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05/26/2012

For the week 5/21-5/25

[Posted 6:00 AM ET]

The European Debt Crisis, continued

Regarding the euro debt crisis, I haven’t changed my opinion one iota, including writing in this space on 1/1/2011, 17 months ago, that the crisis would be with us “well into 2012.” I have also issued constant warnings on a topic that everyone seems to be ignoring. This is the Balkans, when it comes to Greece. I’ve specifically written that one needs to watch Kosovo and Serbia, and last weekend we had a surprise outcome in Serbia’s presidential election, a nationalist winning out over the incumbent pro-Western president. Not good in a nasty land with massive unemployment and debt where neighbors detest each other unlike nowhere else in the world, including the Middle East.

The point being that when the inevitable bank runs start in earnest in Greece, as seems imminent, and within hours spread to Spain (panic as opposed to the slow bleed we are seeing in both today), you will see reactions elsewhere, like in Bulgaria and Romania, two EU nations that never should have been allowed into the eurozone in the first place, as my personal reporting from there years ago concluded.

So this financial crisis on the European continent will morph into a violent one sooner than later. The people can’t take it anymore, and they have new outlets, the extremists, from radical Socialists to neo-Nazis.

Thomas Mayer, chief economist at Deutsche Bank, was quoted in the London Times this week as saying that a full-blown exit by Greece could amount to a “social and political catastrophe… with unforeseeable consequences for Europe and possibly the world.”

For now you have a confluence of events, including outside the region, that will all hit at once.

June 16-17…the Egyptian presidential run-off wherein the Muslim Brotherhood’s candidate could emerge victorious with dire consequences for Israel and the peace treaty between the two.

June 17…the second Greek election, a revote, a referendum on whether the Greeks stay in the euro, since a government that goes back on previously agreed to austerity measures gets cut off from any further installments of the 240 billion euros in aid pledged in Greek Bailouts I and II.

June 18…another round of talks on Iran’s suspected nuclear weapons program in Moscow, almost certainly the last, one way or another.

June 28-29…another formal EU summit that will either spell the end of Greece, if this hasn’t happened sooner, or provide it, and Spain, a final lifeline.

North Korea could test everyone’s nerves by conducting its third nuclear weapons test in this rough time frame as well.

And there is a simmering issue between China and the Philippines in the South China Sea that mandates cooler heads prevail, though this is not a certainty.

I could go on and on…and I do to a large extent further below, particularly in the “Foreign Affairs” section, but for now we focus on the situation in Greece and Spain.

All are in agreement that the odds of Greece leaving the euro, the so-called “Grexit,” rose sharply this week. And at an informal EU summit in Brussels (No. 18 in the last two years), participants issued a statement that said in part:

“We want Greece to remain in the euro area while respecting its commitments. We expect that after the elections, the new Greek government will make that choice.”

Italian Prime Minister Mario Monti said he could help persuade Germany to support Europe’s “common good” and back the call for euro-area bonds, saying a majority of EU leaders supported the proposal.

But Luxembourg Prime Minister Jean-Claude Juncker said, whaddya mean there was a lot of support? He told reporters the idea of joint debt sales “didn’t find much support,” particularly in the German-speaking area.

Monti said, “A united Europe is in Germany’s interest. We’ll have euro bonds in the euro area, and therefore Germany will want them.”

But German Chancellor Angela Merkel said she has “huge difficulties” with euro bonds. For starters, aside from throwing massive liabilities onto the backs of taxpayers, it would raise German borrowing costs and dilute its creditworthiness.

But all are in agreement the Greek government must live up to its bailout pledges and that there can be no easing of the terms or that creates a moral-hazard issue, i.e., everyone else, such as Ireland and Portugal, will want easier terms as well and then the whole fiscal compact, recently negotiated, breaks down.

European Central Bank president Mario Draghi called on governments to take a “courageous leap” of political imagination to safeguard the future of the eurozone. Draghi said it was up to the banks, and especially governments, to take their own decisive action.

“We are living a crucial moment in the history of the EU,” he said, as various manufacturing data for the region revealed more doom and gloom. Key business surveys showed private sector companies pulling back, new orders shriveling up, leading to talk of a new round of layoffs. The downturn is occurring in Germany and France, as well.

The eurozone composite PMI, a combination of the services and manufacturing indexes, fell to 45.9 this month, down from April’s 46.7 and the lowest reading since June 2009. [50 being the dividing line between growth and contraction.]

Germany issued a blunt warning to Greece, some would say putting a gun to its head as it prepares for the critical June 17 vote. The Bundesbank said a Greek withdrawal from the eurozone would be disruptive but “manageable,” an attempt to undermine the claims of anti-austerity Greek leader Alexis Tsipras that Europe wouldn’t dare pull the plug.

“When the euro system provided Greece with large amounts of liquidity, it trusted that the programs would be implemented and thereby ultimately assumed considerable risks. In the light of the current situation, it should not significantly increase these risks,” so said the Bundesbank, which earlier said with regards to easing Greece’s bailout terms, it “would damage confidence in all euro-area agreements and treaties and strongly weaken incentives for national reform and consolidation measures.”

French President Francois Hollande stated firmly that “France and Europe want Greece to stay in the eurozone. We want you to respect your commitments but we want to take steps to show you that we want to restore hope. That is in the interests of Greece, the eurozone and the global economy.”

If there is a stopgap solution to the crisis, it would be a guarantee of bank deposits backed by all remaining eurozone members which would prevent bank runs following a Greek exit from the euro.

At the Brussels summit this week, talk focused on growth measures and Greece. There was zero talk of Spain and its humongous problems, a “triple threat” of recession, rapidly rising debts and a banking system with over $230 billion in problem assets.

The Spanish government has made one futile attempt after another to shore up the banks and on Friday there was talk of a further injection into the most troubled lender, Bankia, of 19 billion euros, this after the government pumped in 4.5 billion just one week earlier to effectively nationalize it. With the new capital funding, the state would own up to 90% of the institution.

I’ve written tons on the situation with Spain’s banks and its 17 regions, the latter comprising 50% of the nation’s GDP, and it’s clear the government is going to require a bailout, but it doesn’t want to do so, a la Greece, because then it would be giving up some of its sovereignty.

But check this out…from BBC News’ Laurence Knight:

Total lending by Spain’s central bank to the Spanish banks has increased from 50 billion euro nine months ago to 264 billion euro in March…and counting (pre-Bankia, for starters). “Spain’s central bank in turn borrows most of this money from the ECB. It now owes the ECB 285 billion euros, or 27% of Spain’s GDP….

“ Italy’s central bank has borrowed 279 billion euro from the ECB, or 18% of Italy’s GDP, while those of France, Greece and the Irish Republic have taken about 100 billion each. And where has the ECB been getting all this money from? The answer is mainly from Germany’s central bank, the Bundesbank.” 644 billion euros by April. 

The yield on Spain’s 10-year bond closed the week at around 6.30%, an extra cost that Prime Minister Mariano Rajoy says will nullify any savings derived from the austerity measures that are being enacted.

Jin Liqun, the chairman of China’s $440 billion sovereign wealth fund, perhaps best summed up the mess in the region.

“The debt crisis is actually much less devastating than the handling of the debt crisis,” he said, in warning political gridlock was driving the eurozone deeper into the woods.

“Too much time has been wasted on endless bargaining on terms and conditions for piecemeal bailouts,” he continued, adapting a Shakespearean quote to add: “Frailty, thy name is leadership.” [London Times]

Eurobits

--The Organization for Economic Cooperation and Development (OECD), in its semi-annual forecast, said eurozone GDP will decline 0.1% in 2012 and rise 0.9% in 2013. Germany’s GDP will rise 1.2% this year and 2.0% next.

--Greece owes over 400 billion euros to the ECB, euro governments, the International Monetary Fund, foreign holders of Greek government bonds and on Greek corporate debt.

--78% of Greeks want to stay in the eurozone, but at the same time anti-austerity Syriza is gaining in the polls.

--GDP in the U.K. fell 0.3% in the first quarter vs. a previous estimate of minus 0.2%. In a Populus poll for the London Times, 49% of Brits back the coalition’s deficit reduction plan, while 51% say the government of David Cameron should slow the pace of cuts.

--Consumer confidence in Italy is at its lowest level in 15 years as its recession deepens. 

--France’s comp PMI was a mere 44.7 in April, while Germany’s was 49.6.

--The OECD warned that Ireland’s economic recovery risked being derailed by the fallout from the eurozone debt crisis, with GDP now expected to expand just 0.6% this year, which is off from the OECD’s November forecast of 1.5%. Unemployment is expected to hold steady at 14.5%, with government and private consumption predicted to fall.

--Not for nothing but Ireland has its referendum on the fiscal compact May 31. Should the Irish pull a surprise and vote it down, they would lose all further EU financing.

Turning to Washington and Wall Street

The above-referenced OECD forecast has the U.S. growing at 2.4% this year and 2.6% in 2013. Frankly, that would be great given what is transpiring in Europe and the slowdown in China and Asia.

Regarding the “fiscal cliff,” the yearend combination of expiring tax cuts and mandated reductions in spending, the Congressional Budget Office said were such a scenario to come to pass the economy could go back into recession first half of 2013.

But the CBO also notes that any extension of the expiring tax cuts, plus a reversal on spending would explode the deficit anew. 

Economist Martin Feldstein was on CNBC and said he expected a six-month extension of the tax cuts and a moratorium on spending reductions right after the November election, thereby creating a new deadline of April 2013 to work things out, but can you imagine what a mess that would be in terms of corporate planning, let alone for the IRS?

Then again, each scenario you throw out there, knowing that Congress will do nothing until it’s forced to, leads to my Crash scenario. Senate Minority Leader Mitch McConnell (R-Ky.) said on CBS’ “Face the Nation,” President Obama “needs to become the adult” in discussions with congressional leaders on spending and debt.

“The Speaker and I have been the adults in the room, arguing that we ought to do something about the nation’s most serious long-term problem,” in echoing House Speaker John Boehner’s call for cuts to government spending as part of any plan to raise the debt ceiling. 

But McConnell differs with Boehner on the issue of timing. Boehner wants discussions before the November vote, while McConnell basically believes Obama won’t engage in good faith until after November anyway.

At least the housing market is showing signs of life. April existing home sales rose and the median home price had its biggest year-over-year gain since January 2006. I said last month that I wanted to wait until April’s figures came in before commenting on my now three-year-old forecast, from end of 2008, that we’d bottom in terms of the median home price in April 2009 and then “just sit there.”

And so we have…the median home price in April ’09 was $166,500. April 2010…$172,300. April 2011…$161,100. And now April 2012…$177,400, up from March’s $164,800.

So seeing as how prices almost always rise further in May and June, before beginning to slide back the remainder of the year, just classic seasonality, the temptation is to say we bottomed and that we will not revisit the April ’09 figure of $166,500. I can’t wimp out on this. My original call worked beautifully for three years. I’m just worried that my predicted market crash could send us back in the soup but I think this would just be temporary.

But I do have to point out that the April existing home sales number came in at 4.62 million on an annualized basis, off the low of 4.11 million in 2008.

The peak annualized rate, however, was 7.11 million in 2005.

[New home sales for April were also up over March and builder confidence is at a 5-year high, though it’s fragile given the persistent headwinds.]

And despite the better news on housing, according to Zillow, more than 30% of borrowers, 16 million homeowners, remain underwater on their mortgage; though 9 out of 10 underwater borrowers are current on their payments.

Street Bytes

--Stocks rallied after three awful weeks, despite ongoing investor anger over the Facebook offering. The Dow Jones rose 0.7% to 12454, while the S&P 500 gained 1.7% and Nasdaq 2.1%. On the tech front the earnings picture was mixed with Dell missing estimates badly and Hewlett-Packard exceeding expectations. 

--U.S. Treasury Yields

6-mo. 0.13% 2-yr. 0.29% 10-yr. 1.74% 30-yr. 2.84%

The U.S. continues to benefit from the safe haven play, the best little whorehouse in a dirty neighborhood.

--The more we learn about the Facebook IPO debacle, the more it’s clear the little guy took it up the butt. For starters, the offering was way overpriced given the company’s fundamentals, but then we’ve learned there was extensive “selective disclosure” of information between the underwriters, in particular Morgan Stanley, which was cutting its revenue estimates, and institutional clients during the “roadshow” leading up to the IPO. It technically isn’t illegal to do so during this pre-offering period, but any other time, selective disclosure is. Wall Street firms must publicly disseminate information that could move the share price; in theory giving the retail investor the same information at the same time as the big institutions.

Morgan Stanley issued a statement saying it “followed the same procedures for the Facebook offering that it follows for all IPOs.” But it’s too late. All manner of state and securities-industry regulators are on the case and investor suits are being filed.

As for Nasdaq, its trading glitches only added to the headaches faced by both brokerages and investors. Executives there knew there could be software issues, especially if huge volume materialized, but went ahead with the offering anyway.

Meanwhile, Facebook had released a regulatory document three days into the roadshow discussing the fact that the more people use mobile phones rather than computers, the less likely they were to click on ads, let alone the fact advertising on mobile is difficult to begin with.

Lastly, founder and CEO Mark Zuckerberg married his longtime college sweetheart, Priscilla Chan, on Saturday. No word on the terms of any pre-nup, if indeed there is one, though it seems anything he earned before the marriage is solely his property afterward. In California, anything either partner earns or acquires after marriage is considered communal property.

--There is much talk of China’s slowing economy. HSBC’s flash estimate of May PMI was 48.7, down from 49.3. The April leading economic indicators figure, however, was up a decent 0.8% in April vs. March.

Nonetheless, everyone is lowering their growth forecasts for 2012, though not significantly…yet. The OECD, for example, pegs it at 8.2% for 2012 and 9.3% for 2013. Like whoopty-damn-do if that proves to be accurate. What’s the concern then? The World Bank lowered their forecast from 8.4% to the same 8.2%. Morgan Stanley is projecting 8.5% for the year, down from an earlier forecast of 9.0%.

But Premier Wen Jiabao is urging renewed efforts at growth, calling the current situation “complex.”

Consumer spending is not picking up the slack as many thought it would. One Goldman Sachs analyst in Hong Kong told clients Chinese economic activity is “exceedingly weak.”

Forget what your personal feelings are about the place, and mine are decidedly mixed these days, but given the global structure of the economy today, we need China to do well.

Geopolitics, the issue of stealing secrets, etc. are totally different matters. As negative as you may get at times, remember that America’s farmers, for one, are fans of the place…and for good reason.

--Fitch Ratings cut the sovereign debt of Japan to A-plus, surprising the political leadership. Japan’s rating is now below that of rivals China and Korea. Fitch blasted the government for its “leisurely” approach to dealing with its massive deficits, 200% of annual GDP, the highest among industrialized nations; even as investors pour more money into Japanese government bonds because they are perceived as more of a safe haven than Europe, for example.

Now many have said for years not to worry about Japan because over 90% of its government bonds are held domestically, as opposed to the situation in Europe with the southern periphery. But it’s been one weak government after another in Japan and the politicians must take action soon.

--Thailand reported a surprise decline in exports for April because of falling demand in the U.S. and Europe, down 3.7% from a year earlier. Analysts had forecast an increase of 3%. Not good.

Earlier, though, Thailand reported GDP rebounded 11% in the first three months compared to the previous three months, though just 0.3% on an annual basis. The worst flooding in decades hit the country late last year making for an easy quarter-to-quarter comp.

--Analysts say Macau’s gambling revenue for the month of May could increase only about 11%, year-over-year vs. April’s 22% growth and far headier rates in 2010 and 2011. Should the 11% rate pan out, it would be the lowest number recorded since July 2009. But revenues would still be a record for a single month. Of particular interest is how much Chinese VIP spenders are being crippled by bad debt.

Eventually, growth in Macau could be hit by new casinos going up in the Philippines and Vietnam. There’s already an impact from Singapore’s casinos.

--Discount airline king Ryanair reported record annual profits for the first quarter, 503 billion euros, as revenues increased by 19%.

--The FDIC said the banking industry earned $35.3 billion in the first quarter, up from $28.7 billion in Q1 of 2011 and the highest level since the second quarter of 2007. About 67% of U.S. banks reported improved earnings.

But bank loans to consumers, like for credit cards and home mortgages, fell.

--In the continuing fallout from its trading debacle, JPMorgan Chase suspended its share buyback program out of prudence, as CEO Jamie Dimon put it. Estimates on the ultimate loss from the bad trade in its Chief Investment Office unit now range up to $6 billion.

--The global wheat crop has gone through some major ups and downs the past three years. We had a historic drought in Russia and Australia in 2010, and then bumper crops in 2011 as rainfall returned to normal, and now we’re back in drought conditions in Russia and Ukraine, as well as a very dry May in Kansas, so the U.S. Dept. of Agriculture is expected to cut its global crop estimate significantly next month, according to analysts surveyed by Bloomberg. Ergo, the price of wheat has been surging in recent weeks.

But…rain is coming for the key Russia/Ukraine growing regions.

--Hewlett-Packard has settled on 27,000 job cuts by end of 2014, about 8% of its workforce, which the company claims will reduce costs by up to $3.5 billion a year.

HP did release earnings and revenues for its first quarter that were better than expected, though profits fell 31% over year ago levels.

CEO Meg Whitman, who joined HP in September after heading up eBay, said the strategy to turnaround the company is on track. 

--Meanwhile, Dell missed Street forecasts badly for both earnings and revenues for its second quarter. Dell is the world’s third-largest personal computer maker by shipments but is suffering with the shift among both consumers and businesses away from desktops and laptops to mobile alternatives, such as Apple’s iPad and other tablet computers. Dell’s notebook business contracted 10% in the quarter. Overall U.S. sales fell 7%.

--Congratulations to Ford Motor for regaining its investment-grade rating from Moody’s. A spokesman for Moody’s said:

“The key factor…was whether or not the company would be able to sustain its strong performance. We concluded that the improvements Ford has made are likely to be lasting.”

As of March, it helps that Ford’s cash and liquid assets were about $32 billion.

--Tiffany reported worse-than-expected results for the quarter and reduced its outlook for 2012. The luxury retailer is often a good barometer of the overall economy and the company reported a drop in crowds at its flagship Fifth Avenue store as the number of tourists from Europe and Asia declined.

--From Jack Farchy / Financial Times

“U.S. manufacturers have attacked plans by JPMorgan Chase to launch an exchange-traded fund backed by physical copper, arguing that the product would ‘grossly and artificially inflate prices’ and ‘wreak havoc on the U.S. and global economy.’

“Copper’s use in electrical wiring makes it essential to the manufacturing industry.

“In a letter to the Securities and Exchange Commission, lawyers representing the copper consumers say the impact of the ETF on the copper market would be comparable to the Sumitomo trading scandal of 1995-96, which sent prices sharply higher.

“JPMorgan is among several groups trying to capitalize on investors’ interest in industrial metals by launching a fund that allows them to access physical copper directly.”

No way this should be allowed. This is different than some of the existing offerings in precious metals such as gold and silver because of the prevalence of copper in so many products.

--The Times-Picayune of New Orleans announced it will scale back the printed edition to just three days a week, making the Big Easy the most prominent U.S. city without a daily newspaper.  Since Hurricane Katrina in 2005, the paper’s daily circulation has declined from 261,000 to 132,000.   According to the Audit Bureau of Circulations, nationwide, papers with a circulation of 25,000 or more had a 21% drop in circulation between 2007 and 2012. 

The Times-Picayune, owned by the Newhouse family, will offer print editions on Wednesday, Friday and Sunday. The move was followed by similar reductions at three other Newhouse papers, all in Alabama.

--Inflation Alert: A one-day ticket at Disneyland is rising 9% this summer. A premium annual pass that includes parking is going up 30%. [I’m having an “It’s A Small World” flashback from my only trip there as a kid…not a good memory.]

--Dogs occupy the No. 1 slot on your editor’s proprietary All-Species List (Man is No. 203), but dogs shouldn’t get too cocky. According to the Insurance Information Institute, dog bites accounted for more than one-third of homeowners insurance liability claims paid in 2011. State Farm, the largest writer of homeowners insurance in the U.S., paid more than $109 million on nearly 3,800 dog bite claims.

Granted more people own dogs these days, they live closer to one another, and many folks deserve to get bit.

--Sports betting could be coming to New Jersey’s racetracks and casinos by the fall. Yippee!   Gov. Chris Christie said my state will act on its own to implement it, defying a federal ban on such wagering in all but four states, claiming he’s confident the state will prevail when the Feds try to stop it. About freakin’ time. Take the Jets and the points at New England on Oct. 21.

--Kudos to United Airlines for telling families with small children they can wait their turn like every other schlep. And if the kids misbehave, United said it would force them to take a stagecoach instead.

--80% of all visitors to the London Olympic Games will pass through Heathrow Airport. Talk about a nightmare. They’ve been running baggage drills and say hundreds of extra border staff will be brought in to ease the lines at passport control but no way will it be an efficient operation.

--In the OECD’s annual Better Life Index, which looks into criteria such as jobs, income and health, Australia comes out on top as the happiest industrialized nation in the world, ahead of Norway and the U.S.

Of course if you’re not careful you could get devoured by a crocodile, or killed by a poisonous snake or spider in the land Down Under, but you have superb premium beer at a reasonable price (as opposed to Norway where you have to take out a second mortgage just to buy a case and the U.S. where, unless it’s Yuengling or Shiner Bock, you’re talkin’ domestic).

--The city of Los Angeles is adopting a ban on plastic bags at supermarket checkout lines. I’m all for this one. We never should have changed from paper anyway. 

[The Trumbore Family treats paper bags from Trader Joe’s like gold because of the handles. It’s the perfect Christmas gift, too.]

Foreign Affairs

Iran: Nuclear arms talks in Baghdad ended without agreement after two tense days of negotiations between Iran and the P5+1 (U.S., Britain, France, Russia, China and Germany). A call for Iran to cease production of 20% enriched uranium was rejected by Tehran, which days earlier had offered the U.N.’s International Atomic Energy Agency (IAEA) inspectors access to the disputed military base at Parchin, where it is suspected Iran has been conducting explosives tests tied to a nuclear weapons program. 

But, nothing was actually signed between Iran and the IAEA, yet Iran thought this single gesture would convince the West to ease international sanctions on its banking system and oil exports. The P5+1, even including Russia and China, has been steadfast that Iran halt its production of highly-enriched uranium, one short step from bomb-grade material, and dismantle the underground site at Qom. In return, the West was prepared to offer Iran needed spare parts for its civil aviation operation.

Said Iranian issue specialist Hassan Abedini, “Giving up 20% enrichment levels in return for plane spare parts is a joke. The package is unbalanced and therefore unacceptable.”

“Unbalanced” is the key word used by all manner of Iranian officials this week. But the P5+1 maintained that any relaxation of sanctions, due to come into effect July 1 in terms of banking and oil, would only come after Iran adopted some confidence-building measures.

But a new round of talks is slated for Moscow, June 18, so Iran can continue doing what it has been doing, stalling for time while it continues with the enrichment program.

For its part, however, Israel will not just wait forever before striking Iran. As even a high-level U.S. government insider conceded to the AP, “We still think we have some time for diplomacy, but it’s not indefinite.”

I’m guessing if no real progress is made in Moscow, the only question for Israeli Prime Minister Benjamin Netanyahu will be whether he attacks before or after the U.S. presidential election?

And in a new Pew poll, 63% of Americans think military force should be used to keep Iran from obtaining nukes, while slim majorities in Britain, France and Germany back such a course.

Syria / Lebanon: As I’ve been concerned about for months in this space, the violence in Syria is beginning to spill into Lebanon with increasing intensity. There were a series of sectarian gun battles in Beirut; the first the result of an accidental shooting of two anti-Syria Sunni Muslim clerics at a Lebanese army checkpoint near Tripoli, which led to a neighborhood battle in Beirut that killed several, and then later in the week, Syrian rebels kidnapped up to 16 Lebanese Shiites returning from a religious pilgrimage in Iran through Syria. Again, this triggered violent protests, forcing Hizbullah leader Sheikh Nasrallah to hit the airwaves and appeal for calm, warning his Shia followers against revenge attacks. [The Lebanese captives were then released unharmed on Friday.]

After the first incident I contacted my friend in Beirut and he said the city, while tense, didn’t appear to be on the verge of erupting into widespread violence. I did not reach out to him after the second wave.

Then, in yet another incident in Beirut, one in which two were killed, one of the gunmen who was arrested after not only has ties to al-Qaeda, but he is said to have been linked to the 2005 assassination of former Prime Minister Rafik Hariri.

It doesn’t help that the Lebanese government is totally dysfunctional and one can just hope the Lebanese Army stays strong.

As for Nasrallah, he is a major ally of Syrian President Bashar Assad, of course, with Hizbullah getting its funding and arms from both Syria and Iran.

And at the NATO summit in Chicago, the alliance ruled out military action against the Assad regime. NATO Secretary General Anders Fogh Rasmussen said, “We are very much concerned about the situation in Syria,” but the alliance has “no intention whatsoever to intervene.”

Editorial / Washington Post

“Why not? What happened to the ‘teachable moment,’ [Ed. Libya] just one year old? There’s a hint [in a Foreign Affairs article by Ivo Daalder, the U.S. ambassador to NATO, and NATO’s supreme allied commander, Adm. James Stavridis]: ‘The United States facilitated this rapid international reaction [in Libya],’ the authors boast. In truth, the leaders of France and Great Britain prodded the United States into action, and a chief goad, French President Nicolas Sarkozy, has since been turned out of office. But it is true that the Libyan action would not have taken place without the promise of substantial U.S. support. On Syria, that promise is missing.

“This is mystifying not just because the humanitarian stakes are as great in Syria as in Libya. As with Libya, NATO could support the Syrian opposition without putting its own troops at risk….Instead…Syria’s conflict, already increasingly violent, might well degenerate into full-blown sectarian warfare; this war could jump into Turkey, Lebanon and Iraq, and al-Qaeda would profit murderously from this opportunity.

“NATO leaders might feel that if they don’t talk about Syria, these outcomes won’t be blamed on them. They are, after all, preoccupied in their search for the exit from Afghanistan. But President Obama and his allies cannot shirk this issue indefinitely. As Syria burns, the Libya ‘victory’ rings increasingly hollow.”

It’s no wonder that the Syrian rebels ask why the Syrian people do not seem to have the same rights as the Libyan people had in taking up arms against the Gaddafi regime.

On Friday, Assad’s forces killed at least 50 civilians, including 13 children, in the central part of the country.

Egypt: I have to admit, I didn’t think the ruling Military Council would allow the presidential vote to go off as early as it did, plus I thought a new constitution would be written beforehand, but there we were this week, two days of voting, Wednesday and Thursday, in a truly historic moment.

What we now know is out of a field of 13 candidates, Mohamed Morsi, the Muslim Brotherhood’s candidate, emerged victorious and will face Ahmed Shafik, a former Air Force general who served briefly as Hosni Mubarak’s last prime minister, in the run-off next month, June 16-17.

The emergence of Shafik in the final weeks was a surprise, but his message of law and order resonated with voters (particularly Christians, who make up 10% of the population). One of those he defeated was Amr Moussa, the former foreign minister and secretary general of the Arab League who had been assumed to be the front-runner. I just have to point out that last week I wrote, in noting Morsi was third in the polls to Moussa and independent Islamist Abdel Abol Fotouh:

“Some are disappointed that the Brotherhood, after gaining the largest bloc in the new parliament last January, has accomplished little, but I look at the Pew Research survey and see 70% of Egyptians still have a positive view of the Brotherhood, albeit down from 75% last year. So the first round of voting could yet yield a surprise or two.” 

So we have a most fascinating finale coming up, albeit a highly disturbing one. Morsi has promised to implement Islamic law if elected, as well as review the 1979 Camp David peace treaty with Israel. He hates both Israel and the U.S. Shafik is a hardliner…a probable dictator.

The other big issue is the role of the military, post election. The current rulers are looking for the next constitution to safeguard their power and independence, including a budget that they insist is protected from public scrutiny.

Ah yes…the Arab Spring. What a mess.

Afghanistan: At the aforementioned NATO summit, the 50 members and allies declared an “irreversible transition” that will put Afghan forces in the lead of the combat by the middle of 2013, this as new French President Francois Hollande reiterated a campaign promise that France would withdraw its 3,400 combat troops by the end of 2012, two years before the timeline agreed to by the coalition previously. What they will leave behind is going to be a nightmare…nothing but corruption and political instability.

While predicting some “bad moments” in the next two years, President Obama said it was nonetheless time to “responsibly bring this war to an end,” while British Prime Minister David Cameron said, “The message to the Afghan people is that we will not desert them.” To which most Afghans I’m sure said, ‘whatever.’

This whole situation is immensely depressing. The London Times reported that the Taliban and Afghan army have a pact to loot NATO supply convoys, dividing up the proceeds. “They even share intelligence about military operations.”

“We lost seven men in an ambush when I first arrived at the base,” explained Afghan army lieutenant Mohammad Wali, who commands 18 men. “So I thought, why risk my life when there’s another way?”

These are the troops NATO is turning the operation over to. There is also growing evidence that what I’ve been writing for years now, that American commanders are way overstating any successes, is indeed the case. The Pentagon, for example, claims 40% of operations are already led by Afghans, but Michael O’Hanlon of the Brookings Institution, who visited Afghanistan last week, said almost all were simple operations. [London Times]

So what will it mean when we say we’ve turned over City X to the Afghans if they are themselves in alliance with the Taliban? It’s insane.

And if the above isn’t bad enough, there was a report that “130 girls and three female teachers (had) fallen ill after ‘poisonous gas’ was released in their school in northern Afghanistan, an official says.” [Sydney Morning Herald]

This was the third such incident within a month. The gas hasn’t been identified as police blame the Taliban. During Taliban rule, 1996-2001, girls weren’t allowed in school.    The Afghan Education Minister said earlier in the month that at least 550 schools remain closed due to insecurity, affecting more than 300,000 students in 11 provinces where the insurgency is strong.

Again, don’t listen to our generals when they speak of successes.

Pakistan: Related to the above, President Obama gambled that he could get Pakistan to finally reopen supply routes into Afghanistan if he invited Pakistani President Zardari to the NATO summit, but Zardari then refused to open them up. Obama was forced to admit:

“I don’t want to paper over real challenges there. There’s no doubt that there have been tensions between [the NATO military coalition] and Pakistan, the United States and Pakistan over the last several months.”

The main supply route has been shut since the Nov. 26 accidental U.S. airstrike that killed 24 Pakistani soldiers. Islamabad continues to demand an unconditional apology. The administration refuses to apologize, claiming both sides made mistakes.

And tensions between our two nations boiled over further by week’s end after Pakistan chose to sentence a doctor who led the CIA to Osama bin Laden’s door to 33 years in prison for treason.

“What Dr. (Shakeel) Afridi did is the furthest thing from treason,” Senators Carl Levin and John McCain said in a joint statement. “It was a courageous, heroic and patriotic act which helped to locate the most wanted terrorist in the world, a mass murderer who had the blood of many innocent Pakistanis on his hands.”

Dr. Afridi had helped the CIA organize a fake vaccination program in an attempt to extract DNA from inside the bin Laden compound. While this failed, Afridi did get the phone number for the compound’s owner, who proved to be bin Laden’s courier and right-hand man.

Pakistan, in turn, felt humiliated by the whole bin Laden action and chose to make an example of Afridi. The U.S. in response announced it would withhold $34 million in aid to the country now that the sentence has been handed down.

Yemen: I understand only one or two percent of the American people, max, give a damn about this place, but I’ve written that I’m exceedingly uncomfortable with the triumphalism exhibited by the Obama administration when it comes to its successes against al-Qaeda. Ask the Yemenis today if they believe al-Qaeda is largely a spent force. On Monday, at a rehearsal for National Day celebrations (marking the 1990 reunification of north and south Yemen), an al-Qaeda suicide bomber killed over 100 soldiers, one of the largest single terrorist acts in the world in years.

North Korea: According to the South Korean Defense Ministry, North Korea appears to have placed an atomic device inside the new tunnel excavated at the country’s nuclear test site. Said a spokesman for the ministry, “This means they can conduct a nuclear test any time.” But the spokesman added it did not appear a “political decision” had been made to proceed with the detonation.

Serbia: Nationalist Tomislav Nikolic defeated liberal incumbent Boris Tadic in the run-off for president of Serbia by two points. It had been thought Tadic would win re-election.

Nikolic said “Serbia will not stray from its European path,” but many question whether this will indeed be the case; Nikolic, after all, serving as a deputy prime minister under former Yugoslav President Slobodan Milosevic. He once said he would rather see Serbia ally itself with Russia over the EU but supposedly has softened that stance.

Serbia is plagued by 24% unemployment and massive debt.

Russia: Opposition leader Alexei Navalny was released from prison after 15 days, striking a defiant tone and vowing to scale up the protests, with Navalny specifically calling for activists to prepare for nationwide demonstrations in the beginning of September, while another opposition figure released at the same time, Sergei Udaltsov, called for his followers to stage a continuous protest outside the White House (Moscow’s version).

Separately, there was a heated debate in the State Duma over a proposed bill that would increase fines to tens of thousands of dollars for staging and taking part in illegal protests. The bill narrowly passed the first round and a second vote is to take place in early June. This could be explosive if enacted.

Former Finance Minister Alexei Kudrin and his think tank released a report on Thursday laying out various scenarios for Russia’s future.

“Things could spiral down into violence and chaos if the government responds too harshly to the ongoing street demonstrations or if the Russian economy slows or dips in the wake of Europe’s mounting woes, the study said.” [The Moscow Times]

The problem with Europe’s debt crisis crossing into Russia involves energy prices, which would tumble further than they already have (barring an attack on Iran) and of course its oil and natural gas that are responsible for the lion’s share of the government’s revenues.

So what has Russian President Vladimir Putin been up to the past week, he having blown off the G-8 at Camp David, sending Prime Minister Medvedev in his stead? He unveiled a new government dominated by loyalists, including his old KGB cronies (Sergei Ivanov and Nikolai Patrushev in the posts of chief of staff and head of the presidential Security Council, respectively), while leaving Foreign Minister Sergey Lavrov and Defense Minister Anatoly Serdyukov in place.

The appointments were made on Monday. On Wednesday, however, Putin pulled a major surprise in decreeing that planned privatizations into the energy sector would be cancelled amid signs of intensified infighting among Moscow’s political elite. This was a huge blow to Medvedev, who had said he would push pro-growth policies built in no small part around privatizations. It was also a big blow to investors as Moscow’s benchmark RTS index finished down 4.4% following the announcement.

And who is a key factor behind Putin’s move? Why if it isn’t Igor Sechin, the “third force” I have long argued could eventually take down Putin. Sechin, as part of the reshuffling in the Kremlin, was left without a place in government but instead was named CEO of Rosneft, the state oil giant. Privatization would mean selling off stakes in companies like Rosneft. As one banking official put it in Moscow, “Rather than seeing privatization we could see further consolidation around Rosneft.”

More power for Sechin. Putin thinks he is taking care of his friends. Instead this is the beginning of the summer of the long knives, and I reiterate my long held stance that Putin doesn’t make it through the end of the year, though the first victim could be Medvedev, who may step down out of frustration and move overseas. He is far from an electric personality, but I honestly believe he has the best interests of his country at heart. No one else around him does. The Russian Mob is firmly in control.

China: Blind activist Chen Guangcheng arrived in New York on Saturday after the month-long diplomatic drama. It is encouraging that the two sides were able to hammer this out, even though there is little doubt Chen’s family and relatives back home will suffer as a result of his release.

Meanwhile, in the case of disgraced one-time high-flyer Bo Xilai, it appears the trial of Wang Lijun, Bo’s former police chief in Chongqing, is about to begin. Wang, who fled to the U.S. consulate before being turned over to authorities, will be tried for treason and faces the death penalty. The outcome will be a good harbinger of what awaits Bo and his wife, Gu Kailai, a murder suspect in the death of the British businessman, Neil Heywood.

And on a totally different topic, the Senate Armed Services Committee said its year-long investigation into Chinese electronic parts used in U.S. military aircraft, launched by Democratic chairman Carl Levin and Republican John McCain, “uncovered 1,800 cases of bogus parts, including on the U.S. Air Force’s largest cargo plane, special operations helicopters and Navy surveillance planes.” 

The 112-page report “outlines how this flood of counterfeit parts, overwhelmingly from China, threatens national security, the safety of our troops and American jobs,” Levin said.

“The report also said the Chinese government denied visas to committee staff to travel to the Asian giant as part of the committee’s probe, with a Chinese embassy official saying the issue was sensitive and that a negative report could end up ‘damaging’ U.S.-China relations.” [AFP/South China Morning Post]

Lastly, Taiwan’s intelligence chief says China is planning on building two aircraft carriers in addition to the retrofitted former Soviet carrier now in trials.

Random Musings

--In a Wall Street Journal/NBC News poll, President Obama tops Mitt Romney 47% to 43%, but nearly half of Americans said the country is at the start of a long-term decline. Only one-third said the country is on the right track. Obama has an overall job approval rating of 48%. 

Additionally, over half disapprove of the president’s handling of the economy. The Journal notes, though, that attitudes are “strikingly similar” to views held at this point in 2004.

For Romney, “More than one in four Americans say having a Mormon as president would cause concern for themselves or someone in their family, neighborhood or office.”

--A Washington Post-ABC News nationwide survey has Obama at 49% and Romney at 46%. On handling the economy they are tied at 47%. Obama’s job approval in this poll is 47%, the exact same reading as George W. Bush in 2004 at this stage.

--Also in the Post/ABC poll, 53% of Americans say gay marriage should be legal, compared with just 36% who felt that way six years ago.

--In a Wall Street Journal/NBC News and Telemundo survey, among Hispanic registered voters, 61% said they would vote for President Obama if the election were held today, while 27% would choose Romney. Worrisomely for Romney supporters, among Hispanics only 26% view him positively and 35% see him in a negative light, while the split is 58-23, positive-negative, for Obama.

40% of the Hispanic vote is what it appears Romney needs for victory, that being George W. Bush’s share in 2004. In 2008, Sen. John McCain took 31%. 

--In reading various analyses of the presidential election, including Karl Rove’s in the Wall Street Journal, as close as it now seems, no matter how you slice it, there is no Republican victory unless Romney takes Florida and Ohio, and then gets help elsewhere.

The latest Quinnipiac University poll in Florida has Romney ahead of Obama 47-41, a huge swing from two months ago when Obama was leading 49-42. Obama’s unfavorability rating in Florida is now at 50% vs. Romney’s 35%.

A series of Marist polls, however, has Obama leading Romney in Florida, 48-44, while the president also leads in Ohio (48-42) and critical Virginia (48-44). But, Obama’s lead in all three, according to Marist, was between 8 and 17 points back in March.

[In key Senate races, Marist has Sen. Bill Nelson (D-Fla.) leading Republican Rep. Connie Mack 43-38, while in Virginia former Democratic National Committee chairman Tim Kaine leads former senator George Allen (R) 46-40.]

--What was once a 10 to 1 cash advantage for Obama over Romney at the end of March is down below 2 to 1. Plus GOP super PACs are going head-on against Obama’s campaign in TV advertising, allowing Romney to spend more of his millions on his ground operation.

Then again, Obama can keep tapping his Hollywood crowd, such as a recent $25,000-per person dinner in Beverly Hills that featured a performance by Pink. [Pink’s a ‘dirty girl.’]

--As George Will opines in the Washington Post, Massachusetts Democratic Senate candidate Elizabeth Warren has turned herself into a laughingstock over her claims she is a minority, specifically part Cherokee.

“The kerfuffle that has earned Warren such sobriquets as ‘Spouting Bull’ and ‘Fauxcahontas’ began with reports that Harvard Law School, in routine academic preening about diversity (in everything but thought), listed her as a minority faculty member, as did the University of Pennsylvania when she taught there. She said that some in her family had ‘high cheekbones like all of the Indians do.’ The New England Historic Genealogical Society said that a document confirmed the family lore of Warren’s Cherokee ancestry, but it later backtracked. She has said that she did not know Harvard was listing her as a minority in the 1990s, but Harvard was echoing her…

“So, although no evidence has been found that Warren is part Indian, for years two universities listed her as such. She has identified herself as a minority, as when, signing her name ‘Elizabeth Warren – Cherokee,’ she submitted a crab recipe (Oklahoma crabs?) to a supposedly Indian cookbook. This is a political problem.

“A poll taken before this controversy found her Republican opponent Scott Brown trouncing her on ‘likeability,’ 57 percent to 23 percent. Even Democrats broke for Brown 40 to 38. Now she is a comic figure associated with laughable racial preferences.”

Pssst…I’m part Sioux…at least I’m saying so on my Indian casino application. I’d like to have a high-end one. No slots. Just blackjack and poker tables.  Perhaps a nice steakhouse that would serve buffalo.

--The Archdiocese of New York is among dozens of dioceses, schools and other institutions suing the Obama administration to block the mandate requiring employers to provide health insurance that includes birth control for workers.

Cardinal Timothy Dolan told the local NBC News affiliate that unless the administration blocks the requirement, the Catholic Church will have no choice but to stop serving the needy.

The suit was filed because the government is requiring the church to “provide, pay for and/or facilitate access to services” that are contrary to its beliefs.

Here’s the thing. In order to get a church-based exemption, the archdiocese of New York, for example, would have to prove 82% of those it serves in its various ministries are Catholics, but as Dolan points out, this means they would have to prove 82% of those in their soup kitchens, for example, are Catholic! That’s absurd.

When this issue first came up months ago, I said it could cost Obama the election by giving Romney an edge in some battleground states he may not otherwise achieve. Since then, virtually every pundit I’ve read says, no way, it’s not a game-changer. I maintain it could be; but that this election will be so close we may never prove there was one single deciding factor. If I’m the Democratic Party, however, I simply don’t see from a purely political standpoint why they would take this risk.

The Washington Post’s Michael Gerson wrote this week:

“In a blowout presidential election, a few large issues dominate. In a tight election, a range of smaller concerns – important to strategic constituencies in battleground states – can end up being crucial….

“I’ve previously argued that the Obama administration, motivated by instinctual liberalism, stumbled into this conflict with Catholic leaders. It is possible, however, Obama is making the political calculation that appealing to younger, non-religious voters is worth the alienation of traditional Catholics. Yet even if this strategy makes sense nationally, it might not be wise in, say, Pennsylvania or Ohio, where the votes of white Catholics could matter greatly.”

I’ve told you many times I’m Catholic…though not a good one these days. But I’ve always been proud of my church for what it’s done for the poor, around the world. Heck, my good friend, Father Bill, who is now ministering to retired priests at Fordham University, spent years and years in Nigeria…get this…taking care of lepers! 

Michael Gerson finished his opinion piece with a line from Thomas More in explaining how some Catholics may feel come Election Day.

“I die the king’s faithful servant, but God’s first.”

--Newark, N.J. Democratic Mayor Cory Booker went on NBC’s “Meet the Press” last Sunday and defended Mitt Romney, saying he was “nauseated” by one of the Obama team’s campaign tactics in going up against the Republican challenger. In comparing the attacks on private equity to those by the Right on Rev. Jeremiah Wright, Booker said:

“This kind of stuff is nauseating to me on both sides. It’s nauseating to the American public. Enough is enough. Stop attacking private equity, stop attacking Jeremiah Wright. This stuff has got to stop because what it does is it undermines, to me, what this country should be focused on. It’s a distraction from the real issues.”

Booker then added: “I have to just say, from a very personal level, I’m not about to sit here and indict private equity…Especially that I know I live in a state where pension funds, unions and other people are investing in companies like Bain Capital. If you look at the totality of Bain Capital’s record, they’ve done a lot to support businesses, to grow businesses.”

But then Booker, under pressure from the Obama campaign, was forced to do some damage-control Sunday night, posting a YouTube video saying attacks on Romney’s record as a job creator were legitimate and that the president “more than deserves re-election.”

Booker was humiliated. 

--Abdel Basset Ali Megrahi, the Libyan who was the only person ever convicted in the 1988 Lockerbie bombing, died this week, nearly three years after he was released from a Scottish prison for “humanitarian” reasons because he supposedly had just three months to live. He is now in Hell.

--33 years ago, the disappearance of six-year-old Etan Patz changed New York City, and the nation, forever. As Ed Koch, mayor of New York at the time of the boy’s disappearance, told the New York Post on Thursday following the arrest of a man who confessed to the murder of Patz, “It affected the way parents treat their children. Whenever possible, don’t let them out of your sight. It was strange, because children had been kidnapped before, children had been killed before, but nothing gripped the city like this ever, before or since.”

At one point 500 officers were working on the case as Etan’s parents worked tirelessly not only to try and find their son, but also other missing children.

Their lobbying efforts led to the 1982 Missing Children Act, which required the FBI to keep track of such cases. Etan became the first missing child to have his picture on a milk carton.

--Congratulations to the team at Space Exploration Technologies, SpaceX, for successfully flying an unmanned rocket to the International Space Station and docking it to become the first private vessel to reach the orbital outpost. Very cool…and hopefully the start of a truly exciting era that captures the imagination.

Just understand such efforts cannot be accomplished without significant government support, as SpaceX had, and the American people need to be told how important such funding is for our future.

--Headline in Thursday’s New York Daily News:

“Bill Clinton shares spotlight in Monaco with porn starlets Brooklyn Lee and Tasha Reign”

The accompanying photo is priceless. Ms. Lee, whom the former president had his arm wrapped around, was named “Best New Starlet” by trade magazine AVN, where she also picked up “Best Sex Scene.”

And that’s your Bill Clinton porn update for Sat., May 26.

--But wait…there’s more Clinton news!

From the Irish Independent’s Hannah Furness:

“An exclusive event hosted by Bill Clinton [Ed. for his Clinton Foundation Millennium Network] and attended by a host of celebrity friends has been criticized after guests who paid up to 1,200 euros for tickets were left queuing outside for hours.

“Attendees complained the underground venue in Waterloo in London ‘stank,’ with perspiration ‘dripping off the walls’ and the rooms too crowded to even see the former president.

“One, who called it the ‘worst party ever,’ described how ‘angry people’ were waiting in the queue outside while high-profile guests were admitted, and another condemned the event as ‘unpleasant.’”

Yuck.

Chelsea co-hosted, so I don’t think she has a future as an event planner.

--Sign of the Apocalypse:

“Edwards flirts with alternate juror during Senator’s financial fraud trial”

From the New York Daily News’ Glenn Blain:

“As jury deliberations continue in (John) Edwards’ campaign finance fraud trial, one gorgeous alternate juror has taken to openly flirting with the former presidential hopeful-turned-lying adulterer.

“The juror, a young woman with jet-black hair, has repeatedly giggled and flashed smiles at Edwards and was spotted flipping her hair back in a come-hither way, according to reporters in the courtroom.

“Friday, she arrived at court wearing a revealing red top, her right shoulder exposed.

“Edwards, clearly amused, has returned the woman’s advances with some smiles of his own – and was even seen blushing.”

Good grief.

--Lastly, this weekend marks the 40th anniversary of the triumph of a resident from my hometown of Summit, New Jersey…Mark Donohue Jr., who won the 1972 Indy 500. He is buried here and I pay my respects a few times a year, being a fan of the sport and having attended his funeral. 

Mark Donohue died in 1975 of injuries he sustained in a crash during practice for the Austrian Grand Prix.

---

On Memorial Day:

Think not only upon their passing
Remember the glory of their spirit*

*An inscription in a chapel at the American cemetery at Normandy.

God bless America.
---

Gold closed at $1571
Oil, $90.86

Returns for the week 5/21-5/25

Dow Jones +0.7% [12454]
S&P 500 +1.7% [1317]
S&P MidCap +3.2%
Russell 2000 +2.6%
Nasdaq +2.1% [2837]

Returns for the period 1/1/12-5/25/12

Dow Jones +1.9%
S&P 500 +4.8%
S&P MidCap +6.3%
Russell 2000 +3.4%
Nasdaq +8.9%

Bulls 38.3
Bears 26.6 [Source: Investors Intelligence]

The StocksandNews.com iPad app is the perfect gift for high school and college graduates; a very cheap one.

Have a great week. Enjoy the holiday.

Brian Trumbore



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-05/26/2012-      
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Week in Review

05/26/2012

For the week 5/21-5/25

[Posted 6:00 AM ET]

The European Debt Crisis, continued

Regarding the euro debt crisis, I haven’t changed my opinion one iota, including writing in this space on 1/1/2011, 17 months ago, that the crisis would be with us “well into 2012.” I have also issued constant warnings on a topic that everyone seems to be ignoring. This is the Balkans, when it comes to Greece. I’ve specifically written that one needs to watch Kosovo and Serbia, and last weekend we had a surprise outcome in Serbia’s presidential election, a nationalist winning out over the incumbent pro-Western president. Not good in a nasty land with massive unemployment and debt where neighbors detest each other unlike nowhere else in the world, including the Middle East.

The point being that when the inevitable bank runs start in earnest in Greece, as seems imminent, and within hours spread to Spain (panic as opposed to the slow bleed we are seeing in both today), you will see reactions elsewhere, like in Bulgaria and Romania, two EU nations that never should have been allowed into the eurozone in the first place, as my personal reporting from there years ago concluded.

So this financial crisis on the European continent will morph into a violent one sooner than later. The people can’t take it anymore, and they have new outlets, the extremists, from radical Socialists to neo-Nazis.

Thomas Mayer, chief economist at Deutsche Bank, was quoted in the London Times this week as saying that a full-blown exit by Greece could amount to a “social and political catastrophe… with unforeseeable consequences for Europe and possibly the world.”

For now you have a confluence of events, including outside the region, that will all hit at once.

June 16-17…the Egyptian presidential run-off wherein the Muslim Brotherhood’s candidate could emerge victorious with dire consequences for Israel and the peace treaty between the two.

June 17…the second Greek election, a revote, a referendum on whether the Greeks stay in the euro, since a government that goes back on previously agreed to austerity measures gets cut off from any further installments of the 240 billion euros in aid pledged in Greek Bailouts I and II.

June 18…another round of talks on Iran’s suspected nuclear weapons program in Moscow, almost certainly the last, one way or another.

June 28-29…another formal EU summit that will either spell the end of Greece, if this hasn’t happened sooner, or provide it, and Spain, a final lifeline.

North Korea could test everyone’s nerves by conducting its third nuclear weapons test in this rough time frame as well.

And there is a simmering issue between China and the Philippines in the South China Sea that mandates cooler heads prevail, though this is not a certainty.

I could go on and on…and I do to a large extent further below, particularly in the “Foreign Affairs” section, but for now we focus on the situation in Greece and Spain.

All are in agreement that the odds of Greece leaving the euro, the so-called “Grexit,” rose sharply this week. And at an informal EU summit in Brussels (No. 18 in the last two years), participants issued a statement that said in part:

“We want Greece to remain in the euro area while respecting its commitments. We expect that after the elections, the new Greek government will make that choice.”

Italian Prime Minister Mario Monti said he could help persuade Germany to support Europe’s “common good” and back the call for euro-area bonds, saying a majority of EU leaders supported the proposal.

But Luxembourg Prime Minister Jean-Claude Juncker said, whaddya mean there was a lot of support? He told reporters the idea of joint debt sales “didn’t find much support,” particularly in the German-speaking area.

Monti said, “A united Europe is in Germany’s interest. We’ll have euro bonds in the euro area, and therefore Germany will want them.”

But German Chancellor Angela Merkel said she has “huge difficulties” with euro bonds. For starters, aside from throwing massive liabilities onto the backs of taxpayers, it would raise German borrowing costs and dilute its creditworthiness.

But all are in agreement the Greek government must live up to its bailout pledges and that there can be no easing of the terms or that creates a moral-hazard issue, i.e., everyone else, such as Ireland and Portugal, will want easier terms as well and then the whole fiscal compact, recently negotiated, breaks down.

European Central Bank president Mario Draghi called on governments to take a “courageous leap” of political imagination to safeguard the future of the eurozone. Draghi said it was up to the banks, and especially governments, to take their own decisive action.

“We are living a crucial moment in the history of the EU,” he said, as various manufacturing data for the region revealed more doom and gloom. Key business surveys showed private sector companies pulling back, new orders shriveling up, leading to talk of a new round of layoffs. The downturn is occurring in Germany and France, as well.

The eurozone composite PMI, a combination of the services and manufacturing indexes, fell to 45.9 this month, down from April’s 46.7 and the lowest reading since June 2009. [50 being the dividing line between growth and contraction.]

Germany issued a blunt warning to Greece, some would say putting a gun to its head as it prepares for the critical June 17 vote. The Bundesbank said a Greek withdrawal from the eurozone would be disruptive but “manageable,” an attempt to undermine the claims of anti-austerity Greek leader Alexis Tsipras that Europe wouldn’t dare pull the plug.

“When the euro system provided Greece with large amounts of liquidity, it trusted that the programs would be implemented and thereby ultimately assumed considerable risks. In the light of the current situation, it should not significantly increase these risks,” so said the Bundesbank, which earlier said with regards to easing Greece’s bailout terms, it “would damage confidence in all euro-area agreements and treaties and strongly weaken incentives for national reform and consolidation measures.”

French President Francois Hollande stated firmly that “France and Europe want Greece to stay in the eurozone. We want you to respect your commitments but we want to take steps to show you that we want to restore hope. That is in the interests of Greece, the eurozone and the global economy.”

If there is a stopgap solution to the crisis, it would be a guarantee of bank deposits backed by all remaining eurozone members which would prevent bank runs following a Greek exit from the euro.

At the Brussels summit this week, talk focused on growth measures and Greece. There was zero talk of Spain and its humongous problems, a “triple threat” of recession, rapidly rising debts and a banking system with over $230 billion in problem assets.

The Spanish government has made one futile attempt after another to shore up the banks and on Friday there was talk of a further injection into the most troubled lender, Bankia, of 19 billion euros, this after the government pumped in 4.5 billion just one week earlier to effectively nationalize it. With the new capital funding, the state would own up to 90% of the institution.

I’ve written tons on the situation with Spain’s banks and its 17 regions, the latter comprising 50% of the nation’s GDP, and it’s clear the government is going to require a bailout, but it doesn’t want to do so, a la Greece, because then it would be giving up some of its sovereignty.

But check this out…from BBC News’ Laurence Knight:

Total lending by Spain’s central bank to the Spanish banks has increased from 50 billion euro nine months ago to 264 billion euro in March…and counting (pre-Bankia, for starters). “Spain’s central bank in turn borrows most of this money from the ECB. It now owes the ECB 285 billion euros, or 27% of Spain’s GDP….

“ Italy’s central bank has borrowed 279 billion euro from the ECB, or 18% of Italy’s GDP, while those of France, Greece and the Irish Republic have taken about 100 billion each. And where has the ECB been getting all this money from? The answer is mainly from Germany’s central bank, the Bundesbank.” 644 billion euros by April. 

The yield on Spain’s 10-year bond closed the week at around 6.30%, an extra cost that Prime Minister Mariano Rajoy says will nullify any savings derived from the austerity measures that are being enacted.

Jin Liqun, the chairman of China’s $440 billion sovereign wealth fund, perhaps best summed up the mess in the region.

“The debt crisis is actually much less devastating than the handling of the debt crisis,” he said, in warning political gridlock was driving the eurozone deeper into the woods.

“Too much time has been wasted on endless bargaining on terms and conditions for piecemeal bailouts,” he continued, adapting a Shakespearean quote to add: “Frailty, thy name is leadership.” [London Times]

Eurobits

--The Organization for Economic Cooperation and Development (OECD), in its semi-annual forecast, said eurozone GDP will decline 0.1% in 2012 and rise 0.9% in 2013. Germany’s GDP will rise 1.2% this year and 2.0% next.

--Greece owes over 400 billion euros to the ECB, euro governments, the International Monetary Fund, foreign holders of Greek government bonds and on Greek corporate debt.

--78% of Greeks want to stay in the eurozone, but at the same time anti-austerity Syriza is gaining in the polls.

--GDP in the U.K. fell 0.3% in the first quarter vs. a previous estimate of minus 0.2%. In a Populus poll for the London Times, 49% of Brits back the coalition’s deficit reduction plan, while 51% say the government of David Cameron should slow the pace of cuts.

--Consumer confidence in Italy is at its lowest level in 15 years as its recession deepens. 

--France’s comp PMI was a mere 44.7 in April, while Germany’s was 49.6.

--The OECD warned that Ireland’s economic recovery risked being derailed by the fallout from the eurozone debt crisis, with GDP now expected to expand just 0.6% this year, which is off from the OECD’s November forecast of 1.5%. Unemployment is expected to hold steady at 14.5%, with government and private consumption predicted to fall.

--Not for nothing but Ireland has its referendum on the fiscal compact May 31. Should the Irish pull a surprise and vote it down, they would lose all further EU financing.

Turning to Washington and Wall Street

The above-referenced OECD forecast has the U.S. growing at 2.4% this year and 2.6% in 2013. Frankly, that would be great given what is transpiring in Europe and the slowdown in China and Asia.

Regarding the “fiscal cliff,” the yearend combination of expiring tax cuts and mandated reductions in spending, the Congressional Budget Office said were such a scenario to come to pass the economy could go back into recession first half of 2013.

But the CBO also notes that any extension of the expiring tax cuts, plus a reversal on spending would explode the deficit anew. 

Economist Martin Feldstein was on CNBC and said he expected a six-month extension of the tax cuts and a moratorium on spending reductions right after the November election, thereby creating a new deadline of April 2013 to work things out, but can you imagine what a mess that would be in terms of corporate planning, let alone for the IRS?

Then again, each scenario you throw out there, knowing that Congress will do nothing until it’s forced to, leads to my Crash scenario. Senate Minority Leader Mitch McConnell (R-Ky.) said on CBS’ “Face the Nation,” President Obama “needs to become the adult” in discussions with congressional leaders on spending and debt.

“The Speaker and I have been the adults in the room, arguing that we ought to do something about the nation’s most serious long-term problem,” in echoing House Speaker John Boehner’s call for cuts to government spending as part of any plan to raise the debt ceiling. 

But McConnell differs with Boehner on the issue of timing. Boehner wants discussions before the November vote, while McConnell basically believes Obama won’t engage in good faith until after November anyway.

At least the housing market is showing signs of life. April existing home sales rose and the median home price had its biggest year-over-year gain since January 2006. I said last month that I wanted to wait until April’s figures came in before commenting on my now three-year-old forecast, from end of 2008, that we’d bottom in terms of the median home price in April 2009 and then “just sit there.”

And so we have…the median home price in April ’09 was $166,500. April 2010…$172,300. April 2011…$161,100. And now April 2012…$177,400, up from March’s $164,800.

So seeing as how prices almost always rise further in May and June, before beginning to slide back the remainder of the year, just classic seasonality, the temptation is to say we bottomed and that we will not revisit the April ’09 figure of $166,500. I can’t wimp out on this. My original call worked beautifully for three years. I’m just worried that my predicted market crash could send us back in the soup but I think this would just be temporary.

But I do have to point out that the April existing home sales number came in at 4.62 million on an annualized basis, off the low of 4.11 million in 2008.

The peak annualized rate, however, was 7.11 million in 2005.

[New home sales for April were also up over March and builder confidence is at a 5-year high, though it’s fragile given the persistent headwinds.]

And despite the better news on housing, according to Zillow, more than 30% of borrowers, 16 million homeowners, remain underwater on their mortgage; though 9 out of 10 underwater borrowers are current on their payments.

Street Bytes

--Stocks rallied after three awful weeks, despite ongoing investor anger over the Facebook offering. The Dow Jones rose 0.7% to 12454, while the S&P 500 gained 1.7% and Nasdaq 2.1%. On the tech front the earnings picture was mixed with Dell missing estimates badly and Hewlett-Packard exceeding expectations. 

--U.S. Treasury Yields

6-mo. 0.13% 2-yr. 0.29% 10-yr. 1.74% 30-yr. 2.84%

The U.S. continues to benefit from the safe haven play, the best little whorehouse in a dirty neighborhood.

--The more we learn about the Facebook IPO debacle, the more it’s clear the little guy took it up the butt. For starters, the offering was way overpriced given the company’s fundamentals, but then we’ve learned there was extensive “selective disclosure” of information between the underwriters, in particular Morgan Stanley, which was cutting its revenue estimates, and institutional clients during the “roadshow” leading up to the IPO. It technically isn’t illegal to do so during this pre-offering period, but any other time, selective disclosure is. Wall Street firms must publicly disseminate information that could move the share price; in theory giving the retail investor the same information at the same time as the big institutions.

Morgan Stanley issued a statement saying it “followed the same procedures for the Facebook offering that it follows for all IPOs.” But it’s too late. All manner of state and securities-industry regulators are on the case and investor suits are being filed.

As for Nasdaq, its trading glitches only added to the headaches faced by both brokerages and investors. Executives there knew there could be software issues, especially if huge volume materialized, but went ahead with the offering anyway.

Meanwhile, Facebook had released a regulatory document three days into the roadshow discussing the fact that the more people use mobile phones rather than computers, the less likely they were to click on ads, let alone the fact advertising on mobile is difficult to begin with.

Lastly, founder and CEO Mark Zuckerberg married his longtime college sweetheart, Priscilla Chan, on Saturday. No word on the terms of any pre-nup, if indeed there is one, though it seems anything he earned before the marriage is solely his property afterward. In California, anything either partner earns or acquires after marriage is considered communal property.

--There is much talk of China’s slowing economy. HSBC’s flash estimate of May PMI was 48.7, down from 49.3. The April leading economic indicators figure, however, was up a decent 0.8% in April vs. March.

Nonetheless, everyone is lowering their growth forecasts for 2012, though not significantly…yet. The OECD, for example, pegs it at 8.2% for 2012 and 9.3% for 2013. Like whoopty-damn-do if that proves to be accurate. What’s the concern then? The World Bank lowered their forecast from 8.4% to the same 8.2%. Morgan Stanley is projecting 8.5% for the year, down from an earlier forecast of 9.0%.

But Premier Wen Jiabao is urging renewed efforts at growth, calling the current situation “complex.”

Consumer spending is not picking up the slack as many thought it would. One Goldman Sachs analyst in Hong Kong told clients Chinese economic activity is “exceedingly weak.”

Forget what your personal feelings are about the place, and mine are decidedly mixed these days, but given the global structure of the economy today, we need China to do well.

Geopolitics, the issue of stealing secrets, etc. are totally different matters. As negative as you may get at times, remember that America’s farmers, for one, are fans of the place…and for good reason.

--Fitch Ratings cut the sovereign debt of Japan to A-plus, surprising the political leadership. Japan’s rating is now below that of rivals China and Korea. Fitch blasted the government for its “leisurely” approach to dealing with its massive deficits, 200% of annual GDP, the highest among industrialized nations; even as investors pour more money into Japanese government bonds because they are perceived as more of a safe haven than Europe, for example.

Now many have said for years not to worry about Japan because over 90% of its government bonds are held domestically, as opposed to the situation in Europe with the southern periphery. But it’s been one weak government after another in Japan and the politicians must take action soon.

--Thailand reported a surprise decline in exports for April because of falling demand in the U.S. and Europe, down 3.7% from a year earlier. Analysts had forecast an increase of 3%. Not good.

Earlier, though, Thailand reported GDP rebounded 11% in the first three months compared to the previous three months, though just 0.3% on an annual basis. The worst flooding in decades hit the country late last year making for an easy quarter-to-quarter comp.

--Analysts say Macau’s gambling revenue for the month of May could increase only about 11%, year-over-year vs. April’s 22% growth and far headier rates in 2010 and 2011. Should the 11% rate pan out, it would be the lowest number recorded since July 2009. But revenues would still be a record for a single month. Of particular interest is how much Chinese VIP spenders are being crippled by bad debt.

Eventually, growth in Macau could be hit by new casinos going up in the Philippines and Vietnam. There’s already an impact from Singapore’s casinos.

--Discount airline king Ryanair reported record annual profits for the first quarter, 503 billion euros, as revenues increased by 19%.

--The FDIC said the banking industry earned $35.3 billion in the first quarter, up from $28.7 billion in Q1 of 2011 and the highest level since the second quarter of 2007. About 67% of U.S. banks reported improved earnings.

But bank loans to consumers, like for credit cards and home mortgages, fell.

--In the continuing fallout from its trading debacle, JPMorgan Chase suspended its share buyback program out of prudence, as CEO Jamie Dimon put it. Estimates on the ultimate loss from the bad trade in its Chief Investment Office unit now range up to $6 billion.

--The global wheat crop has gone through some major ups and downs the past three years. We had a historic drought in Russia and Australia in 2010, and then bumper crops in 2011 as rainfall returned to normal, and now we’re back in drought conditions in Russia and Ukraine, as well as a very dry May in Kansas, so the U.S. Dept. of Agriculture is expected to cut its global crop estimate significantly next month, according to analysts surveyed by Bloomberg. Ergo, the price of wheat has been surging in recent weeks.

But…rain is coming for the key Russia/Ukraine growing regions.

--Hewlett-Packard has settled on 27,000 job cuts by end of 2014, about 8% of its workforce, which the company claims will reduce costs by up to $3.5 billion a year.

HP did release earnings and revenues for its first quarter that were better than expected, though profits fell 31% over year ago levels.

CEO Meg Whitman, who joined HP in September after heading up eBay, said the strategy to turnaround the company is on track. 

--Meanwhile, Dell missed Street forecasts badly for both earnings and revenues for its second quarter. Dell is the world’s third-largest personal computer maker by shipments but is suffering with the shift among both consumers and businesses away from desktops and laptops to mobile alternatives, such as Apple’s iPad and other tablet computers. Dell’s notebook business contracted 10% in the quarter. Overall U.S. sales fell 7%.

--Congratulations to Ford Motor for regaining its investment-grade rating from Moody’s. A spokesman for Moody’s said:

“The key factor…was whether or not the company would be able to sustain its strong performance. We concluded that the improvements Ford has made are likely to be lasting.”

As of March, it helps that Ford’s cash and liquid assets were about $32 billion.

--Tiffany reported worse-than-expected results for the quarter and reduced its outlook for 2012. The luxury retailer is often a good barometer of the overall economy and the company reported a drop in crowds at its flagship Fifth Avenue store as the number of tourists from Europe and Asia declined.

--From Jack Farchy / Financial Times

“U.S. manufacturers have attacked plans by JPMorgan Chase to launch an exchange-traded fund backed by physical copper, arguing that the product would ‘grossly and artificially inflate prices’ and ‘wreak havoc on the U.S. and global economy.’

“Copper’s use in electrical wiring makes it essential to the manufacturing industry.

“In a letter to the Securities and Exchange Commission, lawyers representing the copper consumers say the impact of the ETF on the copper market would be comparable to the Sumitomo trading scandal of 1995-96, which sent prices sharply higher.

“JPMorgan is among several groups trying to capitalize on investors’ interest in industrial metals by launching a fund that allows them to access physical copper directly.”

No way this should be allowed. This is different than some of the existing offerings in precious metals such as gold and silver because of the prevalence of copper in so many products.

--The Times-Picayune of New Orleans announced it will scale back the printed edition to just three days a week, making the Big Easy the most prominent U.S. city without a daily newspaper.  Since Hurricane Katrina in 2005, the paper’s daily circulation has declined from 261,000 to 132,000.   According to the Audit Bureau of Circulations, nationwide, papers with a circulation of 25,000 or more had a 21% drop in circulation between 2007 and 2012. 

The Times-Picayune, owned by the Newhouse family, will offer print editions on Wednesday, Friday and Sunday. The move was followed by similar reductions at three other Newhouse papers, all in Alabama.

--Inflation Alert: A one-day ticket at Disneyland is rising 9% this summer. A premium annual pass that includes parking is going up 30%. [I’m having an “It’s A Small World” flashback from my only trip there as a kid…not a good memory.]

--Dogs occupy the No. 1 slot on your editor’s proprietary All-Species List (Man is No. 203), but dogs shouldn’t get too cocky. According to the Insurance Information Institute, dog bites accounted for more than one-third of homeowners insurance liability claims paid in 2011. State Farm, the largest writer of homeowners insurance in the U.S., paid more than $109 million on nearly 3,800 dog bite claims.

Granted more people own dogs these days, they live closer to one another, and many folks deserve to get bit.

--Sports betting could be coming to New Jersey’s racetracks and casinos by the fall. Yippee!   Gov. Chris Christie said my state will act on its own to implement it, defying a federal ban on such wagering in all but four states, claiming he’s confident the state will prevail when the Feds try to stop it. About freakin’ time. Take the Jets and the points at New England on Oct. 21.

--Kudos to United Airlines for telling families with small children they can wait their turn like every other schlep. And if the kids misbehave, United said it would force them to take a stagecoach instead.

--80% of all visitors to the London Olympic Games will pass through Heathrow Airport. Talk about a nightmare. They’ve been running baggage drills and say hundreds of extra border staff will be brought in to ease the lines at passport control but no way will it be an efficient operation.

--In the OECD’s annual Better Life Index, which looks into criteria such as jobs, income and health, Australia comes out on top as the happiest industrialized nation in the world, ahead of Norway and the U.S.

Of course if you’re not careful you could get devoured by a crocodile, or killed by a poisonous snake or spider in the land Down Under, but you have superb premium beer at a reasonable price (as opposed to Norway where you have to take out a second mortgage just to buy a case and the U.S. where, unless it’s Yuengling or Shiner Bock, you’re talkin’ domestic).

--The city of Los Angeles is adopting a ban on plastic bags at supermarket checkout lines. I’m all for this one. We never should have changed from paper anyway. 

[The Trumbore Family treats paper bags from Trader Joe’s like gold because of the handles. It’s the perfect Christmas gift, too.]

Foreign Affairs

Iran: Nuclear arms talks in Baghdad ended without agreement after two tense days of negotiations between Iran and the P5+1 (U.S., Britain, France, Russia, China and Germany). A call for Iran to cease production of 20% enriched uranium was rejected by Tehran, which days earlier had offered the U.N.’s International Atomic Energy Agency (IAEA) inspectors access to the disputed military base at Parchin, where it is suspected Iran has been conducting explosives tests tied to a nuclear weapons program. 

But, nothing was actually signed between Iran and the IAEA, yet Iran thought this single gesture would convince the West to ease international sanctions on its banking system and oil exports. The P5+1, even including Russia and China, has been steadfast that Iran halt its production of highly-enriched uranium, one short step from bomb-grade material, and dismantle the underground site at Qom. In return, the West was prepared to offer Iran needed spare parts for its civil aviation operation.

Said Iranian issue specialist Hassan Abedini, “Giving up 20% enrichment levels in return for plane spare parts is a joke. The package is unbalanced and therefore unacceptable.”

“Unbalanced” is the key word used by all manner of Iranian officials this week. But the P5+1 maintained that any relaxation of sanctions, due to come into effect July 1 in terms of banking and oil, would only come after Iran adopted some confidence-building measures.

But a new round of talks is slated for Moscow, June 18, so Iran can continue doing what it has been doing, stalling for time while it continues with the enrichment program.

For its part, however, Israel will not just wait forever before striking Iran. As even a high-level U.S. government insider conceded to the AP, “We still think we have some time for diplomacy, but it’s not indefinite.”

I’m guessing if no real progress is made in Moscow, the only question for Israeli Prime Minister Benjamin Netanyahu will be whether he attacks before or after the U.S. presidential election?

And in a new Pew poll, 63% of Americans think military force should be used to keep Iran from obtaining nukes, while slim majorities in Britain, France and Germany back such a course.

Syria / Lebanon: As I’ve been concerned about for months in this space, the violence in Syria is beginning to spill into Lebanon with increasing intensity. There were a series of sectarian gun battles in Beirut; the first the result of an accidental shooting of two anti-Syria Sunni Muslim clerics at a Lebanese army checkpoint near Tripoli, which led to a neighborhood battle in Beirut that killed several, and then later in the week, Syrian rebels kidnapped up to 16 Lebanese Shiites returning from a religious pilgrimage in Iran through Syria. Again, this triggered violent protests, forcing Hizbullah leader Sheikh Nasrallah to hit the airwaves and appeal for calm, warning his Shia followers against revenge attacks. [The Lebanese captives were then released unharmed on Friday.]

After the first incident I contacted my friend in Beirut and he said the city, while tense, didn’t appear to be on the verge of erupting into widespread violence. I did not reach out to him after the second wave.

Then, in yet another incident in Beirut, one in which two were killed, one of the gunmen who was arrested after not only has ties to al-Qaeda, but he is said to have been linked to the 2005 assassination of former Prime Minister Rafik Hariri.

It doesn’t help that the Lebanese government is totally dysfunctional and one can just hope the Lebanese Army stays strong.

As for Nasrallah, he is a major ally of Syrian President Bashar Assad, of course, with Hizbullah getting its funding and arms from both Syria and Iran.

And at the NATO summit in Chicago, the alliance ruled out military action against the Assad regime. NATO Secretary General Anders Fogh Rasmussen said, “We are very much concerned about the situation in Syria,” but the alliance has “no intention whatsoever to intervene.”

Editorial / Washington Post

“Why not? What happened to the ‘teachable moment,’ [Ed. Libya] just one year old? There’s a hint [in a Foreign Affairs article by Ivo Daalder, the U.S. ambassador to NATO, and NATO’s supreme allied commander, Adm. James Stavridis]: ‘The United States facilitated this rapid international reaction [in Libya],’ the authors boast. In truth, the leaders of France and Great Britain prodded the United States into action, and a chief goad, French President Nicolas Sarkozy, has since been turned out of office. But it is true that the Libyan action would not have taken place without the promise of substantial U.S. support. On Syria, that promise is missing.

“This is mystifying not just because the humanitarian stakes are as great in Syria as in Libya. As with Libya, NATO could support the Syrian opposition without putting its own troops at risk….Instead…Syria’s conflict, already increasingly violent, might well degenerate into full-blown sectarian warfare; this war could jump into Turkey, Lebanon and Iraq, and al-Qaeda would profit murderously from this opportunity.

“NATO leaders might feel that if they don’t talk about Syria, these outcomes won’t be blamed on them. They are, after all, preoccupied in their search for the exit from Afghanistan. But President Obama and his allies cannot shirk this issue indefinitely. As Syria burns, the Libya ‘victory’ rings increasingly hollow.”

It’s no wonder that the Syrian rebels ask why the Syrian people do not seem to have the same rights as the Libyan people had in taking up arms against the Gaddafi regime.

On Friday, Assad’s forces killed at least 50 civilians, including 13 children, in the central part of the country.

Egypt: I have to admit, I didn’t think the ruling Military Council would allow the presidential vote to go off as early as it did, plus I thought a new constitution would be written beforehand, but there we were this week, two days of voting, Wednesday and Thursday, in a truly historic moment.

What we now know is out of a field of 13 candidates, Mohamed Morsi, the Muslim Brotherhood’s candidate, emerged victorious and will face Ahmed Shafik, a former Air Force general who served briefly as Hosni Mubarak’s last prime minister, in the run-off next month, June 16-17.

The emergence of Shafik in the final weeks was a surprise, but his message of law and order resonated with voters (particularly Christians, who make up 10% of the population). One of those he defeated was Amr Moussa, the former foreign minister and secretary general of the Arab League who had been assumed to be the front-runner. I just have to point out that last week I wrote, in noting Morsi was third in the polls to Moussa and independent Islamist Abdel Abol Fotouh:

“Some are disappointed that the Brotherhood, after gaining the largest bloc in the new parliament last January, has accomplished little, but I look at the Pew Research survey and see 70% of Egyptians still have a positive view of the Brotherhood, albeit down from 75% last year. So the first round of voting could yet yield a surprise or two.” 

So we have a most fascinating finale coming up, albeit a highly disturbing one. Morsi has promised to implement Islamic law if elected, as well as review the 1979 Camp David peace treaty with Israel. He hates both Israel and the U.S. Shafik is a hardliner…a probable dictator.

The other big issue is the role of the military, post election. The current rulers are looking for the next constitution to safeguard their power and independence, including a budget that they insist is protected from public scrutiny.

Ah yes…the Arab Spring. What a mess.

Afghanistan: At the aforementioned NATO summit, the 50 members and allies declared an “irreversible transition” that will put Afghan forces in the lead of the combat by the middle of 2013, this as new French President Francois Hollande reiterated a campaign promise that France would withdraw its 3,400 combat troops by the end of 2012, two years before the timeline agreed to by the coalition previously. What they will leave behind is going to be a nightmare…nothing but corruption and political instability.

While predicting some “bad moments” in the next two years, President Obama said it was nonetheless time to “responsibly bring this war to an end,” while British Prime Minister David Cameron said, “The message to the Afghan people is that we will not desert them.” To which most Afghans I’m sure said, ‘whatever.’

This whole situation is immensely depressing. The London Times reported that the Taliban and Afghan army have a pact to loot NATO supply convoys, dividing up the proceeds. “They even share intelligence about military operations.”

“We lost seven men in an ambush when I first arrived at the base,” explained Afghan army lieutenant Mohammad Wali, who commands 18 men. “So I thought, why risk my life when there’s another way?”

These are the troops NATO is turning the operation over to. There is also growing evidence that what I’ve been writing for years now, that American commanders are way overstating any successes, is indeed the case. The Pentagon, for example, claims 40% of operations are already led by Afghans, but Michael O’Hanlon of the Brookings Institution, who visited Afghanistan last week, said almost all were simple operations. [London Times]

So what will it mean when we say we’ve turned over City X to the Afghans if they are themselves in alliance with the Taliban? It’s insane.

And if the above isn’t bad enough, there was a report that “130 girls and three female teachers (had) fallen ill after ‘poisonous gas’ was released in their school in northern Afghanistan, an official says.” [Sydney Morning Herald]

This was the third such incident within a month. The gas hasn’t been identified as police blame the Taliban. During Taliban rule, 1996-2001, girls weren’t allowed in school.    The Afghan Education Minister said earlier in the month that at least 550 schools remain closed due to insecurity, affecting more than 300,000 students in 11 provinces where the insurgency is strong.

Again, don’t listen to our generals when they speak of successes.

Pakistan: Related to the above, President Obama gambled that he could get Pakistan to finally reopen supply routes into Afghanistan if he invited Pakistani President Zardari to the NATO summit, but Zardari then refused to open them up. Obama was forced to admit:

“I don’t want to paper over real challenges there. There’s no doubt that there have been tensions between [the NATO military coalition] and Pakistan, the United States and Pakistan over the last several months.”

The main supply route has been shut since the Nov. 26 accidental U.S. airstrike that killed 24 Pakistani soldiers. Islamabad continues to demand an unconditional apology. The administration refuses to apologize, claiming both sides made mistakes.

And tensions between our two nations boiled over further by week’s end after Pakistan chose to sentence a doctor who led the CIA to Osama bin Laden’s door to 33 years in prison for treason.

“What Dr. (Shakeel) Afridi did is the furthest thing from treason,” Senators Carl Levin and John McCain said in a joint statement. “It was a courageous, heroic and patriotic act which helped to locate the most wanted terrorist in the world, a mass murderer who had the blood of many innocent Pakistanis on his hands.”

Dr. Afridi had helped the CIA organize a fake vaccination program in an attempt to extract DNA from inside the bin Laden compound. While this failed, Afridi did get the phone number for the compound’s owner, who proved to be bin Laden’s courier and right-hand man.

Pakistan, in turn, felt humiliated by the whole bin Laden action and chose to make an example of Afridi. The U.S. in response announced it would withhold $34 million in aid to the country now that the sentence has been handed down.

Yemen: I understand only one or two percent of the American people, max, give a damn about this place, but I’ve written that I’m exceedingly uncomfortable with the triumphalism exhibited by the Obama administration when it comes to its successes against al-Qaeda. Ask the Yemenis today if they believe al-Qaeda is largely a spent force. On Monday, at a rehearsal for National Day celebrations (marking the 1990 reunification of north and south Yemen), an al-Qaeda suicide bomber killed over 100 soldiers, one of the largest single terrorist acts in the world in years.

North Korea: According to the South Korean Defense Ministry, North Korea appears to have placed an atomic device inside the new tunnel excavated at the country’s nuclear test site. Said a spokesman for the ministry, “This means they can conduct a nuclear test any time.” But the spokesman added it did not appear a “political decision” had been made to proceed with the detonation.

Serbia: Nationalist Tomislav Nikolic defeated liberal incumbent Boris Tadic in the run-off for president of Serbia by two points. It had been thought Tadic would win re-election.

Nikolic said “Serbia will not stray from its European path,” but many question whether this will indeed be the case; Nikolic, after all, serving as a deputy prime minister under former Yugoslav President Slobodan Milosevic. He once said he would rather see Serbia ally itself with Russia over the EU but supposedly has softened that stance.

Serbia is plagued by 24% unemployment and massive debt.

Russia: Opposition leader Alexei Navalny was released from prison after 15 days, striking a defiant tone and vowing to scale up the protests, with Navalny specifically calling for activists to prepare for nationwide demonstrations in the beginning of September, while another opposition figure released at the same time, Sergei Udaltsov, called for his followers to stage a continuous protest outside the White House (Moscow’s version).

Separately, there was a heated debate in the State Duma over a proposed bill that would increase fines to tens of thousands of dollars for staging and taking part in illegal protests. The bill narrowly passed the first round and a second vote is to take place in early June. This could be explosive if enacted.

Former Finance Minister Alexei Kudrin and his think tank released a report on Thursday laying out various scenarios for Russia’s future.

“Things could spiral down into violence and chaos if the government responds too harshly to the ongoing street demonstrations or if the Russian economy slows or dips in the wake of Europe’s mounting woes, the study said.” [The Moscow Times]

The problem with Europe’s debt crisis crossing into Russia involves energy prices, which would tumble further than they already have (barring an attack on Iran) and of course its oil and natural gas that are responsible for the lion’s share of the government’s revenues.

So what has Russian President Vladimir Putin been up to the past week, he having blown off the G-8 at Camp David, sending Prime Minister Medvedev in his stead? He unveiled a new government dominated by loyalists, including his old KGB cronies (Sergei Ivanov and Nikolai Patrushev in the posts of chief of staff and head of the presidential Security Council, respectively), while leaving Foreign Minister Sergey Lavrov and Defense Minister Anatoly Serdyukov in place.

The appointments were made on Monday. On Wednesday, however, Putin pulled a major surprise in decreeing that planned privatizations into the energy sector would be cancelled amid signs of intensified infighting among Moscow’s political elite. This was a huge blow to Medvedev, who had said he would push pro-growth policies built in no small part around privatizations. It was also a big blow to investors as Moscow’s benchmark RTS index finished down 4.4% following the announcement.

And who is a key factor behind Putin’s move? Why if it isn’t Igor Sechin, the “third force” I have long argued could eventually take down Putin. Sechin, as part of the reshuffling in the Kremlin, was left without a place in government but instead was named CEO of Rosneft, the state oil giant. Privatization would mean selling off stakes in companies like Rosneft. As one banking official put it in Moscow, “Rather than seeing privatization we could see further consolidation around Rosneft.”

More power for Sechin. Putin thinks he is taking care of his friends. Instead this is the beginning of the summer of the long knives, and I reiterate my long held stance that Putin doesn’t make it through the end of the year, though the first victim could be Medvedev, who may step down out of frustration and move overseas. He is far from an electric personality, but I honestly believe he has the best interests of his country at heart. No one else around him does. The Russian Mob is firmly in control.

China: Blind activist Chen Guangcheng arrived in New York on Saturday after the month-long diplomatic drama. It is encouraging that the two sides were able to hammer this out, even though there is little doubt Chen’s family and relatives back home will suffer as a result of his release.

Meanwhile, in the case of disgraced one-time high-flyer Bo Xilai, it appears the trial of Wang Lijun, Bo’s former police chief in Chongqing, is about to begin. Wang, who fled to the U.S. consulate before being turned over to authorities, will be tried for treason and faces the death penalty. The outcome will be a good harbinger of what awaits Bo and his wife, Gu Kailai, a murder suspect in the death of the British businessman, Neil Heywood.

And on a totally different topic, the Senate Armed Services Committee said its year-long investigation into Chinese electronic parts used in U.S. military aircraft, launched by Democratic chairman Carl Levin and Republican John McCain, “uncovered 1,800 cases of bogus parts, including on the U.S. Air Force’s largest cargo plane, special operations helicopters and Navy surveillance planes.” 

The 112-page report “outlines how this flood of counterfeit parts, overwhelmingly from China, threatens national security, the safety of our troops and American jobs,” Levin said.

“The report also said the Chinese government denied visas to committee staff to travel to the Asian giant as part of the committee’s probe, with a Chinese embassy official saying the issue was sensitive and that a negative report could end up ‘damaging’ U.S.-China relations.” [AFP/South China Morning Post]

Lastly, Taiwan’s intelligence chief says China is planning on building two aircraft carriers in addition to the retrofitted former Soviet carrier now in trials.

Random Musings

--In a Wall Street Journal/NBC News poll, President Obama tops Mitt Romney 47% to 43%, but nearly half of Americans said the country is at the start of a long-term decline. Only one-third said the country is on the right track. Obama has an overall job approval rating of 48%. 

Additionally, over half disapprove of the president’s handling of the economy. The Journal notes, though, that attitudes are “strikingly similar” to views held at this point in 2004.

For Romney, “More than one in four Americans say having a Mormon as president would cause concern for themselves or someone in their family, neighborhood or office.”

--A Washington Post-ABC News nationwide survey has Obama at 49% and Romney at 46%. On handling the economy they are tied at 47%. Obama’s job approval in this poll is 47%, the exact same reading as George W. Bush in 2004 at this stage.

--Also in the Post/ABC poll, 53% of Americans say gay marriage should be legal, compared with just 36% who felt that way six years ago.

--In a Wall Street Journal/NBC News and Telemundo survey, among Hispanic registered voters, 61% said they would vote for President Obama if the election were held today, while 27% would choose Romney. Worrisomely for Romney supporters, among Hispanics only 26% view him positively and 35% see him in a negative light, while the split is 58-23, positive-negative, for Obama.

40% of the Hispanic vote is what it appears Romney needs for victory, that being George W. Bush’s share in 2004. In 2008, Sen. John McCain took 31%. 

--In reading various analyses of the presidential election, including Karl Rove’s in the Wall Street Journal, as close as it now seems, no matter how you slice it, there is no Republican victory unless Romney takes Florida and Ohio, and then gets help elsewhere.

The latest Quinnipiac University poll in Florida has Romney ahead of Obama 47-41, a huge swing from two months ago when Obama was leading 49-42. Obama’s unfavorability rating in Florida is now at 50% vs. Romney’s 35%.

A series of Marist polls, however, has Obama leading Romney in Florida, 48-44, while the president also leads in Ohio (48-42) and critical Virginia (48-44). But, Obama’s lead in all three, according to Marist, was between 8 and 17 points back in March.

[In key Senate races, Marist has Sen. Bill Nelson (D-Fla.) leading Republican Rep. Connie Mack 43-38, while in Virginia former Democratic National Committee chairman Tim Kaine leads former senator George Allen (R) 46-40.]

--What was once a 10 to 1 cash advantage for Obama over Romney at the end of March is down below 2 to 1. Plus GOP super PACs are going head-on against Obama’s campaign in TV advertising, allowing Romney to spend more of his millions on his ground operation.

Then again, Obama can keep tapping his Hollywood crowd, such as a recent $25,000-per person dinner in Beverly Hills that featured a performance by Pink. [Pink’s a ‘dirty girl.’]

--As George Will opines in the Washington Post, Massachusetts Democratic Senate candidate Elizabeth Warren has turned herself into a laughingstock over her claims she is a minority, specifically part Cherokee.

“The kerfuffle that has earned Warren such sobriquets as ‘Spouting Bull’ and ‘Fauxcahontas’ began with reports that Harvard Law School, in routine academic preening about diversity (in everything but thought), listed her as a minority faculty member, as did the University of Pennsylvania when she taught there. She said that some in her family had ‘high cheekbones like all of the Indians do.’ The New England Historic Genealogical Society said that a document confirmed the family lore of Warren’s Cherokee ancestry, but it later backtracked. She has said that she did not know Harvard was listing her as a minority in the 1990s, but Harvard was echoing her…

“So, although no evidence has been found that Warren is part Indian, for years two universities listed her as such. She has identified herself as a minority, as when, signing her name ‘Elizabeth Warren – Cherokee,’ she submitted a crab recipe (Oklahoma crabs?) to a supposedly Indian cookbook. This is a political problem.

“A poll taken before this controversy found her Republican opponent Scott Brown trouncing her on ‘likeability,’ 57 percent to 23 percent. Even Democrats broke for Brown 40 to 38. Now she is a comic figure associated with laughable racial preferences.”

Pssst…I’m part Sioux…at least I’m saying so on my Indian casino application. I’d like to have a high-end one. No slots. Just blackjack and poker tables.  Perhaps a nice steakhouse that would serve buffalo.

--The Archdiocese of New York is among dozens of dioceses, schools and other institutions suing the Obama administration to block the mandate requiring employers to provide health insurance that includes birth control for workers.

Cardinal Timothy Dolan told the local NBC News affiliate that unless the administration blocks the requirement, the Catholic Church will have no choice but to stop serving the needy.

The suit was filed because the government is requiring the church to “provide, pay for and/or facilitate access to services” that are contrary to its beliefs.

Here’s the thing. In order to get a church-based exemption, the archdiocese of New York, for example, would have to prove 82% of those it serves in its various ministries are Catholics, but as Dolan points out, this means they would have to prove 82% of those in their soup kitchens, for example, are Catholic! That’s absurd.

When this issue first came up months ago, I said it could cost Obama the election by giving Romney an edge in some battleground states he may not otherwise achieve. Since then, virtually every pundit I’ve read says, no way, it’s not a game-changer. I maintain it could be; but that this election will be so close we may never prove there was one single deciding factor. If I’m the Democratic Party, however, I simply don’t see from a purely political standpoint why they would take this risk.

The Washington Post’s Michael Gerson wrote this week:

“In a blowout presidential election, a few large issues dominate. In a tight election, a range of smaller concerns – important to strategic constituencies in battleground states – can end up being crucial….

“I’ve previously argued that the Obama administration, motivated by instinctual liberalism, stumbled into this conflict with Catholic leaders. It is possible, however, Obama is making the political calculation that appealing to younger, non-religious voters is worth the alienation of traditional Catholics. Yet even if this strategy makes sense nationally, it might not be wise in, say, Pennsylvania or Ohio, where the votes of white Catholics could matter greatly.”

I’ve told you many times I’m Catholic…though not a good one these days. But I’ve always been proud of my church for what it’s done for the poor, around the world. Heck, my good friend, Father Bill, who is now ministering to retired priests at Fordham University, spent years and years in Nigeria…get this…taking care of lepers! 

Michael Gerson finished his opinion piece with a line from Thomas More in explaining how some Catholics may feel come Election Day.

“I die the king’s faithful servant, but God’s first.”

--Newark, N.J. Democratic Mayor Cory Booker went on NBC’s “Meet the Press” last Sunday and defended Mitt Romney, saying he was “nauseated” by one of the Obama team’s campaign tactics in going up against the Republican challenger. In comparing the attacks on private equity to those by the Right on Rev. Jeremiah Wright, Booker said:

“This kind of stuff is nauseating to me on both sides. It’s nauseating to the American public. Enough is enough. Stop attacking private equity, stop attacking Jeremiah Wright. This stuff has got to stop because what it does is it undermines, to me, what this country should be focused on. It’s a distraction from the real issues.”

Booker then added: “I have to just say, from a very personal level, I’m not about to sit here and indict private equity…Especially that I know I live in a state where pension funds, unions and other people are investing in companies like Bain Capital. If you look at the totality of Bain Capital’s record, they’ve done a lot to support businesses, to grow businesses.”

But then Booker, under pressure from the Obama campaign, was forced to do some damage-control Sunday night, posting a YouTube video saying attacks on Romney’s record as a job creator were legitimate and that the president “more than deserves re-election.”

Booker was humiliated. 

--Abdel Basset Ali Megrahi, the Libyan who was the only person ever convicted in the 1988 Lockerbie bombing, died this week, nearly three years after he was released from a Scottish prison for “humanitarian” reasons because he supposedly had just three months to live. He is now in Hell.

--33 years ago, the disappearance of six-year-old Etan Patz changed New York City, and the nation, forever. As Ed Koch, mayor of New York at the time of the boy’s disappearance, told the New York Post on Thursday following the arrest of a man who confessed to the murder of Patz, “It affected the way parents treat their children. Whenever possible, don’t let them out of your sight. It was strange, because children had been kidnapped before, children had been killed before, but nothing gripped the city like this ever, before or since.”

At one point 500 officers were working on the case as Etan’s parents worked tirelessly not only to try and find their son, but also other missing children.

Their lobbying efforts led to the 1982 Missing Children Act, which required the FBI to keep track of such cases. Etan became the first missing child to have his picture on a milk carton.

--Congratulations to the team at Space Exploration Technologies, SpaceX, for successfully flying an unmanned rocket to the International Space Station and docking it to become the first private vessel to reach the orbital outpost. Very cool…and hopefully the start of a truly exciting era that captures the imagination.

Just understand such efforts cannot be accomplished without significant government support, as SpaceX had, and the American people need to be told how important such funding is for our future.

--Headline in Thursday’s New York Daily News:

“Bill Clinton shares spotlight in Monaco with porn starlets Brooklyn Lee and Tasha Reign”

The accompanying photo is priceless. Ms. Lee, whom the former president had his arm wrapped around, was named “Best New Starlet” by trade magazine AVN, where she also picked up “Best Sex Scene.”

And that’s your Bill Clinton porn update for Sat., May 26.

--But wait…there’s more Clinton news!

From the Irish Independent’s Hannah Furness:

“An exclusive event hosted by Bill Clinton [Ed. for his Clinton Foundation Millennium Network] and attended by a host of celebrity friends has been criticized after guests who paid up to 1,200 euros for tickets were left queuing outside for hours.

“Attendees complained the underground venue in Waterloo in London ‘stank,’ with perspiration ‘dripping off the walls’ and the rooms too crowded to even see the former president.

“One, who called it the ‘worst party ever,’ described how ‘angry people’ were waiting in the queue outside while high-profile guests were admitted, and another condemned the event as ‘unpleasant.’”

Yuck.

Chelsea co-hosted, so I don’t think she has a future as an event planner.

--Sign of the Apocalypse:

“Edwards flirts with alternate juror during Senator’s financial fraud trial”

From the New York Daily News’ Glenn Blain:

“As jury deliberations continue in (John) Edwards’ campaign finance fraud trial, one gorgeous alternate juror has taken to openly flirting with the former presidential hopeful-turned-lying adulterer.

“The juror, a young woman with jet-black hair, has repeatedly giggled and flashed smiles at Edwards and was spotted flipping her hair back in a come-hither way, according to reporters in the courtroom.

“Friday, she arrived at court wearing a revealing red top, her right shoulder exposed.

“Edwards, clearly amused, has returned the woman’s advances with some smiles of his own – and was even seen blushing.”

Good grief.

--Lastly, this weekend marks the 40th anniversary of the triumph of a resident from my hometown of Summit, New Jersey…Mark Donohue Jr., who won the 1972 Indy 500. He is buried here and I pay my respects a few times a year, being a fan of the sport and having attended his funeral. 

Mark Donohue died in 1975 of injuries he sustained in a crash during practice for the Austrian Grand Prix.

---

On Memorial Day:

Think not only upon their passing
Remember the glory of their spirit*

*An inscription in a chapel at the American cemetery at Normandy.

God bless America.
---

Gold closed at $1571
Oil, $90.86

Returns for the week 5/21-5/25

Dow Jones +0.7% [12454]
S&P 500 +1.7% [1317]
S&P MidCap +3.2%
Russell 2000 +2.6%
Nasdaq +2.1% [2837]

Returns for the period 1/1/12-5/25/12

Dow Jones +1.9%
S&P 500 +4.8%
S&P MidCap +6.3%
Russell 2000 +3.4%
Nasdaq +8.9%

Bulls 38.3
Bears 26.6 [Source: Investors Intelligence]

The StocksandNews.com iPad app is the perfect gift for high school and college graduates; a very cheap one.

Have a great week. Enjoy the holiday.

Brian Trumbore