Week in Review

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Week in Review

11/17/2012

For the week 11/12-11/16

Crisis in the Middle East

As I’ve been saying all year, we ignore foreign policy at our own peril and President Obama is on the verge of being overwhelmed.

It was a week that saw Israel finally have enough of Hamas’ and Islamic Jihad’s constant rocket barrage into southern Israel and aside from launching an aggressive series of counter-strikes against Hamas targets and missile bases, Israel took out the most wanted leader of Hamas’ military wing, and one of its most powerful political voices, Ahmed Jabari. Jabari was the most senior member to be eliminated in several years. Coupled with Israeli strikes that killed a few civilians, the Arab World was once again in an uproar.

The Grand Imam of Egypt’s powerful al-Azhar Mosque was typical of the reaction in the region: Palestinians in Gaza had a “right to live safely like any other human beings,” but then he, nor any of the other Arab voices, never mentions the rocket attacks against Israel, one of which made a direct hit on an Israeli home, killing three. [Over 500 rockets were fired at Israel in the last three days, at least 180 supposedly intercepted by the missile defense system, Iron Dome.]

As I go to post, with Defense Minister Ehud Barak having called up 75,000 reservists, a ground war is possible. For the first time in decades, both Tel Aviv and Jerusalem were targeted, though thus far the missiles aimed at these two have fallen harmlessly. Egypt sent a delegation to Gaza on Friday that included Prime Minister Qandil, while Israeli Prime Minister Benjamin Netanyahu reiterated he was committed to the peace treaty with Egypt.

“All of this is more dangerous than four years ago because the entire Middle East is so much less stable. Egypt, which recalled its ambassador to Israel Wednesday, is now run by the Muslim Brotherhood that sympathizes with Hamas. Syria’s civil war is spilling outside its borders. And Iran, which is Hamas’ main weapons supplier, is that much more brazen as it watches the U.S. care more about deterring an Israeli strike against Iran than stopping Iran from getting a weapon.

“U.S. influence is ebbing in the region, and the local thugs are filling the vacuum. As that retreat continues, the Obama Administration needs to give Israel the material and diplomatic support to defend itself.”

Also this week, the situation in Jordan, a key ally of the United States, continued to deteriorate with extremists using a fuel subsidy crisis as an excuse to demonstrate against King Abdullah II (which is illegal in Jordan). Jordan’s fourth prime minister in the past year said he had to cut the subsidies because of Jordan’s huge budget deficit and the need to secure a $2 billion bailout from the IMF.

Jordan is under immense pressure these days owing to 200,000 refugees from Syria now making Jordan their home. Extremists are streaming across the border, coming and going, weapons being sent to the Islamists now fighting in Syria, while the Muslim Brotherhood and others threaten Abdullah’s rule, which would be a catastrophic development as Jordan has always been a powder-keg owing to the huge numbers of Palestinian refugees who have long made their home in squalid camps in Jordan.

In Syria itself, France has been the most aggressive in recognizing a new Syrian opposition council, hinting the rebels could get “defensive weapons” for rebel-held areas being bombed by Assad’s forces. Syria has been targeting one particular town on the border with Turkey and killed over 30 there this week as the war threatens to spread into Turkey itself.

The UN estimates four million inside Syria will need sweeping humanitarian aid by next year, with 750,000+ refugees having fled to Turkey, Jordan, Lebanon and Iraq by year end.

I was particularly upset when during President Obama’s press conference, he said, when asked about the White House’s reaction to the ever-unfolding calamity in Syria, “You know, we’ve committed hundreds of millions of dollars of humanitarian aid to help folks both inside of Syria and outside of Syria.”

But I told you just the other day that the UN says it needs $348 million to get the humanitarian mission done (assuming they can ensure safety for aid convoys…not the case today) and yet the UN has received only $157 million thus far, so if the United States has “committed hundreds of millions,” the UN hasn’t seen it, Mr. President.

What’s sickening is that the window of opportunity has long closed. We will have zero influence over whoever ends up in control in the country, and chances are that at this point Syria will break up into four or five little fiefdoms, with terrorists running rampant.

And just as Syria is on Obama, if Jordan goes that’s on him as well. 

There were coordinated general strikes in Greece, Spain, Italy and Portugal that turned violent in some cases this week as the Eurozone entered recession for the second time in four years, with third quarter GDP for the 17-nations sharing the currency declining 0.1% after a 0.2% fall in the second.

The Netherlands’ GDP dropped 1.1% from the second quarter, but France and Germany both saw GDP rise 0.2%, France thus avoiding recession after a 0.1% decline in the second, while Germany’s had risen 0.3% during the same time period.

The problem is, aside from the obvious issue of zero or negative growth across the continent, with the likes of Greece declining 7.2% on an annual basis in the third quarter (they don’t do quarter to quarter) and Portugal falling 3.4%, if Germany is supposed to be Europe’s growth engine, the trend isn’t good.

2010…GDP up 4.2%
2011…up 3.0%
2012…est. up 0.8%
2013…est. up 1.0%

Eurozone industrial production for September was down 2.5% over August, the biggest drop in more than three years.

How sick is Europe? Cisco Systems CEO John Chambers echoed a common refrain among large multinationals reporting earnings these days when he said he expects “Europe to get worse before it gets better.” Orders in the region including Europe fell 10% in the quarter for Cisco.

Last week as I went to post China reported its exports rose a solid 11.6% in October, which I noted, but it wasn’t until later I saw some details. China’s sales to the 27-nation European Union fell 5.6% in the first nine months of the year but dropped 10% in the third quarter. Yes, getting worse before it gets better.

Back to Greece, which is the big story again next week, the Greek parliament approved a budget for 2013 that enshrined more austerity measures with the legislation passing comfortably, 167-128. This was to be the last step for Greece before obtaining its needed 31.5 billion euro in aid from Greek Bailout II.

But as noted last time, the troika (European Commission, European Central Bank and IMF) had serious disagreements on the implementation of Greece’s austerity measures and whether Greece could meet its deficit targets to warrant further aid.

Specifically, the EC’s Jean-Claude Juncker and the IMF’s Christine Lagarde disagreed in public during a press conference as to whether Greece should be given the extension it requested, another two years to meet the targets. Juncker said Greece would get the extension. Lagarde said they shouldn’t (as they were standing next to each other).

So this Tuesday, Nov. 20, the eurozone finance ministers will finally rule on the 31.5 billion. Without it, Greece runs out of cash and defaults.

Enter Germany, whose parliament must approve any aid package such as that for Greece. If you extend the debt targets, that means more funds will be needed down the road and those in opposition to German Chancellor Angela Merkel are questioning her previous promises that German taxpayers wouldn’t be ponying up any more aid for Athens.

“The chancellor has promised to keep Greece in the euro,” said Carsten Schneider, the Social Democrats’ budget spokesman. “Now she must finally say what this promise will mean in extra costs.”

In Greece itself, the main opposition party, left-wing Syriza, which actually leads in the polls with 23% these days, says the government is “dangerous, politically bankrupt and incapable of negotiating.” [There were more articles this week on the growing influence of the neo-Nazi Golden Dawn, who are polling at 10%.]

In Spain, EU economic commissioner Olli Rehn said Madrid wouldn’t require any further austerity until end of next year in a sign Brussels is backing away from an austerity-focused crisis response. The fact Spain will miss its deficit targets by a mile doesn’t seem to matter.

Spain’s Prime Minister Mariano Rajoy wants assistance from the EU and European Central Bank but only if it comes without further austerity measures.

“We have now concluded for 2012 and 2013, Spain has taken effective action,” said Rehn of a potential bailout (rescue) for Spain. “The box is ticked as long as implementation is solid and convincing.”

Britain reported its unemployment rate fell to 7.8% in September but jobless claims rose a sizable amount, while October retail sales fell a larger than expected 0.8% over the prior month.

Washington and Wall Street

Concerns over the fiscal cliff, potential gridlock, poor corporate guidance for the current quarter, Europe’s renewed recession, and new tensions in the Middle East led to another down week on Wall Street; the fourth straight for the Dow Jones and sixth for Nasdaq.

Regarding the chief issue of the day, the fiscal cliff, early in the week the two sides assumed their battle stations with President Obama in a press conference saying, “What I’m not going to do is to extend the Bush tax cuts for the wealthiest 2 percent that we can’t afford and according to economists will have the least positive impact on the economy….A modest tax increase on the wealthy is not going to break their backs. They’ll still be wealthy.”

House Speaker John Boehner, though, emphasized his objection to higher tax rates. Republicans are willing to raise revenues by closing loopholes instead.

Senate Majority Leader Harry Reid said: “Social Security is not going to be part of budget talks as far as I’m concerned.”

But on Friday, after the president met with Boehner, Reid, Senator Minority Leader Mitch McConnell and House Minority Leader Nancy Pelosi, all four emerged to say they had a constructive meeting and all seemed to be willing to compromise, at least a smidgen. It was a start.

I’m not going to waste my time and yours with incessant detail on the negotiations now officially underway. When the deal comes it comes.

I just suspect that whatever emerges, outside of giving the markets a little relief rally, will upon closer inspection, especially on the entitlement side, send the markets down anew.

One single issue alone is telling; taking back the Bush tax cuts on the wealthy, as the president and Democrats want. As every schoolchild should know by now, this only raises $80 billion a year and our annual budget deficits are $1 trillion. Much more has to be done. No one is demanding we slash the deficit overnight…that’s financial suicide. But the markets want to see a legitimate plan for deficit reduction, a glide-path, and the only way you achieve true savings is through entitlement reform. Despite the talk on Friday at the White House, I’m not sure the Democrats are ready to do this.

In the meantime, Corporate America and most investors are on hold. Both need certainty, either to feel confident to invest in their businesses again and hire, or to make investment decisions. In both cases we need clarity on tax policy, including the rates that will be applied on dividends and capital gains.

For today, in general earnings guidance for the current quarter and beyond is lousy, or murky, and there’s another issue out there, the debt ceiling, which the longer the fiscal cliff drags out, threatens to become entangled in that web. The U.S. faces another credit downgrade.

Speaking of the debt ceiling, the budget deficit for October, the first month of the new fiscal year, came in at $120 billion, worse than expected. Yippee! We’re on our way to our fifth straight year with a deficit in excess of $1 trillion…breaking our own world record!

Street Bytes

--The Dow Jones fell 1.8% to 12588 and its four-week losing streak is the worst since August 2011. The S&P 500 fell 1.4% and Nasdaq lost 1.8%. Nasdaq’s six-week slide is its worst since July 2008.

--U.S. Treasury Yields

6-mo. 0.13% 2-yr. 0.24% 10-yr. 1.58% 30-yr. 2.73%

On the inflation front, the consumer price index for October was up 0.1%, ex-food and energy up 0.2% (year over year up 2.2%, ex- 2.0%), while producer prices were down 0.2%, including on core (year over year up 2.3%, ex- 2.1%).

Industrial production for the month of October fell 0.4% as Hurricane Sandy had an impact. And October retails sales were down 0.3%. [Jobless claims for the week also spiked due to the Sandy effect.]

--Japan’s third-quarter GDP fell a much worse than expected 0.9% over Q2, or 3.5% from a year earlier, and the economy has only gotten worse since Sept. 30 so Japan is headed towards its 3rd recession in four years. [More below.]

--BP agreed to pay $4.5 billion in a settlement with the U.S. government over the 2010 explosion and oil spill in the Gulf of Mexico that resulted in the deaths of 11 workers and crippled the regional economy.

The figure includes $1.3 billion in criminal fines – the biggest such penalty in U.S. history (Pfizer’s 2009, $1.2 billion penalty being the previous record-holder) – along with payments of nearly $2.4 billion to the National Fish and Wildlife Foundation, $350 million to the National Academy of Sciences and about $500 million to the Securities and Exchange Commission.

“A federal judge in New Orleans is still weighing a separate, proposed $7.8 billion settlement between BP and more than 100,000 businesses and individuals harmed by the spill.” [Michael Kunzelman / AP]

BP made a profit of $5.5 billion in the last quarter.

Two BP supervisors were also indicted on manslaughter charges in the deaths of 11 fellow workers, while a third executive was accused of making false statements to Congress, as the Justice Department seeks to hold individuals, not just the corporation, accountable.

--Hostess Brands filed for bankruptcy after failing to win a new labor agreement that would have slashed pay and health benefits. Competitors are now likely to buy the brands, but not take on any of the 18,500 workers.

Due to its well-publicized problems, Hostess had been losing critical shelf space in key distributors such as Costco and Wal-Mart.

While everyone is talking about Hostess Twinkies going bye-bye (this brand will get bought), I’m worried about the loss of Funny Bones, which out of the freezer are simply the best.

--Following dismal October results, McDonald’s booted the leader of its U.S. business as it seeks to get back on the beam after a series of stumbles. The 2.2% same-store domestic sales drop was a total surprise and deadly for executive Jan Fields, who will now go back to selling her cookies.

--Dell’s quarterly profit fell 47% in the third quarter as consumer revenues plunged 23%, while sales to big corporations fell 8%. Overall revenues declined 11%. The computer maker is, however, confident of a rebound in the fourth quarter. The market, however, isn’t, gauging by the reaction in the share price.

--Shares in Apple hit $505 on Friday before rebounding to close the week at $530. The $505 number represented a decline of exactly $200 from the intraday, all-time high of $705 on Sept. 21.

--Steven Sinofsky, the head of Microsoft’s Windows division, suddenly left the company in what appears to have been an internal tussle with CEO Steve Ballmer. The share price fell 4% in response.

--The week saw yet another report, this one from the International Energy Agency, touting the impact of the shale-oil boom and how this will help the U.S. overtake Saudi Arabia as the world’s largest oil producer by 2020. It will come far sooner than that…assuming the price of oil remains at a level where the exploration companies can turn a profit. 

--Speaking of the shale-oil boom, like the one in Canada, our friends in the Great White North, specifically Alberta, are looking for U.S. workers for their energy companies tapping the vast deposits in the oil sands. Since 2010, 35,000 U.S. workers a year have been issued work permits, according to Canadian immigration statistics. [Ricardo Lopez / Los Angeles Times]

Alberta is expecting a labor shortage of 114,000 skilled workers by 2021.

--Meanwhile, related to the preceding two stories…Gerrit Wiesmann / Financial Times:

“Europe’s ability to compete against the U.S. as a manufacturing center is being damaged by rising energy costs as North America benefits from cheap natural shale gas, Germany’s biggest companies have warned.

“The energy cost advantage for U.S. companies is rising and is expected to persist until at least 2020, according to the BDI, the German industry lobby group.

“German industrial companies such as Bayer and BASF are among those alarmed over the gap.

“Some executives fear a growing divide between European and U.S. energy costs should energy-intensive manufacturers divert investments that might have gone into Europe to the U.S. instead.

“Harald Schwager, the member of BASF’s executive board responsible for Europe, told the Financial Times: ‘We Europeans are currently paying up to four or five times more for natural gas than the Americans…’…

“Compounding German industry’s fears is Chancellor Angela Merkel’s plan to phase out nuclear power by 2022 and replace it with renewable energy sources, which companies say could drive a bigger transatlantic divergence in electricity prices.”

--The U.S. Postal Service lost a staggering $15.9 billion for the year ending in September; more than triple last year’s pace. The Postal Service continues to be hamstrung by Congress’ inaction on a bill that would allow it to reduce future retiree health benefits. The hang-up is in the House and the issue of ending Saturday delivery.

--Wal-Mart guided lower for the fourth-quarter as it reported same-store sales for the just concluded quarter were up only 1.5% in the U.S. and a less than expected 2.4% overseas. Hardly robust.

--Home Depot Inc. beat earnings estimates and guided higher for the year, but revenues were up only 4% - I mean that’s not exactly spectacular either – and the shares sell for 21 times expected earnings.

--According to the chairman of the Financial Services Oversight and Investigations Subcommittee, Rep. Randy Neugebauer (R-Texas), “Choices made by Jon Corzine during his tenure as chairman and CEO sealed MF Global’s fate.”

Among Corzine’s shortcomings as laid out in the report are:

“He created an ‘authoritarian atmosphere’ where ‘no one could challenge his decisions.’

“He acted as MF’s ‘de facto chief trader,’ allowing him to build a risky European bond portfolio ‘well in excess of prudent limits.’

“He failed to fully disclose MF’s European bond holdings to federal regulators and the investing public.”

“In scathing excerpts from the report…Republican members of the panel also blamed Corzine for a scandalous $1.6 billion shortfall in customer accounts that emerged in the aftermath of the bankruptcy – although they stopped short of saying Corzine should be held criminally liable for the loss….

“The subcommittee said it will leave it to prosecutors and regulators to decide whether Corzine or any other MF employee ‘violated laws or regulations when these withdrawals of customer funds were made.’

“But legal experts said the report’s withering conclusions could provide fuel for civil actions against Corzine, who has emerged from MF’s ruins largely unscathed.”

--A long-time reader in California, J.P., who has supplied me with terrific information over the years, offered me his take on the recent passing of Proposition 30, the big win for Gov. Jerry Brown that allows him to levy ‘temporary’ income tax increases on high earners.

“This is a Big Big deal out here. The wealthier portion of the population is completely freaking out. For an ordinary income being – it now costs you $130,000 to live in the state of California if you make a $million. It used to cost about $85,000, so a $45,000 increase AND they made it retroactive for 2012. Now who cares, they are millionaires…but considering they are already paying about $325,000 in federal taxes and figure $30,000 in property taxes, and you have just reduced their disposable income by nearly 10%. Personally, I think this is going to drive the state into a recession. And then on top of it, they have the prospect of another 4% hike in federal taxes, so potentially a 20% reduction in income. Anyway, lots of folks are talking about leaving, moving businesses, etc.”

--Housing sales in six-county Southern California hit a three-year high in October, rising 25% from year ago levels. The median sale price was $315,000, up 17% from October 2011, according to DataQuick. Inventory, particularly for entry-level homes, has declined big time.

As reported by Alejandro Lazo of the Los Angeles Times, the region’s median hit bottom at $247,000 in April 2009. [J.P., I’ll incorporate your thoughts on housing in a latter column or “Wall Street History” piece on the sector.]

--New York Gov. Andrew Cuomo has requested $30 billion in federal aid for his state as a result of Hurricane Sandy. The cost of fixing the transportation infrastructure alone is mammoth. And as a local television network was playing up this week, because some of New York’s hospitals are still out of commission, there is a 2,000-bed shortage these days that isn’t likely to be made up until around February when some of the impacted hospitals have returned to normal operations. As in forget a large-scale event that is left unsaid, if New York had a bad flu season, it’s screwed.

--New York City’s unemployment rate dropped to 9.3% in October, the third monthly drop in a row, but the city lost 5,700 private sector jobs (while adding 2,800 public sector ones). The numbers don’t take into consideration the impact of Sandy. 

Over the past year, Gotham has added 92,600 private sector jobs…219,800 since the bottom of the recession.

New York State’s unemployment rate in September was 8.7%.

--China has replaced India as the top exporter of students to the U.S., with 194,400 Chinese students studying in America for the 2011-2012 academic year, up 23 percent, while the number of Indian students has dropped 3.5 percent to 100,300. [South China Morning Post]

--For the second time in recent weeks, the Food and Drug Administration has announced it is receiving reports of deaths attributed in part to highly caffeinated energy drinks, the latest being 5-Hour Energy, after previously saying it was investigating Monster Energy. 5-Hour Energy has been mentioned in 90 filings with the F.D.A. since 2009, with reports of 13 deaths over that time.

--I think I was last at the Metropolitan Museum of Art in New York about two years ago and until I read a piece in the New York Post by Dareh Gregorian, I had no idea I could just walk in without paying an admission charge. Did you?

“There’s been a multimillion-dollar heist at the Met – and it’s being carried out by the museum itself, court papers charge.

“Two longtime (museum) members say they – and untold millions of others – were duped into paying for admission or memberships because the institution has done such a good job of hiding the fact that it’s supposed to be free six days a week.

“ ‘Instead of providing free and open access to art for the masses, without regard to socioeconomic status (as originally designed), the MMA has transformed the museum building and museum exhibition halls into an expensive, fee-for-viewing, elite tourist attraction, where only those of financial means can afford to enter a publicly subsidized, city-owned institution,’ the suit says.

“The museums’ ticket booths list admission prices of $25 for adults, $17 for seniors, and $12 for students. Under the word ‘Admissions,’ in much smaller letters, is the word ‘recommended.’”

The suit cites a survey commissioned by the two members “that found that 85 percent of nonmembers thought they had to pay to get into the museum, and that 74 percent of respondents were unaware they could get in for free. Fully 65 percent of members said they’d signed up for memberships so they could get in for free.”

--Be sure to catch at least some of Ken Burns’ “The Dust Bowl” on PBS, Sun. and Mon. 8 p.m.

--“Skyfall,” the latest James Bond flick, topped the U.S. and Canadian box offices last weekend with a franchise-record $87.8 million in ticket sales. It had taken in $323 million in overseas sales since Oct. 26 and one estimate is for “Skyfall” to gross more than $900 million globally. It cost $200 million to produce and marketing for such a film can take another $200 million. Then you have the split with theater owners.

Foreign Affairs

China: Xi Jinping formally became leader of the Chinese Communist Party, taking over for Hu Jintao, though Xi won’t inherit Hu’s president title until the National People’s Congress in March, at which time Li Keqiang also formally becomes premier, replacing Wen Jiabao.

The big surprise of the Communist Party Congress, though, was Hu giving up the top post at the Central Military Commission to Xi, far earlier than many expected. This is important because it makes for an easier transition to Xi, now that he controls both the army and the CP.

As for the seven-member Standing Committee of the Politburo, which is the decision-making body and runs the country, the other five members aside from Xi and Li are all known to be conservatives and on the older side (between the ages of 64 and 67), so some may leave at the end of the first term in 2017.

It also means that two Central Committee members known to be reformers did not make the cut. This doesn’t necessarily mean there will be no reform during Xi’s ten years at the top. No doubt there will be extensive change.

As for the United States, of immediate import is to see how Xi acts on matters such as the territorial dispute with Japan in the East China Sea. With Xi controlling the military from day one, we’ll see in short order just how much pressure he feels from the nationalist elements in China.

In his first remarks after his elevation, Xi said some of the following:

“The people’s desire for a better life is what we shall fight for,” noting his main job was to “steadfastly take the road of prosperity for all.”

Xi said the party suffered from problems of “corruption, taking bribes, being out of touch with the people, [and] undue emphasis on bureaucracy and formalities.”

Zhang Lifan, a historian with ties to some of China’s leaders, told the Washington Post that with the two leading reformers having been excluded from the Standing Committee, “a lot of people will be disappointed and see no reform hope for the future.” With the way things are going, Zhang continued, “some people who were originally holding off going abroad to emigrate may even start their plans sooner.” [William Wan and Keith B. Richburg / Washington Post]

Minxin Pei (Prof. at Claremont McKenna College) / Financial Times

“Based on international experience, the (Communist) party is likely entering a period of crisis before its ultimate exit from power. Since Portugal began its transition to democracy in 1974, roughly 80 countries have made similar transitions from autocracy to varying forms of democracy. To be sure, not all of the transitions have produced high-quality democracies. But the striking fact today is that only a quarter of the countries (48 out of 195) in the world are governed by autocracies. Many factors were responsible for this political revolution. For China, the most relevant are two: failure of one-party rule and the political consequences of economic development.

“A one-party regime may be the most sophisticated form of autocracy. But even such regimes cannot avert demise. Because of the rule of ‘adverse selection’ (autocracies attract opportunists and produced progressively weaker leaders due to over-bureaucratization and risk-aversion), one-party regimes degenerate through organizational decay. While democracies can renew themselves through ‘creative destruction,’ one-party regimes cannot. That is why the world’s oldest democracies are more than 200 years old while the longest-ruling one-party regime – the Soviet Union – lasted only 74 years. Now at 63 years in power, the CCP will soon be testing that limit.

“One thing we have learnt from transitions to democracy since 1974 is that regimes that initiate change before they totally lose credibility fare far better than those that resist democratization until the bitter end. This self-evident lesson ought to be abundantly clear to China’s incoming leaders.”

Israel: Editorial / London Times

“There is an awful inevitability to Israeli actions in Gaza, both in their origins and their consequences. Israel is a liberal, democratic nation with a grave respect for human life. Perhaps uniquely among liberal and democratic nations, however, Israel is the constant target of rocket attacks….

“Hundreds of rockets strike Israel every year, some with a range of up to 30 miles. No country could be expected to put up with this indefinitely.

“And so, periodically, Israel does not put up with it. There has been a steady paramilitary build-up in Gaza since the last assault in 2009….

“Gaza is a terrible place and Israel is not wholly without responsibility for the way it has become one. Being committed to the violent destruction of Israel, Hamas could not have expected an easy relationship with its neighbor. But Israeli policy towards Gaza since Hamas took power (motivated, reasonably, by the fear of the next conflict) has left the territory as an impoverished gangster state, at the mercy of smugglers and militants.

“The cruelest irony for Palestinians in Gaza is that they can see on the West Bank, where significant economic growth has brought relative stability, a better version of their future. In Gaza all one can see on the horizon is things getting worse.

“Ultimately, though, it is Hamas, not Israel, with whom the buck stops….If it wishes to be regarded as a political party, it must behave like one. Hamas must negotiate.”

“Unfortunately, leaders on both sides have short-term political reasons for fighting. Israeli Prime Minister Benjamin Netanyahu and Defense Minister Ehud Barak face an election in January; and it’s perhaps not a coincidence that this Gaza conflict, like the last one, comes between an American and an Israeli election. Hamas, for its part, may hope to upstage a planned diplomatic initiative at the United Nations this month by the rival Palestinian Authority and to prompt concessions from Egypt, such as an opening of its border with Gaza.

“Egypt and the United States, however, have much to lose from further escalation. Neither wants or can afford a rupture in the Israeli-Egypt peace treaty or the disruption of efforts to curb Iran’s nuclear program and remove Syrian dictator Bashar al-Assad….A quick ceasefire would benefit all sides; the alternative is awful to contemplate.”

“So far, Israel has mobilized troops, but is holding off on a full-scale ground assault. That could change.

“For if Israel decides – for whatever reasons – that it must clean out the rat’s nest in Gaza and ensure the safety of its citizens, the only fair question is: What took so long?

“Hamas hides itself among Palestinian civilians, inviting attacks on the very people it claims to represent. Which means the group is responsible for every Palestinian civilian injured in Israel’s operation.

“And doubly responsible for the Israeli civilians its attacks maim and kill.

“Which is why the United States must support Israel as it does what’s necessary to ensure its security – whether that means surgical strikes or a messier fight on the ground.”

Syria: The Pentagon estimates it would take up to 75,000 troops to secure/seize Syria’s chemical weapons stockpile in order to keep it out of the hands of the likes of Hizbullah. So as noted in a New York Times story by David E. Sanger and Eric Schmitt, this calls “into question whether the United States would have the resources to act quickly if it detected the movement of chemical weapons and forced President Obama, as he said in August, to ‘change my calculus’ about inserting American forces into Syria.”

It also seems the Pentagon hasn’t actually drafted any detailed plans to carry out a mission of this kind, though there are evidently contingency plans.

Hizbullah has set up camps near some of the weapons depots.

Iran: Officials from Russia and the U.K. suggested support for bilateral U.S.-Iranian talks, according to the Financial Times, with Iranian Foreign Minister Salehi saying, “A decision on comprehensive, bilateral political talks between the two countries…is up to the supreme leader.”

It’s already November. The red line for Benjamin Netanyahu is between April and June.   By then all are in agreement Iran would hold more than enough 20 percent enriched-uranium for a bomb following further enrichment (a much easier step). And by week’s end, a leaked report by the International Atomic Energy Agency said Iran is ready to double the output at its underground uranium enrichment facility near Qom (Fordo).

Separately, the International Energy Agency said Iran’s oil exports jumped to 1.3 million bpd from 1.0 million in the previous two months. “China and South Korea appear to account for the lion’s share of the increase in Iranian imports,” the IEA said.

This isn’t exactly the way the sanctions were to work, sports fans.

Afghanistan: Former Liberal Democrat leader and longtime diplomat, Paddy Ashdown, says Britain should withdraw all its troops from Afghanistan before another single soldier is lost. In an assessment of the 11-year campaign that has cost 438 British lives, Lord Ashdown writes in the London Times:

“All that we can achieve has now been achieved. All that we might have achieved if we had done things differently has been lost. The only rational policy is to leave quickly, in good order and in the company of our allies. This is the only cause for which further lives should be risked….

“It is now crystal clear that we have lost in Afghanistan. We have succeeded in only one thing; albeit the big thing we first said we went to war for – driving out al-Qaeda. In almost all the other tasks we set ourselves, especially the establishment of a sustainable state, we have failed….

“Our failure in Afghanistan has not been military. It has been political.”

Japan: Prime Minister Noda dissolved parliament and called for an early election. He has been in power just since August 2011 and will lose to newly-elected opposition leader Shinzo Abe, though while Abe’s party (LDP) will win the most seats, experts don’t expect it to have any kind of mandate. There are many smaller parties and polls show half of all voters undecided. It seems the election will be December 16. [Talk about a short campaign…that aspect starts Dec. 4.]

In exchange for the early vote, the opposition agreed to back a deficit-financing bill and electoral reform.

Abe had a brief stint as prime minister in 2006-07 and is a hawk. The LDP enjoyed 50 years of almost uninterrupted rule before the DPJ gained power in 2009.

Meanwhile, Japanese stocks staged a two-day advance of about 4% following Abe’s announcement that if elected he would push the central bank to pursue a far more aggressive monetary policy, forcing the central bank to target inflation of 3% rather than the current 1%.

Burma: I said on my Thursday “Nightly Review” webcast that I give the Obama administration tremendous credit for its moves to open up Burma, but with President Obama headed there soon, some activists in Burma say Obama’s trip is an excessive and premature reward for Burma’s leadership. Activists add the former general Thein Sein, the new president of Burma, while instituting all kinds of democratic reforms, still has not done nearly enough.

Obama is only spending a few hours here, in between stops to Thailand and Cambodia, but they will be important ones. [Republican Sen. Mitch McConnell praised Obama’s trip here on Friday.]

Germany: 16,000 Greeks moved to Germany between January and June. And as Nina Koeppen of the Wall Street Journal reports, “The number of immigrants to Germany from Spain and Portugal was up by 53% for each country.

“The trend bodes ill for countries on Europe’s southern periphery at a time of worsening economic malaise. Many of those leaving are young professionals with valuable skills. Their departures could have long-term consequences for countries such as Greece and Portugal as they struggle to recover.”

France: As President Francois Hollande struggles with a punk economy, his approval rating has plummeted to just 40%. Hollande this week also expressed “deep concern” about the support for Islamic terrorism in France, accusing the right-wing opposition of being responsible for the recent wave of attacks (or foiled plots) in the country. At the same time, a poll published by the IFOP Institute found 75% of French citizens think “there are too many Muslims in France.”

Britain: Speaking of terror, the radical Muslim cleric Abu Qatada was released from a British prison today after winning his appeal against deportation to Jordan. Qatada was once described as Osama bin Laden’s right-hand man in Europe. He will be under curfew in the London area with his movement’s monitored, but it is outrageous he is not being returned to face trial in his home country, where he was convicted of terror charges there in his absence in 1999.

The British court was concerned about the use of torture in his trial in Jordan. Jordan assured the Home Secretary it would not be used to gain evidence against him.

Nick Clegg, the Deputy Prime Minister, said, “We are absolutely determined to see this man get on a plane and go back to Jordan; he does not belong here….he is a dangerous person. He wanted to inflict harm on our country.”

Random Musings

--Gen. David Petraeus broke his silence over his resignation as CIA director and his extramarital affair involving biographer and mistress, Paula Broadwell. Petraeus insisted it was the affair and not the CIA’s role during the Sept. 11, 2012 attacks on the U.S. consulate in Benghazi. But investigators found substantial classified information on a computer used by Broadwell and they have not ruled out the possibility Petraeus passed the material to Broadwell. He’s lied once, we now know. Why should we believe him on the documents?

“This is personal. My two decades in the US Army were the centerpiece of my life. I believe in the ethics professed by the officer corps. Yet, I recognize that we mortals are imperfect (I certainly am) and the human heart is the ultimate IED. So while I’m disappointed that Gen. David Petraeus fell for Miss Fatal Attraction 2012, what makes me really angry is his hypocrisy.

“Petraeus preached a gospel of perfect virtue – always a foolish move – and became another fallen televangelist.

“Nor is it only Petraeus: Misbehavior, double standards and outright criminal acts have become epidemic among our senior officers. There have been dozens of investigations or prosecutions. Our nation’s military leadership is sick.

“As for Petraeus, he who rises by the headlines, falls by the headlines. His shabby indiscretion made national news not only because of his super-sensitive post as CIA director, but because he’d worked to make himself a media phenomenon. Ultimately, his cultivation of the press was far more successful than his failed (but celebrated) counterinsurgency doctrine.

“For his fellow officers, Petraeus’ love of the spotlight was an annoyance, but not a transgression. Even his tawdry ‘under the desk’ sex with a squirrely hustler on the make (a ‘writer’ who had to have ‘her’ book ghost-written) also might have been written off as an all-too-human mistake (let he who is without sin…). What killed Petraeus was his dazzling hypocrisy….

“In Iraq and then Afghanistan, he rigorously enforced ‘General Order No. 1,’ which prohibits our troops from fraternization, all sex, alcohol consumption, the possession of pornography and, generally, from any activity that might make the boredom and terror of this kind of war more bearable. When our troops screwed up, they got hammered.

“Generals can take a weekend in Paris and get drunk (as Gen. Stanley McChrystal did), but the grunt who goofs in a firefight faces a court-martial.

“Now those who’ve tied their military or literary careers to Petraeus and his inept counterinsurgency doctrine are rushing to make excuses for the general: He’s too important to be sacrificed like this, the president shouldn’t have accepted his resignation (resignation my butt – the guy was fired), and the affair only started after he left the military…

Ralph Peters goes on to excoriate Gen. Allen, and some of the other recent cases of generals gone bad, like Gen. William “Kip” Ward, who lost a star and paid an $82,000 fine for cheating on government travel.

Kori N. Schake, an associate professor at West Point who has held senior policy positions at the Departments of State and Defense, told the New York Times’ Thom Shanker:

“Our military is holding itself to a higher standard than the rest of American society. That is beautiful and noble. But it’s also disconcerting. Sometimes military people talk about being a Praetorian Guard at our national bacchanal. That’s actually quite dangerous for them to consider themselves different and better.”

I’ve long complained about the generals in this space, and as noted in Thomas Ricks’ new book “The Generals…” there is much to go after.

I finish each week with a reminder to pray for the men and women of our armed forces. Every now and then I feel compelled to remind you I’m referring to the grunts. As for the generals, I’m biting my tongue. Suffice it to say I have almost 14 years of archives on some of these guys, the very generals butt-boys like Sean Hannity kiss up to.

Veneration of the military only goes so far. I subscribe to Defense News and Army Times to keep up on the subject matter. I’ve kept a folder of the war dead from Iraq and Afghanistan as noted weekly in Army Times. I look at their photos and read their cause of death. You wouldn’t believe the percentage of the deceased who are white, by the way. 90% plus, by my unscientific count.

I noted on more than one occasion in this space, however, that I was a fan of Petraeus and would have voted for him for president. What a sucker I was; despite my knowledge of the topic. I won’t make that mistake again.

--Back to Thomas Ricks, he had an op-ed in the New York Times related to his book’s topic.

“Our generals actually bear much of the blame for the mistakes in the wars (in Iraq and Afghanistan). They especially failed to understand the conflicts they were fighting – and then failed to adjust their strategies to the situations they faced so that they might fight more effectively….

“In the past, Congressional oversight hearings might have produced some evidence that challenged the military’s self-satisfied conclusions. But today, politicians are so fearful of being accused of ‘criticizing our troops’ that they fail to scrutinize the performance of those who lead them.

“In the meantime, too many important questions remain unanswered.

“Why, for example, do we serially rotate our top war commanders? Earlier this month, Gen. Joseph F. Dunford Jr. was selected to replace Gen. John R. Allen as the American commander in Afghanistan. He will be the 11th officer to lead our war there in 11 years. 

“Rotating troops is appropriate, especially when entire units are moved in and out. But rotating top commanders on an annual basis makes no management sense. Imagine trying to run a corporation by swapping the senior executives every year. Or imagine if, at the beginning of 1944, six months before D-Day, Gen. George C. Marshall, the Army chief of staff, told Gen. Dwight D. Eisenhower, the supreme allied commander, that it was time to give someone else a chance to lead.”

--Re Benghazi, as William McGurn of the Wall Street Journal opined:

“Given what we know now about the consulate attack in Benghazi, we need to find out whether Mr. Petraeus’ personal troubles influenced what he said to Congress. In short, America still needs to know what Mr. Petraeus’ unvarnished view of Libya was, and is.”

As it turns out, Petraeus testified to both House and Senate committees on Friday and Republicans were far from satisfied with his answers. Petraeus now claims he characterized the Sept. 11 attack on the consulate as a terrorist strike, but he also told lawmakers this fact was removed from the talking points by other federal agencies who made changes to the CIA’s draft. Petraeus apparently doesn’t know who removed the reference to terrorism.

“We are becoming a conceited nitwit society, pushy and self-aggrandizing. No one is ashamed to brag now, and show off. They think it heightens them. They think it’s good for business.

“It used to be that if you were big, you’d never tell people how big you were because that would be kind of classless, and small. In fact it would be a proof of smallness.

“There is the issue – small but indicative of something larger – of how members of the U.S. military present themselves, and the awe they consciously encourage in the public and among the political class. The other day on his Daily Beast blog, Andrew Sullivan posted a letter from a reader noting the way officers are now given and relentlessly wear on their dress uniforms ribbons, markers and awards for pretty much everything they do – what used to be called fruit salad.”

Sullivan then posted pictures of Gen. Petraeus, lines of medals all over his uniform, and Dwight D. Eisenhower… one bar.

“Top brass sure is brassier than it used to be. And you have to wonder what that’s about. Where did the old culture of modesty go? Ulysses S. Grant wore four stars on his shoulder and nothing else on his uniform. And that was a fellow who’d earned a few medals.”

“Have we noticed a certain lack of modesty in our political figures? Thank goodness, therefore, for Mitt Romney, who in a conference call with donors said he got beat and beat bad, that his campaign was lacking, that his gut on the big issues was probably off, that he shouldn’t have allowed his campaign to become (in the grandiose, faux-macho lingo of campaign consultants who wish they wore fruit salad) an air war and not a ground war, and that they were smoked in get-out-the-vote. He added, with an eye to concerns larger than his own, that he wanted to help the party analyze and define what didn’t work in 2012 so it would be stronger in 2016.

“He said the administration gave ‘gifts’ to interest groups, and the groups appreciated the gifts, and, people being the little automatons they are, said yes, sire, and voted for him

“Maybe you caught the story that went viral the other day with the headline: ‘Woman Blames Husband for Obama’s Re-Election, Runs Him Over with Her Car.’ Our first thought was, gosh, Ann Romney never showed that side of herself on the campaign trail. We also felt a little like the woman when we heard Mitt Romney explain that President Obama defeated him due to government ‘gifts’ he gave to voters.

“Our point here isn’t to kick around Mr. Romney as he tries to justify a loss he clearly never expected. We’d just as soon forget his campaign. But it’s important to understand why Mr. Romney’s reductionist politics is mistaken before it becomes GOP gospel.

“ ‘What the President’s campaign did was focus on certain members of his base coalition, give them extraordinary financial gifts from the government, and then work very aggressively to turn them out to vote, and that strategy worked,’ Mr. Romney told donors on a conference call this week, according to a recording obtained by ABC News.

“ ‘It’s a proven political strategy,’ Mr. Romney continued. The tactic at the heart of the Obama juggernaut was ‘give a bunch of money to a group and, guess what, they’ll vote for you…Giving away free stuff is a hard thing to compete with.’

“Mr. Obama did not invent political vote-buying, and Republicans still sometimes win the White House – five times over the last nine elections. Mr. Romney might have made it six, but he somehow won fewer votes than John McCain in a year when Republicans were said to be supremely motivated….

“Mr. Romney lost a winnable election because he ran on a business biography that the other side destroyed and because he failed to sell a larger vision of economic opportunity.”

“It is often said of those who lose elections that (to paraphrase Shakespeare) nothing so becomes them as the leaving of the contest – when they make a gracious concession, talk of the greatness of our system, then exit the stage.

“Mitt Romney seemed to achieve this with his exemplary conduct and lovely speech on election night. Then, on Wednesday, just eight days later, he went and mucked it all up.

“Thanks to a phone call to supporters in which he mused on the reasons for his defeat, the man whom many thought nine days earlier would be president is being treated with scorn and contempt by Republicans and conservatives who supported him.

“Romney didn’t say on that call that the election had come out as it did because Obama’s team had outplayed and outfoxed his. He should have, because that’s the truth.

“Rather, he said that Obama had won the second term essentially through bribery – or what he called ‘gifts.’ According to the New York Times, Romney said Obama had pulled out an ‘old playbook’ to woo ‘the African-American community, the Hispanic community and young people.’….

“By contrast, Romney said, he talked about ‘big’ national issues: ‘military strategy, foreign policy, a strong economy, creating jobs and so forth.’ So, compared to the ‘gifts,’ he just couldn’t compete.

“Aside from being bad sportsmanship – Romney basically said Obama won by cheating – he was displaying the same obtuseness about the wants and needs of ordinary people that did more to torpedo his campaign than any goodies Obama might have had to dole out.

“Bobby Jindal, the brilliant and effective governor of Louisiana, raged against Romney in response. The former candidate was ‘absolutely wrong,’ he said. Romney was ‘dividing the American voters.’ Republicans, Jindal asserted, ‘need to continue to show how our policies help every voter out there achieve the American Dream.’….

“The American dream, as Jindal said, is achieved just as readily by a person who moves from poverty into the middle class as it is by someone who builds a small business. Indeed, that social mobility is probably more reflective of the enduring nature of the American dream than an individual burst of creative success.

“The inability to grasp this essential fact was Romney’s great weakness as a candidate. It implicitly led him to the signal blunder that probably cost him the presidency – the video in which he said that he couldn’t reach 47 percent of the electorate because they had grown too dependent on government and viewed themselves as victims.

“His comments on Tuesday suggested that, despite two months desperately trying to convince Americans he had misspoken, the 47-percent remark was an honest reflection of his view of the electorate.

“Romney is a good, intelligent, extraordinarily generous man who put on a great fight. But he didn’t understand the country or the people he sought to lead, and that is why he lost.”

--I have zero problem with Dem. Sen. John Kerry being either Secretary of Defense or State, though Kerry wants the State post; as in why would you want to preside over a department, Defense, where you will be doing nothing but stripping the budget the next few years?

President Obama, however, seems determined to nominate Susan Rice, UN Ambassador, for State when Hillary Clinton leaves. But you saw the reaction of Senators Lindsey Graham and John McCain to Rice’s pathetic initial comments on the Benghazi incident.

Obama then said it was “outrageous” to go after a UN ambassador and “besmirch her reputation” as Graham and McCain have.

To which I say, ‘What?’ If Rice is nominated to replace Hillary Clinton, may I remind the people that not only is the Secretary of State our chief diplomat, he/she is No.4 in the line of succession for the presidency and in this age of WMDs and terrorism, that’s something to consider. 

“Can we, as the GOP base, demand an IQ exam as well as a test of basic knowledge from our congressional and presidential candidates? This is not a flippant suggestion: There were at least five Senate seats in this election cycle that might have been occupied by a Republican come January had not the invincible stupidity of the candidate stood in the way.”

“It is hard to believe that some strategists once considered Michelle Obama a hindrance to her husband’s chances of becoming President. Whereas Barack Obama’s previously stellar reputation fell in his first four years in office, his wife’s public standing has soared.

“Far from being a liability, she has proved herself to be a priceless political asset. A personal appearance by Mrs. Obama at a campaign fundraiser guaranteed even larger donations than did a speech by her husband at similar events. The eloquence of her address to the Democratic National Convention in September on occasion outshone the candidate’s own.

“At the election itself, the President’s popularity with female voters surely owed a lot to his sharing an obviously happy marriage with a woman of palpable strength, independence and intelligence. Mrs. Obama also projects a warmth, a folksiness, an American-ness that her sometimes oddly detached husband appears to lack, or at least regularly misplace. We’re not convinced about him, many Americans decided on Tuesday, but we’d like four more years of her….

“In a role fraught with difficulties – express too many opinions and you’re Lady Macbeth, express too few and you’re a Stepford Wife – Mrs. Obama has barely put an elegantly shod foot wrong. The effusive tribute Mr. Obama paid her on Tuesday was richly deserved.”

“Northward winds are driving the record growth of winter sea ice around Antarctica, which stands in contrast to the extensive melting of the Arctic sea ice in recent years, scientists reported Sunday.”

The analysis from the U.S. Defense Meteorological Satellite Program “documented for the first time that long-term changes in the drift of annual sea ice around Antarctica were strongly affected by winds. The area of ocean covered by sea ice grew markedly in regions where the prevailing winds spread out the loosely compacted ice floes, they reported. It shrank in areas where the wind blew the floating ice up against the shore.”

--Worst of America: In one of Staten Island’s neighborhoods devastated by Hurricane Sandy, relief stations were set up for the folks to get essentials but they had to start asking for everyone’s I.D. because people were coming from out of town and loading up their cars with items like diapers and canned food. Where’s Charles Bronson when you need him?

--Best of America: Congratulations to the New York Mets’ R.A. Dickey for winning the National League Cy Young Award, the 38-year-old becoming the first knuckleballer to do so.

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

Gold closed at $1713
Oil, $87.17

Returns for the week 11/12-11/16

Dow Jones -1.8% [12588]
S&P 500 -1.4% [1359]
S&P MidCap -1.7%
Russell 2000 -2.4%
Nasdaq -1.8% [2853]

Returns for the period 1/1/12-11/16/12

Dow Jones +3.0%
S&P 500 +8.1%
S&P MidCap +8.4%
Russell 2000 +4.8%
Nasdaq +9.5%

Bulls 38.3
Bears 28.7 [Source: Investors Intelligence]

Kids, make sure you’ve planted the seed with your folks for a StocksandNews iPad app for the Christmas stocking.

And while I’m not promoting it yet, my Nightly Review video, Mondays through Thursdays, is available. You can watch me age, on tape delay.

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