Week in Review

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Week in Review

12/24/2011

For the week 12/19-12/23

Note: Seeing as next time I’ll be throwing everything at you, including my 2012 outlook, after a look back at 2011, I purposefully tried to hold off on some of the commentary this week.

Europe, Washington and Wall Street

Before we examine the dysfunction in the House Republican caucus, a look at Europe.

The week began with Mario Draghi, president of the European Central Bank, warning of the costs of a eurozone break-up, a scenario that his predecessor, Jean-Claude Trichet, dismissed off hand as being “absurd.” But last weekend in his first interview since becoming ECB president on November 1, Draghi talked of the dangers should one or two struggling countries quit the bloc, and how remaining members would struggle as a result. The markets on Monday opened in a somber mood.

To fight the crisis, Draghi stressed that the ECB’s first mission was to shore up eurozone banks through its three-year loan program, while politicians needed to rebuild investor confidence in public finances through fiscal discipline and by shoring up the bailout fund, the European Financial Stability Facility. Many steps need to be in place by early March as part of the new treaty the eurozone nations agreed to in principle on Dec. 8-9. EU states outside the euro could join as they ratify, save for the U.K. which for now opts to go it alone.

So on Monday, eurozone finance ministers agreed to contribute nearly 200 billion euro in additional loans to the International Monetary Fund to further boost its crisis-fighting resources, but the group failed to reach agreement on a plan to boost the lending capacity of the EFSF, nor on making the permanent bailout facility, the European Stability Mechanism, more flexible by changing the current voting rules requiring unanimity. 

At the same time, ratings agency Fitch warned it could downgrade the EFSF from its current AAA status if either France or Germany lost theirs. This goes back to the principle long discussed in these pages that it’s difficult to have a bailout fund when many of those contributing to the effort are the ones in danger of being bailed out, i.e., Italy, plus if the EFSF is to charge ultra-low interest rates, the credits backing it need to be worthy of the mandate.

But then the ECB came through in opening its window for the first time for the three-year bank loan program that was designed to put at least a short-term end to the funding crisis in the eurozone. The program met with immediate acceptance, as the Financial Times editorialized:

“Stampede! The European Central Bank’s lending of 489 billion euro to more than 500 banks [523] was nothing short of a feeding frenzy. It was more than expected, but hardly a surprise given the starvation diet imposed on the sector by jittery markets. Netting ECB loans due against this week’s lending, the banking sector is 210 billion euro the richer in cash. This should ease fears of an imminent collapse [Ed. a Lehman moment…and a run on the bank(s).] But what will banks do with the funds?”

Ideally, you’d like the banks to lend the money out, but given that 2012 could be as uncertain as 2011 was, the banks may just hoard the cash.

“The money – and there is another three-year loan offer in February – should ease the pressure on banks to dump assets at fire sale prices to raise cash. Disposals can proceed at a steadier pace….But the hoarding suggests the funds will instead flow to that traditional parking space for spare cash; eurozone government bonds.”

“(The banks pay) an interest rate of just 1% (on the ECB loans). The banks will then be able to use this money to buy bonds issued by their own governments, in most cases yielding 6% or more, thus picking up five percentage points of profit by hoovering up whatever debts their governments might choose to issue in the months ahead….

“If the Greek or Italian governments default on their debts the Greek and Italian banks will go spectacularly bust – but these banks will go bust anyway if their governments ever default. Thus all the incentives for bank managements are to go for broke, risking their entire capital in the government debt markets and making maximum use of the new ECB credit lines.”

Well, it does buy more time, some breathing space, to repair balance sheets and restore confidence, while governments convince the people to go along with austerity measures. But here again, this requires a level of leadership sorely lacking on the continent. From the reaction after the ECB turned on the spigot, though, the equity markets in particular appreciated the move, or as a Wall Street Journal headline aptly put it, the “European Central Bank Buys Itself a Quiet Holiday Respite.” Everyone can deal with the issue of whether the flood of cheap money provides a long-term solution next year.

Then again, Italy is slated to hold an auction or two this coming week and on Friday the Italian 10-year was back up around the unsustainable 7.00% level. The ECB’s money grab didn’t help the Italians, at least thus far (nor the euro itself), though Spain, due to some successful short-term bond auctions of its own, saw the yields on its paper decline. Italy and Spain have 150 billion in euro ($200 billion) in debt maturing in just the first quarter. As I’ve been saying, we will continue to go from auction to auction, at least for the next few months, and probably well beyond.

Of course by now you also know that what the European continent needs most these days is growth…and there seems little doubt the eurozone’s GDP turned negative this quarter and is slated to be negative in the first quarter of 2012. In a preview, GDP in the non-euro U.K. may have come in at a revised 0.6% for the third quarter, a tick better than expected, but that’s now ancient history. A reading on U.K. October services plunged over September’s level, exports are down, home prices fell in December over November, and consumer spending is flat.

But for the first 8 months of 2011, the government of Prime Minister David Cameron did receive some good news. The budget deficit was down from 98.7 billion pounds to 88.3 billion, while government revenues were up 4.8%. It’s a start. I’ll have more on Cameron next time as I take a look back on some of what I was saying a year ago with regards to Britain and its import.

“Sadly, the eurozone’s uncertain future will continue to cast a huge shadow over the global economy next year. Surely there are other concerns, including the risk of a not-so-soft landing in China, of pre-electoral paralysis in the U.S., and of a large, unexpected geopolitical shock. Even in the most benign scenario, the massive overhang of global public and private debt will hinder any robust recovery in the advanced economies. But the eurozone remains far and away the greatest source of vulnerability.

“There is no easy solution. The eurozone needs a new constitution that creates powerful, centralized fiscal and regulatory authorities, with corresponding political integration. Substantially greater integration probably means ousting some of the less developed states until they are sufficiently economically advanced. Unfortunately, such a course is politically unacceptable, not least to France, a core member.

“Therefore the only realistic medium-term solution is an expansive interpretation of the European Central Bank’s charter, ideally prefaced by a huge restructuring of public and or private debt in several periphery countries. The ECB is understandably nervous of losing vast sums by pouring money into a leaky bucket, especially without an automatic fiscal backstop vast enough to absorb losses. Germany, in turn, is understandably worried about having to pay a disproportionate share of any future recapitalization, not to mention about being gamed into tolerating much higher inflation as a back-door solution….

“For now, 2012 looks set to be another year of floundering towards an uncertain future for the euro-system.”

“For the last three years the world’s biggest economies – the U.S., eurozone and China – have been living up to the infuriating euphemism so beloved of policymakers: ‘kicking the can down the road.’ They have been avoiding the tough decisions that are required to address their fundamental economic, financial and fiscal problems.

 “The U.S. has postponed its fiscal consolidation and avoided the other structural reforms – investments in infrastructure, education and skills and changes to energy policy – that are required to restore its potential growth rate. The eurozone has been in denial of the fact that some of its member states are insolvent, as well as unable to survive and grow in a monetary union. China has persisted in its weak currency, to support its export and investment-led growth model where savings are too high and consumption too low.

“In all cases political constraints – the approaching elections in the U.S. and leadership transitions in China at the end of 2012, and the inability of the eurozone’s 17 governments and coalitions to coordinate policies coherently while staggered elections and changes of government take place – have led leaders to avoid the short-term pain and political costs of tough decisions that will yield benefits only over the medium term….

“If the world’s biggest economies continue to play the same game and try to kick the cans further down the road for another year, the cans will become bigger and heavier and eventually hit a brick wall. By 2013 at the latest, but possibly already in 2012, a perfect storm of a double-dip recession in the U.S., a disorderly scenario in the eurozone and a hard landing in China could materialize.”

Washington and Wall Street

When I last left you, Saturday morning, it appeared Congress and the administration had reached agreement, albeit perhaps just a partial one, on extending the payroll tax cut (holiday). Then all hell broke loose in the House and suddenly it was gridlock all over again, with Republicans opting to fight the White House but instead shooting themselves in the foot.

The Wall Street Journal’s editorial board, closely followed by conservatives, influenced opinion in a big way with a piece Wednesday that read in part:

“GOP Senate leader Mitch McConnell famously said a year ago that his main task in the 112th Congress was to make sure that President Obama would not be re-elected. Given how he and House Speaker John Boehner have handled the payroll tax debate, we wonder if they might end up re-electing the President before the 2012 campaign even begins in earnest.

“The GOP leaders have somehow managed the remarkable feat of being blamed for opposing a one-year extension of a tax holiday that they are surely going to pass. This is no easy double play.

“Republicans have also achieved the small miracle of letting Mr. Obama position himself as an election-year tax cutter, although he’s spent most of his Presidency promoting tax increases and he would hit the economy with one of the largest tax increases ever in 2013. This should be impossible….

“Their first mistake was adopting the President’s language that he is proposing a tax cut rather than calling it a temporary tax holiday. People will understand the difference – and discount the benefit.

“Republicans also failed to put together a unified House and Senate strategy. The House passed a one-year extension last week that included spending cuts to offset the $120 billion or so in lost revenue, such as a one-year freeze on raises for federal employees. Then Mr. McConnell agreed with Senate Majority Leader Harry Reid on the two-month extension financed by higher fees on Fannie Mae and Freddie Mac (meaning on mortgage borrowers), among other things. It passed with 89 votes and all but seven Republicans.

“Senate Republicans say Mr. Boehner had signed off on the two-month extension, but House Members revolted over the weekend and so the Speaker flipped within 24 hours….

“One reason for the revolt of House backbenchers is the accumulated frustration over a year of political disappointment. Their high point was the Paul Ryan budget in the spring that set the terms of debate and forced Mr. Obama to adopt at least the rhetoric of budget reform and spending cuts.

“But then Messrs. Boehner and McConnell were gulled into going behind closed doors with the President, who dragged out negotiations and later emerged to sandbag them with his blame-the-GOP and soak-the-rich re-election strategy. Any difference between the parties on taxes and spending has been blurred in the interim.

“After a year of the tea party House, Mr. Obama and Senate Democrats have had to make no major policy concessions beyond extending the Bush tax rates for two years. Mr. Obama is in a stronger re-election position today than he was a year ago, and the chances of Mr. McConnell becoming Majority Leader in 2013 are declining.

“At this stage, Republicans would do best to cut their losses and find a way to extend the payroll holiday quickly.”

Wednesday, Sen. Bob Corker (R-Tenn.), said, “Are Republicans getting killed now in public opinion? There’s no question. Both Republicans and Democrats have agreed that this is going to happen [pass the payroll extension, if even for two months], and probably the best thing to happen now is just to get it over with.”

Sen. John McCain (R-Az.) said the House action was “hurting the Republican Party.”

Democrats and President Obama crowed. On Thursday, their isolation increasing, Sen. McConnell said the House should pass the two-month extension. Obama then appeared with some props…people apparently helped by the extra $40 in each paycheck the payroll tax holiday provides for the average American.

“This is it,” said the president. “This is exactly why people get so frustrated with Washington. This isn’t a typical Democrat-versus-Republican issue. This is an issue where an overwhelming number of people in both parties agree. How can we not get that done?”

Hours later, House Republicans caved. On Friday, the Senate and House passed the two-month extension by unanimous consent. Obama went off on his delayed vacation. Boehner and the “backbenchers” licked their grave wounds.

“(The fight) may not have been politically the smartest thing in the world,” said the Speaker, “but let me tell you what. I think our members waged a good fight.”

Your members are freakin’ idiots, Mr. Speaker. You hardly distinguished yourself, either. At least Republicans did manage to wrestle a key concession from Democrats, a provision requiring Obama to decide in 60 days whether to allow construction of an extension of the controversial Keystone XL oil pipeline. Otherwise, for Republicans the week was an unmitigated disaster.

“The best you can say about this political melodrama is that it’s over.

“President Obama will take a victory lap, and he played his hand well if cynically. The two-percentage-point payroll tax holiday has done nothing to lift the economy this year, and it won’t matter in 2012….

“The only purpose of this tax holiday was political, and the House Republican mistake was falling into the President’s trap. They let him pose as a tax-cutter while they put on their pointy accountant hats and talked about ‘the Social Security trust fund,’ as if such a thing contains real money. The better strategy was to extend the payroll holiday, get something in return, and then talk about how Mr. Obama wants to push the economy off his multiple tax-increase cliff in 2013.”

“Now that Congress has reached agreement on what must be one of the worst pieces of legislation in years – the temporary payroll tax holiday extension – let’s survey the damage.

“To begin with, what even minimally rational government enacts payroll tax relief for just two months? As a matter of practicality alone, it makes no sense….

“[Aside from the logistical issue, later addressed by the House] What business operates two months at a time? The minimal time horizon for business is the quarter – three months. What genius came up with two?....

“But making economic sense is not the point. The tax-holiday extension – presumably to be negotiated next year into a 12-month extension – is the perfect campaign ploy: an election-year bribe that has the additional virtue of seizing the tax issue for the Democrats.

“When George McGovern campaigned on giving every household $1,000, he was laughed out of town as a shameless panderer. President Obama is doing exactly the same – a one-year tax holiday that hands back about $1,000 per middle-class family – but with a little more subtlety.

“Obama is also selling it as a job creator. This takes audacity. Even a one-year extension isn’t a tax cut; it’s a tax holiday….

“This is a $121 billion annual drain on the Treasury that makes a mockery of the Democrats’ reverence for the Social Security trust fund and its inviolability….

“The House Republicans’ initial rejection of this two-month extension was therefore correct on principle and on policy. But this was absolutely the wrong place, the wrong time, to plant the flag. Once Senate Republicans overwhelmingly backed the temporary extension, that part of the fight was lost. Opposing it became kamikaze politics….

“The Democrats set a trap and the Republicans walked right into it. By rejecting an ostensibly bipartisan ‘compromise,’ the Republican House was portrayed as obstructionist and, even worse, heartless – willing to raise taxes on the middle class while resolutely opposing any tax increases on the rich….

“The GOP’s performance nicely reprises that scene in ‘Animal House’ where the marching band turns into a blind alley and row after row of plumed morons plows into a brick wall, crumbling to the ground in an unceremonious heap.

“With one difference: House Republicans are unplumed.” 

And now we get to do this all over again in February! Oh joy.

Turning to the economy, data on housing starts, as well as existing and new home sales for November were viewed as positive, even as the National Association of Realtors significantly revised some of their past sales data downward, 14%, which further points to just how awful the crash in housing has been. Data on durable goods was generally solid, though November readings on personal income and consumption were putrid on both counts, but economists spun them into positives nonetheless.

One item that is legitimately positive, however, is the continuing solid news on the weekly jobless claims front…just 364,000 this past week, the lowest tally since April 2008.

But third quarter GDP was revised down again, to just 1.8% (the final revision). So while everyone seems to believe fourth quarter performance will be closer to 3%, just a reminder of what a normal recovery out of deep recession is supposed to look like.

1982…GDP growth, seasonally adjusted on an annual basis

I…..5.1
II….9.3
III…8.1
IV…8.5

I…..8.0
II….7.1
III…3.9

III…1.7
IV…3.8

I…..3.9
II….3.8
III…2.5
IV…2.3

I…..0.4
II….1.3
III…1.8

As for the Christmas shopping season, I live literally two minutes from the upscale Short Hills Mall and have gone over the past two Tuesday mornings, so not exactly prime time, but I was amazed at the crowds in both the Apple store and Macy’s. I’d be shocked if Apple didn’t do well in the quarter, like very well, but when it comes to the likes of Macy’s, crowds are one thing. Margins are quite another. This year’s retail reports for the holidays will be fascinating.

Street Bytes

--We’re down to just four trading days left in the year and after a 3.6% gain for the week the Dow Jones is solidly in the black, up 6.2%, as stocks were helped by the ECB’s bank liquidity move across the pond. The S&P 500 rose 3.7% and is now back in positive territory for 2011, up 0.6%. But Nasdaq, despite its 2.5% advance, is still down 1.3%. As noted above Italy’s bond auctions this coming week could have an impact, either way, on our markets, but it’s all going to come down to the computers, who control the market action these days, especially when the human element is home enjoying the holidays.

--U.S. Treasury Yields

6-mo. 0.03% 2-yr. 0.28% 10-yr. 2.02% 30-yr. 3.06%

Treasury yields rose on growing confidence the economy is improving, while some funds also exited bonds for equities.

--The Wall Street Journal reports that the Federal Reserve is looking to tell the markets it will keep rates near zero into 2014, vs. the current policy of maintaining existing levels until some point in 2013. Of course this would mean savers would continue to take it up the butt. Among the leading economists, only my man Stephen Roach ever brings this up; the horrible policy mistake the Fed has made in killing the elderly, for one, who did the right thing – were conservative, didn’t take undue risk and simply asked for a modest return on their savings – only to get totally screwed.

--AT&T abandoned its $39 billion bid for Deutsche Telekom’s T-Mobile USA arm, a huge setback for AT&T as it conceded it would not be able to overcome opposition from the Obama administration and U.S. regulators. The company will now have to pay Deutsche Telekom a breakup fee of $3 billion plus hand over spectrum worth another $1 billion, though DT has its own problems. What to do with an underperforming business in T-Mobile?

AT&T CEO Randall Stephenson, who took over in 2007 and now has major egg on his face, instead issued a warning to Washington.

“To meet the needs of our customers, we will continue to invest. However, adding capacity to meet these needs will require policymakers to do two things. First, in the near term, they should allow the free markets to work so that additional spectrum is available to meet the immediate needs of the U.S. wireless industry, including expeditiously approving our acquisition of unused Qualcomm spectrum currently pending before the FCC. Second, policymakers should enact legislation to meet our nation’s longer-term spectrum needs.”

--In missing earnings and revenue estimates by a wide margin for its third quarter ended Nov. 30, Oracle Corp. said sales slowed significantly at the end of the period, though company executives didn’t blame the economy, nor predict an overall spending slowdown, because they just don’t know, which seems to be the tact taken by other tech outfits. Oracle did say, however, that the sales process has slowed, with more executives needing to sign off on purchases.

--Online sales have been surging, up 15% over year ago levels according to ComScore Inc.,  and that has led to some problems, such as with Best Buy, the largest U.S. specialty electronics retailer, which was forced to report some of its customers will not receive their packages before Christmas due to overwhelming demand.

--The U.S. Justice Department and Bank of America reached an agreement to resolve allegations its Countrywide Financial Corp. unit engaged in a widespread pattern of discrimination against minorities on home loans. BofA will pay $335 million. According to the complaint, Countrywide charged higher fees and interest rates on over 200,000 African-American and Hispanic borrowers.

--Daniel Mudd, CEO of Fortress Investment Group, is taking a leave of absence to fight SEC charges related to his former role as CEO of Fannie Mae.

--The unemployment rate fell in 43 states in November, the most to report lower rates in a single month in eight years. Nevada still has the highest rate, 13%, followed by California’s 11.3% (down from 11.7%), with North Dakota again the lowest at 3.4%. [Nebraska is at 4.1% and South Dakota, 4.3%.]

Michigan reported the biggest drop, from 10.6% in October to 9.8%.

“While the financial and business world continue to hang on every twist and turn in eurozone politics, I think the biggest issue for the world in 2012 will be whether China can successfully manage a soft landing.

“In recent years, China has become crucial to the world economy: in 2011, it probably added around $1 trillion in U.S. dollar terms alone, equivalent to creating half of a new Italy. Since the 2008 global credit crisis, each subsequent year in China has had its particular theme: 2009 was about preventing a postcredit crisis collapse and recession; 2010 about controlling the power of the expansion; 2011 about stopping inflation from rising too much.

“2012 will be about trying to ensure a soft landing. Growth, under downward pressure from weakening exports and a fall in government-sponsored investment, will have to be led by stronger personal consumption if the economy is to grow by more than 8 percent.”

--China is scaling back its investment in its railway network by a modest 15% to $63 billion. This comes after the deadly crash between two high-speed trains earlier in the year led to public protests and forced Beijing to slow its expansion plans. Railway construction accounts for 3% of China’s overall capital spending.

--Uh oh…nothing can stop the global economy like bird flu has the potential to (save for a commercial jetliner being taken down by a shoulder-fired missile), and Hong Kong health officials were furiously at work this week after a chicken carcass at a poultry market was found to have a “highly pathogenic H5N1 avian influenza virus,” according to an official statement. 17,000 chickens were quickly slaughtered…for starters…as the government suspended the sale and import of live poultry for 21 days. It was in 2003 that H5N1 and SARS killed 299 Hong Kong residents, but thus far the world has been both lucky and smart in combating the spread of these viruses before they get totally out of control. Obviously, despite our best efforts, one day one of these will.

Coincidentally with the above, as the New York Times put it, “For the first time ever, a government advisory board is asking scientific journals not to publish details of certain biomedical experiments, for fear that the information could be used by terrorists to create deadly viruses and touch off epidemics.”

In experiments in the U.S. and the Netherlands, scientists created the H5N1 virus. The studies were paid for by the National Institutes of Health, to promote better understanding of the genetic changes that could make H5N1 easier to transmit.

But as Dr. Anthony Fauci, head of the National Institute of Allergy and Infectious Diseases, said, “I’m sure there will be some people who say these experiments never should have been done.”

Duh. It seems that as part of the research, scientists realized how easy it might be to transmit the virus via aerosols. 

--The Journal reports that the SEC is looking to shut down billionaire hedge-fund manager Philip Falcone, who is being investigated on a number of fronts, including market manipulation. Falcone’s Harbinger Capital has seen its assets slide from a peak of $26 billion in 2008 to less than $5 billion today.

--Wendy’s is poised to become the number two fast food chain behind McDonald’s, which would be a first since its founding in 1969. Current number two Burger King has seen a decline in its same-store sales, while Wendy’s are inching up (and McDonald’s are on fire).

--The U.S. International Trade Commission ruled that HTC Corp., a Taiwanese company, infringed on an Apple patent in employing Android software. HTC must stop importing handsets that infringe on the patent by April. HTC will remove the feature in question at little cost to its business, but it is significant nonetheless for Apple in its ongoing battle with Google’s Android operating system.

--Saudi billionaire, Prince Alwaleed bin Talal, took down a $300 million stake in Twitter, buying shares from existing shareholders that gives him about 3% of the company.

--Just one week after the first U.S. generic competition came on the market, Pfizer said sales of cholesterol blockbuster Lipitor plunged by half. Lipitor at its peak generated sales of $13 billion a year.

--For the first time since it was launched in 1987, Bill Gross’ Total Return Fund is poised to see net outflows this year, owing in no small part to very poor relative performance vs. its benchmark. Hang in there, wholesalers! 

--Saab Automobile filed for bankruptcy on Monday after a nearly two-year effort to save the brand, including attempts to raise funds in China. But without the funding coming through, Saab called it a day after 65 years.

--Former Citigroup chairman Sandy Weill sold his Central Park West penthouse in Manhattan for a staggering $88 million, the buyer being Russian billionaire Dmitry Ryboloviev, who purchased it for his 22-year-old daughter. Weill purchased the property in 2007 for $43.7 million. I’m too old for the daughter.

--Finally, a word on my main China holding in Fujian, the biodiesel/specialty chemical outfit. Since it reported earnings in mid-November, the stock has nosedived for zero reason (though all Chinese stocks have taken a header). For those of you still playing along, understand I am in constant contact with management and this week had a chat with their investor relations people. At my suggestion, we are working on a conference call to update developments in early- to mid-January. I feel as if I’ve been consistent in the comments I’ve been comfortable making. If you believe the China economy is going to hell in a handbasket, well then the stock will continue to be dead money (or no more than a double from current levels). If you believe China will see a soft landing, this cyclical company will then get its fair share of future growth. Air Products is its biggest customer, about 20% of sales, so another way to look at it is, as Air Products goes, probably so we go.

That said, consider this. My holding trades at a P/E of about 1 [yes, one.] Compare that to Dow Chemical, DuPont and Huntsman, which trade at multiples between 11 and 13. I also have a much smaller position in a China food company, which I’ve described here as a mini Archer Daniels. This company has a current P/E of 1.2. ADM trades at about a 9 multiple.

That gives you an idea of how sentiment is shot when it comes to China small caps and concern over the books. I’m giving it one more year. Each China operation is going to have to make a far more concerted effort to prove its finances are real and the ones who do should be rewarded at some point.

That’s my longwinded way of saying, if you are still in the Fujian play, do not sell, at least for another few weeks. I’ll give you honest guidance once the call takes place. I may also formally reveal the name at that point. 

Foreign Affairs

North Korea: Dictator Kim Jong Il died of a massive heart attack at the age of 69, after a 17-year reign that saw him kill, directly or indirectly, millions of his subjects while building up the North’s nuclear and other WMD programs. Incredibly, neither South Korean or U.S. intelligence knew of his death for 51 hours until it was announced on state TV. It’s bad enough Washington didn’t know, but picture being a citizen of Seoul, within artillery range of the North, and trying to have confidence in your nation’s intelligence-gathering capabilities.

Kim was replaced by his son, Kim Jong Un, a pudgy 27-, 28-, or 29-year-old described as being “aggressive,” “erratic,” and a “sadist,” by some. The kid was named “the Great Successor” (and “Supreme Commander,” today, I just saw) and official media this week has been calling him the “outstanding leader.” It’s important to note that thus far all is calm during the period of mourning, which will end Dec. 28-29 with Kim Jong Il’s funeral.

After the funeral, though, the eyes of the world, particularly the United States’ and those of South Korea, Japan, Russia and China, will be on the Great Successor and any signs of a power struggle. The U.S. will also be looking for signs of stepped up activity between Pyongyang and Tehran, the two having cooperated extensively in the past on sharing nuclear and weapons technology. [Syria to a somewhat lesser extent.]

It is anticipated that Kim Jong Un will initially share power with one of his uncles and the military. At least as of today, it appears the military is solidly behind the kid. Some say the younger Kim does already have his own power base after being named the successor 15 months ago, but we’ll all know a lot more in just a few months. For now, yes, those in power with the father have a vested interest in keeping the status quo as much as possible to ensure their own survival. The big question today, though, is, “Who controls the nukes?” [That is if they’ve successfully mated the material with bombs or ballistic missiles, which isn’t known for certain.]

Victor Cha, former director of Asian affairs in the George W. Bush administration and now an advisor to the Center for Strategic and International Studies, in an op-ed for the Financial Times.

“The moment is dripping with irony. Just last week, the U.S. was engaging in painstaking diplomacy on food aid agreements and on prisoner-of-war remains-recovery with the North Koreans as a prelude to a return to the denuclearization negotiations. These bits of diplomacy constituted small bites at the apple. We are now talking about a whole and new apple.

“Approaching the post-Kim Jong-il leadership is not advisable in part because we do not know who is really in charge. Contacting the young son could do more to alienate him within his own system of anti-American military generals. Establishing contacts with others involved in politics or the military could emasculate the young leader’s authority and set off unknown and destabilizing dynamics.

“We do not know North Korea’s future after Kim Jong-il. But if this decrepit regime were to finally collapse of its own weight, there are a host of factors analysts would be able to point to – including economic decay, food shortages, an unstable leadership transition, and an increasingly restless population – which would make the Dear Leader’s death the straw that broke the camel’s back.”

“I can only express satisfaction that the Dear Leader is joining the likes of Gaddafi, bin Laden, Hitler and Stalin in a warm corner of Hell.”

Iraq: The death toll in a highly coordinated series of attacks in Baghdad on Thursday is over 70; the worst carnage in months. The country, just days after the last U.S. troops left the country, is once again on the verge of civil war. Responsibility for the bloodbath, most of which occurred during the morning rush-hour, appears to favor al-Qaeda in Iraq, mainly Sunni, as most of the victims were Shia. Civilians, not security forces, were targeted, including schools and day workers.

Iraq’s power-sharing arrangement of about a year is in tatters after Prime Minister Nouri al-Maliki, a Shia, issued an arrest warrant for Sunni Vice President Tariq al-Hashemi on terror charges. Hashemi, who vehemently denies the allegations, which include organizing death squads, is under the protection of the regional government in Kurdistan. Maliki has demanded the Kurds give him up.

“Iraq’s fragile political ecosystem was sure to be tested after the Obama administration pulled out all U.S. troops to cash a campaign chip. Only the speed and gravity of the crisis now unfolding comes as a surprise.

“In hosting Prime Minister Nouri al-Maliki last week at the White House, President Obama hailed Iraq as ‘sovereign, self-reliant and democratic.’ Mr. Maliki returned home and promptly began a putsch against his Sunni coalition partners….

“Former Prime Minister Allawi, a Shiite, on Tuesday offered the following analysis to Reuters: ‘The Americans have pulled out without completing the job they should have finished. We have warned them that we don’t have a political process which is inclusive of all Iraqis and we won’t have a full-blown state in Iraq. We want to resolve issues between Iraqis in a peaceful way and we want to bring stability. Iraqis should fill the vacuum, rather than anyone else.’ Iranians and al-Qaeda may fill the vacuum now….

“The White House, which hoped to take credit for success, seems to understand it has a problem. CIA Director David Petraeus flew to Baghdad on Tuesday to press the case for moderation. Vice President Joe Biden called Mr. Maliki and requested an ‘inclusive partnership agreement.’ Yet the U.S. finds itself with little leverage. On Wednesday, Mr. Maliki ignored Mr. Biden and declared his intention to take Iraq to ‘a new stage’ of Shiite-dominated rule. If Iraq now descends into a sectarian brawl or dictatorship, Mr. Obama’s withdrawal will have been the needless trigger.”

I wrote last week that “during the course of the 2012 campaign, President Obama will increasingly find he cannot tout his Iraq policy as a success.”

A few days later, amidst the violence and Maliki’s moves, Republican Sen. John McCain said, “The president and vice president are taking victory laps while Iraq unravels. It’s a low point in American involvement in national security affairs.”

And regarding my comment over the past year that if you didn’t think we lost the war, all you had to know is that Christians in Iraq can’t celebrate Christmas openly without being targeted, none other than “Doonesbury” highlighted the topic in Garry Trudeau’s Wednesday strip.

The character, a professor, is teaching a class on the Iraq War and says:

“Okay. Let’s discuss the war’s impact on Iraq’s Christian community, one of the oldest in the world…Since 2003, about 600,000 Christians of an estimated pre-war population of one million have been driven from their homes. A majority left Iraq.

“In other words, our invasion of Iraq set in motion one of the worst Christian diasporas in history. So what do we think of that? Ray?

Syria: It was a horrible week here, probably the worst in terms of a death toll that would appear to be in excess of 250, following twin suicide bombings on Friday in the capital of Damascus that took out at least 44. Friday’s attacks targeted an upscale neighborhood and heavily guarded intelligence buildings and came just one day after an advance team of Arab League observers arrived to monitor the Assad regime’s promise to end its crackdown on protesters. The blasts were the first suicide bombings since the uprising began in March and, according to the government, back its claims the turmoil is the work of terrorists. State TV blamed al-Qaeda and on one hand it does follow the group’s pattern of trying to foment civil war.

I would just observe that the government has an incentive to carry off such attacks itself to help with its message. You won’t see this anywhere else, but I take you back to the days when Vladimir Putin was about to take over for Boris Yeltsin and there was a series of apartment bombings in Russia that Putin directed as a pretense to expanding the war against Chechnya, as was my lone opinion at the time. Putin blamed Chechen terrorists. I thought, and I expressed in this space, the idea that he blew them up. Months later, the late William Safire expressed the very same thoughts in his New York Times column.

Could Assad be taking a page out of Putin’s playbook? [I emphasize, to date, no one in authority has had the guts to take on Putin in this regard.]

Earlier in the week, at least 200 were killed in Syria in a spasm of violence ahead of the Arab League visit.

Iran: Secretary of Defense Leon Panetta said in an interview with CBS News that when it comes to Iran’s nuclear efforts, “It would probably be about a year before (they could build a bomb). Perhaps a little less.” Panetta warned Washington was ready to take “whatever steps necessary to stop it,” including military action. “That’s a red line for us…If we have to do it, we will deal with it.”

The United States and Israel, though, continue to believe they will be able to gain the intelligence needed to know when Iran tries to ‘break out’ and build the bomb…taking the uranium it has already enriched, for example, to a higher level for use in a bomb; a step that doesn’t take long. The hard work has already been done, though the West believes they only have enough enriched material for one or two bombs currently.

On a different matter, the Jerusalem Post reports that Iran “has embarked on an ambitious plan to boost its offensive and defensive cyber-warfare capabilities and is investing $1 billion in developing new technology and hiring new computer experts.”

Spanish-language TV network Univision aired a documentary recently that reported to show Venezuelan and Iranian diplomats, based in Mexico, being briefed on plans for cyber attacks against U.S. targets, including nuclear power plants.

Israel: Prime Minister Benjamin Netanyahu blasted Palestinian Authority President Mahmoud Abbas for a deal that paves the way for Hamas to join the PLO, saying, through a spokesman, that if Abbas “embraces Hamas, if he walks toward Hamas, he is walking away from peace.”

So in the agreement reached among the leaders of various Palestinian groups on Thursday, the likes of Hamas and Islamic Jihad will join the PLO. Heretofore, Hamas, founded 24 years ago, had refused to recognize the PLO as the “sole legitimate representative” of the Palestinians.

Egypt: The death toll in last weekend’s brutal crackdown by the military on protesters in Cairo’s Tahrir Square reached 10, with more than 300 wounded. Soldiers were filmed assaulting female demonstrators.

Meanwhile, in the second of three rounds of voting for a new parliament, Islamists claimed they once again secured a vast majority of the votes cast, this time up to 3/4s. In this round, the Muslim Brotherhood and its allies said they won 40%, while the ultra-conservative Salafists won 35%. [In the first round it was 37% and 24%, respectively.] From my reading of the situation, the last round of the voting should see results more similar to the second than the first.

Pakistan: The U.S. conceded it bears much of the responsibility for the airstrike last month that killed 24 Pakistani soldiers on the Afghan border. The Pentagon said U.S. and Afghan troops were acting in self defense, while admitting there was poor coordination between U.S. and Pakistani forces, which speaks to the level of mistrust that has only grown worse between the two. Unbelievably, U.S. officials admitted they had incorrect mapping information that they then shared with a Pakistani liaison officer, which resulted in an incorrect understanding of where the Pakistani troops were; as in the map coordinates were like nine miles off.

The whole mission went bad from the beginning when NATO didn’t share with their Pakistani counterparts details of the U.S.-Afghan operation in the first place because they feared the Pakistanis would tip off the insurgents. While the Pentagon admitted its errors, the White House has refused to apologize to Pakistan for the deaths, although it has expressed its condolences to the victims’ families. 

Meanwhile, President Zardari returned from Dubai, where he was undergoing medical treatment, to a firestorm over a memo accusing the military of plotting a coup against him. Whatever Zardari’s ailment is, he is unable to resume full work, making his position even more tenuous. The memo was reportedly delivered to the Pentagon, asking for help in staving off the coup. Army chief Gen. Kayani, the real power in Pakistan these days, has called for an investigation.

Afghanistan: Senator John McCain called Vice President Biden’s statement in an interview with Newsweek that the Taliban are not our enemy, “bizarre. Tell the men and women fighting them that,” said McCain.

[The Poles, loyal members of the NATO fighting force here, lost five soldiers in a single roadside bomb attack on Wednesday, according to reports. Our thoughts go out to this good nation and ally.]

Russia: Today, Saturday, is to be the big demonstration in Moscow; further protests against the recent fraudulent Duma election, though sanctioned by the Kremlin to allow the disaffected to blow off some steam, even as President Medvedev said the government won’t allow “provocateurs and extremists” to upset Russia’s stability.

[Separately, Medvedev pledged various reforms to the political system in an attempt to appear relevant as he is due to swap seats with Prime Minister Putin next year.]

Earlier, you had the death of an investigative journalist who was writing about corruption, shot eight times by a masked gunman in the province of Dagistan, one of eight journalists on a 2009 “execution list” published anonymously there.

And in the Sea of Okhotsk, off Russia’s eastern coast, an oil rig sank in rough and frigid seas. 53 of 67 men aboard are said to have died. The platform was being towed to an island when a huge wave hit it, broke through the portholes, and the rig capsized. One survivor told NTV television that he swam away and saw it go down. “I was afraid I’d be sucked down into the crater that formed when it sank.” Survivors, as you can imagine, needed treatment for trauma as well as hypothermia.

China: In yet another hack attack, the U.S. Chamber of Commerce was infiltrated by a group of Chinese hackers who gained access to everything on the lobbying group’s systems. While this just became public, it was discovered and quietly shut down in May 2010. The hackers, while having access to information on all three million members, appear to have been focusing on four Chamber employees specializing on Asia policy, with weeks of their emails being stolen.

And China’s future president and current vice president, Xi Jinping, focused on improving ties with Vietnam in a three-day visit to Hanoi. A Vietnamese government report said that regarding the two sides’ longstanding disputes over island groups in the South China Sea, “the Vietnamese side agreed to be ready, with China, to solve disputes through peaceful negotiation, respecting and paying attention to each other’s legitimate benefits.” A Chinese mouthpiece echoed similar sentiments. So this is good. Xi will slowly gain more responsibility next year and be fully in charge by 2013.

Finally, on Friday, Chinese writer and dissident Chen Wei was sentenced to nine years in jail for “inciting subversion of state power,” one of the harshest sentences imposed on those seeking to replicate the Arab Spring uprising in China. Mr. Chen’s lawyer told Reuters that after the verdict was announced, Chen told the court: “Dictatorship will fail, democracy will prevail.”

Japan: The military has opted to go with Lockheed Martin’s F-35 jet as its next mainstay fighter, choosing it over Boeing’s F/A-18 and the Eurofighter Typhoon. It was a reflection of Japan desiring a tighter security alliance with the United States in the face of China’s growing capabilities and uncertainty over North Korea.

France / Turkey: A nasty diplomatic fight has erupted between these two as one chamber of the French parliament passed a bill criminalizing denial of the 1915-16 Armenian “genocide.” In retaliation, Ankara recalled its ambassador and adopted a number of other measures, including freezing political visits. The French National Assembly approved the bill on Thursday and the Senate will pick it up next year. French Foreign Minister Alain Juppe has opposed it.

Armenians claim 1.5 million were killed by the Ottoman Turks almost one hundred years ago, while Turkey claims it was closer to 300,000 and was more the result of a civil war. Turkish Prime Minister Erdogan said, “This will open very grave and irreparable wounds….This is politics based on racism, discrimination and xenophobia.”

This all goes back to French President Sarkozy’s opposition to Turkey joining the EU, and while his foreign minister may disagree with the bill, Sarkozy has given his tacit approval.

[In the latest poll on the French presidential race, it has tightened. Socialist Francois Holland, 27.5%; Sarkozy, 24%; Marine Le Pen, 20%; Francois Bayrou, 11%; Dominique de Villepin, 3.5%. This is getting interesting.]

Philippines: Over 1,000 were killed in flash-flooding spawned by a typhoon. Half a million are impacted by the catastrophe as a United Nations official described the devastation in two cities as looking like they had been by a tsunami. Disease is now a major concern as bodies are still being retrieved from the mud a week later.

Angola: Human Rights Watch said the government must account for $32 billion missing from state coffers. $32 billion! And this is our new, oil-rich buddy. The missing funds were identified by the IMF and believed to be linked to the state oil company Sonangol. The IMF says the money disappeared between 2007 and 2010.

Random Musings

--As noted last week when I went to post, it was clear Newt Gingrich’s poll numbers would begin to suffer as he was under attack from his fellow Republicans seeking the party nomination. A Gallup national poll now has Gingrich at 26 percent, Mitt Romney at 24 percent, when just a week earlier, Gingrich had a 14-point lead in the same survey. A CNN/ORC national poll had Gingrich and Romney tied at 28. A Washington Post/ABC News national survey had Gingrich and Romney tied at 30.

Gingrich 20
Romney 20
Paul 10 (the previous month, Herman Cain was on top…remember him? The pizza guy. Mr. 9-9-9. Didn’t tell his wife he was paying another woman a rather sizable stipend…]

*Among those identifying themselves as Republican primary voters, 79% said it was still too early to declare a preference.

--Iowa State Gazette poll of likely Republican caucus goers:

Paul 28
Gingrich 25
Romney 18

Romney 25
Paul 20
Gingrich 17

Paul 23
Romney 20*
Gingrich 14 [Most news organizations don’t like the way Public Policy polls are conducted and thus don’t play up their data.]

*Romney gained the endorsement of the Des Moines Register.

--Newt Gingrich’s attacks on the judiciary are nuts. Or as George Will comments in the Washington Post:

“Gingrich radiates impatience with impediments to allowing majorities to sweep aside judicial determinations displeasing to those majorities. He does not, however, trust democratic political processes to produce, over time, presidents who will nominate, and Senate majorities that will confirm, judges whose views he approves.

“Although not a historian, Gingrich plays one on television, where he recently cited Franklin Roosevelt (and Jefferson, Jackson and Lincoln) as ‘just like’ him in being ‘prepared to take on the judiciary.’ Roosevelt, infuriated by Supreme Court decisions declaring various progressive policies incompatible with the Constitution’s architecture of limited government, tried to ‘pack’ the court by enlarging it and attempted to purge from Congress some Democrats who opposed him. Voters, who generally respect the court much more than other government institutions, reelected those Democrats and so thoroughly rebuked FDR’s overreaching that Congress lacked a liberal legislating majority for a generation.

“To teach courts the virtue of modesty, President Gingrich would attempt to abolish some courts and impeach judges whose decisions annoy him – decisions he says he might ignore while urging congress to do likewise. He favors compelling judges to appear before Congress to justify decisions ‘out of sync’ with majorities, and he would sic police or marshals on judges who resist congressional coercion. Never mind that judges always explain themselves in written opinions, concurrences and dissents.

“Gingrich’s unsurprising descent into sinister radicalism – intimidation of courts – is redundant evidence that he is not merely the least conservative candidate, he is thoroughly anti-conservative. He disdains the central conservative virtue, prudence, and exemplifies progressivism’s defining attribute – impatience with impediments to the political branches’ wielding of untrammeled power. He exalts the will of the majority of the moment, at least as he, tribune of the vox populi, interprets it.”

--New Jersey Gov. Chris Christie is not ruling out a possible veep slot on a Romney ticket. It seems pretty clear to me he could provide the shot in the arm needed come next summer and fall as no one would be a more effective attack dog, allowing Romney to take the high road, if he chose.

--Former President George H.W. Bush endorsed Romney, with Bush saying of rival Rick Perry, governor of Mr. Bush’s home state, he “doesn’t seem to be going anywhere.” Bush called Romney “mature and reasonable – not a bomb-thrower.” Of Gingrich, he said, “I’m not his biggest advocate.”

--Regarding President Obama, an AP/GfK survey had 52% saying Obama should be voted out of office; 43% said he deserved a second term. But the above referenced Washington Post/ABC News poll has the president’s approval rating rising to 49 percent, the highest since March, excluding the bump from the killing of Osama bin Laden.

[In the same survey, approval of Republicans in Congress is at 20 percent, while Democrats are at 27 percent. Incredibly, Republican support for the GOP has plunged from 63 percent in April to just 38 percent today, while Democrats’ approval of their own representatives in Congress is down to 51 percent.]

In a USA TODAY/Gallup Poll, in general-election matchups, President Obama edges Mitt Romney and Newt Gingrich by identical 50-48 margins.

[In a separate Gallup Poll, only 11% of adults give Congress good marks, the lowest job approval rating for the body since Gallup started asking the question in 1974.]

In an outtake of Obama’s interview on “60 Minutes” with Steve Croft, Croft asked Obama to reflect on his presidency to date and at one point Obama goes:

“The issue here is not going to be a list of accomplishments. As you said yourself, Steve, you know, I would put our legislative and foreign-policy accomplishments in our first two years against any president – with the possible exceptions of Johnson, FDR and Lincoln – just in terms of what we’ve gotten done in modern history. But, you know, but when it comes to the economy, we’ve got a lot more work to do.”

“You’ve got to love the ‘possible’ in that sentence about FDR and Lincoln. Perhaps Mr. Obama would have dropped the diminishing modifier if old Abe hadn’t taken so darn long to free the salves or win the Civil War. It’s also notable that poor George Washington didn’t make the Obama cut. Historians may consider Washington to be America’s ‘indispensable man,’ but he never did campaign on a promise to lower sea levels.

“Ego aside – or super duper ego aside – Mr. Obama’s claims are instructive because they explicitly reject any connection between his ‘accomplishments’ and the economy that Americans elected him to fix. Might Mr. Obama’s appetites for more government – for more LBJ-style accomplishments – have something to do with the weak recovery?

“The New York Times reported in November that Treasury Secretary Tim Geithner told Mr. Obama shortly after the election in 2008 that ‘Your legacy is going to be preventing the second Great Depression.’ Mr. Obama responded, ‘That’s not enough for me.’

“At this point, we’d settle for Chester A. Arthur or Martin Van Buren.”

--Speaking of super duper egos, Donald Trump has left the Republican Party to register as an independent, thus setting himself up to run for president as a third party candidate should he so choose.

--The FBI reported that violent crime continued to decline in America, down 6.4% in the first half of the year, compared with a year ago, with murders down 5.7% and rapes falling 5.1%. While more sophisticated policing methods have been a huge help, one of the preeminent criminologists, Prof. James Alan Fox of Northeastern University, cites the proliferation of technology, such as security cameras, as playing a major role.

But, the killings of law-enforcement officers rose 14% over the same six-month period.

--U.S. Transportation Secretary Ray LaHood refuses to back the National Transportation Safety Board’s proposal to prohibit drivers from talking on cellphones. Yet another reason why LaHood will go down in history as one of the very worst cabinet officials of any administration.

And how can I be so harsh? Because this is the same bumbling fool who has himself pushed to reduce driver distraction and a year ago, said a ban on cellphone use on the road may be necessary.

I should say I’m not in the best mood on this topic because on Wednesday night in my town, at 6:00 p.m., a 60-year-old woman crossing the street in our downtown area was struck and killed by a man driving an SUV. She was crushed to death.   There was “a lot” of blood all over the street, as one story had it.

This is exactly what I have half-facetiously written about since I started this column. That one day I’ll meet my end in downtown Summit, innocently crossing the street. There is no word as yet whether the driver was ‘distracted,’ but seeing as this occurred about 30 yards from where I had my office for 11 years, I know the location well and he had to be.

--When I posted that as part of the $1 trillion spending bill, the incandescent bulb was saved, I didn’t realize the protection ends Sept. 30, 2012. Let’s see, if I’m not hit by an SUV crossing the street and live about another 25 years, and I blow through six bulbs a year (I don’t use many lights in my place), that’s 150 bulbs I need to buy, minus the 70 or so I already have.

--One of the great men of the 20th Century died, Vaclav Havel, the dissident playwright turned politician who led the nonviolent “Velvet Revolution” in Czechoslovakia in December 1989. In just four months, Havel went from being in prison (sent there a fourth time) to becoming the first democratically elected president of his country. He later oversaw the peaceful breakup into the Czech Republic and Slovakia; Havel then being elected president of the former two times while overseeing his new country’s admittance into NATO in 1999 and then, eventually, the European Union (Havel left office in 2003, months before the country joined the EU in 2004).

Havel was elected Czechoslovakia’ president by the country’s still-communist parliament on Dec. 29, 1989. Three days later he told the nation in a televised New Year’s address:

“Out of gifted and sovereign people, the regime made us little screws in a monstrously big, rattling and stinking machine….

“We have become morally ill because we are used to saying one thing and thinking another. We have learned not to believe in anything, not to care about each other…Love, friendship, mercy, humility, or forgiveness have lost their depths and dimension…They represent some sort of psychological curiosity, or they appear as long-lost wanderers from faraway times.”

Havel, from his 1985 essay “An Anatomy of Reticence”:

“A state that denies its citizens their basic rights becomes a danger to its neighbors as well: internal arbitrary rule will be reflected in arbitrary external relations. The suppression of public opinion, the abolition of public competition for power and its public exercise opens the way for the state power to arm itself in any way it seems fit…A state that does not hesitate to lie to its own people will not hesitate to lie to other states.”

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

Gold closed at $1608
Oil, $99.86

Returns for the week 12/19-12/23

Dow Jones +3.6% [12294]
S&P 500 +3.7% [1265]
S&P MidCap +3.4%
Russell 2000   +3.6%
Nasdaq +2.5% [2618]

Returns for the period 1/1/11-12/23/11

Dow Jones +6.2%
S&P 500 +0.6%
S&P MidCap -2.5%
Russell 2000 -4.5%
Nasdaq -1.3%

Bulls 48.4
Bears 30.5 [Source: Chartcraft / Investors Intelligence]

Have a Merry and Blessed Christmas…Happy Hanukkah!

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