Week in Review

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Week in Review

05/24/2014

For the week 5/19-5/23

Edition 789

Washington and Wall Street

It was a dull week highlighted, using the term loosely, by so-so housing data and further lackluster news on the retail front. The big story really takes place in Ukraine on Sunday with its presidential election as we wait to see what Russia’s reaction will be, Thursday and Friday having seen the worst violence yet in the eastern region.

But for now some brief comments on the U.S. economic scene. Existing home sales for the month of April came in largely as expected, up 1.3% month to month to an annualized figure of 4.65 million, the first such gain of the year, though down 6.8% when compared with April 2013, while new home sales for the month were a little better than expected. The best thing that you can say is the two taken together show the market is probably stabilizing after a rough winter. A real positive is the average mortgage rate on a 30-year fixed is down to 4.14%, the lowest since October, so that’s helpful.

On the retail front, the past two weeks have seen all the big players report and I thought I’d just summarize the big picture, using U.S. comp store sales for a few of the biggies for their last reported quarter.

Macy’s...down 1.6%
Wal-Mart...down 2.4%
Kohl’s...down 0.8%
Target...down 0.3%
Nordstrom...up 3.3%
Home Depot...up 2.6%
Lowe’s...up 0.9%
Best Buy...down 1.3%

Not exactly scintillating. One company that did shine, however, was Tiffany, whose U.S. same-store sales rose 11%.

Now some such as Wal-Mart fell back on the weather excuse and it’s totally legitimate so let’s see what happens in the current quarter. Most economists are looking for a strong rebound in the April-June period, anywhere from 3% to 4% GDP growth after the stagnation of the first quarter, and my guess would be it’s closer to 4% than 3%. 

But that doesn’t mean that’s the pace the economy will grow at in the second half. Too early to forecast this, especially with a few geopolitical items out there that can muck things up.

I do have to take a little detour to ObamaCare, though, because I’ve been saying since January that President Obama would catch a short-term break in terms of negative press for his signature piece of legislation, but that in the months leading up to the November mid-term elections, the topic would heat up anew because we’d be learning about the premium hikes being applied for by the insurance companies, which in turn would obviously impact voter sentiment as they head to the polls.

So I read with interest a piece by Noam N. Levey in the Los Angeles Times. Here’s a small portion of it.

“The Obama administration has quietly adjusted key provisions of its signature healthcare law to potentially make billions of additional taxpayer dollars available to the insurance industry if companies providing coverage through the Affordable Care Act lose money.

“The move was buried in hundreds of pages of new regulations issued late last week. It comes as part of an intensive administration effort to hold down premium increases for next year, a top priority for the White House as the rates will be announced ahead of this fall’s congressional elections.

“Administration officials for months have denied charges by opponents that they plan a ‘bailout’ for insurance companies providing coverage under the healthcare law.

“They continue to argue that most insurers shouldn’t need to substantially increase premiums because safeguards in the healthcare law will protect them over the next several years.

“But the change in regulations essentially provides insurers with another backup: If they keep rate increases modest over the next couple of years but lose money, the administration will tap federal funds as needed to cover shortfalls....

“Insurers around the country have started to file proposed 2015 premiums, just as the midterm campaigns are heating up. ObamaCare remains a top campaign issue, and big premium increases in states with tightly contested races could prove politically disastrous for Democrats.

“If rates go up dramatically, consumers may also turn away from insurance marketplaces in some states, leading to their collapse.

“Proposed increases in a few states where insurers have already filed 2015 rates have been relatively low, with several major carriers seeking just single-digit hikes. But insurers in closely watched states, such as Florida, Pennsylvania, North Carolina and Arkansas, are still preparing their filings.”

Yup. Far more on this topic to come.

Europe and Asia

Before I get to the European Parliament elections, a few economic notes for the eurozone. Markit’s flash composite reading on manufacturing and services for the month of May came in at 53.9 vs. 54.0 in April, with services up, 53.5 vs. 53.1, and manufacturing down, 52.5 vs. 53.4.

Now the flash reading only breaks down Germany and France, individually, and Germany’s comp was strong 56.1, with the service reading in May at 56.4 vs. 54.7 in April, while manufacturing was 52.9 vs. 54.1 the prior month. [Separately, a reading on German business confidence dropped in May.]

But France remained the “sick man of Europe” as its comp fell to 49.3 in May from 50.6, with services down, 49.2 from 50.4, and manufacturing down, 49.3 from 51.2; i.e., both in contraction mode all over again. You can see why the Socialist Party of President Francois Hollande isn’t expected to do well in this weekend’s elections.

In non-Euro U.K., though, retail sales rose a solid 1.3% in April over March, up 6.9% year over year, the best performance since May 2004, but Bank of England Gov. Mark Carney warned of major issues for Britain’s housing market. Prices continue to rise rapidly, despite a building “big debt overhang,” as Carney put it. London home prices are now 25% above the 2008 peak, up 18% annually, while across the rest of the country housing prices rose 10% the past year.

Overall, the eurozone remains in recovery mode, while the European Central Bank and its president, Mario Draghi, will ease monetary policy when the ECB next meets on June 5 to combat the risk of deflation.

One other item. I’ve been warning about the eurozone periphery’s bond markets and the past few weeks have seen far greater volatility.

Italy’s 10-year, for example, which was down to about 2.95% two weeks ago, saw its yield rise to 3.34% on Wednesday, before finishing the week at 3.15%.

Spain’s 10-year, which bottomed at about 2.85%, saw its yield surge to 3.17% at mid-week before rallying back to close Friday at 2.98%.

Spain rallied after receiving a credit upgrade based on a better economic outlook, while in the case of Italy, I really don’t know why it rallied. The prior nervousness was warranted because Italy’s Euro Parliament elections are not expected to go well for Prime Minister Matteo Renzi’s party and, recall, this guy was never officially elected...ergo, he’s the unelected prime minister. So if his party, and coalition, don’t fare well, there could be serious questions about his legitimacy, while admitting national and European Union polls are totally different animals.

Now as to the EU Parliament vote itself, it started with the U.K. and Netherlands on Thursday, and then all the other major players hold their votes on Sunday (including France, Germany, Greece, Italy, and Spain).

None of the results, including for the U.K. and Netherlands (plus a few others voting May 23 and 24) are to be released before 11:00 p.m. Brussels time on Sunday, so I’ll have a full report next week, though initial exit polls from the Netherlands (which were allowed) showed Geert Wilders’ anti-EU Freedom Party doing poorly.

But a refresher on why this vote, while being pooh-poohed in some circles, bears watching.

“European leaders’ wishful thinking starts with the economy. Growth may be back, but it is anemic. Unemployment remains horrific: as many as 26m people in Europe are now out of work. Almost everywhere debt is dangerously high. With banks fragile, credit is hard to come by, and parts of Europe are on the verge of deflation. The eurozone may be heading into a lost decade similar to Japan’s in the 1990s. Japan is a socially cohesive nation-state; the diverse EU is far less likely to survive such an experience.

“The EU could help bolster growth. The European Central Bank could ease monetary policy, including by unconventional means. The European Commission could make a renewed push at completing the single market in services, digital technology and energy, for instance, or could press ahead with a free-trade deal with America.

“Yet a blast of reformist zeal from Brussels would hardly mollify Europe’s disgruntled voters. For one thing, reforms tend to produce short-term pain before long-term gain – one reason why many European governments have found them so hard. For another, voters do not like being pushed around by Eurocrats....

“(While) most eurozone voters want to keep the euro, they have made it quite clear that they oppose the accretion of ever more intrusive powers to the ECB, the European Commission and the European Parliament....In France, a founding member, the EU today attracts even more resentment than it does in famously Eurosceptic Britain. The populists’ appeal in the European elections is based largely on rising hostility to interference by Brussels.”

But whereas the European Parliament used to be nothing more than a chattering club that sopped up EU members’ funds to run a huge bureaucracy (mostly related to translating rules and regulations into the various languages), today it is virtually a co-equal legislator with the national governments that meet in the Council of Ministers. As much as 90% of what the EU does requires European Parliament approval. And as The Economist notes, “since the EU is involved in as much as half of all legislation in Europe, that makes the European Parliament more powerful than most national legislatures.”

The Euro Parliament elects the president of the European Commission, for example, while a populist leaning parliament would spell the death knell for “ever closer union.”

Which is why I’ve spent so much time on the far-right, populist movement in Europe, that threatens to make big gains this go ‘round and possibly be the leading bloc when all the votes are tallied. Again, these are the guys and gals who would love nothing more than for the EU to break up, while not appreciating what an utter economic disaster that would be, for starters.

But a not-so-funny thing happened these last few days before the parliament vote. Some of the far-right leaders showed their true colors. One of them was 85-year-old Jean-Marie Le Pen, the founder and honorary president of France’s Front National party (National Front).

How can I put this delicately? Recall, Jean-Marie’s daughter, Marine, assumed leadership of the FN a number of years ago and she’s been trying to put a more mainstream face on what had been a virulently racist, anti-Semitic party under her wacko father. [For new readers out there, I saw both up close and personal in Paris on May Day.]

Marine probably wishes her father was (you know, not living) because on Tuesday in Marseille, shortly before a rally with Marine, he told a group of French journalists: “There is a demographic explosion in the world and a risk of submersion. A replacement of [the national] population is under way.” However, he added: “Monsieur Ebola can solve the problem in three months.”

Eegads. Immediately, a spokesman for the Socialist government called out Le Pen and said: “For those who often make out that the Front National has changed, here is the proof once again that they have not changed.”

Marine’s attempts to “detoxify” her party and shed its racist image may have just been washed down the drain. We’ll see what happens on Sunday.

Nigel Farage, the leader of the UK Independence Party (UKIP...or Ukip), has previously ruled out joining forces with Le Pen because, as I noted in this space before, the FN had anti-Semitism “in its DNA.”

But Farage said after hearing of Jean-Marie’s comments: “I almost feel sorry for Marine Le Pen. I cannot understand what she has done to make her father dislike her so much.”

However, Mr. Farage had his own ‘insert foot in mouth’ moment this week. As Robert Mackey wrote in the New York Times:

“In a contentious radio interview that sounded at moments like Absurdist theater, the leader of the anti-immigrant UK Independence Party, Nigel Farage, denied his attacks on foreign-born migrants were racist.

“Mr. Farage, a member of the European Parliament who blames membership in the European Union for a host of economic and social problems, was asked about comments he made in February, when he said he was uncomfortable during a recent train journey in London when he could hear only foreign languages being spoken by fellow passengers.

“After Mr. Farage said that he was only expressing discomfort ‘at the rate and pace of change and numbers of people coming to London,’ the interviewer, James O’Brien, pointed out that Mr. Farage’s wife is a German and presumably speaks the language in his presence.

“ ‘Yeah, I don’t suppose she speaks it on the train,” Mr. Farage replied, ‘that’s the point I’m making.’

“ ‘Of course people are allowed to,’ Mr. Farage said.

“Moments later...O’Brien asked, ‘What about if a group of German children did, what’s the difference?’

“ ‘You know what the difference is,’ Mr. Farage replied. ‘We want an immigration policy based on controlling not just quantity but quality as well,’ he added.”

Well, friends, you can see that while the FN and UKIP may receive 20% plus of their nation’s votes, the disapproval ratings for the two leaders themselves are generally in the 70% range, which gives you an idea of their potential ceiling. [A final poll by YouGov for ‘The Sun’ did have UKIP receiving 27% of the Euro Parliament vote, with David Cameron’s Tories in third, behind Labour, at 22%.]

*As I go to post, Farage’s UKIP did gain more than 150 council seats in concurrent local elections, but the BBC’s projected national share of the vote had UKIP at 17% in a Britain-wide election (important for the 2015 general vote), which would trail Labour at 31% and the Conservatives at 29%. [Sorry if this is utterly confusing...I almost forgot myself about the local British polls this week.]

Back to the immigration issue, a big one across the EU, net migration rose to a 20-year high in Germany in 2013, the Statistics Office just released, an increase of 437,000. Immigration from Italy rose by 52% on the year – up 32,000, for example. Net migration from Poland was 72,000.

For Germans a European Parliament vote issue is “welfare tourism.” Chancellor Angela Merkel was quoted as saying, “(Germany) does not want to pay (unemployment benefits) for EU citizens who are in Germany just to seek work.”

Interestingly, on Tuesday, a legal adviser to the European Court of Justice said Germany could refuse to pay some social benefits to citizens of another EU country if they only came to Germany to receive benefits, though the opinion is not binding.

And I do have to add that while the far-right is the focus of the likes of Britain, France and the Netherlands, in Greece’s Euro Parliament vote it is expected that far-left Syriza will capture the most seats (while far-right Golden Dawn probably gets a few of its own), but Syriza needs a very strong showing to buttress its case for bringing down the current, pragmatic government of Prime Minister Samaras.

Finally, this has nothing to do with the EU vote, but speaks to the current state of affairs in France. The national rail operator, SNCF, sparked both ridicule and outrage when it was revealed that 341 new trains it was tasked with building are too wide for 1,300 stations, meaning platforms will have to be “shaved” to prevent them from getting stuck.

France’s transportation minister dubbed it “comically tragic,” but the cost is going to be about $65 million at a time of austerity. Literally, someone was supposed to check one particular region of the country where virtually all of the impacted stations are and clearly failed to do so.

Turning to China, HSBC’s preliminary PMI for China manufacturing came in at 49.7 in May, a 5-month high and better than expected; perhaps a sign the government’s mini-stimulus program, focusing on tax breaks for small companies and speeding up railroad projects, is having some impact.

On a different issue a Barron’s article made a good point. If Asia’s richest man, Li Ka-shing, has been unloading his China real estate holdings for more than a year, how can you possibly believe there is any reason to buy property there?

The real estate market is tumbling by some metrics. New home sales in 54 cities during the May Day holiday were down 47% to a 4-year low. Government land sales, a huge source of revenues, were off 17% in March.

The property market represented 15% of China’s GDP in 2013. Now the government is trying to speed up mortgages for first-time home buyers.

In 44 of 70 cities that the government monitors, prices rose in April, but this was the fewest since October 2012. Existing-home prices were essentially unchanged in Shanghai and Beijing, April over March.

Street Bytes

--Stocks rallied across the board with the S&P 500 closing the week at a new all-time high, an even 1900, up 1.2%. The Dow Jones tacked on 0.7% to 16606, a little over a hundred points shy of its record mark, while Nasdaq gained 2.3% and is now back in positive territory for the year, up 0.2% (same as the Dow).

--U.S. Treasury Yields

6-mo. 0.05% 2-yr. 0.34% 10-yr. 2.53% 30-yr. 3.39%

--Credit Suisse agreed to pay $2.6 billion – the largest penalty in an offshore tax case – for using secret Swiss accounts to help Americans evade taxes, concluding a three-year probe by the Justice Department. It thus becomes the first large global bank in 20 years to admit to criminal charges.

Prosecutors hope to use the penalty as a model for other cases, such as a probe of BNP Paribas’ transactions with sanctioned countries.

Attorney General Eric Holder said at a press conference announcing the penalty, “This case shows that no financial institution, no matter its size or global reach, is above the law. A company’s profitability or market share will never be used as a shield from prosecution or penalty. And this action should put that misguided notion definitively to rest.”

Holder added: “The bank went to elaborate lengths to shield itself, its employees, and the tax cheats it served, from accountability for their criminal actions.

“They subverted disclosure requirements, destroyed bank records, and concealed transactions involving undeclared accounts by limiting withdrawal amounts and using offshore credit and debit cards to repatriate funds.”

Eight Credit Suisse employees have been indicted, though CEO Brady Dougan narrowly got to keep his job, with Dougan telling analysts a day after the penalty was announced that stepping down had “never been a consideration.”

The impact of the plea will take some time to ascertain in terms of the number of clients that will now choose to leave Credit Suisse and take their business elsewhere.

But it also needs to be pointed out that the Justice Department’s action was not intended to destabilize Credit Suisse, let alone the wider financial system, though as the New York Times’ Peter Eavis asked, does the plea amount to justice?

“In some respects, Credit Suisse is definitely being punished. The conviction is a stubborn stain on Credit Suisse’s name. The bank finds itself in the company of corporate felons that include Drexel Burnham Lambert, the ethically challenged Wall Street firm, and Arthur Andersen, Enron’s auditor....

“In addition, the $2.6 billion in penalties that Credit Suisse has agreed to pay is not an insignificant sum....

“Still, the settlement left some critics of big banks disappointed for what it didn’t do.”

Such as producing the names of people whose accounts may have been used for tax evasion.

And as Crain’s New York Business’ Aaron Elstein noted, “pleading guilty to a crime didn’t even ding its credit rating.”

S&P maintained its “A” rating of CS, and Moody’s did the same.

Back to BNP Paribas, Bloomberg reported that U.S. authorities are seeking more than $5 billion for violating U.S. sanctions on Iran, Sudan and other countries.

--Cisco Systems CEO John Chambers wrote President Barack Obama “warning of a collapse of trust in U.S. technology after evidence emerged showing the National Security Agency breaking into his company’s equipment.

“In a letter seen by the Financial Times, John Chambers called for ‘standards of conduct’ to rein in government surveillance so that national security objectives do not interfere with the U.S.’s leading position in the global technology market.” [Daniel Thomas and Richard Waters / FT]

Chambers is right on the mark. It’s deeply disconcerting, and, combined with the Chinese hacking of Corporate America (detailed below), costing the U.S. economy in multiple ways.

--General Motors announced yet another recall, this one involving 2.4 million vehicles in the U.S., bringing the total to over 13 million here (15.8 million worldwide) – more than the carmaker sold in 2013. The latest move covers possible faulty seat belts, transmissions, and air bags.

The recalls have already cost GM $1.3 billion and it now estimates the latest recall will tack on another $400 million in the April-May period.

But so far GM’s U.S. sales are down just 2.3% in the first four months of 2014.

--As I noted would likely be the case last time, AT&T did formally propose a $49 billion acquisition of DirecTV but AT&T can walk away from the deal if DirecTV is unable to renew its hugely successful “Sunday Ticket” offering with the National Football League on “substantially...the terms discussed between the parties,” the telecom company said in a securities filing Monday. DirecTV’s deal with the NFL expires at the end of the 2014 season.

DirecTV has held the rights to the “Sunday Ticket” package since it started offering TV service in 1994. Roughly one out of 10 subscribers has it, which starts at $240 a year.

So now the NFL is in a rather attractive negotiating position, don’t you think?

The deal still has to meet regulatory approval, including that of both the Federal Communications Commission and the Department of Justice.

--Hewlett-Packard met Wall Street’s earnings expectations, though revenue was down 1% for the fiscal second quarter vs. a year ago. But the big news was the company announced plans to lay off a further 16,000 workers on top of a previously announced reduction of 34,000 as part of the restructuring under CEO Meg Whitman going back to 2012.

Whitman said she was pleased to report “HP’s turnaround remains on track,” though she has not been specific as to when the company expects to see the full results of its restructuring strategy.   

--Meanwhile, the world’s biggest personal computer maker, China’s Lenovo, earned a record $817 million for the 12 months to March, with the company saying it sold 55 million PCs during the year, taking its global market share to 17.7%, even as the overall industry saw an 8% decline in PC sales. [HP saw a surprising increase in certain segments of the PC market.]

Lenovo also sold 50 million smartphones and 9.2 million tablets in posting full-year revenue of $38.7 billion, up 14% over the previous year.

--EBay is getting heat from its users over the site’s handling of a hack attack that exposed millions of passwords and other data.

The issue is the database was hacked between late February and early March, but it wasn’t until this week that eBay told users to reset their passwords. The company said it didn’t learn of the attack until two weeks ago. The PayPal payments network wasn’t part of the hacking activity.

--Best Buy Co. warned electronics sales will continue to decline over the second half of the year. The company needs a new hot product and as CEO Hubert Joly said, “There’s no doubt that after several years of rapid growth, the phone market in the U.S. has entered a level of saturation,” while tablets are also selling more slowly.

But the company did beat earnings expectations, even as revenue fell 3.3% from year-ago levels (different from the same-store comps I listed above).

--Tiffany & Co., the world’s second-largest luxury jewelry retailer, handily exceeded expectations, as alluded to above, with net income rising 50% to $125.6 million. Revenue was up 8% in the Americas, 17% in the Asia-Pacific region, 9% in Europe and 20% in Japan.

--Shares in Dick’s Sporting Goods plunged 18% after the company announced that sales of guns and golf equipment are lagging. CEO Ed Stack noted the panic-buying of guns ahead of potential gun legislation had ebbed, while he pointed to statistics showing the fewest golf rounds in the U.S. in 20 years. Regarding the latter I look at myself. As much as I love the sport, my first round of the season won’t be until June and I’ll probably play just 4 rounds here all year (it’s about my schedule...and running taking precedence when I have free time), while I will go to Ireland for some play later. But I used to play 8-10 rounds, not including overseas trips. 

By the way, there’s also a big inventory glut on the equipment side. Good time to get a TaylorMade RocketBallz Stage 2 driver, golfers, as it should be heavily discounted at places like Dick’s. Or wait until next winter when they’ll be giving it away.

--Chinese online retailer JD.com went public, raising $1.78 billion in a test of the appetite for a Chinese Internet company, as the Street gears up for Alibaba’s highly-anticipated offering in the coming months. JD was valued at $25.7 billion and the shares rose 10% the first day of trading, Thursday, before backing off 4% on Friday. The company has reported a loss in each of its first five years, though it racked up $11.5 billion in sales in 2013.

--Pfizer hasn’t totally given up on its bid for Britain’s AstraZeneca as the two sides vie for shareholder support. AstraZeneca issued a statement saying there was no chance of renewed talks after it rejected Pfizer’s “final” offer on Monday. Pfizer is appealing to AstraZeneca shareholders, many of whom have told AstraZeneca’s board to reopen talks with Pfizer later this summer after a May 26 bid deadline passes. U.K. takeover rules then require a three-month cooling-off period.

--As reported by Louis Sahagun of the Los Angeles Times: “Federal energy authorities have slashed by 96% the estimated amount of recoverable oil buried in California’s vast Monterey Shale deposits, deflating its potential as a national ‘black gold mine’ of petroleum.

“Just 600 million barrels of oil can be extracted with existing technology, far below the 13.7 billion barrels once thought recoverable from the jumbled layers of subterranean rock spread across much of Central California, the U.S. Energy Information Administration said.

“The new estimate, expected to be released publicly next month, is a blow to the nation’s oil future and to projections that an oil boom would bring as many as 2.8 million new jobs to California and boost tax revenue by $24.6 billion annually.”

Well this is going to fuel controversy, as it flies in the face of numerous other studies.

--I get into the political situation in Thailand down below, but owing largely to the turmoil, auto production and sales were down 25.6% and 33.2%, respectively, in April vs. year ago levels. The cessation of government incentives for first-time car buyers also hurt.

Thailand’s auto industry employs 500,000 and it’s estimated 10,000 have been let go this year.

Overall, the Thai economy shrank 0.6% in the first quarter on an annualized basis, down 2.1% vs. the prior quarter.

North Dakota 2.6%...lowest
Vermont 3.3%
Nebraska 3.6%
Texas 5.2%
Pennsylvania 5.7%
National Average 6.3%
New York 6.7%
New Jersey 6.9%
California 7.8%...down from a peak of 12.4%
Nevada 8.0%
Rhode Island 8.3%...highest

California’s rate is the lowest in nearly six years (July 2007), the unemployment rate having peaked at 12.4%.

--Marathon Petroleum is acquiring the retail operations of Hess, the largest chain of company operated gas stations and convenience stores on the East Coast, as Hess is opting to focus on becoming a pure production and exploration company.

But fret not, toy truck lovers. The Hess truck will continue, though starting in 2015, it will be available only online.

--With a week to go in the 2013-2014 Broadway season, attendance is up 5% from the corresponding period last year, as reported by Crain’s. Gross revenue gained 11% to $1.2 billion. There were 36 shows playing on Broadway as of last week vs. 28 at this time in 2013.

--London topped a survey for most attractive global city, knocking off New York in the PricewaterhouseCoopers ranking. Singapore came in third, followed by Toronto and San Francisco. Paris was sixth.

--Godzilla had a blockbuster opening last weekend, $93 million in the U.S. and Canada and $103 million overseas. I’m still pegging the insurance losses caused by the monster at $20 trillion.

Foreign Affairs

Ukraine: It’s all about Sunday’s presidential election and what Russian President Vladimir Putin’s reaction will be.  What will happen in the restive east, specifically in the regions of Donetsk and Luhansk, which account for about 15% of Ukraine’s 46 million in population? At last word (and admittedly everything regarding this topic is fluid), separatists control a majority of district electoral offices in the two. [It could easily be 100% by Sunday.]

Separatists were also responsible for an ambush at a Ukrainian army checkpoint, 30 miles south of the city of Donetsk, that resulted in 16 army deaths on Thursday, the heaviest losses of the conflict, until another battle on Friday claimed at least 30 from both sides.

The attackers in Thursday’s incident were apparently in an armored bank van, which was waved through, at which point the insurgents jumped out and opened fire, shooting their targets at point-blank range. The pro-Russian leader of the so-called “Donetsk People’s Republic” denied his men were responsible.

Arseniy Yatsenyuk, the prime minister, called for an emergency session of the United Nations Security Council, saying he had evidence of Russian involvement. 

Separately, Putin claimed on Monday that the estimated 40,000 Russian troops near the Ukrainian border would be removed, and by week’s end there was apparently some movement. On Wednesday, speaking from Shanghai, Putin said he wanted to create “favorable conditions for Ukraine’s election and end speculations,” and that “Any political process is better than an armed standoff.”

But then he said, “It will be very difficult for us to develop relations with people who come to power amid a punitive operation in southeastern Ukraine.”

Yet on Friday, speaking at an economic forum in St. Petersburg, Putin said Russia was prepared to work with whoever was elected Ukraine’s president, though he also blamed the U.S. and President Obama for the violence, which he described as a “full-scale civil war” while denying Moscow was behind the acts of the pro-Russia separatists. 

Yes, it was another week full of contradictory messages from Vlad the Impaler.

Vice President Joe Biden said this week, “If Russia undermines elections in Ukraine, we must remain resolute in imposing greater costs on Russia and we must be equally resolute to invest in the NATO alliance.”

Meanwhile, Russian Prime Minister Dmitri Medvedev refused to say whether Russia would incorporate the regions of Donetsk and Luhansk. “We don’t’ have to guarantee anything to anyone because we never undertook any obligations” in the first place.

But this was also a week that saw Ukraine’s richest businessman, oligarch Rinat Akhmetov, criticize the separatists in the east.

“Cities are witnessing banditry and looting” by armed rebels in Donetsk, he said. “People are tired of living in fear and terror.”

Akhmetov, who employs some 300,000 in his mines and steel mills, called on his workers to stage a “warning” protest. Appearing on television, Akhmetov said:

“What have [Donetsk People’s Republic] done for our region, what jobs have they created? Does walking around Donbass towns with guns in hands defend the rights of Donetsk residents in front of the central government? Is looting in cities and taking peaceful citizens hostage a fight for the happiness of our region? No, it is not! It is a fight against the citizens of our region.”

As for the election, the frontrunner is Petro Poroshenko, the 48-year-old candy magnate, or “Chocolate King,” as he’s called. Poroshenko is a former foreign minister and economy minister who is known as a dealmaker on both sides of the aisle. Even Russian Foreign Minister Sergei Lavrov has admitted to having grudging respect for the man.

Poroshenko has a shot at receiving 50% of the vote, which is what he needs to avoid a run-off, which, should it be necessary would most likely involve former Prime Minister Yulia Tymoshenko. But there are 21 candidates so a first-round win for Poroshenko is going to be tough to attain. [The last published poll did have him at 44%.]

Poroshenko is clearly the best candidate for working with the European Union, the United States and the International Monetary Fund when it comes to securing future aid.

China: The Justice Department on Monday accused five members of the Chinese military of conducting widespread cyberespionage against American companies such as Westinghouse Electric Co., Alcoa, United States Steel and SolarWorld. It was the first time the United States has leveled these kinds of criminal charges against a foreign country.

The five defendants would face decades in prison if convicted, but since they are all in China, it’s highly unlikely they will ever step foot on U.S. soil.

In February 2013, the U.S. security firm Mandiant reported that it linked a specific unit of the People’s Liberation Army to cyberespionage on more than 140 U.S. and foreign companies and entities.

Attorney General Eric Holder said: “The range of trade secrets and other sensitive business information stolen in this case is significant and demands an aggressive response...Success in the international marketplace should be based solely on a company’s ability to innovate and compete, not on a sponsor government’s ability to spy and steal business secrets.”

China’s Foreign Ministry countered the U.S. government “fabricated facts” and that the indictment “seriously violates basic norms of international relations and damages Sino-U.S. cooperation and mutual trust.” A spokesman added, “China is the victim of U.S. theft and cyber-surveillance.”

In retaliation, China suspended its involvement in the Sino-U.S. Cyber Working Group.

Needless to say, Edward Snowden’s revelations have only complicated matters. China can claim that with regards to the National Security Agency, the U.S. has been doing the same thing.

A China government mouthpiece, the Global Times, called the United States a “high-level hooligan” and Washington’s approach “hypocritical.”

It’s not known if the U.S. plans any further action other than the issuing of the indictments.

As for the companies involved, most of whom are headquartered in and around Pittsburgh, the stealing of trade secrets has resulted in thousands of layoffs, for starters, each having sought help in the past from the World Trade Organization or the Commerce Department following the data thefts.

For example, as Keith Bradsher of the New York Times reported, when it came to Westinghouse, which is building four civilian nuclear reactors in eastern China, “The indictment said that Westinghouse’s confidential designs for pipes, pipe supports and pipe routings were stolen, along with its strategies for the Chinese market and its plans for preventing Chinese companies from reselling its technologies to others.”

In what could be an unrelated, or related move, China’s government later announced it will avoid buying computer equipment that runs on Windows 8; Beijing being the largest buyer of computer software in China so it’s a blow for Microsoft, though the ruling thus far only impacts government offices, not the personal computer market.

The Chinese government says the move away from Windows 8 is a result of Microsoft ending support for Windows XP, which has aroused safety concerns and calls for a domestically designed operating system.

On a different issue, the anti-China protests in Vietnam, the prime minister there called for an end to all “illegal protests” after a week of violent demonstrations against Chinese-owned businesses following deployment of a Chinese oil rig in the disputed Paracel Islands in the South China Sea. 

At first, the Vietnamese government allowed the protests, which was a bad move. It certainly didn’t send the right signals to Western companies looking to do business there. At least four Chinese workers were killed at one plant that was attacked by a mob. Some 3,000 Chinese were evacuated from Vietnam.

Regarding the regional disputes in both the South and East China Seas, Chinese President Xi Jinping pledged to peacefully resolve them, but warned:

“To beef up military alliances targeted at a third party is not conducive to maintaining common security in the region,” not mentioning the U.S. by name but clearly intending the message to be received in Washington.

Xi said a zero-sum, “Cold War” concept of security where one country gains at the expense of others would not work.

“We cannot just have the security of one or some countries while leaving the rest insecure,” Xi said, adding that one should not “seek the so-called absolute security of itself at the expense of the security of others. No country should attempt to dominate regional security affairs.” [Reuters]

[Separately, Japan announced plans to establish military outposts on three islands in the Senkakus, which Beijing claims as its own under the name Diaoyus.]

In another matter of importance involving China, a large-scale suicide attack in China’s restive Xinjiang region killed 31, with as many as five attackers throwing bombs and then crashing two cars into shoppers at a large market. More than 90 were injured. The government blamed the Uighurs, Muslim separatists who make up 45% of the region’s population and have been responsible for past incidents, though this was far and away the largest.

China / Russia: Vladimir Putin traveled to China to bolster ties amid the crisis with the West over Ukraine. He returned home with what he wanted, a 30-year, $400 billion gas deal between Russia’s Gazprom and China’s National Petroleum Corporation, though immediately analysts said it would be barely profitable for Gazprom.

But as Alexei Pushkov, the pro-Kremlin chairman of the State Duma’s International Affairs Committee, put it, the contract with China is one of “strategic significance” and that “Obama should give up the policy of isolating Russia: It will not work.”

The deal will allow Russia to diversify its gas supplies and expand eastward, thus making it less dependent on Europe. From that standpoint, it’s a win for Putin.

European Commission President Jose Manuel Barroso, however, immediately sent a letter to Putin reminding him of Gazprom’s obligation to ensure gas supplies to Europe and to abide by earlier agreements.

Putin said that Russia would have to provide $55 billion of the $70 billion cost to build out the infrastructure and that an advance payment of $25 billion agreed to by China will go straight to the construction of a new pipeline for gas flows to the East.

Gilbert Rozman, a Princeton University professor specializing in the region, told the Moscow Times it may be wise not to read too much into the agreement because it could just be a tiny part of a broader Russia-China relationship.

“It is quite possible that Gazprom’s deal is a tradeoff for other things that are not being emphasized, such as perhaps advanced weapons.”

“On Wednesday, it finally happened – the pivot to Asia. No, not the United States. It was Russia that turned East.

“In Shanghai, Russian President Vladimir Putin and Chinese President Xi Jinping signed a spectacular energy deal - $400 billion of Siberian natural gas to be exported to China over 30 years.

“This is huge. By indelibly linking producer and consumer – the pipeline alone is a $70 billion infrastructure project – it deflates the post-Ukraine Western threat (mostly empty, but still very loud) to cut European imports of Russian gas. Putin has just defiantly demonstrated that he has other places to go.

“The Russia-China deal also makes a mockery of U.S. boasts to have isolated Russia because of Ukraine. Not even Germany wants to risk a serious rupture with Russia (hence the absence of significant sanctions). And now Putin has just ostentatiously unveiled a signal 30-year energy partnership with the world’s second-largest economy. Some isolation.

“The contrast with President Obama’s own vaunted pivot to Asia is embarrassing (to say nothing of the Keystone pipeline with Canada). He went to Japan last month also seeking a major trade agreement that would symbolize and cement a pivotal strategic alliance. He came home empty-handed....

“The Chinese and Russians can only roll their eyes. (Norms and rules) mean nothing to them. Sure, they’ll join the World Trade Organization for the commercial advantages – then cheat like hell with cyberespionage and intellectual piracy.”

Iran: The latest round of talks between Tehran and the P5+1 (Russia, China, U.S., U.K., France and Germany) ended this week without any progress being reported. Shortly thereafter, an Iranian military official issued a statement:

“The Armed Forces of the Islamic Republic of Iran will never be caught unawares, and should the enemy want to act on the immature fantasy of aggression, it will face a crushing and lethal response by the Armed forces.”

Iranian President Rohani was a bit more diplomatic, saying his nation can still “likely” reach resolution in the nuke talks by a July 20 deadline, though he added, “We’re not in a hurry to reach an agreement,” as in he left open the possibility of the talks being extended, which has been my belief...that they will be, beyond the November mid-term elections in the U.S.

Gary Samore, who was Barack Obama’s senior advisor on arms control for four years, told The Economist there were three big remaining obstacles to an agreement with Iran: “agreeing on the extent of Iran’s capacity to enrich uranium and the kind of research it can do; the length of time an agreement would cover; and the way in which sanctions are unwound.

“The gap between Western and Iranian negotiators on all three is wide. To sell a deal to a skeptical Congress, already uncomfortable with conceding what Iran insists is its right under the NPT (Non-Proliferation Treaty) to enrich, only a very low number of centrifuges will be acceptable; people close to the talks suggest between 3,000-4,000 of the older IR-1 centrifuges at most. But Iran wants to keep all 19,000 of the centrifuges it has already deployed and to be able to move up to 50,000 in a few years or substitute IR-1s with newer IR-2Ms that are six times more efficient. It would also deem any curb on its nuclear R&D to be insulting.

“The requirement for Mr. Obama’s team, says Mr. Samore, is to be able to say that the breakout period (the time Iran needs to enrich enough uranium for just one nuclear device after throwing out the IAEA inspectors) is at least a year, compared with about two months now.”

The West also wants a 10-20 year agreement, while Iran wants one of no more than five years.

Meanwhile, Iran continues with its ballistic missile program, which was never part of the nuclear talks. U.S. officials have said, however, that any final nuclear agreement must address the fact existing U.N. Security Council resolutions on Iran cover any missile capable of carrying a nuclear warhead.

But as the Washington Post pointed out this week, Supreme Leader Ali Khamenei recently called demands for missile limits “stupid and idiotic.”

The next round of talks is slated for Vienna, June 16-20.

Syria: The unofficial death toll from the Syrian Observatory for Human Rights is now 160,000. The Bashar Assad regime faced new charges of unleashing chlorine gas on a village on Monday, as reported by Reuters.

Libya: What a mess. Islamist-led militias have been streaming into Tripoli amid a standoff with a rogue general whose offensive has won support from officials, diplomats and army units.

The militias are under the command of the country’s chief of staff, who answers to parliament. The other forces are under the control of Gen. Khalifa Haftar. The Islamist-dominated legislature has described Haftar’s campaign as a coup.

But the government condemned parliament for deploying the militias. Confused? I guess we’re supposed to be rooting for Gen. Haftar.

The bottom line is the country for months has descended into total lawlessness.

Egypt: The presidential election that former army chief Abdel Fattah Sisi is expected to win handily is next Monday and Tuesday. The state news agency already reported Sisi was the overwhelming choice of Egyptian ex-pats that had voted at the country’s embassies and consulates overseas.

Thailand: WIR 5/10/14:

“Prime Minister Yingluck was ousted after the Constitutional Court ruled she abused her position....With an election slated for July 20, needless to say there is a current power vacuum. Yingluck’s power base is in rural areas. Civil war remains a possibility.”

“It’s not an overstatement to say this country is on a knife’s edge... I wouldn’t travel there the next few months.”

Well, the military imposed martial law on Tuesday and announced on Thursday it was taking control and suspending the constitution, with army chief Gen. Prayuth Chan-ocha vowing to restore order and enact political reforms. A curfew was declared on Thursday.

The pro-government, pro-democracy, “red shirts” are expected to rally and confrontation seems a virtual certainty over time. The army ordered all politicians, including former Prime Minister Yingluck, to report to the coup leaders. Yingluck was seen on Friday at a military facility and has been formally detained, along with some family members and other politicians. There is no talk of holding elections.

“In declaring martial law Tuesday, Thailand’s army chief...implicitly asked the Thai people and their friends abroad, especially in the United States, to give him the benefit of the doubt. His move was not an outright military takeover...but rather a gentler sort of intervention – an attempt to broker peace between the quarreling political factions that have brought violence to the streets and nearly paralyzed the Thai government and economy for the past six months....

“On Thursday, however, Gen. Prayuth forfeited whatever claim to forbearance he might have had. He ended a meeting of political leaders after little more than an hour, pronounced himself in charge of the country, detained officials of the elected government and shut down independent media. The general explained that his action was temporary and intended only to ‘restore peace,’ as military strongmen generally do in such situations. But there is no getting around his disruption of the constitutional order in one of Southeast Asia’s most successful societies, and that’s something the United States and its allies cannot tolerate. It is an ominous development in a region where democracy has put down roots in recent decades but is still at risk in many places....

“The United States should instruct its old friends in the military that, unless Thailand’s traditional powers-that-be reconcile themselves to the popularity of the Thaksin movement [Ed. the “red shirts”] and the genuine interests of its supporters, this latest coup may yet prove the prelude to a civil war that its authors say they want to prevent.”

North / South Korea: The two exchanged artillery fire on Thursday in disputed waters off the western coast. South Korea said the exchange began when two North Korean artillery shells fell near a South Korean navy ship on a routine patrol. The South Korean ship returned fire. The Defense Ministry in Seoul said it did not believe Pyongyang intended to attack but rather it was a warning.

Meanwhile, the North Korean government issued a rare apology over the collapse of an apartment building in Pyongyang that may have killed more than 100 residents. The news agency said the construction of the apartment block “was not done properly and officials supervised and controlled it in an irresponsible manner.” The news agency also said the collapse left Pyongyang citizens “greatly shocked.”

An expert image analysis by 38 North concludes that North Korea has dramatically sped up the pace of work on construction projects at its main missile launch site, with a South Korean analysis concluding “The field deployment of a nuclear missile is imminent.” 

Mark Fitzpatrick of the International Institute for Strategic Studies went so far as to say, “Given the number of years that North Korea has been working at it, my assessment is that they can mount a warhead on a Rodong.”

India: New Prime Minister Narendra Modi’s Bharatiya Janata Party won 282 of the 545 seats in the lower house of Parliament, according to the Election Commission, which would mark the first time in three decades a single party captured an outright majority; giving Modi the authority to push through broad reforms. For starters, it is hoped Modi will create a far better climate for investment, but some of the changes will be very hard to implement given the country’s intractable bureaucracy.

Nigeria: Boko Haram launched another series of attacks, killing at least 29 at a market in the northeastern part of the country, and then an estimated 118 in the city of Jos.

French President Francois Hollande, after meeting various leaders in the region, including Nigerian President Goodluck Jonathan, said, “We’ve been able to identify ties that link Boko Haram with all the terrorist organizations that are active in Africa...We know the menace, it’s grave, it’s dangerous for the region, for Africa and therefore for Europe.”

The United States has sent 80 support soldiers that will mainly oversee drone surveillance flights. Other European nations are doing the same in the effort to find the 200 girls abducted from a boarding school five weeks ago.

Venezuela: Secretary of State John Kerry said the U.S. was losing patience with the Venezuelan government, calling on President Nicolas Maduro to reopen negotiations with the opposition, talks having collapsed over the issue of political prisoners and their release.

How bad is it there? From The Economist:

“The economy is fast deteriorating. April’s monthly inflation figure is rumored to be over 5%. Venezuela is in de facto default on around $4 billion just in ticket revenues owed to foreign airlines. The state oil company, PDVSA, owes the central bank $75 billion. [Ed. Russia and Ukraine are fighting over a gas bill of about $3.5 billion, by comparison.] The construction industry is at a halt because state-owned firms have virtually stopped producing cement and steel bars. Car sales are down by 90% from this time last year. PDVSA is planning to issue new debt, which will ease the country’s dollar shortage. That will buy Mr. Maduro some time; nothing more.”

Random Musings

--President Obama finally commented on the crisis at the Department of Veterans Affairs, vowing to hold accountable those involved in misconduct, after meeting with VA Secretary Gen. Eric Shinseki, who will provide the president with preliminary results of an investigation into claims by some whistleblowers at the VA that patients face excessive wait times for care and that such delays were covered up.

“Any misconduct – whether it’s allegations of VA staff covering up long wait times or cooking the books – I will not stand for it,” Obama said. “Once we know the facts, I assure you if there is misconduct, it will be punished.”

The White House has been trying to contain a scandal that I told you weeks ago was scaring the heck out of Team Obama because it threatens to be a big mid-term election issue, which is why you have so many Democrats railing for change at the VA, along with every Republican.

Republican Senator John Thune (S.D.) said, “This VA issue is a national embarrassment, and the president’s response to it is an embarrassment. Tough words just aren’t enough when it comes to this issue. We need action.”

Obama noted in his remarks that it was “important that our veterans don’t become another political football.”

Employees and doctors at the Phoenix VA facility said that as many as 40 veterans may have died while waiting for appointments, though the acting VA inspector general said he found no instances of patient deaths over wait times.

As for Shinseki, I said weeks ago he should go, while Obama wants him to be part of the inquiry before the president decides what to do with the leadership.

“The men and women who have served their country in uniform deserve better than delay or denial of the medical care they need and have earned. So it is crucial to get to the bottom of allegations of misconduct at the nation’s veterans hospitals. America’s veterans also deserve not to be treated as so many pawns in election-year gamesmanship – but that sadly is proving to be the case in Congress’ increasingly hyperbolic response....

“Mr. Obama rightly expressed his concern....He promised that people would be held accountable for any wrongdoing and any deficiencies would be addressed....

“That the extent of wrongdoing is unclear doesn’t seem to matter much to those more interested in scoring political points. How else to explain the knee-jerk calls, mainly by Republicans in the House and Senate, for the ouster of Veterans Affairs Secretary Eric K. Shinseki or the ill-advised and punitive legislation aimed at VA workers?....

“No doubt the VA has its problems. Delayed treatment has been an issue for decades, and the back-to-back wars of Iraq and Afghanistan with their unique set of injuries have created a further strain. But as was made clear in recent testimony to the Senate Committee on Veterans’ Affairs, studies have shown that the VA system, which serves almost 6.5 million veterans annually, as a whole outperforms the rest of the health care system by just about every metric.....

“It’s important that the current problems be addressed. But they also ought to be kept in context and veterans not made, as the president put it, into ‘another political football.’”

I could not disagree more with the above. Had the likes of CNN not started investigating the Phoenix VA situation, the White House would have continued to ignore it.

“(The) allegations at the core of the scandal are hardly new: A December 2012 report by the Government Accountability Office revealed that four VA medical centers nationwide hid wait times, fudged data and backdated appointments for the purpose of fabricating compliance with department timeliness goals.

“That should have served as a top-down wakeup call to clean house and bring overdue transparency and reform to what long has been viewed as the most dysfunctional agency in the federal system.

“However, it is clear that in the 18 months since that report was released, VA is still widely failing in its charge to provide timely medical care for the nation’s veterans as demand for those services grow.

“Worse, there are concerns that alleged falsification of records at the Phoenix VA included criminal acts, which have brought federal prosecutors into the picture.

“Simply put, things are getting worse, not better, in VA medical care. Veterans are the victims of systemic incompetence, negligence and possibly malfeasance.

“In situations such as this, the buck must stop at the top: After five years on the job, it is time for VA Secretary Eric Shinseki to step down.

“No one can deny that Shinseki, a Vietnam combat veteran with two Purple Hearts who has given years of selfless service to his nation, is a man of honor and integrity. And his concern and compassion for his fellow veterans is heartfelt...

“But going back to his four-star days as Army chief of staff, Shinseki has long been recognized as a behind-the-scenes leader, one who uses his influence outside the public eye. Unfortunately, that’s simply the wrong style for what VA needs now: a forceful, highly visible leader who publicly demands reforms and bluntly details the resources necessary to carry them out – someone who will hold people accountable, bruise egos when necessary and push hard to bring VA into the modern age....

--Senate Minority Leader Mitch McConnell easily won his Republican primary election in Kentucky on Tuesday, one of several candidates favored by the Republican establishment who beat back tea party challengers.

So after years of intraparty squabbling, the majority of Republicans are going for the strongest candidates that can win back control of the Senate in November.

Democrats are not happy, having hoped some controversial Republican primary candidates would have prevailed, thus giving Democrats far easier targets to run against.

The situation was the same in Georgia, where two mainstream Republicans – businessman David Perdue and Rep. Jack Kingston – advanced to a July runoff, much to the chagrin of Democrat Michelle Nunn.

So some of us Republicans won’t have to worry about the likes of Sharron Angle, Christine O’Donnell, and Todd Akin emerging to snatch defeat from the jaws of victory.

--I have a lot of respect for the opinions of Gerald Seib of the Wall Street Journal and the other day Seib said the following of 2012 presidential candidate, and former Pennsylvania Republican Senator, Rick Santorum, who has written a new book, “Blue Collar Conservatives.”

While there is little chance, as of today, that Santorum could capture the 2016 nomination if he decides to run again, as Seib puts it, Santorum isn’t to be dismissed, yet, because “he grasps two important realities that seem to escape many others. The first is that, outmoded stereotypes notwithstanding, blue-collar Americans, particularly working-class whites in the South and Midwest, today comprise a core element of the Republican Party. The second reality is that, because of the alienation these people feel from both the political and economic systems, the table is set for a new period of populism.

“That helps explain why long-time private-equity executive Mitt Romney, though an accomplished and experienced figure, wasn’t the ideal standard-bearer for the party in 2012, Mr. Santorum argues. More important, he says, these realities suggest Republicans need to rethink their policy focus going forward.

“ ‘We Republicans have neglected to focus our policies and our rhetoric on the plight of lower-income Americans,’ he writes. Later, he adds: ‘Our focus on tax cuts for individuals not only leaves us open to the ‘tax breaks for the rich’ sloganeering of the Left but seems irrelevant to the nearly 50% of the population who don’t pay federal income taxes today.’”

Republicans haven’t taken advantage of an opening provided by Democrats’ alienating many working-class Americans, because us elephants haven’t been offering policies “that speak more directly to those blue-collar Americans in their midst.” [Seib]

And now you have a populist backlash brewing. Seib points to the most recent Journal/NBC poll, where Americans were asked whether they agreed with this statement: “The economic and political systems in the country are stacked against people like me.” Among Republicans, 54% said they agreed – almost identical to the 58% of independents and 55% of Democrats who also shared the sentiment.

Lastly, as Seib writes, “Hillary Clinton did well among these very blue-collar voters in her 2008 primary run for the Democratic nomination. Mr. Santorum is pleading with his party not to take them for granted now.”

--Speaking of Hillary, last weekend on the Sunday talk shows, Karl Rove’s comments about Hillary’s concussion were still receiving big play, with his defenders out in force, such as on Fox.

Yes, her health, and age, will be a campaign issue. In 2015 and 2016! That was my point last week. Don’t take your eyes off the prize, Republicans. It’s about one thing, the Senate. And you can see from the above some are getting the picture.

I don’t for the life of me see what attacking Clinton’s health does for Republicans the next 5 ½ months. Period. She isn’t the president...Barack Obama is. 

--Heather Haddon and Josh Dawsey / Wall Street Journal

“Gov. Chris Christie said Tuesday he would slash payments to public-worker retirement funds by $2.4 billion over the next two years to close a budget shortfall, upending part of a landmark pension deal he struck three years ago that vaulted him into the national spotlight.

“The short-term budget maneuver angered the state’s public-sector unions, drew fire from Democrats who control the Legislature and prompted concerns from at least one Wall Street rating firm. And it underscored the Republican’s challenges as he mulls a 2016 presidential bid in the wake of the George Washington Bridge scandal.”

You see, state tax revenues are coming in way below projections and there is a $1 billion shortfall in this year’s budget.

“You have to make choices, and we are making them,” Christie said.

But it was back in 2011 he vowed to make the pension system more solvent, in exchange for key concessions from public workers on benefits. In turn he was to escalate pension payments each year, the fund being underfunded by $billions.

Wall Street’s three main rating firms have downgraded New Jersey’s credit rating this year due to the budget shortfall and this latest move could result in a further downgrade in the future.

--Last week I wrote that Republicans should support an increase in the minimum wage, over time, to $10.10 in order to take it off the table ahead of the mid-term elections...plus it’s just the right thing to do.

The next day, Sunday, Swiss voters rejected a proposal to introduce what would have been the world’s highest minimum wage in a referendum...a gigantic $25 an hour! Good lord. 76% of voters turned this outrageous proposal down and the Swiss went back to making watches, chocolate and good cheese.

--NBC’s Brian Williams obtained an exclusive with Edward Snowden in Moscow, to be aired next Wednesday. Glenn Grunwald is part of it.

--From Global Security Newswire: “The Air Force missile wing that failed an inspection last year flunked because its security team was unable to quickly recapture a ‘stolen’ nuclear arm.”

Super. That was at Malmstrom Air Force Base in Montana, the 341st Missile Wing that oversees one-third of the U.S. arsenal of 450 Minuteman 3 ICBMs.

--According to a survey by Millennial Branding, and Beyond.com, research and career advisory firms, respectively, just 2% of companies are actively recruiting college graduates with liberal-arts degrees. 27% of companies are seeking to recruit engineering and computer students, while 18% want business majors. [Walter Hamilton / Los Angeles Times]

--So what kind of advice did Elon Musk have for graduating seniors at USC the other day? As reported by the Los Angeles Times’ Shan Li, Musk said, “Work super hard!”

Anything else? Not much. As Ms. Li noted, “Just keep your nose to the grindstone.” Also, in keeping things short and to the point, Musk recommended “Surrounding yourself with good people...Focus on the fundamentals...Take risks.”

--Speaking of bold, and Mr. Musk, his SpaceX Dragon splashed into the Pacific last Sunday, bringing back nearly 2 tons of scientific experiments and old equipment for NASA from the International Space Station.

So the SpaceX Dragon becomes the only supply ship capable of returning home with cargo, and without burning up in re-entry. Actually, it was the fourth Dragon to do so.

SpaceX is in line to have the right to ferry ISS astronauts in about three years.

--Writing in The Atlantic, Olga Khazan has the story of two epidemiologists, Marc Lipsitch and Alison P. Galvani, who are concerned that scientists are taking too many risks in creating new, incurable diseases in labs, supposedly for the purposes of better understanding the disease and to prepare potential vaccines.

For example, it became clear a late-1970s flu outbreak “was likely the result of a lowly lab worker’s snafu.” That was swine flu, or H1N1, which had been dead for 20 years, but was actually sitting frozen in a lab when the mistake was made.

H5N1 avian flu, which killed two dozen people in Hong Kong in 1997, and about 400 worldwide since, is being experimented on using ferrets, “the best animal model for flu viruses in humans.”

But as Lipsitch and Galvani wrote in a PLoS Medicine editorial this past week, “If 10 American laboratories ran these types of experiments for a decade, there would be a 20% chance that a lab worker would become infected with one of these new super-flus and potentially pass it on to others.

“Accidents involving lab-grown pathogens aren’t just the stuff of sci-fi movies. A Singaporean lab worker was inadvertently infected with SARS in 2003. In 2004, a Russian scientist died after accidentally sticking herself with a needle contaminated with Ebola at a Siberian lab. In April, Paris’ Pasteur Institute lost 2,000 vials containing the SARS virus....

“Thanks to vaccination, smallpox was eradicated in 1980, but there are still two samples of it living in labs – one in the U.S. and one in Russia.”

Remember, there is no cure for smallpox and it kills one-third of its victims. Of course there is a chance it could be used for bioterrorism.

So as you hear the MERS stories, remember, other threats lie behind lab doors that aren’t always impenetrable.

---

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

Gold $1292
Oil $104.34

Returns for the week 5/19-5/23

Dow Jones +0.7% [16606]
S&P 500 +1.2% [1900]
S&P MidCap +1.3%
Russell 2000 +2.1%
Nasdaq +2.3% [4185]

Returns for the period 1/1/14-5/23/14

Dow Jones +0.2%
S&P 500 +2.8%
S&P MidCap +2.0%
Russell 2000 -3.2%
Nasdaq +0.2%

Bulls 57.2
Bears 18.3 [Source: Investors Intelligence...near traditional danger ‘spread’ of 40 points between the two]

Have a great holiday weekend. I appreciate your support.

Catch me on Twitter @stocksandnews

Brian Trumbore

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