Week in Review

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Week in Review

02/09/2013

For the week 2/4-2/8

Washington

President Obama gives his State of the Union Address on Tuesday and, according to a Rutgers University survey, as cited in the Washington Post, the state of the union is miserable.

One in four respondents said they were laid off at some point during the past four years. Nearly half said they took a step down in status with their next position, while 54% said they have had to accept lower pay. Among these, 2/3s said it was at least 11% lower. Only 1 in 5 believes jobs and career opportunities will be better for the next generation.

So President Obama will no doubt talk about a ‘new economy,’ ‘building an economy that will last,’ ‘an economy that benefits all and not just the few,’ plus he’ll likely address the coming sequester, the March 1 deadline for $1.2 trillion in automatic spending cuts over the next ten years. This week he talked of a smaller, short-term deal, to buy time to work on a bigger one and thus not hurt the economy at a fragile time.

As I continue to plow ahead with this history of our times, various opinion.

“So President Obama’s call Tuesday for an interim deal that would put off sequestration, pending a broader long-term deficit-reduction plan, is welcome – indeed overdue. Republicans in Congress had all but accepted sequestration, out of their professed desperation for some spending cuts, any spending cuts. Mr. Obama cannot responsibly let that happen, especially in the wake of a report showing that defense spending plunged in the last three months of 2012, dragging the economy down a bit with it.

“What was missing were specifics: Exactly what would Mr. Obama put in the ‘smaller package of spending cuts and tax reforms’ that he proposes? He doesn’t want to present a detailed plan before the GOP agrees to deal on his terms. House Speaker John Boehner doesn’t want to talk about a short-term deal that includes any new revenue....

“How to get the two parties from here to there is a challenge, to say the least. But Mr. Obama may have contributed Tuesday in two ways. First, he rhetorically de-escalated the drama, saying that he and Congress should ‘keep on chipping away at this problem together, as Democrats and Republicans.’

“Second, he indicated that the combination of entitlement cuts and revenue-raising through tax reform that he and Mr. Boehner discussed during their year-end ‘fiscal cliff’ negotiations is ‘still on the table.’ No doubt some in Mr. Boehner’s party, having seen previous ‘grand bargains’ fail – or believing that their embrace of sequestration has given them leverage over the president – will be tempted to dismiss Mr. Obama’s overture. But it would be a tragedy for the country to leave it untested.”

“Washington is in a fit of collective terror over the ‘sequester,’ aka the impending across-the-board spending cuts. Trying to explain the zero economic growth at the end of 2012, White House spokesman Jay Carney blamed Republicans for ‘talk about letting the sequester kick in as though that were an acceptable thing.’ He left out that President Obama proposed the sequester in 2011....

“The sequester that nobody seems to love would cut an estimated $85 billion from the budget this fiscal year starting in March. Half of the savings would come from defense and half from domestic discretionary programs. Medicare providers would take a 2% cut. This ‘doomsday mechanism,’ as some in the Administration call it, was the fallback when the White House and Republicans couldn’t agree during the 2011 debt-ceiling negotiations....

“Republicans have rightly concluded after two years of being sucker-punched that the sequester is the main negotiating leverage they have and may be the only way to restrain spending. So now Democrats and a gaggle of interest groups are denouncing Mr. Obama’s fiscal brainchild because the programs they cherish – from job training to education, to the EPA and energy subsidies, to money for Planned Parenthood – are about to get chopped too.

“Fear not. As always in Washington when there is talk of cutting spending, most of the hysteria is baseless.”

Take, for example, transportation funding. In 2008 the budget for this was $10.7 billion. In 2013 it will be $17.9 billion.

“Education spending more than doubled in Mr. Obama’s first two years and is up 18.6% to $68.1 billion from 2008-2013....

“The bad news for Congressional Democrats and their spending interests is that the noose only tightens after this year. Mr. Obama’s sequester mandates roughly $1.2 trillion of discretionary cuts over the next decade. But if Democrats really want to avoid a sequester, they should stop insisting on higher taxes and start getting serious about modernizing the entitlements like Medicare and Medicaid that comprise the other 60% of government. If they won’t, then sequester away.”

“(Tuesday), Obama demanded a ‘balanced approach,’ coupling any cuts with new tax increases.

“Republicans should explain – message No. 1 – that in the fiscal-cliff deal the president already got major tax hikes with no corresponding spending cuts. Now it is time for a nation $16 trillion in debt to cut spending. That’s balance.

“The Republicans finally have leverage. They should use it. Obama capitalized on the automaticity of the expiring Bush tax cuts to get what he wanted at the fiscal cliff – higher tax rates. Republicans now have automaticity on their side.

“If they do nothing, the $1.2 trillion in cuts go into effect. This is the one time Republicans can get cuts under an administration that has no intent of cutting anything. Get them while you can.

“Of course, the sequester is terrible policy. The domestic cuts will be crude and the Pentagon cuts damaging. This is why the Republican House has twice passed bills offering more rationally allocated cuts....

“Naturally, the Democratic Senate, which hasn’t passed a budget since before the iPad, has done nothing. Nor has the president – until his Tuesday plea.

“The GOP should reject it out of hand and plainly explain (message Nor. 2): We are quite prepared to cut elsewhere. But we already raised taxes last month. If the president wants to avoid the sequester – as we do – he must offer a substitute set of cuts....

“The country needs tax reform. But first it needs to rein in out-of-control spending. To succeed in doing that, Republicans must remain united under one demand: cuts with no taxes – or we will let the sequester go into effect.”

But after reading all the above, George Will, from his Washington Post perch, had a column on why we need a constitutional amendment to require balanced budgets.

Will brings up Nobel laureate economist James Buchanan, late of George Mason University, who passed away last month at 93.

Buchanan pioneered the “public choice” school of analysis. As Will writes:

“Public choice theory applies economic analysis – essentially, the study of how incentives influence behavior – to politics.

“Public choice analysis began in the 1960s, when Washington’s social engineers were busy as beavers building a Great Society and confidence in government reached an apogee that prudent people hope will never be matched. Public choice theory demystified politics by puncturing the grand illusion that nourishes government growth. It is the fiction that elected politicians and government administrators are more nobly motivated, unselfish and disinterested than are persons acting in the private sector....

“Six days after Buchanan died, House Republicans provided dismal (and redundant) validation of public choice theory. Rep. Mick Mulvaney (R-S.C.), supported by Majority Leader Eric Cantor and Budget Committee Chairman Paul Ryan, proposed offsetting just $17 billion of the $60 billion aid for victims of Superstorm Sandy and doing so by cutting just 1.63 percent form discretionary government spending. Rep. Hal Rogers (R-Ky.), chairman of the Appropriations Committee, said this would ‘slash and burn’ important programs, and the measure failed because 71 Republicans opposed it.

“The political class is incorrigible because it is composed of – let us say the worst – human beings. They respond to incentives of self-interest. Their acquisitiveness is not for money but for the currency of power, which they act to retain and enlarge. This class can be constrained, if at all, not by exhorting them to become disinterested but by binding them with a constitutional amendment.”

Meanwhile, related to all the above, the Congressional Budget Office issued a revised forecast for the budget deficit for fiscal 2013, ending Sept. 30, and it’s $845 billion, or the first Obama administration deficit under $1 trillion, yet it would stretch the five-year cumulative deficit to about $6 trillion.

The deficit, given 1.4% GDP growth in 2013, rising to 3.4% by fourth quarter 2014, then glides down for a few years before it ramps back up again due to both rising entitlement spending and interest expense on the debt. I lay out all the figures in my Feb. 6 and 7 “Nightly Review” videos, accessible through the home page (or youtube.com/stocksandnews...or my iPad app), so spend five minutes (cut out all the other stuff if you want), but the CBO also talks of sequestration, coupled with the payroll tax hike and other tax increases, as combining to cost 1.5 million jobs, so look for the president to hammer away at that topic as well in his SOU.

The bottom line, when you look at the long-term budget picture, is it’s really true. Entitlement spending will kill us. The time to act is now. But our president refuses to lead and the Republican Party is a freakin’ mess.

Here’s the real danger, though. A few weeks ago I cited an op-ed by former Deputy Treasury Secretary Roger Altman, a highly respected Democratic voice. I wish he was going to be the new treasury secretary rather than Jack Lew.

Altman’s point was that we are already making substantial progress on the budget deficit, and it’s true that between previously agreed to budget cuts and now the new tax hikes, plus whatever we get out of the sequester debate, the budget deficit, as a percentage of the public debt, can stabilize around the 75% figure (90% is the danger point according to leading academics and economists).

But as Altman readily concedes, and as is my worry, we must attack entitlements now! Altman’s point is enough progress has been made where, assuming the economy starts to grow at 3% or so, we’ll buy ourselves time to work on the hard stuff.

Yet we know what Congress will do. They’ll just keep kicking the can down the road, which is why action must be taken this year. By 2014, we’re back into a new election cycle, nothing gets done, and as sickening as it is, the presidential political cycle begins to stymie action as well.

So Mr. President, for crying out loud, lead us; but not into a ditch.

There was some decent early news with the release of the final composite PMI (purchasing managers index) reading for the eurozone nations for January. The combined services/manufacturing figure for the 17 nations employing the currency came in at 48.6, up from 47.2 in December. Still contraction, but the best in ten months.

Germany’s reading was 54.4, the best since June 2011, but France fell to 42.7, the worst in four years.   Spain fell to 46.5 and Italy 45.4.

French President Francois Hollande then issued a warning over the strength of the euro, saying that while he wasn’t calling for the European Central Bank to set an exchange rate target, he demanded “an indispensable reform of [the] international monetary system.”

“If not we are insisting on countries making efforts to be competitive that are destroyed by the rising value of the euro.”

So a few days later, the ECB left interest rates unchanged at 0.75%, with ECB President Mario Draghi saying business confidence was returning, but the situation “remains fragile.” Banks are beginning to return some of the 1 trillion euro the ECB provided to keep them afloat, which is good, but it’s only 137 billion of it thus far.

“The economic weakness in the euro area is expected to prevail in the early part of 2013. Later in 2013,” said Draghi, “economic activity should gradually recover, supported by our accommodative monetary policy stance, the improvement in financial market confidence and reduced fragmentation, as well as a strengthening of global demand.”

Draghi added: “The exchange rate is not a policy target, but it is important for growth and price stability. We want to see if the appreciation is sustained, and if it alters our assessment of the risks to price stability.”

The euro fell sharply on Draghi’s words. Yes, he was aware of the serious issues, he seemed to be saying.

PIMCO’s Mohamed El-Erian, addressing the global currency issue, such as the policy being pursued in Japan, let alone the U.S., said, “I don’t remember central banks being so deep in experimental mode. It is equivalent to a pharmaceutical company that feels forced to bring a new medicine to the market even though it has not been properly tested.”

James Rickards, an expert on the topic and author of “Currency Wars: The Making of the Next Global Crisis,” told the Wall Street Journal’s Francesco Guerrera:

“People ask me who’s winning. I say nobody. I expect the international monetary system to destabilize and collapse. There will be so much money-printing by so many central banks that people’s confidence in paper money will wane, and inflation will rise sharply.”

In Spain, Prime Minister Mariano Rajoy moved to contain a corruption scandal enveloping his party, alleged secret payments to him and other party leaders. Many are calling for him to step down. Should he stay, he is severely weakened in terms of implementing his reform and austerity program. If he goes, austerity is out the window for sure. So either way Spain loses, as best reflected by a rise in the yield of the 10-year bond from 5.10% to 5.50%.

In a major newspaper poll, 90% of Spaniards believe corruption hurts the nation’s credibility and poses a risk of scaring away foreign investment. 

Rajoy allegedly received 25,000 euro a year from a slush fund from 1997 to 2008. He was party leader from 2004 to 2011. In a nationally televised address, Rajoy said:

“Never, I repeat, never, have I received undeclared money,” calling documents reportedly showing the payments “apocryphal.” 

“We must not allow Spaniards, of whom we are demanding sacrifices, to think that we do not observe the strictest ethical rigor.”

El Pais’ survey showed that Rajoy’s Popular Party would get 23.9% of the vote if a snap election were held today, down from the 44.6% it won in November 2011, when Rajoy was elected.

But the Socialist Party, which governed Spain for the previous eight years, would get an even lower vote, and its leader has a disapproval rating of 81%, compared with Rajoy’s 77%.

In Spain’s first sovereign bond auctions since the crisis, the yields demanded were substantially higher than those of a month earlier.

Italy’s bond yields have also been climbing as there is major uncertainty now over the outcome of the Feb. 24-25 parliamentary elections. Former Prime Minister Silvio Berlusconi has been making progress in the final polls as he slams the reforms of caretaker Prime Minister Mario Monti and Germany for forcing the painful cuts on the Italian people. Berlusconi vows to overturn them if his coalition wins, which doesn’t give bond investors a lot of confidence.

Lastly, EU leaders agreed to a new seven-year budget in Brussels on Friday after talks had collapsed three months ago. For the first time, the budget, covering 2014-2020, will see a decline in EU spending, a rumored 3% (it was all hush-hush, seeing as it still has to be approved by the European parliament).

British Prime Minister David Cameron, with help from German Chancellor Angela Merkel, insisted on deep cuts to reflect the austerity undertaken by many governments, while French President Hollande was calling for more EU spending to help battered economies. Merkel helped broker a compromise.

But the head of the Euro parliament said ‘not so fast.’ To be continued...

Street Bytes

--Stocks finished mixed, with the Dow Jones registering its first down week of the year, though off just 0.1% to 13992. But the S&P 500, up 0.3% to 1517, is not only at its highest level since Nov. 2007, but with a six-week winning streak out of the gate for 2013, it’s off to its best start since 1971! As for Nasdaq, also up six weeks in a row, it’s at its highest level in 12 years.

--U.S. Treasury Yields

6-mo. 0.11%  2-yr. 0.25% 10-yr. 1.95% 30-yr. 3.16%

--From the Barron’s Roundtable, PIMCO’s Bill Gross had some of the following on the bond market:

“The Fed is buying 80% of the Treasury market today. It is remarkable to think that when the Treasury issues debt in the trillion-dollar-plus category, the Fed ends up buying most of it. The Treasury sells it to the banks and primary dealers, who sell it back to the Fed at a higher bid. This is a very different financial system from the free-market capitalism we’ve come to know. And it will continue until inflation exceeds the upper end of the central bank’s target of 2.5% or, by some miracle, we get real economic growth.”

“That’s because central banks are buying the majority of bonds, and the cash flow from the existing stock of bonds, when reinvested, as most is, is more than the supply of bonds. A supply/demand squeeze at near-zero interest rates is nearly inconceivable. Yet that is close to where we are now.”

But with this Ponzi scheme, which I’ve noted in the past is exactly what Europe has seen as well, the game doesn’t end until inflation finally cranks up (the ‘official’ numbers, that is).

--China supplied us with some solid positives this week. The services PMI rose to 56.2 in January from 56.1 in December, and then the government announced January exports rose a far greater than expected 25% from a year earlier, while imports also surged, up 28.8%.

Exports to the U.S. rose 14.5%, the best in ten months, and 5.2% to the EU, the best here in 13 months.

The thing is, China’s numbers for January and February, if you are to believe them at all in the first place, are always skewed by the week-long Lunar New Year holiday. Last year it was in January. This year’s starts tomorrow. So some just wait until March, when the government gives comparisons for the combined Jan.-Feb. period.

One other item. Consumer prices rose only 2.0% in January from a year ago, 2.9% on food prices.

--Mike Ramsey and Vipal Monga of the Wall Street Journal had an important piece related to zero interest rates.

“Ford Motor Co. expects to spend $5 billion this year shoring up its pension funds, almost as much as the auto maker spent last year building plants, buying equipment and developing new cars.

“The nation’s second-largest auto maker is one of a who’s who of U.S. companies pouring cash into pension plans now being battered by record low interest rates....

“The drain on corporate cash is a side effect of the U.S. monetary policy...Companies are required to calculate the present value of the future pension liabilities by using a so-called discount rate, based on corporate bond yields. As those rates fall, the liabilities rise.”

Of course rising equity prices, which the Fed has been encouraging, can help bridge the pension gap.

--American Airlines parent AMR Corp. and US Airways Group Inc. are expected to formally announce they are merging early this coming week. The deal would return American to No. 1 in the world after years of distress. The new airline would have hubs at seven of the nine busiest U.S. airports along with a strong presence in Europe and Latin America. But the combination doesn’t have a strong presence in Asia. As one analyst put it, “China is the flashing red light this merger doesn’t address.”

--The major retailers reported a solid 5.8% sales upswing in January over the same month last year, beating analysts’ estimates. But this doesn’t include Wal-Mart or Best Buy which don’t report monthly same-store sales anymore, with others such as Macy’s and Target to follow; focusing on quarterly earnings instead. Macy’s actually reported a huge 11.7% advance in January.

--Ireland took what its government believes is a “historic step” in restructuring a chunk of Ireland’s bank debts without outright opposition from the European Central Bank, though not exactly a ringing endorsement, either.

The government is looking to exit from its international bailout by end of the year and while it doesn’t mean writing off any of its 64 billion euro in debt, it will stretch out repayments on almost half of it over a much longer timeframe, easing the country’s short-term funding requirements. Like in issuing long-term government bonds with maturities of up to 40 years to replace promissory notes, government IOUs. Irish taxpayers still have to pay off the debt represented by the notes, 28 billion, but over a longer period.

[Separately, auto sales in Ireland fell a whopping 18% in January over year ago levels.]

--The federal government is seeking $5 billion from Standard & Poor’s Ratings Services, though now several states, including California, are joining in on the fun as the Justice Department sued S&P for allegedly causing some banks and credit unions to lose $5 billion after relying on the ratings of mortgage-linked securities. S&P says the claims are “meritless.”

The suits allege S&P inflated its ratings to cater to the banks that helped arrange and sell the securities at the height of the housing bubble.

But it also smacks of payback for S&P’s historic downgrade of United States credit following Washington’s debt-limit fight in 2011. McClatchy Newspapers says around the same time, Moody’s, which did not downgrade the government, was dropped from the investigation into the ratings agencies. 

--Michael Dell is taking the computer maker he founded private in a $24.4 billion leveraged buyout, to be joined by Silver Lake Partners and Microsoft. Shareholders are being offered $13.65 per share, which is up from the Jan. 11 close of $10.88 before rumors surfaced of the move. But the stock was $18 last February, and, of course, over $50 back in 2000 before Nasdaq cracked. Many are saying Dell is exiting on the cheap. It’s also not known what he’ll do with the company in private that will really turn things around. Dell went from the No. 1 PC maker to No. 3 behind Hewlett-Packard and Lenovo.

--Greenlight Capital, a hedge fund run by short-seller/activist David Einhorn, sued Apple, believing Apple’s stock was grossly undervalued. Einhorn wrote:

“However, like many other shareholders, Greenlight is dissatisfied with Apple’s capital allocation strategy. The combination of Apple’s low (and shrinking) price to earnings multiple and $137 billion (and growing) hoard of cash on the balance sheet supports Greenlight’s contention that Apple has an obligation to examine all options to create and unlock additional value.”

Apple has $145 per share of cash on its balance sheet. “As a shareholder,” Einhorn wrote, “this is your money.”

At issue is Apple’s attempt to eliminate preferred stock from its corporate charter. Einhorn wants Apple to distribute a “perpetual preferred” stock that could pay a dividend yield of 4%.

--BlackBerry’s new Z10 smartphone got off to a strong start in Canada and is selling out in some stores in the UK. It will be introduced in the U.S. in early March.

--The U.S. Postal Service plans to end Saturday delivery of first-class mail by August, in an attempt to save about $2 billion a year, though will continue to deliver parcels six days a week, a service that has been growing 14% a year. It’s not known yet whether Congress will block this effort. Half seem to appreciate it’s the right thing to do, the other half of congressmen are worried about losing votes. The USPS lost $16 billion last year and has defaulted twice on required payments to the U.S. government. Since 2006, the agency has reduced costs by $15 billion and cut the workforce by about 193,000.

--Social networking site LinkedIn Corp. reported net income rose 66% on an 81% increase in revenue, handily beating Wall Street estimates and sending its shares up 10%. LinkedIn now has 202 million users, a 39% gain from the prior year. Not too shabby.

--The New York Times Co. saw advertising slide 8.3% in the fourth quarter from a year earlier, which actually wasn’t as bad as feared. Subscribers to digital editions of the Times and International Herald Tribune, meanwhile, increased 13.1% from September to 640,000.

--As noted in a report by the Financial Times, “Credit market investors are falling out of love with U.S. shopping malls as up to 15% of the country’s suburban retail centers are forecast to close over the next five years in the face of online competition.”

--Yum Brands (Kentucky Fried Chicken, Pizza Hut and Taco Bell) receives half its profit from China and has been expanding rapidly there, but same-store sales in China fell 6% in the fourth quarter, owing to both a slowing economy and, more importantly, a scandal over the quality of KFC’s chicken, some suppliers of which were said by the government to be using excessive amounts of antibiotics.

“Due to continued negative same-store sales and our assumption that it will take time to recover consumer confidence, we no longer expect to achieve earnings per share growth in 2013,” said CEO David Novak.

--The New York Times, the Wall Street Journal, the Energy Department, the Federal Reserve...not a day goes by when an organization or agency doesn’t confess that it was the victim of a cyberattack. But as a former Energy Department official noted, “It’s a continuing story of negligence,” as well as sophistication on the part of the hackers.

--Retail sales in Australia declined for a third straight month in December.

--Indonesia reported GDP expanded in the fourth quarter 6.1% compared with a year earlier. Indonesia and the Philippines have been rockin’ and rollin’ lately. Actually, the former has grown by an average 5.7% the past decade.

--Alcatel-Lucent CEO Ben Verwaayen is stepping down as the French-U.S. telecom gear maker continues to struggle. Since its creation in 2006, the combined company has racked up billions in losses, suffering from intense competition from the likes of Ericsson, China’s Huawei and Nokia Siemens Networks. In its latest restructuring effort, another 5,500 jobs are being eliminated.

What is depressing for some of us in my area is to drive by the company’s North American headquarters in Murray Hill, N.J. The massive parking lots, once filled to the brim during Bell Labs’ hey-day, are virtually empty. 

--Good news...Home Depot said it would be hiring 80,000 seasonal workers this spring versus 70,000 last year.

--National home prices rose 8.3% in December compared with a year earlier, according to CoreLogic, the 10th straight month of year-over-year increases. But four states saw declines: Pennsylvania, New Jersey, Illinois and Delaware. Prices jumped 20.2% in Arizona, 15.3% in Nevada and 14.6% in Idaho.

--You know who I want to succeed? Sirius XM Radio Inc. The company hung in there during very tough times (it didn’t help it way overpaid for some talent), and now thanks to the auto comeback and a growing number of paying subscribers, the company earned $156 million in the fourth quarter with revenue rising 14% to $892.4 million. Sirius said it has 23.9 million subscribers as of yearend, up 9% from the end of 2011.

--John Malone’s cable group, Liberty Global, is buying the UK’s Virgin Media in a cash and stock deal worth $23.3 billion that will create the world’s largest broadband company, with 25 million customers in 14 countries. 

The merger puts Malone in direct competition with Rupert Murdoch. Back in 2006, Virgin Media was created from the merger of NTL and Telewest, and Sir Richard Branson’s Virgin Mobile in 2006.

Branson, who started with a London record store and exploded from there, will reap $316 million from the buyout.

--I have written of the horsemeat scandal in Ireland and the UK, where some burgers were being sold in major supermarkets that contained equine enhancement.

Now, the leading maker of frozen lasagna in the UK, Findus, was found to contain up to 100% horsemeat in some of its foods. At issue, aside from the obvious, is whether the food products contain phenylbutazone – a banned cancer-causing veterinary drug – which is not allowed to enter the food chain.

--Monopoly replaced the iron with a cat-shaped playing piece. Keep it away from any birds you may have as pets. Also keep it in the box so it can’t get outside and wreak havoc among the bird population there.

Meanwhile, the Scottie dog was the clear favorite among fans following a month-long online poll. Dog and cat are liable to get in lots of fights over hotels.

Foreign Affairs

Iran: Supreme Leader Ayatollah Ali Khamenei said of direct negotiations with the United States over Tehran’s nuclear program: “Some naïve people like the idea of negotiating with America, however, negotiations will not solve the problem. American policy in the Middle East has been destroyed and Americans now need to play a new card. That card is dragging Iran into negotiations." Khamenei added America was “holding a gun” up to Iran. “You Americans have pointed guns toward Iran, but at the same time you want to negotiate....Negotiations with threats and without good intentions have no meaning.” [Washington Post]

According to a Gallup Poll of Iranians, 63% still want their country to develop its nuclear power capabilities, despite the hardships caused by economic sanctions. Only 17% said the country should stop. The rest had no response. Rather surprising, I think you’d agree, especially since 56% of respondents said sanctions had hurt Iranians “a great deal.” [Jerusalem Post]

Regarding Israel, Iranian President Mahmoud Ahmadinejad, in an historic visit to Egypt, the first by an Iranian leader since 1980, told news editors there:

“The people of Iran are ready to march on Israel to wipe it out if it launches into an adventure against Tehran” and attacks the country.

“The Zionists...hope to aggress Iran and attack it, but they are very afraid of the Iranian reaction and of the consequences of such an attack.”

Israeli President Shimon Peres, speaking to the Knesset, responded, the threat of a nuclear-armed Iran was growing under the “terrifying dictatorship” ruling the Islamic republic.

“The Iranian danger has grown. It threatens our existence, the independence of the Arab states, the peace of the whole world.”

On a different matter, Defense Secretary Panetta accused Iran’s paramilitary force of an intensified campaign to destabilize the Middle East by smuggling antiaircraft weapons to its militant allies.

I have long worried about the proliferation of shoulder-fired missiles with the fall of Gaddafi, but Panetta said Iran is exporting so-called manpads – antiaircraft missiles that can be carried by a single person.

“There is no question when you start passing manpads around, that becomes a threat – not just to military aircraft but to civilian aircraft,” Panetta told the Wall Street Journal in an interview.

Back to Ahmadinejad, a former prosecutor general and ally of his was arrested and taken to prison (later released) two years after a parliamentary probe found him responsible for deaths by torture of at least three jailed anti-government protesters.

Ahmadinejad is feuding with the Larijani brothers, including parliament speaker Ali, who appear to be favorites of Ayatollah Khamenei.

Lastly, Iran agreed to a new round of talks on its nuclear program with the P5+1 (Britain, France, Russia, China, the U.S. and Germany) in Kazakhstan on Feb. 26. It is highly doubtful anything substantive will result from this as Iran continues with its brilliant stall game.

Syria: Outgoing Defense Secretary Panetta acknowledged divisions within the administration over how to respond to the civil war in Syria. The Pentagon, former CIA Director David Petraeus, General Martin Dempsey (chairman of the Joint Chiefs of Staff) and former Secretary of State Hillary Clinton supported a plan to arm the rebels, but President Obama rejected it.

Meanwhile, fighting in and around Damascus was heavy this week, though the regime has kept rebels out of the city center.

“We now know that President Obama’s national security team overwhelmingly supported providing arms to the rebels in Syria....

“As we have frequently argued, the rationale for such action is compelling. Syria’s civil war...grows steadily worse and more dangerous for the United States and its allies. An opposition that once was a peaceful pro-democracy movement has been all but overtaken by jihadist organizations, including an al-Qaeda affiliate, that receive ample funding and weapons supplied from abroad.

“As Obama administration officials have frequently said, the longer Bashar al-Assad’s regime survives, the worse the outcome will be for Syria, its neighbors – all of which are U.S. allies – and the United States. Failure to back more moderate forces, which have been chronically short of effective weapons, will prolong the war and could leave the United States and its allies confronting a postwar Syria in which they have no friends and al-Qaeda and other extremists are ascendant.

“So why was the Petraeus plan rejected? According to the Times, Mr. Petraeus and Mrs. Clinton were rebuffed when they presented the plan to the White House. At the time, Mr. Obama was in the midst of a reelection campaign in which he frequently assured voters that ‘the tide of war is receding.’....

“(The) president’s only public explanation for his resistance, in a recent interview with the New Republic, amounted to excuse-making.”

Regarding Israel’s airstrike on Syrian military targets last week, President Assad accused the Israelis of trying to destabilize his country, but the raid was humiliating and exposed his vaunted air-defense system. Assad was mocked by Turkey, a backer of the rebels.

“Why didn’t Assad even throw a pebble when Israeli jets were flying over his palace and playing with the dignity of his country?” said Turkey’s foreign minister.

Israel came close to admitting responsibility for the attack, with Defense Minister Ehud Barak saying it was “further proof that when we say something, we mean it.”

Israel: The White House announced President Obama will visit Israel for the first time this spring, his first trip to the country since the start of his presidency. Obama will also visit Jordan and Saudi Arabia, as of today.

As for Israeli Prime Minister Benjamin Netanyahu and his coalition building exercise post-election, main partner Avigdor Lieberman, the former foreign minister, accused Yesh Atid leader Yair Lapid of being more interested in becoming the next prime minister rather than how he can help the government should he enter it.

“I’ve never seen this happen. Days after the election, instead of talking about what can be done to help the country, about the middle class, or asking ‘where is the money?’, a person only talks about how they want to be prime minister,” said Lieberman.

Separately, Bulgarian authorities wrapped up a seven-month investigation into a terror attack on a bus in the resort of Burgas last July that killed five Israeli tourists and concluded, as expected, that Hizbullah was involved. 

But the European Union continues to have cold feet when it comes to designating Hizbullah a terrorist organization, as the United States did long ago, even though this attack occurred on EU soil.

The importance of them doing so has more than just symbolic meaning; Hizbullah has its funds in European banks and such assets need to be targeted. France, for one, worries that sanctioning Hizbullah would further destabilize Lebanon.

But while Hizbullah is in the Lebanese government, Prime Minister Mikati vowed Lebanon would cooperate with Bulgaria to “uncover the circumstances” of the attack.

Additionally, on Wednesday, Matthew Levitt, the leading authority on Hizbullah’s operations, issued a report through the Washington Institute’s Stein Program on Counterterrorism and Intelligence detailing the intensified and reorganized collaboration between Hizbullah and Iran’s Quds Force.

According to Levitt, the combined “threat has sometimes eclipsed that of al-Qaeda....Iranian decision-makers settled on a campaign of violence based on a three-tiered threat stream targeting the following: Israeli tourists, government figures (diplomats, retired officials), and targets broadly representative of Israel or the Jewish community (community leaders, prominent Israeli companies).”

Quds Force operations are “targeting Israeli, American, British, or Gulf States’ interests.”

Egypt: The U.S. State Department issued a travel warning to all Americans, essentially saying, stay away. Violence is increasing, the economy, heavily dependent on tourism, is in depression, and President Morsi is totally inept.

Regarding the Ahmadinejad visit, Egypt’s top Muslim cleric, the sheik of al-Azhar, the Sunni Muslim world’s foremost Islamic institution, warned Iran against interfering in Arab Gulf countries or trying to spread Shiite influence; not exactly the kind of reception Ahmadinejad was hoping for.

Tunisia: In the birthplace of the Arab Spring, a prominent opposition leader was assassinated, Chokri Belaid, unleashing major protests. The prime minister then announced he would form a new government of technocrats to guide the country to elections “as soon as possible.”

So this sounded like a concession to the opposition, which has been demanding positions of influence in the Islamist-dominated power structure. The prime minister, Hamadi Jebali, addressed the nation.

“This is a sad day that shook the country regardless of our differences. We are at a crossroads and we will learn from it to make a peaceful Tunisia, secure and pluralist, where we may differ but not kill each other.”

But no so fast...the ruling Ennahda party rejected Jebali’s move, saying he “did not ask the opinion of his party.”

Four opposition groups have pulled out of the national assembly in protest. It’s the secularists vs. the Islamists, just as in Egypt.

Iraq: Yup, we lost that war, in case you were still in the camp that felt otherwise. Ahead of provincial elections in April, sectarian violence is at a fever pitch with over 225 having been killed in bombings and attacks thus far in 2013, including 30+ on Friday. Sunnis are blasting Prime Minister Nouri al-Maliki for acting like a dictator in seeking to consolidate power among the Shiites.

Mali: Week in Review, 2/2/13: “Libya is a failed state, we lost four Americans there, the terrorists took the weapons from Libya into Mali and Algeria...” New York Times, 2/7/13: “Since the war that toppled Col. Muammar Gaddafi’s began in 2011, arms-tracking analysts have warned that weapons looted from the colonel’s stockpiles could find their way to militants in sub-Saharan Africa.

“Although public evidence for transfers has been scarce or not fully verifiable, persistent accounts of smuggled arms reaching Mali have circulated for more than a year...

“In the case of Mali...weapons from Libya had changed the course of Mali’s war – so much so that the French military eventually intervened.

“Recent photographs from Mali provide perhaps the clearest publicly available indication yet that these transfers have in fact occurred.”

France claimed hundreds of terrorists have been killed in the military operation in Mali, with as far as I can tell just one French casualty thus far. France may begin withdrawing some of its 4,000 troops by March.

But Friday saw the first suicide attack on Malian troops, though only one was wounded. The terrorists will keep coming back.

On a related topic, NATO Secretary-General Anders Fogh Rasmussen, while praising France and Britain for their willingness to take the lead in military operations, such as in Libya and Mali, when the U.S. decides to sit back, warned that both operations exposed gaps in European defense capabilities. In an interview with the Financial Times, Rasmussen said:

“We saw that in Libya and in Mali the U.S. has had to come and provide Intelligence Surveillance Reconnaissance assets, they have had to provide air-to-air refueling tankers for jets. These are just two capabilities where we have huge European shortfalls. The Europeans must invest to fill the gaps.” 

It’s a bigger future problem as the U.S. looks to continue to pull back, while at the same time the austerity kick in the EU hasn’t been good for defense budgets.

“If these cuts continue,” Rasmussen said, “Europe will not be able to lead or even participate in international crisis management.”

Japan/Russia/China: Tokyo said Russian fighter planes violated its airspace on Thursday, as Japan scrambled its air force in response. Moscow denied the accusation; this as Japan stages an annual rally supporting the country’s claims for an island chain in northern Japan controlled by Russia. Russia said it will never give up the territory, known to them as the Kuriles.

Earlier, Japan accused China of locking fire-controlled radar on a Japanese military vessel in the disputed islands between the two in the East China Sea, which China also denied. This is yet the latest incident between these two that with one mistake could explode into all-out war.

Japanese Prime Minister Shinzo Abe said of the radar incident, “It was a dangerous act that could have led to an unpredictable situation....We strongly ask for their self-restraint in order to avoid an unnecessary escalation.”

North/South Korea: By all indications, Pyongyang is about to conduct its third nuclear test at any moment, with South Korea now placing its military on the highest alert, giving soldiers the orders to shoot back immediately if they come under attack, which could obviously help escalate any otherwise small-scale incident. Any response no longer has to be first approved by Seoul’s command center.

As for China’s reaction to North Korea’s preparations, Beijing, at least rhetorically, came down hard on Pyongyang, editorializing in a state paper:

“If Pyongyang gets tough with China, China should strike back hard, even at the cost of deteriorating bilateral relations.”

Russia: President Vladimir Putin went to Sochi to inspect preparations for the 2014 Winter Olympics and what he found horrified him. The cost is staggering, now an estimated $51 billion or more costly than the much-larger Summer Olympics in London and Beijing. There is clearly massive corruption and Putin fired one of the top Olympic officials, a man whose company was charged with building the ski jump and adjacent facilities before selling its stake to state-owned Sberbank. The initial estimate was $40 million. It escalated to $265 million and is behind schedule.

On another topic, while the rate of decline was far less than the past, Russia’s “natural” population (number of births minus number of deaths, as opposed to actual change in population, which takes into account migration flows) nonetheless fell for a 20th straight year.

Britain: It’s just been assumed that Prime Minister David Cameron would be standing for reelection in 2015, and would be shepherding the referendum on his country’s status in the EU shortly thereafter.

But a majority of his Tory MPs voted against him and his support for gay marriage, which did still pass overwhelmingly in the Commons, 400-175.

But of the 303 Conservative MPs, 136 opposed the Marriage Bill, 127 backed it, and 40 abstained. Cameron was hoping to win more than half. Those who opposed warned the issue would come back to haunt him.

Random Musings

“President Obama has been lucky in many ways, but no more so than in not having a Senator Barack Obama to assail his use of Presidential war powers. For surely Senator Obama would now be denouncing the ways that President Obama has embraced the unilateral, even pre-emptive powers that George W. Bush used in prosecuting the war against al-Qaeda.

“The latest example is the leak to NBC News of a Justice Department ‘white paper’ that summarizes the legal justification for using drones to kill al-Qaeda operatives, including American citizens. The white paper summarizes a more detailed legal explanation from Justice’s Office of Legal Counsel (OLC) that remains classified – again, like the habits of the supposedly too secretive Bush Administration.

“You may recall that Mr. Obama and Eric Holder, before he became Attorney General, denounced the OLC memos that explained why waterboarding and other ‘enhanced interrogation’ techniques were legal. Once he became Attorney General, Mr. Holder ostentatiously made four of those memos public on April 16, 2009, along with plenty of moral preening about how the new Administration had banned that sort of barbarism.

“Yes, this crowd doesn’t arrest and interrogate suspected terrorists. It merely blows them away with missiles from the sky.

“Hypocrisy aside, the Justice Department makes an adequate legal case. If John Yoo or Dick Cheney had written it, the document would no doubt be less defensive in asserting executive powers. There might be less talk about ‘balancing analysis’ and more of Constitutional prerogatives. But the Obama paper gets to the correct legal conclusion....

“The timing of the white paper leak was no accident, coming before Thursday’s confirmation hearing for John Brennan to lead the CIA. As counterterrorism chief in the Obama White House, Mr. Brennan has been the main keeper of the drone target list. He was also denied the CIA job four years ago in part because he was said to have known too much about enhanced interrogation at the CIA in the Bush years. Perhaps the leakers (probably in Congress) hope to embarrass him, or to get him or Mr. Obama to agree to some kind of judicial review for drone attacks.

“That would be a major mistake. We’ve written before that this Administration should do more to capture and interrogate terrorists in order to prevent future attacks, rather than defaulting so often to drone strikes. But its drone warfare is legal and necessary to protect America.”

“When Barack Obama was a senator, he wasn’t compelled to confront the brutal logic of leadership. Now in office, he’s thrown into the Machiavellian world. He’s decided, correctly, that we are in a long war against al-Qaeda; that drone strikes do effectively kill terrorists; that, in fact, they inflict fewer civilian deaths than bombing campaigns, boots on the ground or any practical alternative; that, in fact, civilian death rates are dropping sharply as the C.I.A. gets better at this. Acting brutally abroad saves lives at home.

“Still, there’s another aspect of Machiavellian thought relevant to the drone debate. This is a core weakness in his thought. He puts too much faith in the self-restraint of his leaders. Machiavelli tells us that men are venal self-deceivers, but then he gives his Prince permission to do all these monstrous things, trusting him not to get carried away or turn into a monster himself.

“Our founders were more careful. Our founders understood that leaders are as venal and untrustworthy as anybody else. They abhorred concentrated power, and they set up checks and balances to disperse it.

“Our drone policy should take account of our founders’ superior realism. Drone strikes are so easy, hidden and abstract. There should be some independent judicial panel to review the kill lists. There should be an independent panel of former military and intelligence officers issuing reports on the program’s efficacy.

“If you take Machiavelli’s tough-minded view of human nature, you have to be brutal to your enemies – but you also have to set up skeptical checks on the people you empower to destroy them.”

--I’m on record, multiple times, as saying defense spending should be cut, pointing to the outrageous fact there is massive corruption in our procurement process, as Senator John McCain knows all too well, let alone issues with health-care.

Defense spending can be cut. But that does not mean our force level needs to be.

So I read with interest an op-ed in the Wall Street Journal by Michele A. Flournoy, a recent undersecretary of defense who some say should have been President Obama’s selection for the top slot at the Pentagon in lieu of Chuck Hagel.

“Whether or not Congress avoids sequestration by March 1, defense spending will likely be cut by at least 10% over the next decade. As 20% of the federal budget and 50% of discretionary spending, it will be part of any longer-term budget deal.

“Unfortunately, the United States has an abysmal record of managing postwar drawdowns of defense spending. Almost all have resulted in a ‘hollow force’ – too much force structure with too little investment in people, readiness and modernization.

“Why? Because the easiest way to reduce Defense Department spending quickly is to enact across-the-board cuts in military end-strength, operations and maintenance, and procurement – solving the budget problem on the back of the force rather than on the department writ large....

“Deep cuts to force structure, readiness and modernization should be the last resort, not the default course of action.”

Flournoy then cites a number of areas to reduce spending, including “unnecessary overhead.” 

“Over the past decade, the number of DOD civilians increased by more than 100,000 to roughly 778,000 in 2010, while the number of contractors also ballooned.”

“The current trajectory of the Pentagon’s health-care spending is unsustainable. DOD’s medical costs have more than doubled since 2001, to more than 10% of the defense budget from roughly 6%, and they are growing faster than any other federal health-care program: 10.6% per year, compared with the 9% for the Veterans Administration and 8.5% for Medicare. Overall, U.S. health-care costs are rising 6.3% per year.

“Tricare – the suite of insurance programs that cover service members, their families and military retirees – now covers nearly 10 million Americans. But DOD is bearing a disproportionate share of this burden. For example, 52% of the working-age military retirees who are eligible for private health insurance instead choose Tricare as their primary payer, shifting the costs from private companies to DOD.

“Out-of-pocket expenses for Tricare beneficiaries haven’t changed since the program’s inception in 1996, but as costs have skyrocketed the government’s share has grown to 88% from 73%. The Defense Department’s proposals to increase some copays for non-active-duty beneficiaries have been repeatedly rejected by Congress.”

I subscribe to Army Times and Defense News to keep up on these topics. The ridiculously low premiums that families under Tricare pay, for example, are beyond outrageous.

-- Sen. Marco Rubio has been selected to deliver the Republican response to the State of the Union Address. Seems like a good choice, seeing as how Rubio is going to deliver it in both English and Spanish, but then sometimes these things kind of blow up in our face...see Fred Thompson.

--In a new Gallup Poll, Alabama claimed the title of most conservative state, followed by a tie for second between North Dakota and Wyoming, then Mississippi and Utah.

The most liberal, aside from the District of Columbia, was.....Massachusetts! What a shock! Oregon was next, followed by Vermont.

--New Jersey Democratic Sen. Robert Menendez’ staff conceded the senator contacted federal health-care officials twice in defense of his friend, Salomon Melgen, who the agency in charge of Medicare and Medicaid had ordered to repay $8.9 million for overbilling the government. Melgen’s appeal on this matter is ongoing.

Menendez is facing a Senate ethics inquiry because he accepted two free trips on Melgen’s private plane in 2010 to Melgen’s home in the Dominican Republic. Menendez then was forced to acknowledge he hadn’t reported the trips, let alone pay for them, until recently. It is against the rules for members to accept gifts beyond $250 without prior authorization. That was 2010. Menendez cut a check for $58,500 for the trips earlier this month, after the trips were reported by the media.

The health-care fraud case against Melgen exploded when the FBI invaded his West Palm Beach offices.

A Menendez aide told the Washington Post that the senator didn’t know Melgen was under formal investigation.

What a sleazy, slimy representative of my state. Someone tell the senator to clear out his office. I’m too busy.

--Week in Review, 11/24/12: “Illinois Congressman Jesse Jackson Jr. finally resigned....Jackson is under multiple investigations....No doubt his resignation is part of a plea deal.” Wall Street Journal, 2/8/13: “Former Rep. Jesse Jackson Jr. has agreed to plead guilty to violating federal campaign-finance laws in a deal with prosecutors.”

--New Jersey Gov. Chris Christie went on David Letterman’s show and made fun of his weight issue by eating a donut. Then a former White House physician Connie Mariano told CNN that she’s worried Christie may die in office if he’s elected president.

Heck, I’ve written in these pages, I think, that someday the governor will drop dead. We all know it. It’s not as if he hasn’t had recent health issues, either.

I like Chris Christie. But then when he comes out and says his preteen son was watching the CNN interview and asked if he was going to die, frankly, I don’t believe the story. I think the kid was already sophisticated enough to understand his father is in trouble health-wise. I mean for crying out loud, I have not seen a heavier person in my entire state.

As for Ms. Mariano, it was totally unprofessional of her to have given the interview in the first place.

But then I learned Gov. Christie actually called Mariano and yelled at her, according to the doctor. On Friday, Christie admitted he spoke with the physician and intended to keep the conversation private. Oh brother. 

--Speaking of weight, researchers from the National Institutes of Health, as noted in the British Medical Journal, have had the opportunity to analyze a study conducted in the late 1960s and early 1970s, some of the data from which had been missing for decades, and it had to do with the debate over using butter or margarine.

In fact, now the scientists are questioning whether margarine might have been more harmful for us all along. People who substituted margarine in place of butter died sooner than those who made no change to their diet! [Irish Independent]

--Am I the only one who seemed to miss the fact the latest asteroid fly-by, Feb. 15, wasn’t predicted until very recently? NASA scientists said Thursday this office-building-size rock will be the nearest recorded brush with a space rock so large. The good news is it will pass about 17,000 miles above Earth.

“The bad news: A million other potentially dangerous – and unknown – city-killing space rocks are out there, and one of them could be on a collision course with Earth. Critics say NASA and other space agencies are not doing enough to scan for these threats.” [Brian Vastag / Washington Post]

Now an astronomer in Spain did find this particular asteroid a year ago but it wasn’t until recently that NASA realized the size and path. In fact this rock, 2012 DA14, crosses paths with Earth twice a year but scientists are confident it won’t collide with us for at least the next century.

One NASA expert told the Post’s Vastag that only about 1% of the smaller, but still dangerous, asteroids near Earth have been spotted.

At least if we knew where they were headed, we could like fly to the opposite side of the planet until the danger passes, know what I’m sayin’?

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

Gold closed at $1668
Oil, $95.81

Returns for the week 2/4-2/8

Dow Jones -0.1% [13992]
S&P 500 +0.3% [1517]
S&P MidCap +0.7%
Russell 2000 +0.3%
Nasdaq +0.5% [3193]

Returns for the period 1/1/13-2/8/13

Dow Jones +6.8%
S&P 500 +6.4%
S&P MidCap +8.7%
Russell 2000 +7.6%
Nasdaq +5.8%

Bulls 54.7
Bears 21.1 [Source: Investors Intelligence...way over 30 danger line at this point.]

Nightly Review video schedule, Mon. thru Thurs., posted around 5:30 p.m. 

Have a great week. I appreciate your support.

Brian Trumbore

Happy Birthday, Bro!

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