Week in Review

---

Week in Review

05/11/2013

For the week 5/6-5/10

The U.S. Economy and Deficit Picture

It was a light week for economic news, save for another good figure on the weekly jobless claims front, 323,000, the lowest since Jan. 2008, and, if you take the 4-week average, the lowest level since Nov. 2007. So this is good.

Regarding earnings, it increasingly looks like S&P 500 companies will report record profits, up about 5% for the first quarter, but sales growth remains non-existent; projected to increase all of 1%. That’s what happens in a 2% overall growth environment, though when it comes to the bottom line, Corporate America, you’d think, has wrung out just about all the extra costs it can, plus you have the uncertainty in ObamaCare for 2014 and beyond.

But when it comes to the equity market, it’s still more about easy money than anything else, as central banks in Australia, India and South Korea joined the crowd in lowering interest rates this week. The Dow Jones and S&P 500 hit new all-time highs, with the Dow finishing over 15000 for the first time ever and the S&P over 1600. Nasdaq is at its best level since November 2000.

Regarding the Federal Reserve’s unprecedented $85 billion-a-month bond-buying program meant to spur the economy, the Wall Street Journal reports the Fed has mapped out a strategy for winding it down, reducing “the amount of bonds they buy in careful and potentially halting steps, varying their purchases as their confidence about the job market and inflation evolves. The timing on when to start is still being debated.” [Jon Hilsenrath] A number of Fed governors speak this coming week so we may learn a lot more about their plans.

Meanwhile, there is good news on the deficit front, though I’ve been pounding the table that this is so incredibly deceiving unless we tackle entitlements, today, because if we don’t do it this year, it sure as heck isn’t getting done during the 2014 election-cycle and, after that, it’s all about 2016.

On Friday, the government reported a surplus of $113 billion for April – the largest in five years. Through the first seven months of the budget year, the deficit is $488 billion, according to the Treasury, and we’re likely to end up between $775 billion and the Congressional Budget Office’s estimate of $845 billion when the fiscal year ends, Sept. 30.

Yes, I keep saying, the deficit is going to come down the next few years assuming just decent growth in the economy, but then it will soar anew, owing to entitlements, and the amount of interest we pay on the debt will skyrocket given a normalized rate environment.

So my argument has been about two simple facts: Needed entitlement reform and the coming interest debacle. That’s it.

As for the debt-ceiling, thanks to April’s surplus and $66 billion in dividends from Fannie Mae and Freddie Mac that will be hitting the Treasury’s books (more below), as well as the improving tax receipts picture, as well as spending restraint, the Treasury will be able to pay our nation’s bills for months without seeking additional borrowing authority. 

Lori Montgomery and Zachary A. Goldfarb / Washington Post

“(Better news on the deficit) might seem like good news, but it is unraveling Republican plans to force a budget deal before Congress takes its August break. Instead, the fiscal fight appears certain to bleed into the fall, when policymakers will face another multi-pronged crisis that pairs the need for a higher debt limit and the fresh risk of default with the threat of a full-scale government shutdown, which is also looming Oct. 1.

“In the meantime, Republicans face a listless summer, with little appetite for compromise but no leverage to shape an agreement. Without that leverage, House Budget Committee Chairman Paul Ryan (R-Wis.) said Tuesday, there is no point in opening formal budget negotiations between the House and the Senate, because Democrats have no reason to consider the kind of far-reaching changes to Medicare and the U.S. tax code that Republicans see as fundamental building blocks of a deal.

“ ‘The debt limit is the backstop,’ Ryan said before taking the stage at a debt summit organized by the Peter G. Peterson Foundation in Washington. ‘I’d like to go through regular order and get something done sooner rather than later. But we need to get a down payment on the debt. We need entitlement reform. We’re very serious about tax reform because we think that’s critical to economic growth and job creation. Those are the things we want to talk about.’”

Republican Sen. Bob Corker (Tenn.) said, “I think there’s a better atmosphere for a solution than there’s been in the past, but I’m a little worried about people here in the Senate having fiscal fatigue. There isn’t any sense of urgency right now.”

“The standoff between President Barack Obama and Republicans in Congress has produced spending restraint and higher taxes now – and nothing credible about curbing spending on retirement and health benefits, the real deficit drivers.

“Think about it. The U.S. has an economic crisis: It is unemployment, not the deficit. There are nearly 12 million Americans without jobs looking for work, three million of them for a full year or more.

“The U.S. Treasury is borrowing $70 billion a month and paying interest at less than 1.8% on its 10-year bonds, only partly because the Fed has been buying a lot of them. The deficit is shrinking as the economy slowly improves....

“But the deficit isn’t going to cure itself. It will widen in a few years, and the government’s debt burden will get heavier unless Congress and the president go beyond the recent tax increases on the rich and caps on annual appropriations.

“Here’s one reason to do more: Interest on the federal debt, half of which is held overseas, will amount to 6% of all federal spending this year. The White House says that even if the economy does as well as it hopes and if Congress adopts all of President Obama’s spending and tax proposals, interest will consume more than 10% of federal spending in 2018 and 13% in 2023, crowding out spending on things.

“Harry Truman, weary of ‘on the one hand, on the other,’ supposedly pleaded for a one-handed economist.

“Our time calls for policy makers and pundits with two eyes: one on the present, and the other on the future.”

If I’ve done nothing else over the years as a ‘pundit,’ I’m focused on both the present and the future, especially when it comes to the deficit debate.

Lastly, Syria is one or two steps removed from devolving into the total catastrophe category. It obviously has not been a market mover to date. I never said it deserved to be thus far. But the next three months are critical for the fate of the entire region. If the spillover continues, eventually Wall Street will be forced to take notice.

The final reading on euro-area services and manufacturing (the composite) increased to 46.9 in April, up from 46.5 in March (and better than the 46.5 flash estimate). Of course a 46-handle is still solidly in the contraction zone, 50 being the dividing line between growth and the alternative.  The manufacturing component came in at 46.7 vs. 46.8 in March.

Eurozone retail sales fell 0.1% in March, after a 0.2% drop in February, according to Eurostat. Retail sales in Spain cratered 10.5% for the month, year over year.

But Germany had some unexpected good news. Industrial production was up 1.2% in March over February, while factory orders rose 2.2% for the month; analysts having projected small declines in each. Exports also rose 2.7% in March, with those to the euro-area increasing 4.2%.  Add it all up and the German DAX hit a series of all-time highs.

But then you had Dutch industrial production falling 2% in March over February, while France’s declined 0.9%, so we continued the pattern of Germany doing better than its European brethren, as tensions also increased between Germany and France.

Concerning Franco-German relations, from The Economist:

“On a scale of one to ten, the friendship now rates lower than two, says Ronja Kempin at the German Institute for International and Security Affairs. Perhaps for the first time, fundamental disagreements are being aired in the open. Germany scoffs at France’s apparent belief that it should show more solidarity in the euro crisis by pledging more German taxes to support weaker members. Instead, it reckons that struggling countries, a group that includes France, must reform their labor and product markets to become more competitive. Otherwise, Mrs. Merkel’s government thinks, more German rescue funds would only create ‘moral hazard’ by allowing backsliding over reform.”

So this week, French Finance Minister Pierre Moscovici declared the era of austerity over after his German counterpart, Wolfgang Schauble, offered flexibility on deficit cutting.

“We’ve been pleading for a growth policy for a year,” said Moscovici. “Austerity on its own impedes growth.”

But this is an election year in Germany, Sept. 22 is the vote, and coalition lawmakers there are pushing back against the two-year extension for France to meet European Union deficit rules floated by Olli Rehn, the EU economic and monetary affairs commissioner. So even if Merkel wanted to help France, she is limited by a potential backlash.

The election also means policy making among Europe’s elected leaders has ground to a crawl.

One other item. Germany’s Schauble, speaking at a global investment conference in London, said countries must work together to “reduce global liquidity,” as the current wave of stimulus is causing “critical problems,” specifically it could lead investors to making poor decisions as the central banks with their record-low interest rate policies force investors to hunt for assets with higher returns.

Schauble did add, however, that when it came to the eurozone crisis, while it wasn’t yet solved, it was diminished.

Greece: Early in the week, the IMF said Greece had made “exceptional” progress on reducing its budget deficit, but then it added, “very little” had been done to tackle Greece’s “notorious tax evasion,” with the rich and self-employed “simply not paying their fair share” as austerity unfairly hits mostly public sector workers earning a salary or a pension. 

Last month, the Greek parliament adopted a law that will allow the dismissal of 15,000 civil servants, but under Greece’s current bailout plan, Athens has to cut 150,000 public sector jobs overall from 2010 to 2015, about a fifth of the total.

The IMF thinks the Greek economy will grow next year, like 0.6%, but it will contract another 4.6% this year, on top of a 20% collapse in GDP since the crisis began.

At least tourist bookings for the crucial summer season are described as buoyant.

Portugal: The government is cutting 30,000 civil service jobs and raising the retirement age one year as part of its bailout agreement.

Italy: The government expects the economy will now shrink 1.4% this year and unemployment will reach a record 12.3%.

Slovenia: The government announced a package of measures it hopes will allow it to avoid an EU bailout, including a tax increase, a major restructuring of the banking sector, and a program of mass privatization. The EU will issue its verdict by the end of the month. Slovenia has been in recession since 2011 and many analysts expect it to follow Cyprus into the bailout club.

Exports for the month of April rose a better than expected 14.7% from a year earlier vs. a 10% increase in March. Imports were up 16.8% for the month, besting March’s 14.1% pace.

However, many doubt the veracity of the data. China’s export figures have shown positive signs of recovery in external demand, but this flies in the face of other Asian exporters, such as South Korea and Taiwan, which have seen their export numbers weaken amid slowing global demand.

Separately, China’s consumer price index for April rose 2.4%, higher than March’s 2.1% reading, but below the government’s 3.5% target. Food prices, critical here, rose 4%, but non-food, the CPI was up only 1.6%. 

Worrisomely, producer prices for April fell 2.6%, year-on-year; a reflection of lower global commodity prices as well as unused factory capacity.

And the HSBC reading on the service economy came in at 51.1 for April, far lower than March’s 54.3 as staffing in the sector decreased for the first time since Jan. 2009. Also not good.

But at least passenger-vehicle sales rose 13% in April. Passenger vehicle demand has soared 25% since 2006, according to Bloomberg.

Street Bytes

--All three major averages had their third consecutive solid weekly gain with the Dow Jones up 1.0% to 15118, the S&P 500 up 1.2% to 1633, and Nasdaq up 1.7% to 3436. The dollar has been rallying as well, with the recent employment data reinforcing the belief the U.S. is the best developed market out there, and eventually the Fed will be pulling back on its bond-buying program. The greenback jumped to nearly 102 yen, its strongest level against the Japanese currency since October 2008, while it traded back to parity with the Aussie dollar and rose against the euro. Of course a strong dollar can do a number on some commodities.

--U.S. Treasury Yields

6-mo. 0.08% 2-yr. 0.24% 10-yr. 1.90% 30-yr. 3.09%

The long end of the curve had its roughest week in two months as the yield on the 10-year rose 16 basis points. PIMCO’s Bill Gross said on Friday that the 30-year bull market for bonds may have ended on April 29. I’m not getting excited until the 10-year hits 2.25%.

--As alluded to above, Fannie Mae said it will pay $59.4 billion in dividends to the U.S. Treasury, after posting a record profit in the first quarter. The $58.7 billion net profit reflected a gain of $50.6 billion from reversing an earlier writedown of tax benefits.

With this dividend payment to the Treasury, Fannie will have repaid $95 billion of the $116 billion it has received from taxpayer funds.

Freddie Mac earlier said it would pay a dividend of $7 billion to the Treasury, meaning it will have repaid about $37 billion of the $71 billion it had received.

Congress and the White House want to wind the two down but haven’t decided how to reduce the government’s role.

--The death toll from China’s H7N9 bird flu has reached at least 31, with a mortality rate approaching 25%. The World Health Organization continues to say it has no evidence the new strain is easily transmissible between humans. But the WHO also says 40 percent of those infected appear to have had no contact with poultry.

Meanwhile, Saudi Arabia has seen at least seven new deaths from a SARS-like virus, bringing the overall toll to 18, with health officials saying they are as concerned about the coronavirus as they are about H7N9. The coronavirus thus far has a mortality rate in excess of 50 percent.

The concern with both diseases is that they evolve into a pandemic.

--Hedge fund manager Kyle Bass reiterated his warning on Japan at an investment conference this week, saying it is “the beginning of the end” for Japan’s finances, describing the government as being “insolvent” and recent accounting moves, including a new form of debt, as “adding a Ponzi scheme to a Ponzi scheme.”

[Meanwhile, the Tokyo Nikkei index hit another five-year high as the spectacular post-Abe’s election rally continues.]

--Sony reported an annual profit for the first time in five years, owing to the weakening yen and asset sales; the weaker currency boosting exports.

--Another big beneficiary of the yen is Toyota, whose profits more than tripled to $9.7 billion for the fiscal year that ended in March. The automaker expects a further rise in profits of 40 percent this year.

--Shares in Tesla Motors soared after its Model S received a 99 out of a possible 100 in Consumer Reports magazine. The last car to score this well was the Lexus LX460 in 2009 – but no car at any price has ever scored higher. 

The Model S is also the quietest vehicle ever tested by the magazine.

Separately, the electric car maker reported its first profit in its 10-year history, with revenues hitting $562 million. Tesla expects to make in excess of 20,000 Model S vehicles each year.

But the shares finished the week in nosebleed territory, as more than one analyst said the stock is trading like it’s 1999. Auto expert Maryann Keller observed, “It has nothing to do with Tesla’s fundamentals. It has to do with pie-in-the-sky aspirations that don’t reflect the realities of the auto industry.”

Tesla’s market cap is now far in excess of that of Fiat, majority owner of Chrysler Group.

I mean consider that Tesla sold 4,900 Model S sedans in the quarter vs. Fiat’s delivery of 1.02 million cars and trucks worldwide in the period. Tesla had the above-noted revenue of $562 million...Fiat $26.1 billion.

--Microsoft announced it has sold 100 million licenses for Windows 8 in the six months since it was launched, which is good but it’s also only in line with previous version and Microsoft is conceding interest is already waning. Windows 8 has also failed to make a dent in the tablet market dominated by Apple and Samsung so a substantial update to make it easier to use is slated for later in the year.

Actually, as an analyst, Richard Doherty, at Envisioneering, a tech research firm in New York, put it, “People feel stupid sitting in front of it.”

I was on record from day one as saying Windows 8 sucked. I also felt stupid sitting in front of it.

Windows 8 will weigh heavily on Steve Ballmer’s legacy, who last October called the launch a “bet-the-company” moment for Microsoft.

--A global gang of cyberthieves hacked into financial institutions and stole $45 million from ATMs in what authorities say was a first-of-its-kind heist.

Hackers broke into computer networks of financial companies in the U.S. and India and eliminated the withdrawal limits on prepaid debit cards. Then people involved in the operation withdrew the tens of millions from ATMs in Manhattan and more than 20 other locations around the world. Eight were accused of masterminding the heist.

Of the $45 million, $40 million of it was withdrawn over 10 hours in 36,000 transactions, with $2.4 million taken from ATMs in New York.

--Spending at U.S. casinos rose 4.8 percent in 2012 to $37.3 billion, slightly below 2007’s record high of $37.5 billion, according to the American Gaming Assn.

Nevada, with 265 operating casinos, experienced a 1.5 percent increase in gross gaming revenue.

--Ski visits rose 20 percent for the winter of 2012-2013 in New England and New York. Nationally, U.S. ski areas saw an 11 percent increase.

--Disney’s $4 billion bet on Marvel back in 2009 continues to look like a brilliant move as Marvel’s “Iron Man 3” broke box office records last weekend, becoming the second-highest domestic opener ever – selling $175 million in tickets (and far more overseas, like a staggering $505 million), while there are a slew of other Marvel movies on the way, including “Captain America 2” and “Avengers 2.”

--McDonald’s reported same-store sales fell 1% in April, blaming the performance in part on fears of the bird flu in Asia. In the fast food chain’s Asia, Middle East and Africa division, sales were down 2.9%. They were also down 2.4% in Europe, while up 0.7% in the U.S.

Charles Ramsey, the Cleveland resident who helped rescue the women there, gave McDonald’s terrific publicity when he said he was eating their food when he heard Amanda Berry’s cry for help.

“We salute the courage of Ohio kidnap victims & respect their privacy,” the company wrote via its Twitter account. “Way to go Charles Ramsey – we’ll be in touch.”

--California sued JPMorgan Chase for operating a “debt collection mill” that flooded courts with more than 100,000 lawsuits to obtain speedy judgments before consumers could fight back.

“The state alleges that JPMorgan relied on incomplete records and erroneous information to make its cases; in some instances, key documents allegedly were signed by low-level employees posing as assistant treasurers and bank officers.” [Los Angeles times]

California also alleges JPM revealed customers’ credit card numbers.

--The U.S. Dept. of Agriculture projected in its monthly crop report Friday that we will see a record harvest of corn this autumn, with domestic supplies more than doubling by next year. The USDA predicted that this fall’s corn harvest would total 14.1 billion bushels, a 31% increase over last year. The projection would break the current record of 13.1 billion bushels set in 2009.

Needless to say, corn futures have been slumping. Even my farmer friends in the Oklahoma Panhandle have been receiving some rain the past few months.

--31 were arrested in connection with the February theft of $50 million in diamonds at Brussels’ airport. Most of those taken in were from Brussels. Some of the stolen diamonds were found in Switzerland, as well as a large amount of cash recovered in Belgium.

--According to Automatic Data Processing Inc. CFO Jan Siegmund, growth at smaller companies is slowing down over uncertainty concerning ObamaCare. ADP, which processes payrolls for thousands of employers, is seeing weakness as firms turn cautious about taking on new employees before the Affordable Care Act goes into effect next year.

“Hydraulic fracturing has generated many byproducts in recent years – more jobs, more tax revenue for city and state governments, more domestically produced natural gas and crude oil and, of course, more controversy.

“Though opponents have argued that fracking substantially contributes to greenhouse gas emissions, new estimates from the Environmental Protection Agency show that the leakage of methane – a greenhouse gas – from wells, pipelines and other infrastructure is much lower than previously believed, thanks in large part to better pollution controls implemented by the industry itself, according to the Associated Press. Recently released EPA estimates of methane emissions between 1990 and 2010 are 20 percent less than previous estimates, the AP reported, even as natural gas production has grown by almost 40 percent during the same period.

“To the oil and gas industry, the EPA’s revisions are proof that the environmental impact of fracking – which involves injecting millions of gallons of pressurized water, sand and chemicals into wellheads to break up gas trapped in shale rock formations – can be contained and managed. ‘The new EPA estimates reshape the entire fracking debate,’ says Chris Faulkner, CEO of Dallas-based Breitling Oil and Gas. ‘It shows the industry is taking proactive steps to reduce escaped methane emissions and has made great progress. What environmentalists don’t want to admit is that the oil and gas industry [has] a vested interest to capture the gas and not flare or vent it. It’s a commodity, and it has real value.”

--Occidental Petroleum shareholders ousted 78-year-old Chairman and former CEO Ray Irani after nearly three decades at the company, having taken over as CEO in 1990 from legend Armand Hammer. Occidental is the nation’s fourth-largest oil company and the industry’s biggest producer of oil inside the U.S.

--A study by the U.S. Department of Agriculture said the number of honeybee colonies declined 31% last winter, another blow to both the industry and more broadly agriculture. I didn’t realize the single biggest driver of demand for bee colonies is California’s almond crop, which requires bees for pollination.

“Overall, more than $20 billion of harvests rely on pollination, with the almond harvest alone valued at $4 billion a year.” [Wall Street Journal]

--Billionaire hedge-fund manager John Paulsen apparently lost 27 percent in his Gold Fund last month, bringing the loss for the year to 47 percent, according to Bloomberg.

--The 40-day dockworkers strike in Hong Kong is over after dockers accepted a 9.8 percent pay raise; workers having previously demanded a 20 percent increase.

--The Texas fertilizer plant that exploded last month, killing 14, injuring more than 200, and causing $10s of millions in damage had only $1 million in liability coverage, according to USA TODAY and the AP, emblematic of the amazing irresponsibility of the owners.

State and federal investigators haven’t determined what caused the blast, but a criminal investigation was launched on Friday with the arrest of a paramedic who helped evacuate residents the night of the explosion. Bryce Reed was charged with possessing a destructive device, but law enforcement officials said they had not linked the charge to the April 17 fire and blast at West Fertilizer.

--Oracle CEO Larry Ellison has purchased at least nine properties along Malibu’s coastline for an estimated $200 million to $250 million, according to the Los Angeles Times. Ellison is ranked the third-richest person in the U.S. by Forbes, with a fortune estimated at $43 billion. Last year he bought most of the Hawaiian island of Lanai for more than $500 million.

--Manchester United claims 659 million fans world-wide, with TV audiences approaching 50 million for each one of its matches, compared with 17.5 million for the average NFL game, according to Deutsche Bank.

So it was a big deal this week when after 26 trophy-laden years, Manager Alex Ferguson announced he was retiring, Man U taking its 13th Premier League title this season. David Moyes, Everton’s manager, is replacing him.

--The U.S. is experiencing one of the calmest tornado seasons on record, two years after the deadliest.

Through Thursday, just three have been killed by tornadoes this year, seven from May 2012 to April 2013, which is the lowest figure for any 12-month period since Sept. 1899-Aug. 1900.

--We note the passing of longtime Barron’s editor and writer, Alan Abelson. He was 87 and was still working when he went on medical leave about three months ago. Since 1966, his Up and Down Wall Street column was must reading for some and the stocks he mentioned often had significant moves in their share price Monday morning.

Foreign Affairs

Syria: Following Israel’s alleged attacks targeting Iranian missiles headed for Hizbullah last weekend, it appears President Bashar Assad is hunkering down to align himself more fully with Iran and Hizbullah. Hizbullah leader Hassan Nasrallah said he was ready to accept Syria’s offer for new arms, “game-changing (weapons)...even if it is going to disturb the balance (in the region).” Nasrallah could be referring not just to conventional weapons, but also the chemical variety. In a fiery televised speech on Thursday, near Beirut, he added that Syria would open the door to “popular resistance in the Golan.”

The Turkish government and opposition activists claim the Assad regime has carried out recent massacres in the coastal region as part of a sectarian campaign to carve out a Sunni-free, Alawite ministate for itself. One opposition activist in Turkey said this week about 800 were believed to have been killed in places like the seaside town of Banias. Apparently, villagers were told they had three hours to leave, after the massacre.

Republican Senator John McCain said on “Fox News Sunday,” “We need to have a game-changing action, and that is...establish a safe zone and to protect it and to supply weapons to the right people in Syria who are fighting, obviously, for the things we believe. Every day that goes by, Hizbullah increases their influence and the radical jihadists flow into Syria and the situation becomes more and more tenuous.”

As to the use of chemical weapons, Turkish Prime Minister Erdogan said it’s clear the Assad regime has used them, while an independent U.N. commission of inquiry said it has seen evidence rebel forces, not the government, have deployed sarin gas.

“What will unfold in Syria if the Obama administration persists with its policy of providing humanitarian and other non-lethal aid while standing back from the fighting? The most likely scenario is that Syria fractures along sectarian lines. An al-Qaeda affiliate, Jabhat al-Nusra, is already consolidating control over a swath of northeastern Syria; remnants of the regime, backed by Shiite fighters from Lebanon’s Hizbullah movement, could take over a strip of the western coastline.

“Such a splintering would almost certainly spread warfare to Iraq and Lebanon, as it has to some extent already. That could cause the collapse of the Iraqi political system that was the legacy of the U.S. mission there. Chemical weapons stocks now controlled by the Assad regime would be up for grabs, probably forcing further interventions by Israel in order to prevent their acquisition by Hizbullah or al-Qaeda. Jordan, the most fragile U.S. ally in the Middle East, could collapse under the weight of Syrian refugees. Turkey and Saudi Arabia, which have been imploring the Obama administration to take steps to end the war, could conclude that the United States is no longer a reliable ally.

“Of course, some of these consequences may come about whatever the United States does. But the best way of preventing them is to quickly tip the military balance against the Assad regime – something that would probably require an air campaign as well as arms for the moderate opposition. If the regime’s fighting strength is decisively broken it might still be possible to force out the Assads and negotiate a political transition, as Secretary of State John F. Kerry aspires to do. For now, with the regime convinced it is winning, there is no such chance – and with each passing month Syria’s breakup comes closer to reality.

“In short, there are substantial risks for the United States if it intervenes in Syria but also grave dangers in its present policy. On Tuesday President Obama said his job was to ‘constantly measure’ what actions were in the best U.S. interest. It’s not an easy calculus, to be sure. But for two years, as Mr. Obama has heeded the warnings about U.S. engagement, the situation in Syria has grown more dangerous to U.S. interests. There are no good options, as everyone likes to say. But it’s becoming increasingly clear that the greatest risk to the United States lies in failing to take decisive action to end the Assad regime.”

“America does have a choice. It can afford to stay out. And at this late date, it probably will.

“Early in the war, before the rise of the jihadists to dominance within the Syrian opposition, intervention might have brought down Assad and produced a decent successor government friendly to America and non-belligerent to its neighbors.

“Today our only hope seems to be supporting and arming Salim Idriss, the one rebel commander who speaks in moderate, tolerant tones. But he could easily turn, or could be overwhelmed by the jihadists. As they say in the Middle East, you don’t buy allies here. It’s strictly a rental.

“Israel’s successful strikes around Damascus show that a Western no-fly zone would not require a massive Libyan-style campaign to take out all Syrian air defenses. Syrian helicopters and planes could be grounded more simply with attacks on runways, depots and idle aircraft alone, carried out, if not by fighters, by cruise missiles and other standoff weaponry.

“But even that may be too much for a president who has assured his country that the tide of war is receding. At this late date, supporting proxies may be the only reasonable option left. It’s perversely self-vindicating. Wait long enough, and all other options disappear. As do red lines.”

“At this stage...any U.S. intervention would require a full Presidential commitment. Mr. Obama couldn’t merely make an announcement, deploy some troops and drop the subject as he did on Libya and Afghanistan. He has to make the case to the American public and commit himself both to toppling Assad and to shaping the aftermath. Such a commitment is not in Mr. Obama’s political character, to put it mildly.

“If nothing else, events in Syria are proving once again that in the absence of U.S. leadership, bad actors fill the vacuum. Sooner or later – usually sooner – the troubles they create implicate U.S. interests. By striving so hard to avoid U.S. intervention, the Obama Administration has made a wider war far more likely.”

Iran: Regarding the June 14 presidential election, there don’t appear to be any prominent reformers in the race, as candidates register this week, with a final list unveiled later in the month by the Guardian Council, which has the final say as to who gets on the ballot and who doesn’t.

Most of the candidates will be loyal to Supreme Leader Ayatollah Ali Khamenei, though will seek to reduce tensions with the West. But, all will strongly support the ongoing nuclear program, including uranium enrichment. President Ahmadinejad, who is ineligible, wants his top political protégé on the ballot, but Esfandia Rahim Mashaei has been denounced for opposing Islamic rule.

Libya / Benghazi: At the House Oversight Committee hearing chaired by Congressman Darrell Issa (R-Calif.), Gregory Hicks, the deputy chief of mission who was in Tripoli, described how the day of September 11, 2012, quickly turned to tragedy, presenting a lengthy and detailed recollection of the events, including his frustration with a military that Hicks argued could have prevented the second attack, following the initial assault that claimed Ambassador Chris Stevens and another American.

Hicks said he was watching television at his villa in Tripoli when he first got word of the initial attack. He listened to two messages on his cellphone and Stevens’ chilling words.

Hicks described a series of phone calls to the State Department and Libyan officials, frustrating efforts to find out what was happening in Benghazi, and a call from Clinton. He recalled another call from the Libyan prime minister with word that Stevens was dead.

Republicans at the hearing focused on the talking points used by UN Ambassador Susan Rice on the Sunday talk shows in which she said the attacks appeared to be associated with demonstrations in Egypt and Libya over an anti-Islam video.

Democrats referred to a video clip of Director of National Intelligence James Clapper telling a Senate panel earlier this year that the hit on Rice was unfair.

“She was going on what we were giving her,” Clapper said of the talking points.

Hicks talked of how the second attack in Benghazi could have been prevented if the U.S. military had scrambled jet fighters to scare off the insurgents with a show of force.

“The defense attaché said to me that fighter aircraft in Aviano (Italy) might be able to get to Benghazi in two to three hours,” Hicks said, but also that there was no air-refueling option available so they could not make the trip.

This to me is the biggest abomination of the whole tragedy. It is the anniversary of Sept. 11 and there were no forces on standby for a region increasingly in chaos, with American interests throughout? If we had fighter jet crews on standby in Aviano (yes, with a tanker) they could have been over Benghazi in about 75-90 minutes (which is the point of a video I did on my channel concerning a report on Monday by NBC’s Andrea Mitchell that planes were at least five hours away...an outrageous claim playing the American people as chumps).

“The Pentagon says no F-16s were on call that night, but why not? Why weren’t contingency plans in place? The State Department’s supposedly independent review panel said in December that ‘there simply was not enough time for armed U.S. military assets to have made a difference.’ The review blamed lower level officials for the security failure and didn’t even bother to interview Mrs. Clinton. Mr. Hicks says he was ‘effectively demoted’ after Benghazi from ‘deputy chief of mission to desk officer.’”

“The Benghazi story until now has been a jumble of factoids that didn’t quite cohere, didn’t produce a story that people could absorb and hold in their minds. This week that changed. Three State Department officials testifying under oath to a House committee changed it, by adding information that gave form to a growing picture. Gregory Hicks, Mark Thompson and Eric Nordstrom were authoritative and credible. You knew you were hearing the truth as they saw and experienced it. Not one of them seemed political. You had no sense of how they voted. They were professionals. They’d seen a bad thing. They came forward to tell the story. They put the lie to the idea that all questioning of Obama administration actions in Benghazi are partisan and low....

“The Obama White House sees every event as a political event. Really, every event, even an attack on a consulate and the killing of an ambassador.

“Because of that, it could not tolerate the idea that the armed assault on the Benghazi consulate was a premeditated act of Islamist terrorism. That would carry a whole world of unhappy political implications, and demand certain actions. And the America presidential election was only eight weeks away. They wanted this problem to go away, or at least to bleed the meaning from it....

“From the day of the attack until this week, the White House spin was too clever by half. In the weeks and months after the attack White House spokesmen said they were investigating the story, an internal review was under way. When the story blew open again, last week, they said it was too far in the past: ‘Benghazi happened a long time ago.’ Jay Carney, the White House press secretary, really said that.

“Think of that. They can’t give answers when the story’s fresh because it just happened, they’re looking into it. Eight months later they don’t have anything to say because it all happened so long ago.

“Think of how low your opinion of the American people has to be to think you can get away, forever, with that.

“Will this story ever be completely told? Maybe not. But it’s not going to go away, either. It’s a prime example of the stupidity of all-politics-all-the-time. You make some bad moves for political reasons. And then you suffer politically because you made bad moves.”

“The Hicks testimony left no doubt that Benghazi was an attack by organized terrorists. In the course of that long night, Mr. Hicks or his aides discussed what was happening with the Pentagon, the State Department and the U.S. Africa Command in Stuttgart, Germany. A lot of public officials were in the loop, and in real time.

“The distance and discrepancy between what Mr. Hicks was telling these officials across the U.S. government that night and what Ambassador Rice told the American people five days later is vast. That distance needs to be explained, and the loop closed for the sake of public accountability.”

Pakistan: Saturday is this country’s historic parliamentary election as Pakistan looks to complete its first peaceful transition of power (an elected government handing over power to another elected government), but the campaign has been anything but that, with election-related bombings and shootings killing 110 people alone in April, most of the attacks blamed on the Taliban and its offshoots.

On Thursday, one of the sons of former Prime Minister Gilani was abducted at a rally, with two others killed in the attack.

Former Prime Minister Nawaz Sharif is expected to become the next prime minister and he’s vowed to end the country’s involvement in the U.S.-led war on terror if elected. But he’s declined to say whether he would stop military operations against the Taliban.

Meanwhile, former cricket star turned politician, Imran Khan, who is expected to finish no worse than a strong third, suffered a horrific fall during a campaign stop in Lahore. Khan fell from a forklift truck, tumbling 15 feet, head-first, into a set of speakers. He suffered a gash to the head (and some cracked vertebrae) and was shown on television bleeding profusely, unconscious, as he was rushed to a hospital.

Afghanistan: President Hamid Karzai said the U.S. and its allies would be able to keep bases here following the end of the NATO combat mission end of 2014, Karzai saying the White House had asked for nine bases spread across the country.

But the administration wasn’t happy because it seemed Karzai was looking for a larger force than the U.S. is willing to commit to. The White House hasn’t reached a firm decision as yet on the number but it is looking like under 10,000. The administration also wants to hash out issues such as legal immunity before it talks specifics on bases or troop levels.

It was a deadly week for U.S. forces with eight killed last Saturday, the bloodiest day this year for Western troops. Five were killed when their vehicle struck a roadside bomb, two were killed in an insider attack, and another in a small-arms attack.

North Korea: Pyongyang said it had no intention of using an American it sentenced to hard labor for 15 years as a bargaining chip in talks with the United States. At the same time, the North stood down its military forces and moved two medium-range missiles from their launch positions, marking the end of six weeks of sustained tension with South Korea and the U.S.

China: The Obama administration directly accused China’s military of mounting cyberattacks on American government computer systems and defense contractors, stating that one of China’s motives could be to map “military capabilities that could be exploited during a crisis.”

Until now, the administration had avoided directly accusing the People’s Liberation Army of such attacks, but a Pentagon report to Congress stated:

“In 2012, numerous computer systems around the world, including those owned by the U.S. government, continued to be targeted for intrusions, some of which appear to be attributable directly to the Chinese government and military.”

Meanwhile, a lengthy article in China’s People’s Daily argued that China may have rights to the Ryuku island chain, which includes Okinawa.

The article was written by two scholars at the Chinese Academy of Social Sciences, considered to be China’s top state-run think tank. 

Okinawa was absorbed by Japan in 1879 and of course is home to major U.S. Air Force and Marine bases as well as 1.3 million people, who are considered more closely related to Japan in ethnic and linguistic terms than to China.

Japan lodged a diplomatic protest over the article. A foreign ministry official said, “We told them that if the Chinese government shares the position of casting doubt about Japan’s ownership of Okinawa, we would never accept it and firmly protest it.”

The Chinese government response was that the view in the commentary was solely that of researchers, but obviously the government allowed it to be prominently displayed in the largest state-run publication.

Malaysia: The scandal tainted governing coalition fended off its strongest ever challenge on Sunday to win national elections and extend its 56-year rule. Prime Minister Najib Razak’s National Front captured a reported 129 of Malaysia’s 222 parliamentary seats to win a simple majority. Opposition leader Anwar Ibrahim’s three-party alliance picked up 80 seats. Ibrahim claimed there was massive fraud. 

Turnout was about 80%, the highest in the country’s history. Voting is not compulsory. 

France: On the one-year anniversary of President Francois Hollande’s election, 70 percent of the French people believe there will be a “social explosion” in the coming months, while the business community has zero confidence that Hollande is up to today’s challenges.

Bangladesh: The death toll from the garment factory building that collapsed over two weeks ago now exceeds 1,000; easily the worst-ever garment industry disaster. Shockingly, a woman was found alive, Friday, 17 days after the collapse.

Random Musings

--I was reading a story in the Moscow Times concerning the Boston Marathon bombings and it really is telling just how many ethnicities are involved between the bombers and the fellow “Misha” and his parents. Misha is Mikhail Allakhverdov, a Ukrainian-Armenian, whose parents, Yury and Lidia, are Christian Armenian and Ukrainian. The parents moved with their son Misha to the U.S. from Baku in the 1990s, to escape the persecution of Armenian Christians in the capital of the newly independent and predominantly Muslim republic of Azerbaijan.

Tamerlan and Dzhokhar Tsarnaev were Chechens, whose parents moved from Russia to Kyrgyzstan, then back to Russia, before emigrating to the U.S. Their parents had two close Russian-speaking friends in Boston who hailed from Kazakhstan.

Ruslan Tsarni, the Chechen uncle of the Tsarnaev brothers, was apparently the first to mention Misha, referring to him as an Armenian who “somehow...just took [the] brain” of his nephew Tamerlan.

Animosity between Armenians and Chechens spans centuries, including a six-year war between Armenia and Azerbaijan, which began in 1988 and had a Chechen contingent led by Shamil Basayev fighting against the Armenians during what was called the Nagorno-Karabakh war. To this day there is a stalemate with almost daily exchanges of gunfire along the disputed border.

So as a scholar at Armenia’s National Academy told the Moscow Times:

“The fact that there is a Chechen and an Armenian in this story means that the U.S. and Britain just want to declare all Caucasians terrorists and separate the Caucasus from Russia. We have suffered from these plots before and thus we recognize them easily.”

As for Dagestan, that’s where the Tsarnaev brothers’ mother is from. She’s known as an “Avar.”

According to a scholar from the Russian Academy of Sciences’ Institute of the World Economy and International Relations:

“Azerbaijan would point out that the terrorists were brainwashed by an Armenian, while Armenians will talk about a plot against Russians.”

Yes, it’s complicated. And regarding the Boston bombings, U.S. officials say Russia withheld crucial intel from the FBI, text messages between Tamerlan’s mother and a Russian relative that suggested Mr. Tsarnaev was interested in joining militant groups responsible for attacks in the Caucasus region.

“Thirty-one months ago Senate Minority Leader Mitch McConnell affronted the media and other custodians of propriety by saying something commonsensical. On Oct. 23, 2010, he said: ‘The single most important thing we want to achieve is for President Obama to be a one-term president.’ He meant that America needed conservative change from the statist course of Obama’s presidency (the stimulus, ObamaCare, etc.), therefore America needed a president who would not veto such change.

“By similar reasoning, Obama today could sensibly say, and probably has said to himself, that the single most important thing he wants to achieve now is for Democrats to win control of the House in 2014. That redoubt of conservatism is an insuperable obstacle to the change he favors – ever-larger government as an instrument of wealth redistribution....

“Actually...Democrats are more apt to lose control of the Senate than gain control of the House. Republicans need to gain six Senate seats; Democrats are defending seven seats in states where Obama averaged just 40.5 percent of the vote in 2012. Democrats need to gain only 17 House seats, but just 17 Republicans hold seats from districts Obama carried last year, when he won 209 districts and lost 226. Analyst Charlie Cook says that the House, having reached ‘partisan equilibrium,’ has little ‘elasticity.’ Now that 96 percent of House Democrats represent Obama districts and 93 percent of Republicans represent districts that voted for Mitt Romney, ‘The House is now more sorted along partisan lines than ever.’...

“In the past 150 years, since the emergence of today’s two-party system, no party holding the presidency has gained even 10 House seats – or captured control of the House – in an off-year election.”

“The Air Force stripped an unprecedented 17 officers of their authority to control – and, if necessary, launch – nuclear missiles after a string of unpublicized failings, including a remarkably dim review of their unit’s launch skills. The group’s deputy commander said it is suffering ‘rot’ within its ranks.

“ ‘We are, in fact, in a crisis right now,’ the commander, Lt. Col. Jay Folds, wrote in an internal email obtained by The Associated Press and confirmed by the Air Force.

“Asked about this at a Senate hearing Wednesday, Air Force Secretary Michael Donley, the service’s top official, explained the problem by stressing that launch control officers are relatively junior in rank – lieutenants and captains – and need to be reminded continually of the importance of ‘this awesome responsibility’ for which they have been trained.”

We are so screwed....and in so many respects, the military so overrated. I love the grunts. I have little respect for the leader corps. See the failures in Iraq and Afghanistan. See Tommy Franks.

Sen. Richard Durbin, chairman of the Senate Appropriations Subcommittee on Defense, expressed outrage, saying the AP report revealed a problem that “could not be more troubling.”

The transgressions occurred at Minot Air Force Base, N.D.

--Speaking of transgressions, from Craig Whitlock / Washington Post:

“The estimated number of military personnel victimized by sexual assault and related crimes has surged by about 35 percent over the past two years, the Pentagon reported Tuesday, as the White House and lawmakers expressed anger with the military’s handling of the problem.

“The sobering statistics, along with several recent sexual-abuse scandals in the armed services, prompted President Obama to bluntly warn the Defense Department that he expected its leaders to take tougher action against sex offenders and redouble their efforts to prevent such crimes.

“ ‘The bottom line is, I have no tolerance for this,’ Obama told reporters. ‘If we find out somebody’s engaging in this stuff, they’ve got to be held accountable, prosecuted, stripped of their positions, court-martialed, fired, dishonorably discharged – period.’”

Obama added: “For those who are in uniform who’ve experienced sexual assault, I want them to hear directly from their commander in chief that I’ve got their backs.”

--Houston, we have a true “Dirtball of the Year” candidate. Samuel Pinkus.

You see, the author of “To Kill A Mockingbird,” Harper Lee, who I have to admit I didn’t know was still alive, she being 87, sued her literary agent, Samuel Pinkus, for, as Lee says, tricking her into assigning him the copyright on the Pulitzer-Prize-winning book.

You know, if someone told you ‘We are sending you on a long trip and you will have only one book and movie’ to watch...this could easily be the one. “Ben Hur” would be another. 

So this a-hole, Pinkus, evidently took advantage of Lee’s failing hearing and eyesight to transfer the rights and has failed to respond to license requests.

I’m embarrassed I forgot this, but Harper Lee’s titanic classic was also the only book she ever published.

“”In the lawsuit, Lee alleges that when her long-time literary agent, Eugene Winick, became ill in 2002, his son-in-law, Mr. Pinkus, switched several of Mr. Winick’s clients to his own company.

“Mr. Pinkus is alleged to have transferred the rights to secure himself ‘irrevocable’ interest in the income derived from Lee’s book.”

--New Jersey Gov. Chris Christie secretly underwent lap-band surgery.

“I’ve struggled with this issue for 20 years,” he said. “For me, this is about turning 50 and looking at my children and wanting to be there for them.”

The surgery was on Feb. 16 and apparently he has lost 40 pounds thus far. 

--So much for New York Gov. Andrew Cuomo and my belief, long ago, that the 2016 race would be between Cuomo and Christie.

The number of New York Democratic politicians who’ve been arrested, or implicated, in corruption scandals the past few months is more than enough to keep Cuomo out of the picture.

This week at least six Democratic state senators (and other politicos) were ensnared by Queens state Sen. Shirley Huntley, who wore a wire but still received one year in prison herself for ripping taxpayers off of $87,000 in funds.

--As reported by Nicole Gelinas of the New York Post, New York City will spend $8.7 billion on the police department this year, $4.3 billion on salaries and wages, $4.4 billion on pensions. The latter figure has soared from $1.1 billion since 2002, while the former has just kept up with inflation.

And therein is yet another example of the benefit bombs lying in the books at all levels of government.

--The rest of America is wondering why the good folks of South Carolina elected Mark Sanford to Congress as he captured 54 percent of the vote in a special election against Elizabeth Colbert Busch.

--Sorry to tick off some Tea Partiers, but I am not a fan of Texas Republican Sen. Ted Cruz.

And for Mr. Cruz to tick off the Wall Street Journal editorial board as he did the other day, well, let’s just say that wasn’t a smart move.

Basically, Cruz rewrote history, as the Journal put it, when it came to the gun-control bill.

“Mr. Cruz will have more success in the Senate, and in his mooted Presidential candidacy, if he stops pretending that he’s Nathan Hale and everyone else is Benedict Arnold.”

--Speaking of the Tea Party, the IRS was forced to apologize Friday for what it acknowledged was “inappropriate” targeting of conservative political groups during the 2012 election to see if they were violating their tax-exempt status.

As reported by the AP: “IRS agents singled out dozens of organizations for additional reviews because they included the words ‘tea party’ or ‘patriot’ in their exemption applications.”

The agency says no high-level officials were aware. Senate Republican leader Mitch McConnell said:

“I call on the White House to conduct a transparent, government-wide review aimed at assuring the American people that these thuggish practices are not under way at the IRS or elsewhere in the administration against anyone, regardless of their political views.”

Obviously there is more to this story...developing...

--Yes, I’m a big fan of Prince Harry and you couldn’t help but love his visits to Arlington National Cemetery and Walter Reed hospital on Friday to pay his respects and visit the wounded. When it comes to war, he can walk the walk.

--Ohio prosecutors have said they plan to seek the death penalty against Ariel Castro, the Cleveland man suspected of imprisoning three women for about a decade. Make it quick.   

Charles Ramsey, who busted down a door to free Amanda Berry, and the rest, is known as a “dish technician” and hard worker at his place of employment in downtown Cleveland, Hodge’s restaurant.

And at the end of your years...may God welcome you with, “Well done, my son.”

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

Gold closed at $1436
Oil, $95.90

Returns for the week 5/6-5/10

Dow Jones +1.0% [15118]
S&P 500 +1.2% [1633]
S&P MidCap +2.1%
Russell 2000 +2.2%
Nasdaq +1.7% [3436]

Returns for the period 1/1/13-5/10/13

Dow Jones +15.4%
S&P 500 +14.5%
S&P MidCap +16.6%
Russell 2000 +14.8%
Nasdaq +13.8%

Bulls 52.1
Bears 19.8 [Source: Investors Intelligence]

Have a great week. I appreciate your support.

Nightly Review video schedule...Monday thru Thursday, though the next few weeks I may need to take one or two off.

Brian Trumbore

---