far greater technical skill than bankers.”

Now talk amongst yourselves.

--Australia’s upper and lower houses of parliament have finally signed off on the controversial carbon tax, requiring the country’s coal-fired power stations and other big emitters to “pay to pollute” starting July of next year. This vote has been years in the making.

--Las Vegas attracted more visitors in September than a year ago as convention attendance soared 49%. But, gambling revenues were down 6.6% over the same period. At least visitation was up a 19th consecutive month and occupancy neared 86%.

--With the cost of Thanksgiving dinner in the U.S. rising 13% this year, the biggest gain in two decades, according to the American Farm Bureau Federation, wild turkeys have been put on notice that if they know what’s good for them, they’ll stop harassing humans.

--Speaking of Thanksgiving, Wal-Mart is once again accelerating Black Friday, this time opening its doors at 10 p.m. on Thursday, which is atrocious behavior, at least to those of us for which this is our favorite holiday. So Boooo on Wal-Mart, which says its customers said they would rather stay up late to shop than get up early. And Booo on the customers, too.   Take away their citizenship.

Foreign Affairs

Iran: A new clock is ticking…the time from when the U.N.’s International Atomic Energy Agency (IAEA) issued its long-awaited report on Iran’s suspected nuclear arms program, Nov. 8, and the 2012 presidential election in the United States, next Nov. 6. I have argued for weeks that should the Obama administration feel compelled to take military action against Iran, it will be next spring because the White House cannot afford to have Iran test a nuclear weapon after next Labor Day at the height of the presidential campaign as it would spell the end for the Obama presidency. “This happened under your watch, Mr. President!” the Republican nominee would repeat over and over again during the debates.

Now most experts say that Iran won’t have a nuclear capability until 2013 at the very earliest.  I just argue there isn’t a soul in the Western World (or Israel) who really knows how far advanced Iran is, and my point on fixing the spring as the date for action, assuming any efforts at increased sanctions against the Iranian government go nowhere, is because Obama needs time for damage control, as would probably be inevitable, before Americans went to the polls. Trust me, should the White House act next year it will be as much about our election as anything else. That’s simply the way our corrupt system works.

So what did the IAEA say? The agency found some of Iran’s activities pertained to civilian applications but others were “specific to nuclear weapons development." The IAEA had acquired more than 1,000 pages of documents relating to Iran’s program, sourced from the agency and 10 of its member states, as well as from Iran itself.

“All of this information, taken together, gave rise to concerns about possible military dimensions to Iran’s nuclear program,” the report stated. Other intelligence provided to the agency pointed to Iran’s construction of “a large explosives containment vessel” at a previously little known site called Parchin that could be used for nuclear-related testing.

The report also shows that Iran worked to redesign and miniaturize a Pakistani nuclear-weapon design. “It is a very, very well thought out program and it is clear they are proceeding relentlessly with it,” as a senior research fellow, Ephraim Asculai, of Tel Aviv University put it. But the quarterly report stopped short of claiming that Tehran is determined to acquire atomic weapons.

The chairman of the House Intelligence Committee, Republican Mike Rogers, said the findings heightened fears Israel would launch an attack without world action on sanctions, urging President Obama to tighten economic measures, including cutting the supply of refined fuel to Iran and targeting its central bank.

For his part, Israeli Prime Minister Benjamin Netanyahu issued a simple, yet pointed, statement:

“The significance of the report is that the international community must bring about the cessation of Iran’s pursuit of nuclear weapons, which endanger the peace of the world and of the Middle East.”

But while the U.S., France and Britain have called for a new sanctions regime unless Iran comes clean, permanent U.N. Security Council members Russia and China will block such efforts. China’s Foreign Ministry spokesman said on Friday, “Dialogue and cooperation is the most effective way to resolve the Iranian nuclear issue. Sanctions and pressure cannot fundamentally solve it.”

Russian President Dmitry Medvedev said: “We should exhale, calm down and continue a constructive discussion of all issues on the Middle East agenda, including the Iranian nuclear program,” adding a military strike on Iran could be a “catastrophe.” Prime Minister Vladimir Putin condemned the “arrogant” West’s talk of a strike.

Of course both Russia and China seek to protect their commercial interests in Iran, first and foremost.

As for Iran’s position, President Ahmadinejad said, “Unfortunately, there is someone in charge of the IAEA who not only has no authority but tramples upon the IAEA laws and only echoes U.S. words.” 

On Thursday Ayatollah Ali Khamenei weighed in, saying his country was the victim of “Iranophobia” mounted by the West and Israel to justify a possible pre-emptive strike. “If the thought of invasion against the Islamic republic of Iran crosses anybody’s mind he must ready himself to receive a strong slap and iron fist. The enemies, especially the United States and its puppets and the Zionist regime, should know that the Iranian nation will not invade any country or nation, but it will respond to any invasion or threat with full force in a way that it will break up invaders from within,” said the Son of Satan.

France’s Foreign Minister, Alain Juppe, warned: “If Iran refuses to conform to the demands of the international community and refuses any serious cooperation, we stand ready to adopt, with other wiling countries, sanctions on an unprecedented scale.”

At week’s end, Defense Secretary Leon Panetta said any military strike on Iran would have a “serious impact” on the region and possibly U.S. forces there, without having any real impact on Iran’s nuclear program. “You’ve got to be careful of unintended consequences here.”

Meanwhile, the Wall Street Journal reported on Friday that the U.S. “has quietly drawn up plans to provide (the United Arab Emirates) with thousands of advanced ‘bunker-buster’ bombs and other munitions, part of a stepped-up U.S. effort to build a regional coalition to counter Iran.” The UAE is seen as the most hawkish against Iran in the region, at least as much so as Saudi Arabia, and its air force could act as an American proxy if called upon. The Pentagon is also arming the Saudis and Oman with advanced fighter jets and munitions.

Editorial / Wall Street Journal

“(The IAEA’s) 14-page annex detailing the state of Iran’s weapons work should (keep you up at night). It lays to rest the fantasies that an Iranian bomb is many years off, or that the intelligence is riddled with holes and doubts, or that the regime’s intentions can’t be guessed by their activities.

“So much, then, for the December 2007 National Intelligence Estimate, which asserted ‘with high confidence’ that Iran had abandoned its nuclear-weapons work in 2003 and ended any chance that the Bush administration would take action against Iran. So much, too, for the Obama administration’s attempts to move Iran away from its nuclear course, first with diplomatic offers and then with sanctions and covert operations.

“The serious choice now before the administration is between military strikes and more of the same. As the IAEA report makes painfully clear, more of the same means a nuclear Iran, possibly within a year.

“It’s time, then, to consider carefully what that choice means for the United States. In the run-up to the war in Iraq, we wrote that ‘the law of unintended consequences hasn’t been repealed,’ and that ‘no war ever goes precisely as planned.’ That was obviously true of a boots-on-the-ground invasion, but it would also be true of an aerial campaign to demolish or substantially degrade Iran’s nuclear facilities….

“The question for the world, and especially for the Obama administration, is whether those dire consequences [Ed. including potential nuclear war as an Iranian bomb leads to nuclear proliferation in the region] are worse than the risks of a pre-emptive strike. We think we know what the Israelis will decide, especially if they conclude that President Obama stays on his current course.

“Opponents of a pre-emptive strike say it would do no more than delay Iran’s programs by a few years. But something similar was said after Israel’s strike on Iraq’s Osirak reactor in 1981, without which the U.S. could never have stood up to Saddam after his invasion of Kuwait. In life as in politics, nothing is forever. But a strike that sets Iran’s nuclear programs back by several years at least offers the opportunity for Iran’s democratic forces to topple the regime without risking a wider conflagration.

“No U.S. president could undertake a strike on Iran except as a last resort, and Mr. Obama can fairly say that he has given every resort short of war an honest try. At the same time, no U.S. president should leave his successor with the catastrophe that would be a nuclear Iran. A nuclear Iran on Mr. Obama’s watch would be fatal to more than his legacy.”

The IAEA’s 35-nation board meets this coming Thursday and Friday to decide whether to report Iran to the U.N. Security Council.

Israel: Talk about a diplomatic disaster, French President Nicolas Sarkozy and President Obama didn’t realize a private conversation at the recent G20 summit in Cannes was overheard by a number of journalists and inadvertently transmitted over a system used for translation. Sarkozy says of Benjamin Netanyahu, “I can’t see him anymore, he’s a liar.” Obama retorted: “You may be sick of him, but me, I have to deal with him every day.”   While Israeli media played it up, Israeli officials kept their mouths shut.

Syria: I reached out to my friend in Beirut this week, wondering why he hadn’t written anything recently, and in learning he was on vacation I asked him about the border issues between Syria and Lebanon, voicing my own concerns. Michael observed, “Very nasty…and it will get worse, I fear.” Seeing as there is no bigger expert on the region than he, in my humble opinion, this says it all. Lebanon’s president, Michel Sleiman, confirmed this week that Syria was mining the border with Lebanon to prevent arms smuggling to the Syrian opposition, as well as prevent dissidents from fleeing into Lebanon.

And after the Arab League and Syria supposedly reached agreement on ending the violence against protesters, ten days ago, Bashar Assad’s regime continued the killing, another 20+ on Thursday alone (a reported 18 on Friday as I write), as the U.N. estimates the toll at 3,500. [I listed a figure of 4,000 last week, which was from various human rights groups, the same groups the U.N. is relying on.] The epicenter of the violence remains Homs, where fighting between army defectors and soldiers has been intense in pockets, while elsewhere Assad’s goons round up suspects a la Hitler’s SS.

Separately, Syria stopped paying for oil produced within the country by Royal Dutch Shell and Total, as reported by the Financial Times, further evidence of the regime’s unease amid the pro-democracy protests and economic sanctions. Oil export earnings, some $3.5 billion a year, have been hit by an embargo imposed by the European Union. The oil companies had continued to pump the crude, despite not being paid, but now the government ordered them to cut output because storage capacity has been met owing to the EU embargo.

The only encouraging item this week was a story in the Jerusalem Post that Assad is being offered asylum by several Arab leaders, this according to U.S. Assistant Secretary of State Jeffrey Feltman, formerly an excellent ambassador to Lebanon, as I recall. 

Meanwhile, the U.S. is investigating reports that Syrian leaders are moving their cash into Lebanese banks; this as there are increased concerns that Palestinian groups loyal to Damascus are once again taking root in Lebanon, the last thing this Hizbullah-led country needs. One group I never heard of, Saiga, a pro-Syrian Palestinian faction, has “restructured and a younger generation has taken the leadership.” [Daily Star] You read something like this and you understand how the war on terror will never be over in our lifetime…that is if you needed further proof.

Lastly, Lebanese opposition leader Saad Hariri said he would not attempt to topple the Hizbullah government and would wait for 2013 parliamentary elections instead. But Hariri really needs to return to the country, seeing as how he’s been holed up in Paris. I understand the assassination threats, but he’s doing his people zero good in France. 

Iraq: I would encourage you to visit my “Hot Spots” link for an analysis of how the United States’ imminent withdrawal “is the mother of all disasters.” Prime Minister Nouri al-Maliki is a bad guy and he continues a purge of leading Sunni figures, particularly in the security apparatus under the guise of ridding Iraq of Baathists. Remember, Maliki is still acting defense and interior minister, since the elections of 2010! He’s nothing more than Tehran’s puppet. It’s Sunni vs. Shiite all over again, and the U.S. won’t be there to keep the peace, while al Qaeda looks for openings to reignite the civil war. As Maj. Gen. Jeffrey Buchanan, the top American military spokesman in Iraq, told the New York Times, “I cringe whenever anybody makes a pronouncement that al Qaeda is on its last legs.”

Meanwhile, ExxonMobil became the first major oil company to sign a contract with Kurdistan’s Regional Government to explore for oil and gas. It’s a huge vote of confidence for the semi-autonomous region, but Exxon could face a backlash in Baghdad, which believes the contracts are illegitimate. Under a landmark deal with the central government, Kurdistan receives half of all revenue from the oil it can export.

India / Pakistan: Indian Prime Minister Manmohan Singh said this week that the two rivals needed to open a new chapter in their relationship amid signs of a warming in ties between the nuclear armed nations. A week earlier, Pakistan announced it would normalize trade with India. Singh met with Pakistani Prime Minister Gilani and praised him as a man of peace.

This all sounds great, but the terrorists have zero incentive for allowing peace to break out, or as Pakistani Foreign Minister Khar said, “We have many, many long miles to move ahead still.” And the U.S. Embassy in Islamabad on Monday acknowledged the existence of a “potential threat” to Pakistan’s nuclear warheads from local extremists, according to a press report out of India. Also, as reported by the Global Security Newswire, “The Atlantic and National Journal jointly reported that the Pakistani army had taken to transporting nuclear warheads around the country via unmarked civilian-style vans on congested roadways in an attempt to keep their whereabouts away from prying U.S. intelligence efforts.”

Boy, that makes me feel a lot better. Of course it was just a month or so ago that U.S. Sec. of State Hillary Clinton told us all not to worry about the safety of Pakistan’s nukes. I can’t remember if she cackled after saying this.

North Korea: This little hellhole is not going away in terms of its potential to ruin our day and roil global markets further. This week a senior South Korean officials said North Korea’s uranium enrichment program at Yongbyon was now a “small industry,” capable of generating nuclear weapons. It was one year ago Pyongyang revealed its uranium work. U.S. specialists at that time were allowed to tour a plant that contained 2,000 centrifuges. The official asserted the North could make one to two bombs a year just from this ‘known’ operation on top of the existing stockpile, estimated last I saw at 8 to 12 weapons.

China:  Speaking of nukes, according to a report from the Bulletin of the Atomic Scientists, China appears to be fielding four new nuclear-ready ballistic missiles (someone tell Herman Cain) and is spending an increasing amount on developing bombs for use on longer-range missiles.

Authors Hans Kristensen and Robert Norris estimate that China now possesses 240 nuclear weapons as well as some 140 ballistic missiles fielded on land; 72 missiles with ranges that can hit U.S. targets and 40 capable of striking the U.S. mainland.

But China has had trouble, according to Kristensen and Norris, in developing a sea-based platform for its nuclear warheads. They add:

“China’s main concern is the survivability of its minimum nuclear deterrent, and it spends considerable resources on dispersing and hiding its land-based missiles….

“The U.S. government has complained for years that China is too opaque regarding its military forces and budgets and that it needs to be more open.” [Global Security Newswire]

Meanwhile, the chiefs of China’s leading information technology companies said they would cooperate with the government’s efforts to more strictly police the Internet and online media. The CEOs of 39 internet, telecom and computer groups reached a “consensus” that internet companies “must strengthen self-control, self-restraint and strict self-discipline,” as reported by official news agency Xinhua and the Financial Times’ Kathrin Hille. [Love the spelling of ‘Kathrin,’ I have to add.]

Now we wait to see how this is implemented and the reaction among China’s 500 million Internet users.

Finally, last week I mentioned dissident Ai Weiwei and his $2 million+ tax bill, but since the government said it was hitting him up for this, which he vehemently disputes, over $800,000 has come flooding in from supporters (a figure as of Tuesday so easily higher now). A government mouthpiece, The Global Times, said the donations may violate the law. “Since he’s borrowing from the public, it at least looks like illegal fund-raising.”

Ai is uncertain as to what to do with the money because to hand it to the government is an admission of guilt. [I haven’t had a chance this morning to read a report that says he’s thinking of paying off half of the bill with the proceeds.]

Nigeria: Last weekend was a horrible one here as the Islamic militant group Boko Haram launched a wave of coordinated attacks, killing more than 150 in a single day. The group is bent on the imposition of Sharia throughout Nigeria and took responsibility for the suicide bombers. A spokesman said, “We will continue attacking federal government formations until security forces stop persecuting our members and vulnerable civilians.” Aside from military barracks, six churches were blown up in one Christian neighborhood. [Initially, the death toll was said to be in the 60s, but then a Red Cross official went into the morgue and counted at least 150 bodies personally.]

Australia: President Obama will be here next week and he’ll announce at that time that the United States will begin rotating troops through an Australian base in Darwin, intensifying the alliance as the China threat grows. 2/3s of all Marines are based in the Pacific, with large concentrations on Guam and Okinawa, where new Chinese long-range missiles make the forces there highly vulnerable, thus the thought of repositioning some of them. Both Obama and Aussie Prime Minister Gillard will argue China has nothing to do with the decision…cough cough.

Some Aussie analysts say this is a highly risky move for Australia and its own relations with China, a critical trading partner.

Nicaragua and Guatemala: I have to admit I didn’t realize President Daniel Ortega “eviscerated” the constitution [Los Angeles Times] to become eligible for a third term in Nicaragua as he was reelected in last weekend’s vote, while in Guatemala, a true narco-state controlled by Mexican drug cartels these days, a retired army general, Otto Perez Molina, appears to have won the race there though he’s helpless to stop the violence.

Remember when Latin America was democratizing across the continent? That is hardly the case today.

Mexico: In a huge blow to President Calderon’s efforts to combat the drug cartels, his top cabinet secretary in the effort, Jose Francisco Blake Mora, was killed in a helicopter crash on Friday that claimed seven other lives, including government officials. Bad weather appears to be the initial cause.

Random Musings

--Various polls of likely Republican primary voters and/or Republican-leaning Independents:

USA TODAY/Gallup

Cain 21%
Romney 21%
Gingrich 12%
Perry 11%

Washington Post/ABC News

Romney 24%
Cain 23%
Perry 13%
Gingrich 12%

Wall Street Journal/NBC News

Romney 28%
Cain 27%
Gingrich 13%
Paul 10%
Perry 10%

New York Times/CBS News

Cain 18%
Romney 15%
Gingrich 15%
Perry 8%

A huge 31% in this last one either want someone else or are undecided.

In the Wall Street Journal/NBC survey, President Obama receives a 44% job approval rating for the third consecutive month.

In the Washington Post/ABC poll, 70% say the allegations against Herman Cain make no difference in their vote.

--Editorial / The Economist

“The European Union may seem the epitome of political dysfunction, but America has been running it close. All this year the deadlock between the Republicans in Congress and Mr. Obama has meant that precious little serious legislation has been passed. The president’s jobs bill is stuck; the House of Representatives’ budget plans have been scuppered by the Democrat-controlled Senate. At the end of this year temporary tax cuts and other measures, worth around 2% of GDP, are set to expire – which could push America back into recession….

“The right is mostly to blame. Ronald Reagan, a divorcee who did little for the pro-life lobby and raised taxes when he had to, would never be nominated today. Mr. Romney, like all the Republican presidential candidates, recently pledged to reject tax rises, even as part of a deal where spending cuts would be ten times bigger. Mr. Cain surged briefly to the front of the pack because of a plan that would cut personal taxes to 9%; Mr. Perry lost support for wanting to educate the children of illegal immigrants. Meanwhile, in Congress, the few remaining pragmatic Republican centrists, like Senator Richard Lugar, are being hunted down by tea-party activists.

“Mr. Obama has tried harder to compromise. But he foolishly failed to embrace a long-term budget solution put forward by the bipartisan Simpson-Bowles commission, which he himself appointed. Ever since the furor over the debt ceiling this summer, he has ‘pivoted’ to the left, dabbling in class war, promising his supporters that the budget can be solved by taxing ‘millionaires and billionaires’….

“The divisiveness is hardly new, but it is increasingly structural. As the battle for billions of campaign dollars heats up, neither side dares grant the other any modicum of success, or risk the ire of its donors by appearing to compromise.”

--As part of the above NBC News/Wall Street Journal survey, 57% of those who voted for Republican John McCain in 2008 say they are more enthusiastic to vote in the coming election than past elections, compared with 41% of 2008 Obama voters.

--Texas Gov. Rick Perry during Wednesday’s CNBC debate.

“It is three agencies of government when I get there that are gone. Commerce, Education, and the – what’s the third one there? Let’s see, Commerce and, let’s see. I can’t. The third one, I can’t. Sorry. Oops.”

Perry replied in the media filing center afterwards: “Yeah, I stepped in it, man. Yeah, it was embarrassing. Of course it was.”

John Podhoretz / New York Post

“The Titanic-like campaign of Texas Gov. Rick Perry crashed into the iceberg of his own brain at 9:18 EST last night.

“Perry, who entered the race as an immediate frontrunner in August and then sank like a stone after a series of wretched debate performances, outdid himself with the most embarrassing single televised minute any important American politician has ever inflicted upon himself.

“Ever. In history….

“We saw a moment of utter blankness, of paralyzed thought, that offered the perfect illustration of why people tell pollsters they fear public speaking more than they fear death….

“It wouldn’t have meant anything if it had happened to Mitt Romney, who is so fluid by now that he sounds like a carnival barker trying to tempt you into seeing the Hall of Wonders. Or to Newt Gingrich, who has been liberated by the ultimate pointlessness of his campaign into a genuinely refreshing devil-may-care looseness.

“Such a moment for either man might have humanized him, might have suggested that they had some commonality with ordinary folk and were not simply Terminator 2012s programmed by Skynet to speak perfect Republican blarney.

“Not Perry. He literally had no margin for error coming into last night’s event in Michigan….

“His only hope of reviving his damaged candidacy was to deliver unexpectedly brilliant performances in public events. Well, he was unexpected last night – we thought he couldn’t possibly have been any more unimpressive than he had been previously. He sure surprised us!”

--As for Herman Cain and the women accusing him of sexual harassment, the AP reported that one of Cain’s accusers, Karen Kraushaar, filed a complaint, not of sexual harassment but of unfair treatment while working as a spokeswoman at the Immigration and Naturalization Service, three years after she settled a sexual harassment complaint against Cain with the assistance of the same lawyer, Joel Bennett. It’s complicated, but I want to wait 24 hours when it comes to Kraushaar…and another 24 hours (a week) before commenting further on Cain. Hopefully it takes care of itself and I don’t have to!

--There were few big issues in Tuesday’s elections, but Ohio voters rejected a new law sharply restricting public worker’s collective bargaining rights; important as Ohio is going to once again be a real battleground state in the 2012 presidential election. It was also seen as a referendum on Ohio Rep. Gov. John Kasich.

And Atlanta approved Sunday alcohol sales. No wonder I never seemed to stay in Atlanta on Sundays. I always left at the crack of dawn for another city, come to think of it.

--Editorial / Washington Post…on further looming cuts to the defense budget.

“True, the Pentagon brass are known for pushing hard for their funding. But they rarely speak in such apocalyptic tones – and there is good reason to take their warnings seriously. Under President Obama’s budget plan, $465 billion is already due to be cut from military spending over the next decade, from an annual budget now of about $700 billion. That will already require a downsizing of the Army and Marines, the reduction or cancellation of more weapons systems and a shrinking of the Navy to its lowest size in decades. Defense Secretary Leon Panetta, a lifelong budget hawk, is rightly concerned that such cuts may go too far.

“If the additional sequestration goes forward, the total reduction could come to $1 trillion. This, Gen. Odierno said, would ‘almost eliminate our modernization programs’ in the Army, including new armored vehicles. Adm. Greenert said it could force the two U.S. companies that build Navy ships out of business. The Air Force would have to retire some 1,000 aircraft. In all, about 1 million military and civilian jobs would be lost….

“In the meantime, a bad and even dangerous message would be sent to U.S. allies and adversaries. ‘We’ll have those who attempt to exploit our vulnerabilities,’ Gen. Odierno said. ‘We might lose our credibility in terms of our ability to deter.’

“Congress set this bomb in place when it agreed in the summer that half of $1.2 trillion in automatic cuts would be assessed to defense if a debt reduction plan failed to pass this year. Now it has heard from senior commanders just how much damage its explosion would cause. It would be an unconscionable act of political irresponsibility to allow their predictions to come true.”

--I have a nephew who this year had a choice between going to Pitt or Penn State and thankfully chose the former. Otherwise, I have little to add here in the hideous case of Jerry Sandusky, having already commented exclusively in another column I do for the site, except to say that aside from wanting to know what Joe Paterno really knew all these years, like you I’m trying to figure out how assistant coach (then graduate assistant) Mike McQueary lived with himself all this time after witnessing what he did back in 2002. I also just want to put in my two cents when it comes to Penn State’s students. Think twice, kids, before you act like an idiot. These days it follows you everywhere, as opposed to the time of my own youth when we could get away with a lot of stuff with nothing more than personal memories as opposed to photos splashed on the Internet for all future employers to see. 

--The Pew Research Center’s Internet & American Life Project surveyed 800 children between the ages of 12 and 17 and while eight in 10 teenagers said they have developed positive feelings about themselves and forged better friendships on social networking sites, nine in 10 say they have witnessed cruelty by their peers on the same networks.

Pew concludes, though, that online bullying is not as common as what takes place on the schoolyard or in the hallway. 

--According to Air Force officials, for years the Dover Air Force Base mortuary disposed of portions of troops’ remains by cremating them and dumping the ashes in a landfill. The practice was abandoned in favor of burial at sea. Officials acknowledged the practice to the Washington Post, saying “the procedure was limited to fragments or portions of body parts that were unable to be identified at first or were later recovered from the battlefield, and which family members had said could be disposed of by the military.”

Said Gari-Lynn Smith, “portions of whose husband’s remains were disposed of in the landfill after his 2006 death in Iraq, she was ‘appalled and disgusted’ by the way the Air Force had acted. She learned of the landfill disposal earlier this spring in a letter from a senior official at the Dover mortuary.

“ ‘My only peace of mind in losing my husband was that he was taken to Dover and that he was handled with dignity, love, respect and honor,’ Smith said. ‘That was completely shattered for me when I was told that he was thrown in the trash.’”

The Dover mortuary changed its policy in 2008. No officials have been fired over their past actions. 

Each week there is yet another example (or two this time, including the Penn State debacle) where you see how America is falling short. It has to stop.

--I was reading some stories on the latest pilgrimage for the hajj, an estimated 2.5 million strong this year with no major incidents. Back in 1990, 1,426 died in stampedes, but the Saudis have spent $billions on infrastructure projects to ease the congestion. I just have trouble that only Muslims are allowed to attend, in looking at the bigger picture. It speaks volumes. Every other church welcomes visitors to its holiest shrines. Open up…Muslims. You’d get my tourist dollars, for one.

--The U.S. is relying on Russia to give us a lift into space these days with the retirement of the shuttle program, so it’s more than a bit disturbing that a Russian space probe sent to collect rocks and such from a Martian moon veered off course within minutes of the launch of its 33-month mission. The craft was then stuck in an Earth orbit and as of this writing could crash back to Earth after its batteries run out, assuming Russian engineers are unable to correct the fault. The venture is also carrying China’s first Mars satellite, a failure that China will now file away for 1,000 years for future use. 

--Last week I railed on social networking and how I can’t wait for the day when I have the guts to get off it. So the Nov. 7 issue of Barron’s had the following, courtesy of social-email software provider harmon.ie:

57%: share for whom the majority of work interruptions involve a social-networking tool

15 minutes: maximum time that 45% of workers go without being interrupted

$10,375: total per-person loss of annual productivity for all types of distractions

---

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

God bless America.
---

Gold closed at $1788
Oil, $98.99

Returns for the week 11/7-11/11

Dow Jones +1.4% [12153]
S&P 500 +0.8% [1263]
S&P MidCap -0.8%
Russell 2000 -0.2%
Nasdaq -0.3% [2678]

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

Dow Jones +5.0%
S&P 500 +0.5%
S&P MidCap -1.7%
Russell 2000 -5.0%
Nasdaq +1.0%

Bulls 44.2
Bears 34.7 [Source: Chartcraft / Investors Intelligence]

Have a great week. I appreciate your support.

*For those of you who listen to the podcast, recognizing you thus may not read this, I apologize for last week but I had no Internet service for recording it until too late in the day due to the power failure here. The week before that I was traveling and I never do a podcast in those situations. But hopefully I’m back to normal this weekend.

Brian Trumbore



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Week in Review

11/12/2011

For the week 11/7-11/11

[Posted 6:00 AM ET]

Europe, Washington and Wall Street

I’ll switch things up this week and start with the conclusion. Europe will continue to stumble from crisis to crisis, the Continent needs growth and none is forthcoming, there is no backstop for the likes of Italy and Spain despite what the politicians said three weeks ago, and, longer term, there is zero cause for optimism.

Short-term the market remains nothing more than a casino, albeit more of a headline driven one than ever before, and who knows where stocks will go the final seven weeks of 2011? I don’t change my annual forecast and I’m stuck with 5% to 7% declines for the major averages and now we’re back up for the year, though we’ve learned these days seven weeks can be an eternity.

Just look at the last three. For the week ending Oct. 28, stocks soared around the world on optimism the European Union, European Central Bank and IMF had reached a comprehensive agreement to recapitalize the banks, slash Greece’s debt as part of Greek Bailout II, and super-charge the existing European Financial Stability Fund that was designed to backstop Greece, Ireland and Portugal while those little wieners, three of the PIIGS, I mean, got their acts together. The concern, though, was that markets move faster than ever these days and contagion would spread to Italy and Spain, which in the case of the former it did.

But first, after soaring the week ending Oct. 28, equity markets took it on the chin the week ending Nov. 4 because Greek Prime Minister Papandreou decided that the bailout agreement for his country of the week before needed to be voted on by the entire country first, a rather pissed off nation at that, witness all the rocks that have been displaced this year in Athens, plus everyone looked around and said, hey, that agreement between EU, ECB and IMF officials doesn’t really stand a chance of being implemented. Like how the heck do we finance this super-duper leveraged EFSF? Who is going to buy the bonds that would be issued? What kinds of guarantees are bondholders getting? And, in the case of Greece, just why am I, a holder of Greek crappola, getting a 50% haircut without being able to cash in my insurance (in the form of credit-default swaps)? 

But by the end of this week, one ending on Veterans Day, which formally marks the end of the stupidest war in the history of the planet, World War I, the war to end all wars, peace broke out across Europe anew, or at least in financial markets, as both Italy and Greece reached agreements (or were darn close to one in the case of the former) on new governments, both to be run by technocrats, which is purposefully not as exciting as Technicolor because this is serious business, you see.

In the case of Greece, a new prime minister was sworn in, Lucas Papademos, a respected (so they tell me, I never met the man myself) former vice-president of the European Central Bank.

“The Greek economy is facing huge problems despite the enormous efforts made,” he said the day before he was officially sworn in by a gang of Greek Orthodox priests in fancy robes that are probably worth more than all of Greece’s state-owned operations the government is charged with selling off these days combined.

“Greece is at a crucial crossroads…the course will not be easy, (but) the problems will be resolved faster…if there is unity, cooperation and wisdom,” Papademos said, he having an easier name to type than Papandreou, at least for yours truly.

Papademos and his unity government, which will contain the old finance minister, Evangelos Venizelos, now must implement the Oct. 26 Euro bailout, Greek Bailout II, that entitles Greece to 130bn euro ($179 billion) on top of the first Greek Bailout of 110bn euro, plus manage the voluntary debt swap that gives bondholders a 50% haircut. Additionally, new elections are to be held around Feb. 19. For at least taking the first steps in implementing the new bailout, Greece will finally be rewarded with an 8bn euro ($11 billion) loan installment from the first bailout that allows the government to pay its bills come mid-December at the latest. Otherwise, there is no money and we’ll all be locking our doors as a precaution against Greeks bearing rocks.

Oh, and Greece’s economy is supposed to contract a further 2.8% next year, after falling 5.5% in 2011, which is why the debt to GDP ratio in Greece is slated to approach 200% in 2012 before beginning to decline. 

As for Italy, with the senate here having passed a mandated package of austerity measures as called for by the EU and ECB, and with Prime Minister Sleazio Berlusconi having agreed to step down once the lower house ratifies the package on Saturday, Mario Monti, a former European commissioner, i.e., bureaucrat, will become prime minister. Markets rallied Friday on word Monti was the man.

But earlier in the week, boy was it touch and go in terms of Italy’s ability to take us all down.

You see, Italy has 1.9 trillion euro in sovereign debt, or a cool $2.6 trillion, and 300bn euro of it needs to be refinanced next year, for starters, so it would be nice if the government could do so at low interest rates. After all, the German 10-year bund is trading with a yield around 1.85% these days, that’s nice and low.

But Italy’s 10-year rocketed above 7.00% this week, almost touching 7.50% before closing Wednesday at 7.25%. Yikes, said global financial markets. Why that’s unsustainable! Or as Italian broadcaster Dick Vitale was heard to exclaim, “That’s Bailout City, baby!!!”

Thursday morning, though, the Italians sold $6.8 billion of 12-month bills at a yield of 6.08% and everyone breathed a sigh of relief. Forget the yield at auction for such an instrument last month was only 3.57%, and 1.90% a year ago, 6.08% was better than what folks expected.

Yes, friends, we’re just lurching from crisis to crisis, and there is no mechanism in place to deal with it all. The only thing that kept the Italian 10-year from shooting through the roof was first, the hoped for change in government, and second, the European Central Bank apparently buying gobs of Italian debt to drive the yield down to 6.53% by week end, though this can’t continue, as some of the below commentary spells out better than I can right now because my brain is nothing more than a disorderly pile of linguine after having to write about this mess for 18 months.

Yes, this was a week where IMF Managing Director Christine Lagarde told an audience that the world economy was headed for a “lost decade” unless nations acted together to counter the threats to growth.

“In our increasingly interconnected world, no country or region can go it alone,” she told a forum in Beijing. “There are dark clouds gathering in the global economy.”

Advanced economies, Lagarde said, have a “special responsibility” to restore confidence and lift growth, adding that her host, China, needed to boost domestic consumption, which as you’ll see shortly they’ve been doing a nice job of.

“If we do not act, and act together, we could enter a downward spiral of uncertainty, financial instability, and a collapse in global demand. Ultimately, we could face a lost decade of low growth and high unemployment,” at which point attendees ignored the shrimp cocktail and went straight to their rooms to hide under the covers.

And just to close the circle from my above opening, this was also a week where EU economic and monetary affairs commissioner Olli Rehn said “Growth has stalled in Europe and there is a risk of a new recession. There is a broad consensus on the necessary policy action. What we need now is unwavering implementation.”

Rehn’s staff at the European Commission lowered its growth forecast for the EU’s 27 economies to 0.6% in 2012 from an estimated 1.6% in 2011. The 17-nation eurozone is now expected to grow just 0.5% next year. Ergo, recession for a portion of this time is a certainty, probably starting in the current quarter. The U.K.’s retail sales for October, for example, declined a worse than expected 0.6%, while Spain reported its third-quarter GDP was unchanged over Q2, not what that place needs given its 21.5% unemployment rate. [Spain elects a new government on Nov. 20 as well.]

And it just needs to be said that Europe is already facing a massive credit crunch, particularly when it comes to small business, while I noted a number of weeks ago that the next real flashpoint is going to be Eastern Europe, a fact everyone else seemed to pick up on this past week. Eastern Europe relies heavily on Western European banks for credit and those banks are looking at mandated recapitalization efforts through next June that will lead to a further closing of the loan window at the worst possible time.

Further opinions…

Gideon Rachman / Financial Times

“As the European ship heads for the rocks, so the officers in charge are being thrown overboard….But while politicians may come and go, European leaders insist that one thing will remain neutral – the euro. No summit is complete without the ritualistic declaration that Europe will do ‘whatever it takes’ to preserve the single currency. But the repeated vows to save the euro betray a dangerous confusion.

“The euro is not an end in itself. The single currency is just an instrument, aimed at promoting economic prosperity and political harmony across Europe. As the evidence mounts that it is doing the precise opposite, it is time to think not about how to save the euro – but about how to scrap it, or at least allow the weakest members to leave.

“For reasons of pride, fear, ideology and personal survival, it is extremely hard for European leaders to accept that the euro is a large part of the problem. Instead they search for other explanations for the economic crisis. Countries have failed to stick to the rules. They have lied. Europe needs new political structures. The bazooka is not big enough. The markets are irrational. The people are revolting….

“The euro has helped both to create and sustain the crisis in Europe. First, it caused interest rates to plunge in southern Europe, encouraging countries such as Italy and Greece to go on a borrowing binge. Now the single currency rules out the options that postwar Italy and others traditionally used to cope with high levels of debt: inflation and devaluation of the currency. Neither policy was cost free, but they provided an alternative to the ‘internal devaluation’ (otherwise known as wage cuts and mass unemployment) that is currently being urged on Italy, Greece and much of southern Europe….

“Economic chaos in Greece is now being supplemented by political chaos. In Italy, meanwhile, borrowing costs go up and up – in a way that will soon make the country’s finances unsustainable. If Italy, the world’s seventh largest economy, applies to the EU bailout fund – or even to the IMF – there simply may not be enough money to meet its needs. It would be like an elephant getting into a life raft….

“Greece and Italy are not the only problems. Ireland and Portugal have already had to accept bailouts – and may be destabilized anew by the latest crisis. Spain’s vulnerability is clear. France has not balanced its budget since the 1970s and is fretting about its triple-A rating.”

Nouriel Roubini / Financial Times

‘With interest rates on its sovereign debt surging well above 7%, there is a rising risk that Italy may soon lose market access. Given that it is too-big-to-fail but also too-big-to-save, this could lead to a forced restructuring of its public debt of 1,900bn euro. That would partially address its ‘stock’ problem of large and unsustainable debt but it would not resolve its ‘flow’ problem, a large current account deficit, lack of external competitiveness and a worsening plunge in gross domestic product and economic activity.

“To resolve the latter, Italy may, like other periphery countries, need to exit the monetary union and go back to a national currency, thus triggering an effective break-up of the eurozone….

“(Once) a country that is illiquid loses its market credibility, it takes time – usually a year or so – to restore such credibility with appropriate policy actions. Therefore unless there is a lender of last resort that can buy the sovereign debt while credibility is not yet restored, an illiquid but solvent sovereign may turn out insolvent. In this scenario skeptical investors will push the sovereign spreads to a level where it either loses access to the markets or when the debt dynamic becomes unsustainable.

“So Italy and other illiquid, but solvent, sovereigns need a ‘big bazooka’ to prevent the self-fulfilling bad equilibrium of a run on the public debt. The trouble is, however, that there is no credible lender of last resort in the eurozone.

“One is urgently needed now. Eurobonds are out of the question as Germany is against them and they would require a change in treaties that would take years to approve. Quadrupling the eurozone bailout fund from 440bn euro to 2,000bn is a political non-starter in Germany and the ‘core’ countries. The European Central Bank could do the dirty job of backstopping Italy and Spain, but it does not want to do it as it would take a huge credit risk. It also cannot do it, as unlimited support of these countries would be obviously illegal and against the treaty no-bailout clause….

“Output now is in a vicious free fall. More austerity and reforms – that are necessary for medium-term sustainability – will make this recession worse….The recessionary deflation that Germany and the ECB are imposing on Italy and the other periphery countries will make the debt more unsustainable….

“The eurozone can survive with the debt restructuring and exit of a small country such as Greece or Portugal. But if Italy and/or Spain were to restructure and exit this would effectively be a break-up of the currency union. Unfortunately this slow-motion train wreck is now increasingly likely.

“Only if the ECB became an unlimited lender of last resort and cut policy rates to zero, combined with a fall in the value of the euro to parity with the dollar, plus a fiscal stimulus in Germany and the eurozone core while the periphery implements austerity, could we perhaps stop the upcoming disaster.”

Editorial / Wall Street Journal

“In the European economic crisis, all roads lead through Rome….

“In Italy, as in Greece, Spain and Portugal and eventually France, the welfare-entitlement state has hit a wall. Successive governments on the Continent, right and left, have financed generous entitlements with high taxes and towering piles of debt. Their economies have failed to grow fast enough to keep up, and last year the money started to run out. The reckoning has arrived….

“This is a crisis of the welfare state, and Italy is a model basket case. Mario Monti, who is tipped to lead a new government of technocrats, once described the Italian economy as a case of ‘self-inflicted strangulation.’ Government debt is 120% of GDP, making Italy the world’s third-largest borrower after the U.S. and Japan. Its economy last grew at more than 2% a year in 2000….

“But now hard choices can no longer be postponed. And the solution to Europe’s debt crisis must begin with reforming, if not dismantling the welfare state….

“The road from Rome may now lead to Paris, Madrid and other debt-ridden European countries. But this is no cause for U.S. chortling, because that same road also leads to Sacramento, Albany and Washington. America’s federal debt was 35.7% of GDP in 2007, but it was 61.3% last year and is rising on an Italian trajectory. The lesson of Italy, and most of the rest of Europe, is never to become a high-tax, slow-growth entitlement state, because the inevitable reckoning is nasty, brutish and not short.”

Nick Squires / Irish Independent

“Decades of turning a blind eye to endemic tax evasion, corruption, and dismal economic growth have sent Italy careening into its present crisis.

“The country may be renowned for global brands such as Ferrari, Gucci and Armani but the eurozone’s third-largest economy has been hobbled by the chronic failure of successive governments to enact reforms.

“On the streets of Rome, Italians may express relief and grim satisfaction that Mr. Berlusconi has announced his intention to resign, but many realize that the country’s problems extend far beyond the failings of the scandal-prone prime minister.

“Italy’s people know they have been sleepwalking into an economic abyss for years and must now pay the reckoning….

“The country’s dismally low growth is a consequence of corruption, a bloated bureaucracy, an overpaid and cosseted political class, stifling bureaucracy, low productivity and a third-rate educational system.

“On almost all those indices, the problems in the ‘Mezzogiorno,’ the sun-baked, Mafia-plagued south of Italy, are much more acute than in the wealthy north, highlighting a regional divide that has existed since unification in 1861, threatening to split the nation.

“Of the world’s top 200 universities, only one is Italian – Bologna University in the north....

“Italy also performs poorly in global rankings of transparency and competitiveness….

“Tax evasion is almost a national sport. Italians resent paying high taxes when they feel they get little in return – streets are potholed, hospitals are overcrowded, playgrounds for children are often smashed up and covered in graffiti and public transport is frequently shabby and outdated.

“And they have been set a terrible example – among the plethora of accusations that Mr. Berlusconi has faced in his many trials are those of tax fraud and false accounting.

“ ‘How do you expect Italians to respect the rules when the law is ignored by our politicians?’ said Alessio, 42, who sells T-shirts and souvenirs to tourists from a shop overlooking the Trevi Fountain….

“Seeing no prospects at home, young Italians are leaving in droves to seek better opportunities in Britain, the U.S., Australia and the Gulf, in an accelerating brain drain that will deprive the country of much-needed entrepreneurial talent….

“Italy’s fat cat politicians are also a drain on the public purse. The 945 members of the Senate and the Chamber of Deputies earn an average annual salary of 140,000 euro ($193,000) – almost twice as much as British MPs….

“They are chauffeured around in expensive Alfa Romeos, Maseratis and Audis with tinted windows.

“There are a staggering 30,000 of these executive cars and they cost the Italian taxpayer an estimated 2bn euro a year….

“So even with Berlusconi on his way out after 17 years at the heart of Italian politics, the prospects for meaningful change look distant.”

[Ed. Don’t change the system yet, my Italian friends. I’m thinking I might want to be a chauffeur there.]

Washington

It was a very light week in terms of economic data, as in the only releases of note were Thursday’s jobless claims report that came in at 390,000, better than expected and below the psychologically important 400K mark, and a better than expected reading on consumer sentiment that helped the equity markets out on Friday.

Otherwise, all eyes are on the supercommittee in Washington, that 12-member bipartisan congressional panel charged with coming up with at least $1.2 trillion in budget savings by November 23rd, after which Congress has until Dec. 23rd to act on it or allow automatic cuts of like amount, half from defense, to be put in place.

But as of this writing it seems clear the supercommittee will not act heroically and come up with the $3 or $4 trillion in savings that is really needed to put a dent in the ever-rising federal deficit. They either come up with $1.2 trillion, or let the automatic trigger mechanism take hold, before which there will be intense pressure to shelve the process because of the deep cuts to defense. It’s a joke, though a very bad one for the future of our country let alone financial markets.

Should the supercommittee fail to act…fail to come up with real cuts…I stick to my prediction of months ago that in 2012 we will have our budget moment, our Italy, in the form of a Crash, worse than this summer’s crashette. We already know that should Congress miss this opportunity (after President Obama missed his own in trashing Simpson-Bowles at the start of 2011), next year will go down as one of the ugliest, and destructive, political campaigns since 1860, and you know what followed that one.

I hope I’m proved wrong…that Congress will do the right thing at the last moment, but we’re already past the time when the Congressional Budget Office was supposed to be able to ‘score’ whatever the supercommittee comes up with before presenting it to the full Congress for debate.

Lastly, some news on China’s economy. Consumer prices for October rose at a 5.5% clip, far better than the 6.5% rate in July that spooked markets. Producer prices also came in at a less than expected increase of 5.0%, the smallest increase in a year. Critically, food costs rose 11.9%, which is still way too high but better than September’s 13.4% pace. The non-food inflation rate was only 2.7% for the month. None of this means the government is about to lower interest rates, but it is taking other steps to ease monetary policy and will likely do more before year end, such as reducing bank reserve requirements to encourage more lending, especially to small business. [A report on Friday revealed that lending had already picked up more than forecast in October.]

Additionally, retail sales rose a strong 17.2% in October, on the heels of September’s 17.7% rise. Imports for the month soared 28.7%, much higher than forecast, so domestic demand is rising, just as the West, and the Chinese government, wants it to. [Imports from the U.S. rose 20.5% in October.]

Conversely, exports rose only 15.9% in October, owing in no small part to Europe’s weakness. China’s exports to Europe increased just 7.5%. 

Lastly, industrial production in October rose 13.2% vs. a 13.8% gain in September, while car sales were at the slowest pace in five months and housing starts fell 1.3% from a year earlier. There are real signs the housing bubble has popped, as the government wanted, but now we have to watch the speed of the decline in prices and the first anecdotal evidence is a bit worrisome.

My large holding in Fujian reports earnings this week and I suspect I will be commenting extensively on this next time.

Street Bytes

--For the week, stocks finished mixed. The Dow Jones rose 1.4% to close at 12153, the S&P 500 added 0.8%, but Nasdaq finished down 0.3%. Nasdaq has declined 3 of the last 4 weeks while the Dow Jones has gained 3 of 4.

--U.S. Treasury Yields

6-mo. 0.02% 2-yr. 0.23% 10-yr. 2.06% 30-yr. 3.13%

Bonds were little changed, though the market was closed on Friday and thus didn’t have a chance to respond to Friday’s rally in European and U.S. equities.

--Federal Reserve Vice Chairman Janet Yellen said the central bank will be conducting its fourth round of stress tests on U.S. banks and whether they can withstand a recession.

“We are monitoring European developments very closely, and we will continue to do all that we can to mitigate the consequence of any adverse developments abroad on the U.S. financial system,” said Yellen.

--France was furious after Standard & Poor’s mistakenly suggested that it had downgraded France’s triple-A credit rating on Thursday, sparking a sell-off in French government bonds. S&P said that due to a technical error, a message was automatically disseminated to subscribers suggesting the change. Off with S&P’s heads!

--A USA TODAY analysis finds “Households have reduced debt by $549 billion since 2007, mostly by cutting mortgages through defaults and paying down credit cards. During that time, the federal government has added more than $4 trillion in debt, pushing the country’s total borrowing to a record $36.5 trillion, excluding the financial industry, according to the Federal Reserve.” [Dennis Cauchon / USA TODAY]

--A week ago, as I went to post, there were rumors the $600 million in lost MF Global customer cash had been found, though I hastened to add it was “too soon to say this was fact.” And, indeed, a week later regulators still don’t know exactly where the cash is. Said an official with the Commodity Futures Trading Commission, “Their books are a disaster.”

Michael Goodwin / New York Post

“Across the land the cry is heard: ‘String up the bankers. Make ‘em pay for America’s suffering.’

“In other precincts, other villains are targeted: ‘The real crooks are in government. They’re to blame for the disaster.’

“Humbly, I nominate a candidate to satisfy both appetites.

“Let Jon Corzine pay the piper for all our sins.

“Corzine is the perfect poster boy for what’s ailing America. He went from Wall Street to politics, then back to Wall Street, and left a trail of wreckage everywhere. Yet he keeps failing upward, raising at least $500,000 for President Obama this year amid talk he could be named Treasury secretary.

“Now he is under investigation for bringing down MF Global….

“Corzine used his connections to get the low-watt company admitted to the exclusive club of ‘primary dealers’ of government debt.

“He quickly borrowed billions and ramped up risky trading in European government bonds, assuming he could make a killing when they are bailed out. He can tell it to the judge and shareholders.

“Corzine first made a fortune as a Master of the Universe at Goldman Sachs before being pushed out in 1999. He took his gilt and, running as a liberal Democrat, bought himself a seat in the United States Senate from New Jersey. He quickly tired of Washington and bought the Jersey governor’s chair.

“All told, he spent about $100 million of his own cash on the two races, but that was a pittance next to the billions of taxpayer dough he wasted.

“He nearly drove the Garden State into bankruptcy before voters tossed him out after one miserable term.

“Republican Chris Christie defeated him and is winning bipartisan support for cleaning up the Corzine mess. Now the courts and G-men will have to clean up the MF Global mess.

“If he dodges prison, retirement would seem the smart bet for Corzine. And a welcome relief for America.”

On Friday, the brokerage’s bankruptcy trustee fired 1,066 employees, a figure that should be on Corzine’s tombstone. 

--General Motors, in a sign of the times, said it would probably shed more plants and workers in Western Europe owing to the continent’s debt crisis and looming recession. In particular, GM is looking to drastically cut back on its Opel-Vauxhall unit, where 8,300 jobs have already been eliminated. Overall, GM reported third-quarter earnings that were slightly better than expected, but it warned Q4 results would be flat due mostly to Europe.

--Friday, Bloomberg first reported that U.S. auto-safety regulators are looking into the safety of lithium-ion batteries that power electric vehicles after a Chevy Volt battery caught fire. Regulators have approached other automakers that sell vehicles with such batteries.

“The Volt caught fire while parked at a National Highway Traffic Safety Administration testing center in Wisconsin, three weeks after a side-impact crash test, said an agency official….

“The fire was severe enough to burn vehicles parked near the Volt, the agency official said. Investigators determined the battery was the source of the fire, the official said.”

Better not let the Volt fall into the hands of terrorists, I’m thinking. No one would think twice seeing it parked outside an embassy.

--The Dept. of Agriculture reported that China has become the top market for U.S. farm exports for the first time, surpassing Canada. For the fiscal year ending Sept. 30, U.S. exporters sold $20 billion in agricultural products to China. The mainland has been importing huge amounts of corn from the U.S., even though China is the second-largest corn grower in the world behind the land that spawned the Kardashians. Overall, U.S. farm exports were a record $137.4 billion this fiscal year and are expected to be a like amount in 2012. [Separately, the USDA said the nation’s corn crop will be the lowest in terms of yield per acre in eight years, though because farmers planted so much more last spring, the actual crop size will be the fourth-biggest in history.]

--Seven weeks to go and the broad-based CRB index of 19 commodities is still down on the year, per your editor’s prediction when the CRB peaked at 370…320.20 vs. a 12/31/10 close of 332.80…even as the price of oil has rebounded to nearly $100 and gold has recovered half of its loss from the highs.

--Libya’s interim oil minister said oil production should reach 700,000 barrels a day by year end, or half pre-revolution levels, but the post-Gaddafi environment is still fraught with tremendous uncertainty and there is no reason why any foreign company, outside the energy sector, would make new investments until the political situation becomes clearer. [I just saw a story, Sat. morning, that the militias started firing on each other today.]

--Meanwhile, the Obama administration announced this week that it would postpone until after the 2012 election a final decision on the proposed Canada-U.S. oil pipeline, another real profile in courage by a president not wanting to offend either his environmental base or union supporters who would benefit on the jobs front. Republicans can have a field day on this one. The White House says it needs the delay to reroute part of the pipeline to appease the environmentalists. The administration had previously said it would decide on the pipeline by year end.

--The European Union will overtake the United States as the world’s biggest oil importer in 2015, according to the International Energy Agency, owing to better fuel efficiency in the U.S. as well as increased domestic oil and gas production that even the Obama administration can’t stop.

But what cracks me up about the IEA’s periodic reports is their attempt to predict crude prices way in the future, like the latest call that oil will reach $120 a barrel in 2035. This is so freakin’ stupid. Why bother, IEA? [And of course if Iran is attacked, who knows how high the price of crude could soar? I still maintain, though, that in this instance right after the spike is the perfect time to ‘short’ the product and/or sector. Iran will not be able to close the Strait of Hormuz.]

--India reported its largest decline in domestic auto sales for October, off 23.8%, since December 2000. I’d say that’s a bit disconcerting.

--A.P. Moeller-Maersk A/S, the world’s biggest container shipping line, said it will lose money this year, lowering its initial forecast of a small profit as freight rates plunge. The whole freight business was yet another bubble in that the industry has added way too many ships, far more than demand warrants, at least today. Maersk said the global container fleet expanded by 224 vessels in the first nine months of the year. I’m assuming rats are also obtaining favorable passage rates.

--Speaking of rats, with Fannie Mae requesting an additional $7.8 billion from taxpayers after soured derivatives bets led to a loss of $5.1 billion for the recent quarter, Fannie has now hit us up for $111 billion, while sibling Freddie Mac is up to $72 billion. Well isn’t that special.

--Walt Disney Co. reported strong fiscal fourth-quarter earnings with net income up 30% over a year earlier. Revenue rose 7% as the media network division, including ESPN, continues to set viewership records. I was interested to see business was solid at Hong Kong Disneyland, which I went to a few years ago and was frankly very unimpressed, though I understand they’ve made improvements since then. 

--Cisco Systems reported revenues rose 4.7% in its latest quarter, better than expected, as CEO John Chambers said “the company is seeing stability in our switching portfolio.” Gross profit margins increased in this important segment as well.

--Adobe halted development of its Flash Player for mobile browsers, surrendering to Apple in the war over web standards. Adobe’s decision means web developers who now use Flash tools to produce content will instead move over to newer HTML5 technology, not that I have the slightest idea what this is, which is why I have my own tech support. 

By the way, I was told on Friday my Apple iPad app for StocksandNews isfinally on the way, sports fans. Like it might be available now. It probably behooves me to get an iPad myself, come to think of it.

--I apologize I just haven’t looked at the Olympus Corp. accounting scandal in Japan in great detail, but what I’ve read reeks of one of the all-time scams, whereby the company was way overpaying for small, basically bankrupt outfits that had zero to do with Olympus’ core business, first cameras and then a move into medical equipment, plus advisers on the deals were paid outrageously large fees. Then as the investments soured, the company tried to mask the losses. The entire board of directors is to be replaced and the whole scandal wouldn’t have been brought to light had the former CEO, Michael Woodford, not blown the whistle and given evidence to investigators in Britain and the U.S. For Japan, which likes to say its accounting is squeaky clean, this is a huge black eye on par with anything that has happened in the U.S., including Enron.

--Shares in Green Mountain Coffee Roasters Inc. traded at $115 on Sept. 20, less than two months ago. This week they closed at $43 after the company’s future earnings outlook disappointed the Street, this as hedge-fund manager David Einhorn questioned the company’s accounting, transparency and business practices. Green Mountain’s CEO denied the company has committed any wrongdoing.

--Jefferson County, Alabama, filed for bankruptcy in the largest such municipal filing in U.S. history, some $4 billion, though this was long expected. It eclipses the 1994 filing of Orange County, California, which had more population but less debt. Jefferson County’s problems were largely the result of a heavily-indebted effort to revamp its sewers. No word on whether they are now overflowing as a result of the action.  Good thing I live uphill from there.

--Toyota recalled 550,000 vehicles worldwide – mostly in the United States – over steering issues. They say that unless you’re driving on the Bonneville Salt Flats, this can be a real problem. The models involved are mostly from 2004 and 2005, and include Camry and Lexus brands. Otherwise, drive on!

--Thailand’s floodwaters encircled another two industrial parks east of Bangkok, though mass transit systems and central commercial districts remained dry (at least as I write). Among the latest firms threatened by the ongoing, slow-motion disaster are Unilever, Johnson & Johnson, Isuzu and Honda. Earlier, Toyota said it could no longer estimate the financial impact from the Thai floods, a move Honda previously announced as a result of flooding at a separate location. The issue now is what will next year’s rainy season bring? Will companies abandon Thailand permanently and move production elsewhere?

--Boeing’s new 787 Dreamliner made its first commercial flight from Tokyo to Hong Kong on October 26, an All Nippon Airways trip. But on Sunday, ANA had to make a second approach at a west Japan airport before landing after a glitch forced the pilot to manually deploy the main landing gear, the airline said. Huh. A spokesman for Boeing gave no explanation for the problem but said the company understood “the backup procedures worked as expected.” [AFP]

--According to Johnson Associates, which puts out a closely followed annual survey on compensation, Wall Street bonuses will fall 20% to 30% this year from a year ago, with the sharpest declines in trading and investment banking.

But writing in the New York Times, Professor Nassim Nicholas Taleb, who coined the phrase “Black Swan,” opines:

“I have a solution for the problem of bankers who take risks that threaten the general public: Eliminate bonuses….

“(It’s) time for a fundamental reform: Any person who works for a company that, regardless of its current financial health, would require a taxpayer-financed bailout if it failed, should not get a bonus, ever. In fact, all pay at systemically important financial institutions – big banks, but also some insurance companies and even huge hedge funds – should be strictly regulated.

“Critics like the Occupy Wall Street demonstrators decry the bonus system for its lack of fairness and its contribution to widening inequality. But the greater problem is that it provides an incentive to take risks. The asymmetric nature of the bonus (an incentive for success without a corresponding disincentive for failure) causes hidden risks to accumulate in the financial system and become a catalyst for disaster. This violates the fundamental rules of capitalism; Adam Smith himself was wary of the effect of limiting liability, a bedrock principle of the modern corporation.

“Bonuses are particularly dangerous because they invite bankers to game the system by hiding the risks of rare and hard-to-predict but consequential blow-ups, which I have called ‘black swan’ events….

“Consider that we trust military and homeland security personnel with our lives, yet we don’t give them lavish bonuses. They get promotions and the honor of a job well done if they succeed, and the severe disincentive of shame if they fail. For bankers, it is the opposite: a bonus if they make short-term profits and a bailout if they go bust. The question of talent is a red herring: Having worked with both groups, I can tell you that military and security people are not only more careful about safety, but also have far greater technical skill than bankers.”

Now talk amongst yourselves.

--Australia’s upper and lower houses of parliament have finally signed off on the controversial carbon tax, requiring the country’s coal-fired power stations and other big emitters to “pay to pollute” starting July of next year. This vote has been years in the making.

--Las Vegas attracted more visitors in September than a year ago as convention attendance soared 49%. But, gambling revenues were down 6.6% over the same period. At least visitation was up a 19th consecutive month and occupancy neared 86%.

--With the cost of Thanksgiving dinner in the U.S. rising 13% this year, the biggest gain in two decades, according to the American Farm Bureau Federation, wild turkeys have been put on notice that if they know what’s good for them, they’ll stop harassing humans.

--Speaking of Thanksgiving, Wal-Mart is once again accelerating Black Friday, this time opening its doors at 10 p.m. on Thursday, which is atrocious behavior, at least to those of us for which this is our favorite holiday. So Boooo on Wal-Mart, which says its customers said they would rather stay up late to shop than get up early. And Booo on the customers, too.   Take away their citizenship.

Foreign Affairs

Iran: A new clock is ticking…the time from when the U.N.’s International Atomic Energy Agency (IAEA) issued its long-awaited report on Iran’s suspected nuclear arms program, Nov. 8, and the 2012 presidential election in the United States, next Nov. 6. I have argued for weeks that should the Obama administration feel compelled to take military action against Iran, it will be next spring because the White House cannot afford to have Iran test a nuclear weapon after next Labor Day at the height of the presidential campaign as it would spell the end for the Obama presidency. “This happened under your watch, Mr. President!” the Republican nominee would repeat over and over again during the debates.

Now most experts say that Iran won’t have a nuclear capability until 2013 at the very earliest.  I just argue there isn’t a soul in the Western World (or Israel) who really knows how far advanced Iran is, and my point on fixing the spring as the date for action, assuming any efforts at increased sanctions against the Iranian government go nowhere, is because Obama needs time for damage control, as would probably be inevitable, before Americans went to the polls. Trust me, should the White House act next year it will be as much about our election as anything else. That’s simply the way our corrupt system works.

So what did the IAEA say? The agency found some of Iran’s activities pertained to civilian applications but others were “specific to nuclear weapons development." The IAEA had acquired more than 1,000 pages of documents relating to Iran’s program, sourced from the agency and 10 of its member states, as well as from Iran itself.

“All of this information, taken together, gave rise to concerns about possible military dimensions to Iran’s nuclear program,” the report stated. Other intelligence provided to the agency pointed to Iran’s construction of “a large explosives containment vessel” at a previously little known site called Parchin that could be used for nuclear-related testing.

The report also shows that Iran worked to redesign and miniaturize a Pakistani nuclear-weapon design. “It is a very, very well thought out program and it is clear they are proceeding relentlessly with it,” as a senior research fellow, Ephraim Asculai, of Tel Aviv University put it. But the quarterly report stopped short of claiming that Tehran is determined to acquire atomic weapons.

The chairman of the House Intelligence Committee, Republican Mike Rogers, said the findings heightened fears Israel would launch an attack without world action on sanctions, urging President Obama to tighten economic measures, including cutting the supply of refined fuel to Iran and targeting its central bank.

For his part, Israeli Prime Minister Benjamin Netanyahu issued a simple, yet pointed, statement:

“The significance of the report is that the international community must bring about the cessation of Iran’s pursuit of nuclear weapons, which endanger the peace of the world and of the Middle East.”

But while the U.S., France and Britain have called for a new sanctions regime unless Iran comes clean, permanent U.N. Security Council members Russia and China will block such efforts. China’s Foreign Ministry spokesman said on Friday, “Dialogue and cooperation is the most effective way to resolve the Iranian nuclear issue. Sanctions and pressure cannot fundamentally solve it.”

Russian President Dmitry Medvedev said: “We should exhale, calm down and continue a constructive discussion of all issues on the Middle East agenda, including the Iranian nuclear program,” adding a military strike on Iran could be a “catastrophe.” Prime Minister Vladimir Putin condemned the “arrogant” West’s talk of a strike.

Of course both Russia and China seek to protect their commercial interests in Iran, first and foremost.

As for Iran’s position, President Ahmadinejad said, “Unfortunately, there is someone in charge of the IAEA who not only has no authority but tramples upon the IAEA laws and only echoes U.S. words.” 

On Thursday Ayatollah Ali Khamenei weighed in, saying his country was the victim of “Iranophobia” mounted by the West and Israel to justify a possible pre-emptive strike. “If the thought of invasion against the Islamic republic of Iran crosses anybody’s mind he must ready himself to receive a strong slap and iron fist. The enemies, especially the United States and its puppets and the Zionist regime, should know that the Iranian nation will not invade any country or nation, but it will respond to any invasion or threat with full force in a way that it will break up invaders from within,” said the Son of Satan.

France’s Foreign Minister, Alain Juppe, warned: “If Iran refuses to conform to the demands of the international community and refuses any serious cooperation, we stand ready to adopt, with other wiling countries, sanctions on an unprecedented scale.”

At week’s end, Defense Secretary Leon Panetta said any military strike on Iran would have a “serious impact” on the region and possibly U.S. forces there, without having any real impact on Iran’s nuclear program. “You’ve got to be careful of unintended consequences here.”

Meanwhile, the Wall Street Journal reported on Friday that the U.S. “has quietly drawn up plans to provide (the United Arab Emirates) with thousands of advanced ‘bunker-buster’ bombs and other munitions, part of a stepped-up U.S. effort to build a regional coalition to counter Iran.” The UAE is seen as the most hawkish against Iran in the region, at least as much so as Saudi Arabia, and its air force could act as an American proxy if called upon. The Pentagon is also arming the Saudis and Oman with advanced fighter jets and munitions.

Editorial / Wall Street Journal

“(The IAEA’s) 14-page annex detailing the state of Iran’s weapons work should (keep you up at night). It lays to rest the fantasies that an Iranian bomb is many years off, or that the intelligence is riddled with holes and doubts, or that the regime’s intentions can’t be guessed by their activities.

“So much, then, for the December 2007 National Intelligence Estimate, which asserted ‘with high confidence’ that Iran had abandoned its nuclear-weapons work in 2003 and ended any chance that the Bush administration would take action against Iran. So much, too, for the Obama administration’s attempts to move Iran away from its nuclear course, first with diplomatic offers and then with sanctions and covert operations.

“The serious choice now before the administration is between military strikes and more of the same. As the IAEA report makes painfully clear, more of the same means a nuclear Iran, possibly within a year.

“It’s time, then, to consider carefully what that choice means for the United States. In the run-up to the war in Iraq, we wrote that ‘the law of unintended consequences hasn’t been repealed,’ and that ‘no war ever goes precisely as planned.’ That was obviously true of a boots-on-the-ground invasion, but it would also be true of an aerial campaign to demolish or substantially degrade Iran’s nuclear facilities….

“The question for the world, and especially for the Obama administration, is whether those dire consequences [Ed. including potential nuclear war as an Iranian bomb leads to nuclear proliferation in the region] are worse than the risks of a pre-emptive strike. We think we know what the Israelis will decide, especially if they conclude that President Obama stays on his current course.

“Opponents of a pre-emptive strike say it would do no more than delay Iran’s programs by a few years. But something similar was said after Israel’s strike on Iraq’s Osirak reactor in 1981, without which the U.S. could never have stood up to Saddam after his invasion of Kuwait. In life as in politics, nothing is forever. But a strike that sets Iran’s nuclear programs back by several years at least offers the opportunity for Iran’s democratic forces to topple the regime without risking a wider conflagration.

“No U.S. president could undertake a strike on Iran except as a last resort, and Mr. Obama can fairly say that he has given every resort short of war an honest try. At the same time, no U.S. president should leave his successor with the catastrophe that would be a nuclear Iran. A nuclear Iran on Mr. Obama’s watch would be fatal to more than his legacy.”

The IAEA’s 35-nation board meets this coming Thursday and Friday to decide whether to report Iran to the U.N. Security Council.

Israel: Talk about a diplomatic disaster, French President Nicolas Sarkozy and President Obama didn’t realize a private conversation at the recent G20 summit in Cannes was overheard by a number of journalists and inadvertently transmitted over a system used for translation. Sarkozy says of Benjamin Netanyahu, “I can’t see him anymore, he’s a liar.” Obama retorted: “You may be sick of him, but me, I have to deal with him every day.”   While Israeli media played it up, Israeli officials kept their mouths shut.

Syria: I reached out to my friend in Beirut this week, wondering why he hadn’t written anything recently, and in learning he was on vacation I asked him about the border issues between Syria and Lebanon, voicing my own concerns. Michael observed, “Very nasty…and it will get worse, I fear.” Seeing as there is no bigger expert on the region than he, in my humble opinion, this says it all. Lebanon’s president, Michel Sleiman, confirmed this week that Syria was mining the border with Lebanon to prevent arms smuggling to the Syrian opposition, as well as prevent dissidents from fleeing into Lebanon.

And after the Arab League and Syria supposedly reached agreement on ending the violence against protesters, ten days ago, Bashar Assad’s regime continued the killing, another 20+ on Thursday alone (a reported 18 on Friday as I write), as the U.N. estimates the toll at 3,500. [I listed a figure of 4,000 last week, which was from various human rights groups, the same groups the U.N. is relying on.] The epicenter of the violence remains Homs, where fighting between army defectors and soldiers has been intense in pockets, while elsewhere Assad’s goons round up suspects a la Hitler’s SS.

Separately, Syria stopped paying for oil produced within the country by Royal Dutch Shell and Total, as reported by the Financial Times, further evidence of the regime’s unease amid the pro-democracy protests and economic sanctions. Oil export earnings, some $3.5 billion a year, have been hit by an embargo imposed by the European Union. The oil companies had continued to pump the crude, despite not being paid, but now the government ordered them to cut output because storage capacity has been met owing to the EU embargo.

The only encouraging item this week was a story in the Jerusalem Post that Assad is being offered asylum by several Arab leaders, this according to U.S. Assistant Secretary of State Jeffrey Feltman, formerly an excellent ambassador to Lebanon, as I recall. 

Meanwhile, the U.S. is investigating reports that Syrian leaders are moving their cash into Lebanese banks; this as there are increased concerns that Palestinian groups loyal to Damascus are once again taking root in Lebanon, the last thing this Hizbullah-led country needs. One group I never heard of, Saiga, a pro-Syrian Palestinian faction, has “restructured and a younger generation has taken the leadership.” [Daily Star] You read something like this and you understand how the war on terror will never be over in our lifetime…that is if you needed further proof.

Lastly, Lebanese opposition leader Saad Hariri said he would not attempt to topple the Hizbullah government and would wait for 2013 parliamentary elections instead. But Hariri really needs to return to the country, seeing as how he’s been holed up in Paris. I understand the assassination threats, but he’s doing his people zero good in France. 

Iraq: I would encourage you to visit my “Hot Spots” link for an analysis of how the United States’ imminent withdrawal “is the mother of all disasters.” Prime Minister Nouri al-Maliki is a bad guy and he continues a purge of leading Sunni figures, particularly in the security apparatus under the guise of ridding Iraq of Baathists. Remember, Maliki is still acting defense and interior minister, since the elections of 2010! He’s nothing more than Tehran’s puppet. It’s Sunni vs. Shiite all over again, and the U.S. won’t be there to keep the peace, while al Qaeda looks for openings to reignite the civil war. As Maj. Gen. Jeffrey Buchanan, the top American military spokesman in Iraq, told the New York Times, “I cringe whenever anybody makes a pronouncement that al Qaeda is on its last legs.”

Meanwhile, ExxonMobil became the first major oil company to sign a contract with Kurdistan’s Regional Government to explore for oil and gas. It’s a huge vote of confidence for the semi-autonomous region, but Exxon could face a backlash in Baghdad, which believes the contracts are illegitimate. Under a landmark deal with the central government, Kurdistan receives half of all revenue from the oil it can export.

India / Pakistan: Indian Prime Minister Manmohan Singh said this week that the two rivals needed to open a new chapter in their relationship amid signs of a warming in ties between the nuclear armed nations. A week earlier, Pakistan announced it would normalize trade with India. Singh met with Pakistani Prime Minister Gilani and praised him as a man of peace.

This all sounds great, but the terrorists have zero incentive for allowing peace to break out, or as Pakistani Foreign Minister Khar said, “We have many, many long miles to move ahead still.” And the U.S. Embassy in Islamabad on Monday acknowledged the existence of a “potential threat” to Pakistan’s nuclear warheads from local extremists, according to a press report out of India. Also, as reported by the Global Security Newswire, “The Atlantic and National Journal jointly reported that the Pakistani army had taken to transporting nuclear warheads around the country via unmarked civilian-style vans on congested roadways in an attempt to keep their whereabouts away from prying U.S. intelligence efforts.”

Boy, that makes me feel a lot better. Of course it was just a month or so ago that U.S. Sec. of State Hillary Clinton told us all not to worry about the safety of Pakistan’s nukes. I can’t remember if she cackled after saying this.

North Korea: This little hellhole is not going away in terms of its potential to ruin our day and roil global markets further. This week a senior South Korean officials said North Korea’s uranium enrichment program at Yongbyon was now a “small industry,” capable of generating nuclear weapons. It was one year ago Pyongyang revealed its uranium work. U.S. specialists at that time were allowed to tour a plant that contained 2,000 centrifuges. The official asserted the North could make one to two bombs a year just from this ‘known’ operation on top of the existing stockpile, estimated last I saw at 8 to 12 weapons.

China:  Speaking of nukes, according to a report from the Bulletin of the Atomic Scientists, China appears to be fielding four new nuclear-ready ballistic missiles (someone tell Herman Cain) and is spending an increasing amount on developing bombs for use on longer-range missiles.

Authors Hans Kristensen and Robert Norris estimate that China now possesses 240 nuclear weapons as well as some 140 ballistic missiles fielded on land; 72 missiles with ranges that can hit U.S. targets and 40 capable of striking the U.S. mainland.

But China has had trouble, according to Kristensen and Norris, in developing a sea-based platform for its nuclear warheads. They add:

“China’s main concern is the survivability of its minimum nuclear deterrent, and it spends considerable resources on dispersing and hiding its land-based missiles….

“The U.S. government has complained for years that China is too opaque regarding its military forces and budgets and that it needs to be more open.” [Global Security Newswire]

Meanwhile, the chiefs of China’s leading information technology companies said they would cooperate with the government’s efforts to more strictly police the Internet and online media. The CEOs of 39 internet, telecom and computer groups reached a “consensus” that internet companies “must strengthen self-control, self-restraint and strict self-discipline,” as reported by official news agency Xinhua and the Financial Times’ Kathrin Hille. [Love the spelling of ‘Kathrin,’ I have to add.]

Now we wait to see how this is implemented and the reaction among China’s 500 million Internet users.

Finally, last week I mentioned dissident Ai Weiwei and his $2 million+ tax bill, but since the government said it was hitting him up for this, which he vehemently disputes, over $800,000 has come flooding in from supporters (a figure as of Tuesday so easily higher now). A government mouthpiece, The Global Times, said the donations may violate the law. “Since he’s borrowing from the public, it at least looks like illegal fund-raising.”

Ai is uncertain as to what to do with the money because to hand it to the government is an admission of guilt. [I haven’t had a chance this morning to read a report that says he’s thinking of paying off half of the bill with the proceeds.]

Nigeria: Last weekend was a horrible one here as the Islamic militant group Boko Haram launched a wave of coordinated attacks, killing more than 150 in a single day. The group is bent on the imposition of Sharia throughout Nigeria and took responsibility for the suicide bombers. A spokesman said, “We will continue attacking federal government formations until security forces stop persecuting our members and vulnerable civilians.” Aside from military barracks, six churches were blown up in one Christian neighborhood. [Initially, the death toll was said to be in the 60s, but then a Red Cross official went into the morgue and counted at least 150 bodies personally.]

Australia: President Obama will be here next week and he’ll announce at that time that the United States will begin rotating troops through an Australian base in Darwin, intensifying the alliance as the China threat grows. 2/3s of all Marines are based in the Pacific, with large concentrations on Guam and Okinawa, where new Chinese long-range missiles make the forces there highly vulnerable, thus the thought of repositioning some of them. Both Obama and Aussie Prime Minister Gillard will argue China has nothing to do with the decision…cough cough.

Some Aussie analysts say this is a highly risky move for Australia and its own relations with China, a critical trading partner.

Nicaragua and Guatemala: I have to admit I didn’t realize President Daniel Ortega “eviscerated” the constitution [Los Angeles Times] to become eligible for a third term in Nicaragua as he was reelected in last weekend’s vote, while in Guatemala, a true narco-state controlled by Mexican drug cartels these days, a retired army general, Otto Perez Molina, appears to have won the race there though he’s helpless to stop the violence.

Remember when Latin America was democratizing across the continent? That is hardly the case today.

Mexico: In a huge blow to President Calderon’s efforts to combat the drug cartels, his top cabinet secretary in the effort, Jose Francisco Blake Mora, was killed in a helicopter crash on Friday that claimed seven other lives, including government officials. Bad weather appears to be the initial cause.

Random Musings

--Various polls of likely Republican primary voters and/or Republican-leaning Independents:

USA TODAY/Gallup

Cain 21%
Romney 21%
Gingrich 12%
Perry 11%

Washington Post/ABC News

Romney 24%
Cain 23%
Perry 13%
Gingrich 12%

Wall Street Journal/NBC News

Romney 28%
Cain 27%
Gingrich 13%
Paul 10%
Perry 10%

New York Times/CBS News

Cain 18%
Romney 15%
Gingrich 15%
Perry 8%

A huge 31% in this last one either want someone else or are undecided.

In the Wall Street Journal/NBC survey, President Obama receives a 44% job approval rating for the third consecutive month.

In the Washington Post/ABC poll, 70% say the allegations against Herman Cain make no difference in their vote.

--Editorial / The Economist

“The European Union may seem the epitome of political dysfunction, but America has been running it close. All this year the deadlock between the Republicans in Congress and Mr. Obama has meant that precious little serious legislation has been passed. The president’s jobs bill is stuck; the House of Representatives’ budget plans have been scuppered by the Democrat-controlled Senate. At the end of this year temporary tax cuts and other measures, worth around 2% of GDP, are set to expire – which could push America back into recession….

“The right is mostly to blame. Ronald Reagan, a divorcee who did little for the pro-life lobby and raised taxes when he had to, would never be nominated today. Mr. Romney, like all the Republican presidential candidates, recently pledged to reject tax rises, even as part of a deal where spending cuts would be ten times bigger. Mr. Cain surged briefly to the front of the pack because of a plan that would cut personal taxes to 9%; Mr. Perry lost support for wanting to educate the children of illegal immigrants. Meanwhile, in Congress, the few remaining pragmatic Republican centrists, like Senator Richard Lugar, are being hunted down by tea-party activists.

“Mr. Obama has tried harder to compromise. But he foolishly failed to embrace a long-term budget solution put forward by the bipartisan Simpson-Bowles commission, which he himself appointed. Ever since the furor over the debt ceiling this summer, he has ‘pivoted’ to the left, dabbling in class war, promising his supporters that the budget can be solved by taxing ‘millionaires and billionaires’….

“The divisiveness is hardly new, but it is increasingly structural. As the battle for billions of campaign dollars heats up, neither side dares grant the other any modicum of success, or risk the ire of its donors by appearing to compromise.”

--As part of the above NBC News/Wall Street Journal survey, 57% of those who voted for Republican John McCain in 2008 say they are more enthusiastic to vote in the coming election than past elections, compared with 41% of 2008 Obama voters.

--Texas Gov. Rick Perry during Wednesday’s CNBC debate.

“It is three agencies of government when I get there that are gone. Commerce, Education, and the – what’s the third one there? Let’s see, Commerce and, let’s see. I can’t. The third one, I can’t. Sorry. Oops.”

Perry replied in the media filing center afterwards: “Yeah, I stepped in it, man. Yeah, it was embarrassing. Of course it was.”

John Podhoretz / New York Post

“The Titanic-like campaign of Texas Gov. Rick Perry crashed into the iceberg of his own brain at 9:18 EST last night.

“Perry, who entered the race as an immediate frontrunner in August and then sank like a stone after a series of wretched debate performances, outdid himself with the most embarrassing single televised minute any important American politician has ever inflicted upon himself.

“Ever. In history….

“We saw a moment of utter blankness, of paralyzed thought, that offered the perfect illustration of why people tell pollsters they fear public speaking more than they fear death….

“It wouldn’t have meant anything if it had happened to Mitt Romney, who is so fluid by now that he sounds like a carnival barker trying to tempt you into seeing the Hall of Wonders. Or to Newt Gingrich, who has been liberated by the ultimate pointlessness of his campaign into a genuinely refreshing devil-may-care looseness.

“Such a moment for either man might have humanized him, might have suggested that they had some commonality with ordinary folk and were not simply Terminator 2012s programmed by Skynet to speak perfect Republican blarney.

“Not Perry. He literally had no margin for error coming into last night’s event in Michigan….

“His only hope of reviving his damaged candidacy was to deliver unexpectedly brilliant performances in public events. Well, he was unexpected last night – we thought he couldn’t possibly have been any more unimpressive than he had been previously. He sure surprised us!”

--As for Herman Cain and the women accusing him of sexual harassment, the AP reported that one of Cain’s accusers, Karen Kraushaar, filed a complaint, not of sexual harassment but of unfair treatment while working as a spokeswoman at the Immigration and Naturalization Service, three years after she settled a sexual harassment complaint against Cain with the assistance of the same lawyer, Joel Bennett. It’s complicated, but I want to wait 24 hours when it comes to Kraushaar…and another 24 hours (a week) before commenting further on Cain. Hopefully it takes care of itself and I don’t have to!

--There were few big issues in Tuesday’s elections, but Ohio voters rejected a new law sharply restricting public worker’s collective bargaining rights; important as Ohio is going to once again be a real battleground state in the 2012 presidential election. It was also seen as a referendum on Ohio Rep. Gov. John Kasich.

And Atlanta approved Sunday alcohol sales. No wonder I never seemed to stay in Atlanta on Sundays. I always left at the crack of dawn for another city, come to think of it.

--Editorial / Washington Post…on further looming cuts to the defense budget.

“True, the Pentagon brass are known for pushing hard for their funding. But they rarely speak in such apocalyptic tones – and there is good reason to take their warnings seriously. Under President Obama’s budget plan, $465 billion is already due to be cut from military spending over the next decade, from an annual budget now of about $700 billion. That will already require a downsizing of the Army and Marines, the reduction or cancellation of more weapons systems and a shrinking of the Navy to its lowest size in decades. Defense Secretary Leon Panetta, a lifelong budget hawk, is rightly concerned that such cuts may go too far.

“If the additional sequestration goes forward, the total reduction could come to $1 trillion. This, Gen. Odierno said, would ‘almost eliminate our modernization programs’ in the Army, including new armored vehicles. Adm. Greenert said it could force the two U.S. companies that build Navy ships out of business. The Air Force would have to retire some 1,000 aircraft. In all, about 1 million military and civilian jobs would be lost….

“In the meantime, a bad and even dangerous message would be sent to U.S. allies and adversaries. ‘We’ll have those who attempt to exploit our vulnerabilities,’ Gen. Odierno said. ‘We might lose our credibility in terms of our ability to deter.’

“Congress set this bomb in place when it agreed in the summer that half of $1.2 trillion in automatic cuts would be assessed to defense if a debt reduction plan failed to pass this year. Now it has heard from senior commanders just how much damage its explosion would cause. It would be an unconscionable act of political irresponsibility to allow their predictions to come true.”

--I have a nephew who this year had a choice between going to Pitt or Penn State and thankfully chose the former. Otherwise, I have little to add here in the hideous case of Jerry Sandusky, having already commented exclusively in another column I do for the site, except to say that aside from wanting to know what Joe Paterno really knew all these years, like you I’m trying to figure out how assistant coach (then graduate assistant) Mike McQueary lived with himself all this time after witnessing what he did back in 2002. I also just want to put in my two cents when it comes to Penn State’s students. Think twice, kids, before you act like an idiot. These days it follows you everywhere, as opposed to the time of my own youth when we could get away with a lot of stuff with nothing more than personal memories as opposed to photos splashed on the Internet for all future employers to see. 

--The Pew Research Center’s Internet & American Life Project surveyed 800 children between the ages of 12 and 17 and while eight in 10 teenagers said they have developed positive feelings about themselves and forged better friendships on social networking sites, nine in 10 say they have witnessed cruelty by their peers on the same networks.

Pew concludes, though, that online bullying is not as common as what takes place on the schoolyard or in the hallway. 

--According to Air Force officials, for years the Dover Air Force Base mortuary disposed of portions of troops’ remains by cremating them and dumping the ashes in a landfill. The practice was abandoned in favor of burial at sea. Officials acknowledged the practice to the Washington Post, saying “the procedure was limited to fragments or portions of body parts that were unable to be identified at first or were later recovered from the battlefield, and which family members had said could be disposed of by the military.”

Said Gari-Lynn Smith, “portions of whose husband’s remains were disposed of in the landfill after his 2006 death in Iraq, she was ‘appalled and disgusted’ by the way the Air Force had acted. She learned of the landfill disposal earlier this spring in a letter from a senior official at the Dover mortuary.

“ ‘My only peace of mind in losing my husband was that he was taken to Dover and that he was handled with dignity, love, respect and honor,’ Smith said. ‘That was completely shattered for me when I was told that he was thrown in the trash.’”

The Dover mortuary changed its policy in 2008. No officials have been fired over their past actions. 

Each week there is yet another example (or two this time, including the Penn State debacle) where you see how America is falling short. It has to stop.

--I was reading some stories on the latest pilgrimage for the hajj, an estimated 2.5 million strong this year with no major incidents. Back in 1990, 1,426 died in stampedes, but the Saudis have spent $billions on infrastructure projects to ease the congestion. I just have trouble that only Muslims are allowed to attend, in looking at the bigger picture. It speaks volumes. Every other church welcomes visitors to its holiest shrines. Open up…Muslims. You’d get my tourist dollars, for one.

--The U.S. is relying on Russia to give us a lift into space these days with the retirement of the shuttle program, so it’s more than a bit disturbing that a Russian space probe sent to collect rocks and such from a Martian moon veered off course within minutes of the launch of its 33-month mission. The craft was then stuck in an Earth orbit and as of this writing could crash back to Earth after its batteries run out, assuming Russian engineers are unable to correct the fault. The venture is also carrying China’s first Mars satellite, a failure that China will now file away for 1,000 years for future use. 

--Last week I railed on social networking and how I can’t wait for the day when I have the guts to get off it. So the Nov. 7 issue of Barron’s had the following, courtesy of social-email software provider harmon.ie:

57%: share for whom the majority of work interruptions involve a social-networking tool

15 minutes: maximum time that 45% of workers go without being interrupted

$10,375: total per-person loss of annual productivity for all types of distractions

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

God bless America.
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Gold closed at $1788
Oil, $98.99

Returns for the week 11/7-11/11

Dow Jones +1.4% [12153]
S&P 500 +0.8% [1263]
S&P MidCap -0.8%
Russell 2000 -0.2%
Nasdaq -0.3% [2678]

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

Dow Jones +5.0%
S&P 500 +0.5%
S&P MidCap -1.7%
Russell 2000 -5.0%
Nasdaq +1.0%

Bulls 44.2
Bears 34.7 [Source: Chartcraft / Investors Intelligence]

Have a great week. I appreciate your support.

*For those of you who listen to the podcast, recognizing you thus may not read this, I apologize for last week but I had no Internet service for recording it until too late in the day due to the power failure here. The week before that I was traveling and I never do a podcast in those situations. But hopefully I’m back to normal this weekend.

Brian Trumbore