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07/12/2014

For the week 7/7-7/11

[Posted 12:00 AM ET]

Edition 796

Washington and Wall Street

Outside of a smattering of earning reports, there was nothing going on this week in terms of the Street and economic news, save for the release of the Federal Reserve’s minutes from its June meeting, where we learned the Open Market Committee agreed that their bond-buying program that initially was at $85 billion a month would end with a final reduction of $15 billion at their October gathering; so another $10 billion at the July 29-30 confab and $10 billion Sept. 16-17...the program having been cut to the current $35 billion.

“Signs of increased risk-taking were viewed by some participants as an indication that market participants were not factoring in sufficient uncertainty about the path of the economy and monetary policy,” the minutes showed.

Fed officials expressed concern about low volatility in equity and fixed-income markets but at the same time, “it was noted that monetary policy needed to continue to promote the favorable financial conditions required to support the economic expansion,” according to the minutes.

So the issue is when will the Fed begin raising the funds rate off zero? Most expect the first increase in the second or third quarter of 2015, and there is no doubt the market can handle the initial few 25 basis point moves, or an initial 50-bp hike, but it’s about perception and whether the Fed is viewed as being behind the curve, particularly when it comes to inflation, which I argue is going to pick up at a pace that causes the Fed to act sooner. St. Louis Fed President James Bullard did say this week he favored the first hike being in the initial quarter of next year, but I’m saying by year end there could be real market pressure to act sooner than that.

The Fed, however, can point to underemployment and still slack wage growth, along with a weak consumer, as being reasons for maintaining a zero policy (not that it has worked) and with what we saw this week, weakness in the financial markets generated by concerns over growth in China, again, along with a credit scare in Europe, maybe the Fed’s caution is warranted. When it comes to Europe, I have certainly been consistent. I don’t see where the sustainable 2% growth the continent needs, throughout, is coming from. More on this in a bit.

I’ve just been fairly optimistic on U.S. growth, but, yes, if the rest of the world begins to roll over anew, we will too....or at best stagnate.

This week the New York Times’ Neil Irwin was awarded the lead on the front page for a column that generated some press, a piece titled “Welcome to the Everything Boom, or Maybe the Everything Bubble.”

Mr. Irwin talked of the European debt boom that I have been harping on for the better part of the past year as being a true bubble, and he talked of New York City office towers going for outrageous sums [Pssst...nice job, my friends at Bank of New York, for selling their iconic One Wall Street location for top dollar...]

“Around the world, nearly every asset class is expensive by historical standards. Stocks and bonds; emerging markets and advanced economies; urban office towers and Iowa farmland; you name it, and it is trading at prices that are high by historical standards relative to fundamentals. The inverse of that is relatively low returns for investors.

“The phenomenon is rooted in two interrelated forces. Worldwide, more money is piling into savings than businesses believe they can use to make productive investments. At the same time, the world’s major central banks have been on a six-year campaign of holding down interest rates and creating more money from thin air to try to stimulate stronger growth in the wake of the financial crisis,” writes Irwin.

It all has to unwind at some point. A new day will dawn, a new era. These transitions just never go as smoothly as planned. Like remember how great that Arab Spring was going to be? Remember how U.S. inaction in Syria led to now 170,000 deaths, nine million displaced, and an entire region convulsed in violence?

OK, I’m getting off track and those last thoughts obviously had nothing to do with Mr. Irwin’s column, but it’s also not stretching his thesis too much, that a day of reckoning could be on the horizon for the financial markets.

For today, U.S. markets paused this week, but now the second-quarter earnings reports will start flooding in in earnest, and we’ll receive a lot more economic data the next two weeks, so we’ll begin to get a clearer picture on economic growth in the U.S., or lack thereof.

But while I cover the foreign affairs mess down below in great detail, I can’t help but note some comments from Bret Stephens in his Wall Street Journal op-ed on President Obama’s “Post-Pax Americana world of collapsing U.S. will.”

“American pre-eminence isn’t being challenged by emerging powers. The challenge comes from an axis of weakness. Russia is a declining power. China is an insecure one. Groups like ISIS and other al-Qaeda offshoots are technologically primitive and comparatively weak. Iran is a Third World country trying to master 70-year old technology.

“Where does their confidence come from? It isn’t the objective correlation of forces. The GDP of New York City alone is nearly three times the size of Iran’s. Some demographers predict that Russia’s population will fall to as low as 52 million before the century is out. The anticorruption campaign being carried out by Xi Jinping in China smacks of similar efforts by Mikhail Gorbachev and suggests an equal amount of internal rot. A contingent of French Foreign Legionnaires easily turned back an ISIS-like challenge in Mali last year.

“But upstart countries and movements don’t operate according to objective criteria – if they did, they wouldn’t operate at all. Rather, they act on an intuition about their adversaries, a sense of their psychology, a nose for their weaknesses. ‘When tens of your soldiers were killed in the streets of Mogadishu,’ wrote Osama bin Laden in his 1996 fatwa declaring war on the U.S., ‘you left the area carrying disappointment, humiliation and your dead with you.’ This was not an indictment of the excess of American power. It was mockery of its timidity.

“So it is now. The U.S. could have long ago dispatched Assad with targeted airstrikes. Fearing unforeseen consequences we did not, and so we got the foreseeable consequence that is Syria and Iraq today. The U.S. could use Apache gunships to blunt the offensive of ISIS and kill a lot of jihadists. Fearing entanglement we do not, and so we risk acceding to the creation of an Islamic caliphate. The U.S. could have destroyed Iran’s nuclear infrastructure in a week-long bombing campaign, or crippled its economy with additional targeted sanctions. Fearing another Iraq-like war we will not, meaning Iran will get a bomb when the timing suits it best....

“Ours is still an American world, but it is presided over by a president who doesn’t believe in American power. The best lack all conviction while the worst are filled with passionate intensity – and a sense that the moment is theirs to seize. We know how that story ended.”

Europe and Asia

Europe was shaken a bit when Portugal’s second-largest bank, Banco Espirito Santo SA, missed a short-term debt payment, reviving memories of the euro currency crisis and Portugal’s role in it. That led to European Central Bank President Mario Draghi’s 2012 pledge to do what it takes to keep the eurozone together and there has largely been stability since.

European equity markets had calmed down by Friday after declining 3.6% in the prior five trading sessions (Euro Stoxx 600...like the S&P 500), as the Portuguese bank sought to reassure investors by revealing its exposure to related companies in a very complicated corporate structure. The lender said it has a capital buffer of 2.1 billion euros above the regulatory minimum, this while the country’s central bank said the bank’s solvency is “solid.” Now ask me if anyone believes them.

At least they are going outside the family, after Espirito has been family owned for its 94-year history, in selecting a new CEO.

But who the heck knows? Not a lot of transparency in Espirito’s books.

What we do know is that after all the uproar, the yield on Portugal’s 10-year debt rose to 3.99% before closing the week at 3.87%, which is less than one-quarter the peak 17% level at the height of the crisis. [Its stock market did, however, fall 12% in seven days.]

Italy’s 10-year yield rose from 2.81% last Friday to finish the week at 2.89%. The yield on Spain’s bond rose from 2.65% to 2.76%. Like whoopty-damn-do. Hardly a crisis, boys and girls. 

At least not yet. I’ve been pounding the table on the Euro bond bubble and I recognize some of the reasons why yields have plummeted for the periphery as they have.

But I also keep pointing out that unless you tell me the likes of Spain, Italy, Greece and Portugal are going to start growing consistently, they can’t possibly service their humongous government debt levels in the future without investors demanding a much higher return. Granted, each country will be different, but if you think Draghi and the ECB are going to be able to “do what it takes” forever, then you just don’t understand the dynamics of the European Union and the eurozone. Yes, Draghi saved the day in 2012, but as I’m about to note, the divisions in the eurozone are already reemerging and it won’t be bailout city forever.

So we turn to Greece. The troika (the IMF, ECB and EC) says Greece needs a third bailout but the Greek government is balking as it would lead to another round of conditions, austerity measures. Draghi warned Greece’s leaders that the pace of reform is slowing, and that they must make more progress in order to unlock the last 1 billion euro in aid.

Instead, what we saw this week was a state-controlled electrical utility shut down about 25% of the grid, though not to the bigger tourist areas (tourism being 20% of the economy, with bookings today at their best pace since the 2004 Olympics), and then public sector workers began a 24-hour strike over austerity measures that have led to 40% reductions to salaries and pensions. 4-0.

So Greece is not out of the woods, and many in the eurozone won’t be real sympathetic if it rolls over again.

Then you have the industrial production figures for the month of May, released this week.

Germany, down 1.8%, a third month of decline. France, down 1.7% when an increase was expected. Italy, down 1.2% over April, also when an increase was expected. [Germany’s exports were also surprisingly down 1.1% in May over April.]

[Even the U.K. saw factory output decline 1.3% in May, the first decline there in six months.]

So in the eurozone the pace of recovery has slowed from the first quarter’s. Ukraine hasn’t helped in this regard, nor is the siege of Donetsk and Luhansk (detailed below) likely to improve sentiment. Or the fear among Europe’s leaders that their home-grown Islamists will eventually return home from the theater in Iraq and Syria....or Nigeria, or Somalia, or Yemen....

Two other items.

The IMF said Spain needed to raise taxes because government revenue is falling after Prime Minister Mariano Rajoy introduced his plan to cut income and corporate taxes to boost growth amid the deepest budget cuts in Spain’s democratic history. Rajoy faces reelection next year and he’s ignoring calls from the IMF and the European Commission to hike some taxes.

And you know how Mario Draghi has been talking about his plan to hand as much as 1 trillion euros to banks, who can then lend the funds out to spur investment and economic growth? The experts are picking apart his latest “targeted longer-term refinancing operation” (TLTRO) and it’s really a lot of baloney.

Marco Valli, an economist at UniCredit SpA in Milan, told Bloomberg the other day:

“It is unlikely that companies that had no intention of investing will start to do so now. It isn’t clear that banks in peripheral countries where private sector debt needs to be reduced further will be capable of returning to flat or positive net lending in about a year. This could restrain the impact of this facility.”

Others say the TLTRO will work. I’ll go with Mr. Valli.
Turning to Asia...

China reported its inflation numbers for June and the PPI (or factory-gate prices as they like to call them) fell 1.1% year-over-year, which was actually good, the slowest rate of decline in more than two years; a sign industrial activity might be improving.

Consumer prices for the month rose 2.3%, with food up 3.7%, below the 4% level for the latter that the government finds manageable.

But exports for June rose only 7.2% when a double-digit increase was expected, and imports were up only 5.5%, also below expectations. Exports to the U.S. were up 7.5%, year-over-year, and up 13.1% to the European Union, which sounds good but if the EU recovery was really in full swing it would be even higher.

But Chinese Prime Minister Li Keqiang, said “China’s economic performance in the second quarter has improved from that in the first quarter. However, we cannot lower our guard against downward pressures. We will keep up our composure and not adopt strong stimulus. Instead, we will increase the strength of targeted measures.”

Second-quarter GDP is coming out soon. China’s numbers folks are furiously pulling all-nighters as they toy with them. “Let’s see, if we take a $1 billion from here and add to there and divide by 12...presto! 7.4%!”

There was also a highly disturbing item on Friday. The state broadcaster called a location-tracking function offered by Apple’s iPhone a “national security concern,” the latest sign of a backlash against U.S. technology firms. Recall just last month, Chinese state television raised concerns about Microsoft’s Windows 8 operating system.

It’s tit-for-tat, and an expensive game. The United States has been calling out Chinese telecom equipment suppliers like Huawei Technologies and ZTE, saying their gear could be used to spy on Americans. China then started pulling back on Cisco Systems’ equipment.

This isn’t good for anybody, and as I note further below, just another sign of rapidly deteriorating relations between our two nations

One note on Japan. Machine orders fell the most on record (since 1987) for the month of May, down 19.5% from April, when a slight gain was forecast.

Street Bytes

--U.S. equities took their cues from Europe, China and a general feeling the rally needed a rest as the Dow Jones lost 0.7% to 16943, while the S&P 500 declined 0.9% and Nasdaq 1.6%. The Russell 2000 plunged 4% and is now back in negative territory for the year, -0.3%.

--According to the Lipper unit of Thomson Reuters Corp., the average diversified U.S.-stock fund returned 3.4% in the second quarter, bringing its first half return to 4.9%.

Funds specializing in small cap growth companies, though, were up only 0.4% in the first half of the year.

Core bond funds, which are focused on intermediate-maturity, investment-grade debt, returned a solid 4.1% for the first six months.

--U.S. Treasury Yields

6-mo. 0.06% 2-yr. 0.45% 10-yr. 2.52% 30-yr. 3.34%

Yields fell, 12 basis points on the 10-year, for example, as there was a flight to safety, but also just general demand from all over for high-quality paper with a yield far greater than that of, say, the German bund (1.20% on its 10-year).

--Natural gas futures hit a six-month low this week, a big break for consumers. Any concerns on the geopolitical front have been trumped by the continuing surge in North American oil-and-gas production, with U.S. gas producers refilling storage at a record pace after the horrible winter.

One small item hitting nat gas prices this past week is the looming chill that is going to hit the Great Lakes and Upper Midwest, with temperatures falling anywhere between 10 and 20 degrees below normal for a few days, ergo natural air conditioning.   

The gasoline price is beginning to edge down as well, with the national average at $3.64 a gallon on Thursday, down from the second-highest level ever for a Fourth of July weekend of $3.67.

Thankfully, the violence in Iraq remains far from the bulk of that key country’s oil production in the south, which makes up about 90% of total production, thus Iraq is not leading to higher prices as first seen when ISIS launched its offensive.

This could yet change, however, and government instability, detailed below, doesn’t help.

Separately, Libya is looking to increase oil exports as rebels handed over two key ports to the state-run National Oil Corporation, which is another reason why oil has come off its highs.

--Bank of America reports that the U.S. will remain the world’s biggest oil producer this year after overtaking Saudi Arabia and Russia. BofA’s Francisco Blanch said, “The shale boom is playing a key role in the U.S. recovery. If the U.S. didn’t have this energy supply, prices at the pump would be completely unaffordable." [Bloomberg]

--Meanwhile, corn prices fell below $4 bushel for the first time in four years owing to perfect growing conditions in the U.S. corn belt, along with favorable weather in areas from Ukraine to China. Aside from hitting farmers’ income, land prices could slide a bit in the Midwest.

Agricultural land prices in the Midwest are up just 1% annually vs. double-digit increases in recent years, according to the University of Illinois.

Just two years ago, the U.S. growing season went up in flames in an historic heat wave and corn prices soared above $8 per bushel.

Friday’s report from the U.S. Department of Agriculture didn’t help corn as the USDA hiked its reserve forecast for the product, with the price closing the week at $3.84.

The USDA also had bearish news for soybean farmers, as it raised its forecast for the 2014 harvest. Soybean futures have declined 10 consecutive sessions, the longest streak since July 1973, with prices down 17% in the past 12 months. The above noted cool weather for next week in the Midwest also comes at a critical time in crop growth. Ergo, no heat stress on plants.

--Wells Fargo & Co. reported quarterly results that matched expectations, though revenue was down 1.7% vs. a year ago. Investors were underwhelmed by net interest margin – a key profitability figure that measures the difference between what a bank makes on lending and what it pays depositors – as it narrowed to 3.15%, compared with 3.40% a year earlier. Other facets of the report were less than exciting.

[The next week the other big five banks report.]

--Cancer-stick makers Reynolds American and Lorillard are in merger talks that could be wrapped up as early as Monday. The two would have a combined U.S. market share of 42% of the cigarette market. Reynolds is looking to bulk up in e-cigarettes, where Lorillard is the market leader.

--According to Inside Mortgage Finance, home lending, which hit a 14-year low in the first quarter of this year, rebounded strongly in the second quarter, with the trade journal saying it was up 32% from Q1.

“The Mortgage Bankers Assn. projects that lenders will originate $1.02 trillion in mortgages this year, with 42% of that being refinance loans. That’s down from $1.76 trillion last year, when the refinance share was 63%.

“Other mortgage watchers have lower projections. FBR & Co. recently cut its 2014 origination forecast 8% to $989 billion from $1.08 trillion.” [E. Scott Reckard / Los Angeles Times]

--Alibaba is racing to complete its initial public offering within the next month, setting a target date of August 7 or 8, but it’s running out of time for the roadshow.

The Chinese ecommerce company could raise about $20 billion, which would make it one of the largest ever (largest on the New York Stock Exchange, where it will be traded).

But if Alibaba starts its roadshow July 21, that bumps up against summer vacations and many investors will miss out, thus potentially stifling demand.

--Citigroup is set to pay more than $7 billion to resolve a long-running government investigation into its sales of mortgage-backed securities, with $4 billion going to the Department of Justice and $3 billion for mortgage relief for homeowners – such as principle reduction – as well as other payments to a half dozen state attorneys-general.

Analysts initially thought Citi would pay around $1.5 billion.

--More than $1.1 billion in venture capital funding was raised in the second quarter in New York, while nationally the figure of $13.9 billion is the most since the end of the 1998-2000 dot-com bubble.

As reported by Matthew Flamm of Crain’s New York Business, Uber led the way nationally with a $1.2 billion round, part of California’s $8.93 billion raised in 442 deals, according to VC database CB Insights.

--Personal computer sales showed signs of health in the second quarter, with Gartner Inc. saying shipments rose 0.1% in the period vs. a year earlier, while rival IDC said global unit shipments declined 1.7%, much better than the firm’s earlier forecast of a 7.1% sales decline.

The big three – Lenovo, Hewlett-Packard and Dell – all showed sizable shipment increases and the growth came from both the consumer and corporate segments.

At the same time, sales of some tablet models have cooled.

--Samsung Electronics forecast a 25% drop in profit for the second quarter due to a slowdown in the smartphone market and a strong Korean currency, as well as increased competition in the Chinese and some European markets during the period.

Samsung still expects an operating profit of $7.1 billion for the quarter, but it would be a third straight quarterly decline.

--Four out of 10 American households are now cellphone use only, twice the rate from just five years ago, though the pace of dumping landlines has slowed.

--Rengan Rajaratnam, the brother of imprisoned Galleon Group LLC co-founder Raj Rajaratnam, was cleared in the first loss of at least 88 people charged in the federal crackdown on insider trading. Rengan had been accused of scheming with his older brother, with Raj having been convicted of insider trading in 2011.

--Russian car sales plunged 17% year-over-year in June, according to the Association of European Businesses. A decline this year would follow a 5.5% fall in auto sales in 2013.

Meanwhile, investment in Russian real estate fell nearly 60% in the first half of 2014, according to consultancy Jones Lang LaSalle. It’s all about economic uncertainty emanating from the crisis in Ukraine.

--Corinthian Colleges Inc., a major for-profit college operator, negotiated a deal with the U.S. Department of Education to sell off the bulk of its more than 100 campuses and wind down the rest.

Corinthian has 12,000 employees serving 72,000 students. Its financial picture had been deteriorating, with total enrollment down 14% in May from a year earlier, while new student enrollment was off 13%. Revenue was down 12% for the quarter ended March 31.

Corinthian is a high-profile example of the Obama administration’s new rules that cut federal aid for for-profit schools whose students default on federal loans at high rates or who end up deeply in debt.

The school will be winding down operations over the next six months. 

--Last holiday weekend’s box-office receipts dropped 46% for the top 12 movies and were the lowest for a Fourth of July weekend since 1999.

The top movie was “Transformers: Age of Extinction,” which took in $36.4 million in domestic sales, but $50.9 million in China.

This is looking like the worst summer in a decade, with receipts down 20% thus far (the season starting in May). Year-to-date domestic numbers are down 3.8%, according to boxofficemojo.com.

But for this weekend, the big story is the release of “Dawn of the Planet of the Apes,” which has received some excellent reviews. But if I were you, I’d stay away from the monkey houses at your local zoo because once they see the flick, it could get ugly.

--The first Colorado study on the post-legalization pot market estimated that total market demand for marijuana in Colorado is about 130 metric tons a year...121 tons for residents and 9 tons for visitors.

Marijuana has an average market rate in Colorado of $220 per ounce, according to the report by pot regulators. Thus far, the state is selling a lot more medical marijuana than recreational stuff.

--Of course with all the pot smoking you need some munchies and Crumbs Bake Shop, which sells specialty cupcakes and donuts out of 65 stores (at its peak) in 12 states announced on Monday it was filing for bankruptcy.

But on Thursday, word broke that Marcus Lemonis, best known for the CNBC reality show “The Profit,” who is also CEO of Camping World, was interested in rescuing Crumbs and forming an investment group to do so.

--A company called Cynk Technology saw its stock climb about 50% on Thursday to $21.95 in over-the-counter trading before finishing at $13.90.

But Cynk was trading at six cents on May 15. The thing is, Cynk, which purportedly operates a social network, has no revenue, no assets and only one employee, who when tracked down said he no longer works with the company...if it is a company. Friday, trading in the company was suspended.

--A prostitute linked to the death of a Google executive, who died from a heroin overdose on his yacht, may also be linked to the earlier death of the owner of a popular Atlanta music venue, according to the AP.

The Google executive’s death was back in November but Alix Tichelman was just charged in the case. Police say Tichelman had many clients in Silicon Valley.

--Long Island Rail Road riders are worried sick about a potential strike that could begin as early as July 20, the LIRR being the nation’s busiest commuter railroad serving 300,000 weekday riders and tons of summer beachgoers and visitors to the Hamptons. The last LIRR strike was in June 1994 and lasted just three days.

--A new appraisal of the value of the Detroit Institute of Arts’ collection pegs it at $2.7 billion to $4.6 billion.

The appraisal is in advance of a federal bankruptcy trial in August for the city, but while some want to see the art sold off to meet debts and pension obligations, there would be significant delays in selling off the pieces due to donor lawsuits that could prevent the sale of many of the most valuable works.

Actually, the appraiser, Artvest Partners, said the bulk of the museum’s collection might raise as little as $850 million because some of it is in areas that have fallen out of favor with collectors, citing old masters and 19th-century European paintings.

The D.I.A. has works by Pieter Bruegel the Elder (have postcards of his work under my blotter), Michelangelo, Rembrandt, and van Gogh, among other greats.

Foreign Affairs

Israel: Violence escalated as Israel was on the verge of all-out war with Hamas. The Israel Defense Forces have mobilized tens of thousands of reservists for a possible ground assault into Gaza, and while many of the over 600 rockets fired by Hamas into Israel have been intercepted by the Golden Dome defense system, others have gotten through, though no Israelis have been killed as I go to post.

The same can’t be said of the Palestinians, whose death toll rose to over 100 on Friday (including nine killed when an Israeli missile hit a coffee shop where people had gathered to watch the World Cup), with 700 injured, according to the Gaza Health Ministry, as the IDF targets militant missile sites, that are often housed in ordinary homes. Israel offers warnings prior to a strike, but there are confirmed reports Hamas tells the people they should remain inside.

President Obama called Prime Minister Benjamin Netanyahu on Thursday offering U.S. help to broker a ceasefire. But Netanyahu is under immense internal pressure to take the fight into Gaza from those on the Right that are in his governing coalition. As one Knesset member, Moshe Feiglin, asked: “Why is there still electricity, water and food in Gaza?”

Feiglin expressed the opinion of many Israelis: “As long as we bury our heads in the sand and don’t make the population that calls to destroy us pay a price, we will continue living under a constant existential threat.”

Coalition leaders Avigdor Lieberman (foreign minister) and Naftali Bennett (leader of the far-right Jewish Home party) said Israeli restraint in the face of the rocket fire “was not power.”

Those on the Left in Israel, such as Meretz leader Zehava Gal-On, call for a ceasefire with international help and then accept the Arab League Peace Plan to end the conflict with the Palestinians. [Jerusalem Post]

For his part, Netanyahu has accused Hamas of “committing a double war crime by intentionally trying to hit Israeli citizens, and using the local Gaza population as human shields.”

Earlier, Netanyahu spoke to the father of the Palestinian teenager killed by Israeli extremists in retaliation for the deaths of the three Israeli teenagers that were kidnapped by Hamas.

“I want to express my shock, and the shock of all Israeli citizens, at the heinous murder of your son,” the prime minister said. “We acted immediately afterward to locate the murderers, and they will be brought to justice.”

Six Israeli nationalists were arrested in the death of the Palestinian, Mohammad Abu Khieder, with at least three later confessing.

The Haaretz newspaper, in an editorial, said there was no such thing as “Jewish extremists,” that they are instead the descendants and builders of a culture of hate and vengeance that is nurtured and fertilized by the guides of “the Jewish state”: Those for whom every Arab is a bitter enemy. The paper called for a “cultural revolution in Israel. Its political leaders and military officers...must begin raising the next generation, at least, on humanist values, and foster a tolerant public discourse. Without these, the Jewish tribe will not be worthy of its own state.”

Iraq: Last Saturday night, a video was released showing Abu Bakr al-Baghdadi making a rare public appearance in the northern city of Mosul, the self-declared caliph of the new “Islamic State,” ordering Muslims to obey him. The appearance marked a significant change for the shadowy Baghdadi, a man with a $10 million price on his head by the Americans.

“I am the wali [leader] who presides over you, though I am not the best of you. So if you see that I am right, assist me. If you see that I am wrong, advise me and put me on the right track, and obey me as long as I obey God.”

Text superimposed on the video identified Baghdadi as “Caliph Ibrahim,” the name he took when ISIS declared on June 29 a “caliphate,” a pan-Islamic state last seen in Ottoman times in which the leader is both political and religious.

Meanwhile, Prime Minister Nouri al-Maliki took to the airwaves and reminded Iraqis his State of Law bloc won the most seats in parliament in April elections and that he was prepared to run for prime minister again, assuming his bloc gained a full majority.

Parliament, which broke up on Tuesday, July 1, and then announced it would delay its next session by more than a month, abruptly changed course and said it would meet again this Sunday.

Shiite cleric Moqtada al-Sadr said Maliki’s coalition should withdraw its support for his bid for a third term and pick another candidate.

Kurdish ministers boycotted Iraq’s caretaker Cabinet and authorities in Baghdad halted cargo flights to two Kurdish cities Thursday in an escalating feud between the two sides.

The four Kurdish ministers withdrew to protest Maliki’s “provocative” branding of their provincial capital Irbil a haven for ISIS.

As to the battle in the field, as reported by Defense News’ John T. Bennett, on Tuesday, Senate Armed Services Committee Chairman Sen. Carl Levin, D-Mich., was asked by reporters if he worries that the U.S., which has upped its combat forces from 300 to nearly 800, is on its way to a much larger military footprint in Iraq.

Levin said he first wanted to review a coming Pentagon assessment of the capability of the Iraqi Army.

“The U.S. military assessment also must measure whether the Iraqi military is coming together against a common enemy.”

So what happens if the assessment is the Iraqi army can’t defeat ISIS?

“Well, there’s another half: Whether or not the political leaders in Iraq are able to come together to broaden their base, and to do what that government has not yet done: Involve the Sunnis a lot more and unify the country politically,” Levin said.

Many think-tank types believe a partition into three autonomous regions is a fate accompli. What’s most important, rather, is the defeat of ISIS.

The Iraqi government admitted ISIS seized control of a disused chemical weapons factory, though the UN and U.S. say the munitions are degraded and the rebels would be unable to make usable chemical arms from them.

As for the captured uranium ISIS got control of in Mosul, I have to go with those downplaying the risk it can be turned into a dirty bomb. Better material for that purpose has long been out there around the world.

Lastly, Iraqi security forces found 53 corpses, blindfolded and handcuffed, south of Baghdad. It wasn’t immediately clear who the victims were.

Michael Young / Daily Star

“Today, we are living through the sectarian response to Iran’s sectarian strategy throughout the region. The potential consequences are frightening, and we are already seeing the precursors of this in Syria, Iraq and Lebanon.

“There has been much debate over whether ISIS represents a majority of Sunnis, particularly in Iraq. The question is naïve. ISIS almost certainly does not represent most Sunnis, but nor did the Bolsheviks in 1917 Russia. Vanguard movements are not often democratic in nature. They seize the initiative during periods of social and political vacuum, rapidly mobilize supporters against established orders and, before anyone has had time to react, create dynamics in their own favor before systematically eliminating their rivals.

“The Iranians should know this more than anybody else, since that is how Ayatollah Ruhollah Khomeini came to power and ultimately consolidated his authority after the revolution. And it is what ISIS is doing today in Iraq, this week having started to arrest Saddam-era Sunni military officers in Mosul, in order to ensure that no political counterweight can emerge.

“In Iraq, Syria and Lebanon, Iran bolstered Shiite or Alawite regimes or parties that sought as best they could to marginalize the Sunni community. This has now blown up in Tehran’s face. Iraq is breaking apart, Syria’s regime is pursuing an active policy of partition and Hizbullah is facing an increasingly dangerous Sunni challenge in Lebanon that it will not be able to contain. Only in Yemen are Iran’s favorites making headway, and even then, for every action there is usually an equal counterreaction.

“The Lebanese situation is especially alarming. While most of Lebanon’s Sunnis have no patience for ISIS, they are caught between two very disturbing realities: The absence of a moderate leadership on the ground that can contain the more radical elements in the street; and a perception among many in the community that the regional sectarian tide is turning, so that the million and a half Syrian refugees in the country, most of them Sunnis, are regarded as a welcome addition in the perceived struggle with Hizbullah and the Shiites.

“This is extremely worrisome, because if Lebanon’s Sunnis are pushed in a direction where extremists impose on them an abandonment of coexistence, the country will be finished....

“The so-called Arab Spring broke the back of the old order of supposedly secular dictatorships, but failed to bridge the gap toward more democratic and pluralistic entities. Today we are caught in a political no-man’s land – with neither the security offered by the dictators nor the representativeness of pluralistic systems.

“The Middle East is at a foundational moment in its history, one perhaps more momentous than the post-World War I period when the region’s contours were redrawn. The optimists will say that all change brings something better. But until that time it will bring a great deal that is worse, as regional states come to the realization that their arrogance and irresponsibility has released forces with the potential of devouring them.”

Iran: As negotiations move closer to a July 20 deadline for a deal over Iran’s nuclear program, it seems clear little progress has been made, with major disagreements on the constraints Iran is willing to accept in exchange for an end to sanctions, as well as the length of time for the deal.

For example, Iran wants to be allowed to run up to 50,000 centrifuges (it currently has about 20,000) to power its one existing nuclear reactor. The U.S. wants just a small fraction of that number (Israel wants Iran to be left with zero).

And then in a speech on Monday, Supreme Leader Ayatollah Ali Khamenei reiterated to senior level officials and military personnel that Iran needs significantly greater enrichment capacity.

On Tuesday, Iran’s Deputy Foreign Minister Abbas Araghchi, Tehran’s point man in the negotiations, vowed his team won’t “back down” on any of its nuclear rights.

Also on Tuesday, French Foreign Minister Laurent Fabius said “differences” have emerged between Russia and the other nations participating in the talks, after a long period in which Russia had maintained a united front with the other five: China, France, Germany, the United States and the U.K.

[And we just learned Russian Foreign Minister Sergei Lavrov is blowing off this weekend’s talks in Vienna to be with Putin in Latin America, see below. The remainder of Russia’s negotiating team will be on hand.]

Back to Iraq and the region at large, in an op-ed for the Washington Post, David Ignatius quotes Derek Harvey, longtime Iraq intelligence analyst now teaching at the University of South Florida, and Harvey’s take on Gen. Qassem Suleimani, the “supposed strategic genius of the Iranian Revolutionary Guard Corps,” who, as Ignatius writes, “has blundered disastrously. By overreaching in Iraq and Syria and triggering a violent reaction, Iran now faces dangerous instability on its border for years to come.”

Derek Harvey:

“Suleimani’s orchestration of brutal military campaigns in both Syria and Iraq set the stage for the Sunni Arab response turning to extremism. He missed opportunities for moderation while still protecting Iranian interests. His partnership with extremism in Syria resulted in the threat growing in Syria and rebounding to Iraq. His refusal to counsel some moderation and inclusion by [Iraqi Prime Minster] Maliki developed a fertile environment for [the Islamist State] and others to exploit.”

Ignatius:

“Another aspect of Suleimani’s unfolding disaster is that the rise of the Islamic State has hastened Kurdish independence.”

Jordan: Appearing in Berlin, Israeli Foreign Minister Lieberman said Jordan’s stability is one of Israel’s vital national security interests and Jerusalem will do everything to preserve that stability. The Obama administration is also prepared to help should Jordan ask for assistance.

For now, though, ISIS is in no position to take on the Jordanian military. But as I noted last time, the kingdom is worried about ISIS spawning an internal threat.

King Abdullah is reportedly concerned that Chechen jihadis, who have been fighting with ISIS, could enter Jordan as “refugees.”

Egypt: President Abdel Fattah al-Sisi conceded the sentencing of three al-Jazeera journalists has been damaging. Sisi made this statement to Egyptian journalists during a roundtable, though he stopped short of saying whether he will issue a pardon.

Meanwhile, the Sisi government implemented a long-feared hike in energy prices as officials pledged to reduce the budget deficit by slashing fuel subsidies accounting for a fifth of state spending, as reported by the Financial Times. The new prime minister, Ibrahim Mehleb, said it would be a “crime” not to curb the subsidies. Mehleb said the funds would now be made available for essential services such as healthcare and education.

The price of diesel immediately rose 64%, up to 80% for regular gasoline. Natural gas prices for industry rose from 30% to 70%. Electricity prices are due to start rising shortly.

Public unrest thus far appears to be fairly limited. But you can imagine taxi drivers, for starters, aren’t happy.

Afghanistan: Ashraf Ghani Ahmadzai won the presidential runoff against Abdullah Abdullah, 56% to 44%, according to the Independent Election Commission, as released this week. But as I wrote recently, the evidence of fraud is overwhelming. Ghani and Abdullah agreed to an audit of about a third of the polling stations in response.

Abdullah had won the first round of the election back on April 5 with 45% of the vote to Ghani’s 32%. Abdullah is calling for 2.5 million votes in southern and eastern regions to be voided because the number of ballots exceed the population.

The electoral commission head said the results could be altered after an investigation and that the final tally is scheduled to be released on July 22.

At risk is a pact needed to keep U.S. troops in Afghanistan beyond this year.

U.S. Secretary of State John Kerry traveled to the country on Thursday to deliver a message to current President Hamid Karzai, as well as to Abdullah and Ghani, that it was a “critical moment” in Afghanistan’s history.

Abdullah was supposedly planning a “parallel government.” The U.S. was quick to respond that such a move would trigger the suspension of aid and security assistance.

Abdullah then pulled back from the brink but now he must show his frustrated supporters that he gained something in his meeting with Kerry, such as broadening the scope of the audit of the vote.

One of the fears is that the contest between the two could break down along ethnic and sectarian lines, with Ghani being Pashtun and Abdullah gaining his support primarily from Tajiks.

Separately, four Czech soldiers were among 16 killed in a suicide attack in eastern Afghanistan. The Taliban claimed responsibility.

The United Nations, in a report issued Wednesday, said the number of civilian casualties is soaring, up 24% in the first half of 2014, with 1,564 having been killed in violence. At least 1,200 of the deaths were directly blamed on the Taliban.

Ukraine: The army had its biggest victories of the three-month campaign this past week, retaking a number of separatist strongholds. Pro-Russian rebels were forced to retreat from their base in Slovyansk in the disputed east, with some driving armored vehicles flying Russian flags into Donetsk last weekend. Another force reassembled in the city of Luhansk. Kiev authorities then promised to tighten a ring around the two, though with large civilian populations, a full-blown assault is complicated and would be extremely deadly, but this is where the separatists have chosen to make their big stands.

Donetsk is a city of almost a million people, though a reported 100,000 have already fled in recent weeks. People are afraid the city will be bombed. Luhansk has 400,000 inhabitants and authorities are increasing the number of trains to allow the citizenry there to leave.

The Kiev government claims the insurgents will use the people as human shields.

Heavy fighting on Friday, however, killed at least 23 government soldiers and border guards – many in an early morning rebel rocket attack at a roadblock, in a big setback for President Poroshenko’s government, the Ukrainian leader nonetheless vowing, “For every life of our fighters, the bandits will pay with dozens or hundreds of their own.”

Russian President Vladimir Putin has been surprisingly quiet and passive as the rebels have been largely beaten back by Ukraine’s resurgent military. Dmitry Trenin, director of the Carnegie Moscow Center, said, “Time has come to change the tactics but the strategy remains the same”: keeping Ukraine out of NATO, protecting the status of the Russian language in Ukraine, and maintaining economic links with important Ukrainian enterprises, as reported by the Financial Times’ Courtney Weaver.

Putin, aside from facing increased sanctions, has to deal with some on his far right who have called for more aid to the separatists, while according to a poll, 2/3s of Russians do not want the Kremlin to intervene militarily in Ukraine. Back in March it was a different story, with a separate survey revealing 65% of Russians saying Russia has the right to intervene militarily in both Crimea and eastern Ukraine

An EU summit slated for July 16 will address the issue of further sanctions on Russia, including on industry, investment and trade.

In Washington, senior senators from both parties have threatened to introduce sanctions of their own, mocking the Obama administration for not doing more.

Sen. Bob Corker (R-Tn.) criticized what he called the White House’s “feckless” and “paper tiger” approach to Ukraine.

Senator Robert Menendez (D-N.J.) asked, “What are we waiting for?” in pointing out Russia was long told to “end support for all separatists” in eastern Ukraine and hadn’t.

Adrian Karatnycky / Wall Street Journal

“(The) reality is that no matter the outcome, President Putin’s Ukraine strategy is a shambles. By taking Crimea and fomenting a violent insurgency that has left as many as 2,000 dead, he has turned a country that had a large pro-Russian minority against him, caused a surge of Ukrainian patriotism, and contributed to the emergence of a solid pro-EU majority in Ukraine.

“Assuming that the separatist insurgency and proxy war continue to wane, Mr. Putin’s next moves will likely focus on economic sabotage of Ukraine’s pro-Western authorities through export barriers and high gas prices, accompanied by efforts to rebuild a pro-Russian political force inside the country.

“But even that approach would signal an important turning point: Having wreaked havoc and death in eastern Ukraine, Mr. Putin could be retreating from the path of war, returning for the time being to soft power in the battle for Ukraine.”

At least Putin was able to boast on Monday that Russian arms exports are flourishing, $5.6 billion worth of weapons and military hardware having been sold in the first half of 2014, about the same pace as first half of 2013.

Russia is the second leading arms exporter next to the U.S., with many of its exports being to the likes of India and China.

China: President Xi Jinping commented at an annual China-U.S. dialogue held in Beijing that confrontation with the U.S. would be a “disaster.” The U.S. delegation was led by Secretary of State John Kerry, who in his opening remarks said Washington was not seeking to “contain” China.

Xi said the two countries were now “more than ever interconnected,” with much to gain from cooperation.

“China-U.S. confrontation, to the two countries and the world, would definitely be a disaster,” he said.

“We should mutually respect and treat each other equally, and respect the other’s sovereignty and territorial integrity and respect each other’s choice on the path of development.”

President Obama, in a statement, said the U.S. “welcomes the emergence of a stable, peaceful, and prosperous China.

“We remain determined to ensure that cooperation defines the overall relationship.” [BBC News]

But many believe relations between the two nations are at their worst since normalization. Certainly East Asia is as unstable as it’s been since the Cold War. Simmering disputes in the South and East China Seas can go hot in the blink of an eye...one mistake by one pilot or one sea captain.

And then there is China’s leader.

Editorial / The Economist

“China’s president appears to have killed two eagles with one arrow in bringing down one of the nation’s highest-ranking military men. On June 30th General Xu Caihou was stripped of his Communist-Party membership and handed over to prosecutors on corruption charges. State media said he took money and other loot in exchange for arranging promotions. Until last year, General Xu was one of the two dozen most powerful men in the country.

“His fall helps consolidate Xi Jinping’s control over the army and at the same time burnishes his credentials as an anti-corruption crusader....

“Mr. Xi has already moved away from the older model of consensus-based rule in which the top handful of leaders shared responsibility and decision-making authority. He has asserted his authority as the sole head of numerous policy ‘leading groups’ of the sort that once had multiple bosses. By taking down Mr. Zhou’s cronies [Ed. Zhou Yongkang, former head of state security and formerly one of China’s most powerful men], he will control the state-security network as well as the armed forces.

“Perhaps the biggest drawback is what all of this says to the general populace. Convincing people that he is determined to root out corruption at all levels is one thing. But it is hard for Mr. Xi to do it without appearing to admit what everybody already knows: that the system itself is rotten to the core.”

Xi, in a speech in Seoul on July 4, after I posted my last column, denounced Japan’s “barbaric” wartime aggression for creating enormous suffering in China and South Korea. South Korean President Park Geun-hye echoed similar sentiments.

“In the first half of the 20th century, Japanese militarists carried out barbarous wars of aggression against China and Korea, swallowing up Korea and occupying half of China,” Xi said.

Japan hit back. Chief Cabinet Secretary Yoshihide Suga said: “Any attempt by China and South Korea to coordinate in picking apart past history unnecessarily and making it an international issue is utterly unhelpful for building peace and cooperation in the region.” [South China Morning Post]

Japanese Prime Minister Shinzo Abe said his door is always open for dialogue. Abe was in Australia this week, where he and counterpart Tony Abbott signed an agreement on closer defense ties. Australia, of course, has recently increased its military ties with the U.S.

You can see where this all is headed. Don’t throw out your Risk board.

One analyst with the Korea Institute for Defense Analyses, Kim Chul-woo, told the SCMP:

“Strategically, Seoul is still close to the United States. Economically, it tilts towards Beijing. On the historical side, Seoul and Beijing are getting along.”

Regarding the recent protest for democracy in Hong Kong, the South China Morning Post, Hong-Kong based, said its computer analysis of the crowd puts it at 140,000, well below the organizers’ claim of 510,000, which everyone, including myself, has trumpeted. The police had it at 98,000 (though this wasn’t an official figure).

The man the paper tasked with the calculation went through all manner of geographic information systems, including the density of the area and how long it took to travel the route.

I don’t know...I just looked at a ton of photos and knowing the area well, personally, it was a massive crowd.

North Korea: Pyongyang test-fired another two Scud-type ballistic missiles on Wednesday, with the missiles flying 310 miles before landing in the sea. North Korea has conducted 13 rocket and missile tests this year, firing off 90 projectiles, as reported by the New York Times. Some of the ballistic missiles flew as far as 400 miles. 

Remember, ballistic missile tests violate United Nations Security Council resolutions, but neither the UN, nor the West, nor North Korea’s direct neighbors ever do anything in response.

And the mystery is on concerning the health of leader Kim Jong Un, who visibly limped on stage at a public appearance on the anniversary of his grandfather’s death.

Normally, a state broadcast wouldn’t have shown this.

Brazil: I wrote last time, “I wasn’t going to comment on the conduct surrounding the World cup until it was over, and I will still hold off on making any broad, sweeping statements, but what a tragic embarrassment to have that construction accident in Belo Horizonte, where Tuesday’s semifinal is scheduled to be played.” Several were killed in that incident.

Well on Tuesday, there was an embarrassment of a different kind, a national humiliation, in Belo Horizonte, as Germany annihilated Brazil 7-1, scoring five goals in the first half between 11:00 and 29:00...five goals in 18 minutes. For those watching it was astounding.

For Brazilians, it was a despicable performance that is rebounding rapidly on President Dilma Rousseff, who is running for reelection.

You’ve seen over the past year how many in Brazil rioted over the $11 billion cost of holding the World Cup, money built for stadiums that will be seldom used again, and money that could have gone to improve the lot of the Brazilian people.

But because futbol is such a huge sport in the nation, had Brazil won the Cup, it’s possible the good feeling would have carried over to October’s vote.

Now, however, focus returns squarely on the government and what all will agree was a costly disaster, and not even an honorable exit.

A professor who was interviewed by the Wall Street Journal said, “The result of this game will leave a mark on a generation.”

Prior to the debacle, Rousseff was receiving 38% in the polls, with her nearest challenger in a multi-party field at 20%. Early in the tournament she was gaining. No longer. One way or another, there will be a second round of voting.

Paul Hayward / Daily Telegraph

“Brazil spent $11 billion on a national calamity. The world’s greatest football nation was left numb, humiliated and flummoxed as five German goals flew into their net in the first 29 minutes of a crushing 7-1 defeat....

“Around this ground after Oscar’s consolation goal there was dismay but also trepidation. What would it mean for public order? What incendiary mix might be sparked by embarrassment and anger?”

A fan interviewed by the Daily Telegraph said, “The only good thing is I think it will affect President Dilma in the election. But all our politicians are even worse than the team.”

Rousseff said, “Like every Brazilian, I am very, very sad about this defeat. I am immensely sorry for all of us.” She is most sorry for herself.

Germany: The government of Chancellor Angela Merkel expelled a U.S. intelligence official after the discovery of two alleged double agents spying for Washington. The timing couldn’t be worse, what with trans-Atlantic trade talks at a critical stage, let alone talks on Iran’s nuclear program rapidly approaching their deadline and all manner of separate business deals, including plans to upgrade the German military’s drones. Prior issues involving allegations from Edward Snowden have led to the German government ending a longstanding contract with Verizon over concerns about network security.

Editorial / Wall Street Journal

“The world has come a long way since 2008 when hundreds of thousands of Germans turned out to hear candidate Barack Obama speak in Berlin. On Thursday our German friends tossed out ‘the representative of the U.S. intelligence agencies,’ presumably the CIA station chief in Berlin.

“The expulsion of America’s top spy would have been rare in East Germany during the Cold War, much less in an ally the U.S. is treaty-bound to defend. Thursday’s order by Chancellor Angela Merkel’s government reflects America’s diminished standing in the world under President Obama, and perhaps some dubious CIA spycraft....

“Much of this is faux outrage because the Germans surely know that even friendly nations spy on one another. During the Cold War the top aide to Chancellor Willy Brandt was discovered to have been a spy for East Germany. And these days Russian spies are all over Europe, especially Germany....

“Germany enjoys closer commercial and political ties with both Russia and Iran than do most other Western countries. The U.S. needs to understand these relationships, and that requires intelligence. The U.S. would be irresponsible if it didn’t eavesdrop on German officials.

“The espionage flap also offers cover for an all-too familiar strain of German anti-Americanism. Steffen Seibert, the government’s apparently tone-deaf spokesman, on Wednesday declared ‘a deep-seated difference of opinion between Germany and the United States on the question of how to balance security and interference in civil liberties.’ Sorry, Mr. Seibert, the U.S. isn’t Germany’s security threat....

“The real U.S. offense isn’t the spying so much as doing it so poorly....

“Congress’ intelligence committees should do a deeper dive into the German cases and Langley’s larger failings. But Americans should also ask why even our friends now think they can expel a U.S. official and pay no price for it.”

[I’m going to have more on this next week. I’m really tired of Merkel and it’s time to let loose.]

On a totally different topic, Germany’s Environment Minister Barbara Hendricks announced that Germany wants to ban fracking. “There will be no fracking for economic purposes in Germany in the near future.” Under her proposal, most forms would be banned until 2021.

Yet as the Wall Street Journal editorialized, “Germany imports 90% of its gas supply. Yet the country has up to 2.3 trillion cubic meters of domestic shale gas. Germany already possesses much of the infrastructure to efficiently produce and distribute shale gas. It’s 438,000 kilometers of pipelines cover much of Europe. Germans are fracking pioneers, having used fracking technology to extract tight gas since the 1960s.

“If enacted, the ban would put Germany at the mercy of Vladimir Putin, who repeatedly uses Europe’s energy dependence on Russia to the Kremlin’s advantage. German Chancellor Angela Merkel and her Christian Democrats have yet to weigh in on this nutty idea.”

Russia: Out of nowhere, Vladimir Putin arrived in Cuba on Friday and announced Russia was writing off 90%, or almost $32 billion, of Cuba’s Soviet-era debt (approved by both houses of the Russian parliament prior to his departure). Putin is meeting with both Raul and Fidel Castro, as he kicks off a six-day tour of Latin America, including Brazil and Argentina.

Kenya: About 100 have been killed in terrorist attacks in the nation’s eastern coastal districts the past six weeks, Somali militant Islamist group al-Shabab claiming responsibility, including for an attack that killed at least 60 watching a World Cup match.

Indonesia: An important presidential election has taken place, but I plead total ignorance. I do see the Electoral Commission is to rule on the vote tally on July 22, which is then subject to a month of appeals, so I’ll catch up later. For now, though, the tally, a la Afghanistan, is already being highly disputed.

Random Musings

--President Obama met with Republican Texas Governor Rick Perry and urged him to support the president’s $3.7 billion emergency measure aimed at solving the border crisis.

Obama claims the funds would address Republicans’ calls for increased border security while caring for the unaccompanied children streaming into the country.

The president said in a press conference after the meeting, “The challenge is, is Congress prepared to act to put the resources in place to get this done?”

Perry said the crisis was the result of “bad public policy” and urged the president to visit the border, which Obama has refused to do.

Perry wants to see an immediate infusion of National Guard troops, while Obama said, “We’re happy to consider (this), but that’s a temporary solution.”

At issue is a 2008 law that requires extra legal protections for migrants coming from countries that do not share a border with the United States and an unintended consequence has been a flow of children from El Salvador, Guatemala and Honduras, 52,000 in the past eight months, at least, that is overwhelming the system. So Republicans want to see the 2008 law amended or repealed to expedite the children’s return to their home countries.

Some Democrats, however, say this exposes children to potentially dangerous situations back home.  Said Democratic Sen. Dianne Feinstein of California, “That’s not what this country is all about. This, in my view, has to be handled in a way which is compassionate.” [New York Times]

But given the toxic environment on the Hill, the likelihood of a deal between Democrats and Republicans on the funding measure is virtually nil. Like Gov. Perry, many Republican leaders, including Speaker John Boehner, want to see the Guard deployed, which the proposal doesn’t address.

$1.8 billion is to provide shelter and care to the immigrants; $1.6 billion for security and enforcement; and $300 million to help the Central American countries repatriate their citizens and create advertising campaigns to discourage placing children in the hands of smuggling cartels; though further detail in all three categories is lacking.

Meanwhile, the Wall Street Journal’s Laura Meckler and Ana Campoy report that “few minors are (deported) and many are able to stay for years in the U.S., if not permanently....

“In fiscal year 2013, immigration judges ordered 3,525 migrant children to be deported, according to Justice Department figures. Judges allowed an additional 888 to voluntarily return home without a formal removal order.

“Those figures pale in comparison with the number of children apprehended by the border patrol. In each of the last five years, at least 23,000 and as many as 47,000 juveniles have been apprehended....

“Separate data from the Department of Homeland Security show that in fiscal 2013, about 1,600 children were actually returned to their home countries – less than half the number who were ordered removed – suggesting that some are evading deportation orders.

“The head of the immigration court system told a Senate hearing this week that 46% of juveniles failed to appear at their hearings between the start of the 2014 fiscal year last Oct. 1 and the end of June.”

Editorial / Wall Street Journal

“The horrifying sight of children from Central America sitting in camps at the U.S. border has turned the immigration debate from mad to madder, so some basic facts about migrants and the border may be irrelevant. But allow us to try.

“The first fact to keep in mind is that America’s southern border is already far more under control than it was for most of the last 20 years....

“Apprehensions have plunged since the record 1.64 million in 2000.

“Border enforcement has increased markedly, perhaps deterring some potential migrants. But the bigger factor behind the declines is almost surely the slower-growing U.S. economy. Illegal immigration boomed in the fast-growing 1990s, fell with the slower growth at the start of the last decade, but then picked up again with the mid-decade expansion. Then it plunged sharply amid the Great Recession and miserable recovery to a low of 327,577 in 2011....

“(The) news is that illegal crossings are picking up again as the recovery gains steam and the American jobless rate falls. This ebb and flow shows that immigrants continue to come to the U.S. mainly to work and support their families, and they don’t come when there is less work....

“If the U.S. had more work visas for low-skilled immigrants, those parents could move back and forth more easily. As President Obama rightly said on Wednesday in Texas, this is another argument for immigration reform....

“A clear statement from the President that there is no automatic sanctuary in the U.S. would go far to correcting the misinformation and reduce future child migration. This is how Michael Chertoff, the Homeland Security secretary, stopped a previous influx from Central America during the Bush Administration.

“The larger tragedy of this episode is that it has done enormous and needless damage to the cause of immigration reform. The Obama Administration’s incompetence has again undermined its own agenda. But once the misery of the children is past, no one should think that illegal immigration can be stopped by more enforcement alone, by more Border Patrol agents or more harassment of American business. The way to reduce illegal immigration is by providing more work visas to enter – and leave – the U.S. legally.”

Sheldon Adelson, Warren Buffett and Bill Gates / New York Times

“American citizens are paying 535 people to take care of the legislative needs of the country. We are getting shortchanged. Here’s an example: On June 10, an incumbent congressman in Virginia lost a primary election in which his opponent garnered only 36,105 votes. Immediately, many Washington legislators threw up their hands and declared that this one event would produce paralysis in the United States Congress for at least five months. In particular, they are telling us that immigration reform – long overdue – is now hopeless.

“Americans deserve better than this....

“Most Americans believe that our country has a clear and present interest in enacting immigration legislation that is both humane to immigrants living here and a contribution to the well-being of our citizens.... Our present policy, however, fails badly on both counts.

“We believe it borders on insanity to train intelligent and motivated people in our universities – often subsidizing their education – and then to deport them when they graduate....for those who wish to stay and work in computer science or technology, fields badly in need of their services, let’s roll out the welcome mat....

“Americans are a forgiving and generous people, and who among us is not happy that their forebears – whatever their motivation or means of entry – made it to our soil?

“For the future, the United States should take all steps to ensure that every prospective immigrant follows all rules and that people breaking these rules, including any facilitators, are severely punished. No one wants a replay of the present mess....

“A Congress that does nothing about these problems is extending an irrational policy by default; that is, if lawmakers don’t act to change it, it stays the way it is, irrational. The current stalemate – in which greater pride is attached to thwarting the opposition than to advancing the nation’s interests – is depressing to most Americans and virtually all of its business managers. The impasse certainly depresses the three of us.

“Signs of a more productive attitude in Washington – which passage of a well-designed immigration bill would provide – might well lift spirits and thereby stimulate the economy. It’s time for 535 of America’s citizens to remember what they owe to the 318 million who employ them.”

Charles Krauthammer / Washington Post

“As is his wont, President Obama is treating the border crisis – more than 50,000 unaccompanied children crossing illegally – as a public relations problem. Where to photo op and where not. He still hasn’t enunciated a policy. He may not even have one....

“These kids are being flown or bused to family members around the country and told to then show up for deportation hearings. Why show up? Why not just stay where they’ll get superior schooling, superior health care, superior everything? As a result, only 3% are being repatriated, to cite an internal Border Patrol memo.

“Repatriate them? How stone-hearted, you say. After what they’ve been through? To those dismal conditions back home?

“By that standard, with a sea of endemic suffering on every continent, we should have no immigration laws. Deny entry to no needy person.

“But we do. We must. We choose. And immediate deportation is exactly what happens to illegal immigrants, children or otherwise, from Mexico and Canada. By what moral logic should there be a Central American exception?

“There is no logic. Just a quirk of the law – a 2008 law intended to deter sex trafficking. It mandates that Central American kids receive temporary relocation, extensive assistance and elaborate immigration/deportation proceedings, which many simply evade.

“This leniency was designed for a small number of sex-trafficked youth. It was never intended for today’s mass migration aimed at establishing a family foothold in America under an administration correctly perceived as at best ambivalent about illegal immigration.

“Stopping this wave is not complicated. A serious president would go to Congress tomorrow proposing a change in the law, simply mandating that Central American kids get the same treatment as Mexican kids, i.e., be subject to immediate repatriation.

“Then do so under the most humane conditions. Buses with every amenity. Kids accompanied by nurses and social workers and interpreters and everything they need on board. But going home.

“One thing is certain. When the first convoys begin rolling from town to town across Central America, the influx will stop.”

--Peggy Noonan / Wall Street Journal...on President Obama...

“This is a president with 2 ½ years to go who shows every sign of running out the clock. Normally in a game you run out the clock when you’re winning. He’s running it out when he’s losing.

“All this is weird, unprecedented. The president shows no sign – none – of being overwhelmingly concerned and anxious at his predicaments or challenges. Every president before him would have been. They’d be questioning what they’re doing wrong, changing tack. They’d be ordering frantic aides to meet and come up with what to change, how to change it, how to find common ground not only with Congress but with the electorate.

“Instead he seems disinterested, disengaged almost to the point of disembodied. He is fatalistic, passive, minimalist. He talks about hitting ‘singles’ and ‘doubles’ in foreign policy.

“ ‘The world seems to disappoint him,’ says the New Yorker’s liberal and sympathetic editor, David Remnick.

“What kind of illusions do you have to have about the world to be disappointed when it, and its players, act aggressively or foolishly? Presidents aren’t supposed to have those illusions, and they’re not supposed to check out psychologically when their illusions are shattered....

“It is weird to have a president who has given up. So many young journalists diligently covering this White House, especially those for whom it is their first, think what they’re seeing is normal.

“It is not. It is unprecedented and deeply strange. And, because the world is watching and calculating, unbelievably dangerous.”

--Juliet Eilperin / Washington Post

“Bears, beer and horse heads: What exactly is going on with the leader of the free world?

“On a single day this week in Denver, President Obama scarfed down pizza and drinks with strangers, shot pool with Colorado’s governor and shook hands with a guy on the street wearing a horse mask. His top staffers are promoting these stops on Twitter with the hashtag #TheBearIsLoose – a term one of Obama’s aides coined in 2008 when the candidate would defy his schedule.

“More than five years into his presidency, Obama is trying to free himself from the constraints of office, whether by strolling on the Mall or hopscotching the country as part of a campaign-style tour. White House senior adviser Dan Pfeiffer says the president ‘just wants to get out’ and influence ‘our overall political conversation’ by connecting with ordinary Americans.

“But to some, breaking free can also look like running away.”

--In a new Quinnipiac University survey, 46% of registered voters want the Republicans to win control of the Senate, with 44% saying they want the Democrats to retain control of the chamber. By the same 46-44 margin, voters want to see the GOP keep control of the House.

Reminder, while the Democrats have a 55-45 current margin in the Senate (including two independents who vote with the Dems), they are defending 21 of the 36 seats up for grabs.

Meanwhile, 73% disapprove of the job congressional Republicans are doing, with 63% saying they disapprove of the way Democrats are handling things.

For president, 58% of Democrats and Democratic leaning voters say if their party’s presidential primaries were held today, they’d support Hillary Clinton. Sen. Elizabeth Warren, who has said she is not running, is second at 11%, with Vice President Biden at just 9%, which is really rather remarkable.

As for the GOP, talk about no front runner. Sen. Rand Paul is at 11% among Republicans and Republican leaners, with Gov. Chris Christie, former Florida Gov. Jeb Bush, and former Arkansas Gov. Mike Huckabee, each at 10%. Sen. Ted Cruz, Wisconsin Gov. Scott Walker and Rep. Paul Ryan are at 8%. Sen. Marco Rubio is at 6%.

--Regarding Chris Christie, according to a report by The Record (N.J.), the Port Authority fast-tracked the hiring of Christie’s former law firm under pressure from the Republican governors administration and has paid the firm at least $6.3 million since 2010.

And when it comes to Christie’s presidential ambitions, I’ve been saying for over a year now that the topic cracks me up for a pretty simple reason. He hasn’t done a good job in my state. Period.

In the current Crain’s New York Business, Greg David compares the performance of the economies of New Jersey, New York State and New York City since the Great Recession. One series of stats is telling. Jobs lost in recession and jobs regained. 

To wit:

In New York State...300,200 jobs were lost in the recession.  524,600 have been regained.

In New York City...140,800 jobs were lost. 374,900 have been regained.

In New Jersey...257,900 were lost. Just 100,300 have been regained.

As Mr. David comments: “Why is this? New Jersey’s mainstay industries – pharmaceuticals, telecommunications and casino gambling – are in long-term declines. The weakness of financial services is taking a toll, too. The state has no offsetting growth sectors like technology or film and television production, which are boosting New York City and New York State.

“The question for Mr. Christie is how he can launch a presidential campaign on such an economic track record. It’s hard to see what he could say about it.”

--New York Gov. Andrew Cuomo has a 59% to 24% lead over his Republican challenger, Rob Astorino, in his reelection bid, according to a new Wall Street Journal/NBC 4 New York/Marist poll. A majority of New York state voters, 54%, still don’t know who the heck Astorino is, and that, sports fans, can be a problem.

--According to CBS White House correspondent Mark Knoller, as of this week, President Obama had attended 393 fundraisers since taking office, compared with George W. Bush’s 216 at the same point in his presidency. [Karl Rove / Wall Street Journal]

--Cleveland was selected to host the 2016 Republican National Convention, winning out over Dallas.

But why Cleveland? Ohio decides national elections and the last two it went for Obama. Plus RNC Chairman Reince Priebus has been pushing a new urban policy for the party and the importance of issues such as poverty, economic opportunity and education in big cities.

Ohio also has a strong Republican governor in John Kasich, while another Ohio Republican, Sen. Rob Portman, pressed hard for the city.

But as the Washington Post’s Paul Kane and Reid Wilson noted, LeBron James could complicate matters, turning a city famous for losing into a winner.

And there’s another potential problem. Instead of the traditional Labor Day weekend, or thereabouts, date for a convention, Priebus is pushing for an earlier primary cycle and a June convention date, which gives the nominee more time to raise cash for the general election.

But with LeBron announcing on Friday that he is returning to Cleveland, and if the team has a late playoff run, into June, what then? Conventions need up to six weeks to prepare the arena, including for installing security measures.

So the RNC will almost certainly have to move its date back into July, seeing as the Cavs would be unlikely to agree ahead of time to move their games to another venue, which would probably mean Ohio State’s arena, 140 miles away.

--A New York Times story says Chelsea Clinton is following her parents’ lead and giving paid speeches. Like try $75,000 a pop, though her spokesman told the Times all of her paid speaking engagements “are on behalf of the Clinton Foundation, and 100% of the fees are remitted directly to the foundation.”

Chelsea’s fee is apparently more than the reported $50,000 per speech earned by Jeb Bush, Colin Powell and Madeleine Albright.

[Last time I wrote of Hillary’s $1.8 million take from appearances on nine college campuses during the last year and a half and she told ABC News, after I had posted, that “All of the fees have been donated to the Clinton Foundation for it to continue its life-changing and life-saving work. So it goes from a foundation at a university to another foundation.” It’s just that simple. Or maybe not.]

--Former New Orleans mayor Ray Nagin was sentenced to 10 years in prison on corruption charges, among them kickbacks from contractors looking for city work, with many of the schemes taking place post-Katrina, when contractors were rushing into the city for rebuilding projects.

--We note the passing of Eduard Shevardnadze, 86. He played a vital role in ending the Cold War as Soviet foreign minister under Mikhail Gorbachev and then went on to lead his native Georgia in those first years of independence.

Shevardnadze always struck me as a reasonable man and he was one of the architects of Gorbachev’s reform policy of “perestroika,” though the two later had a falling out. Oh, how I wish we were dealing with someone like Mr. Shevardnadze today.

--The Washington Post reports that 90% of people identified in a tranche of communications intercepted by the NSA were ordinary Internet users, not foreign surveillance targets.

Much of the highly personal information was retained, the paper says, even though it had no intelligence value. The information was provided by former NSA contractor Edward Snowden.

The Post reviewed 160,000 emails and instant messages from some 11,000 online accounts, gathered by the NSA between 2009 and 2012.

Much of the information, the paper says, has a “startlingly intimate, even voyeuristic quality” telling stories of “love and heartbreak, illicit sexual liaisons, mental-health crises, political and religious conversions, financial anxieties and disappointed hopes.”

If my emails are part of this collection you would find mental-health crises related to being a Mets fan during the period in question. 

However, the paper says the intercepted files did contain “discoveries of considerable intelligence value.”

These included “fresh revelations about a secret overseas nuclear project, double-dealing by an ostensible ally, a military calamity that befell an unfriendly power, and the identities of aggressive intruders into U.S. computer networks.”

So therein is the policy dilemma for President Obama. As the Post writes, there are some discoveries of “considerable intelligence value” but there is also “collateral harm to privacy on a scale that the administration has not been willing to address.”

--So we have been told since we were little kids that there were only two facilities in the world where smallpox samples are allowed, by international agreement, and they are in Atlanta at the Centers for Disease Control and Prevention headquarters, and at a virology and biotechnology research center in Novosibirsk, Russia.

Wrong! Last week, a government scientist cleaning out a storage room at a lab at the National Institutes of Health’s Bethesda, Md., campus found decades-old vials of smallpox.

The vials, which date from the 1950s, were flown to Atlanta and we learned Friday that two of them were live. They will be destroyed.

Smallpox – which vanished from the United States after World War II and was eradicated globally – killed hundreds of millions of people in the 20th century alone. There is no cure.

Last month, a safety lapse involving three labs in Atlanta led to the accidental release of live anthrax bacteria. 84 employees have had to get a vaccine or take antibiotics as a precaution.

But wait...there’s more! The CDC admitted late Friday that there have been numerous incidents where its labs in Atlanta improperly sent potentially deadly pathogens to other laboratories, including a virulent bird flu virus, over the past decade.

Geezuz, my fellow Americans. We are so freakin’ overrated. 

At least CDC Director Thomas Frieden told reporters he was “angry about it.”

--Uh oh. A Colorado man is infected with pneumonic plague, last seen in the state in 2004. The man has been hospitalized and treated and he’s not transmissible, according to a Colorado Dept. of Public Health and Environment official. He may have contracted the illness from his dog, which died suddenly and was also found to be carrying the disease.

The dog probably received it from the dead animal population, according to the spokesperson. So don’t handle dead rodents; especially if you’re in Colorado... high and hallucinating.

--Nice holiday weekend in Chicago, with at least 14 killed and dozens more wounded in gun violence. Police were involved in eight shootings themselves, including two that left civilians dead. Police officers were shot at by suspects in three of the city’s 53 shooting incidents, which was more than the combined total of Detroit and New York, which had 46, 10 of which were fatal.

But, to be fair, through June 30 there had been nine fewer homicides in Chicago in 2014 than for the first half of 2013. It was 2012 when Chicago was the only city in America to register more than 500 homicides.

--NASA approved full production on the most powerful rocket ever, Boeing’s Space Launch System, which is designed to explore the deep reaches of space, including near-Earth asteroids, the moon and, ultimately, Mars.

The rocket’s initial test flight from Cape Canaveral is expected in 2017.

Critics say its assembled from already developed technology. One, Space Frontier Foundation, said SLS was “built from rotting remnants of left over congressional pork. And its budgetary footprints will stamp out all the missions it is supposed to carry, kill our astronaut program and destroy science and technology projects throughout NASA.”

Ouch.

Boeing counters the advantage of building SLS is that it can carry out a “menu of missions” that include shooting astronauts to the moon and Mars, in addition to asteroids.

I just hope I’m still around when we launch the first manned mission to the Red Planet.

---

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

God bless America.

---

Gold $1337...highest weekly close since March
Oil $100.83

Returns for the week 7/7-7/11

Dow Jones -0.7% [16943]
S&P 500 -0.9% [1967]
S&P MidCap -2.3%
Russell 2000 -4.0%
Nasdaq -1.6% [4415]

Returns for the period 1/1/14-7/11/14

Dow Jones +2.2%
S&P 500 +6.5%
S&P MidCap +5.1%
Russell 2000 -0.3%
Nasdaq +5.7%

Bulls 60.6
Bears 15.2 [Source: Investors Intelligence]

Have a great week. I appreciate your support.

For new readers, pick up the StocksandNews iPad app. Perfect for beach bars.

Brian Trumbore
 



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Week in Review

07/12/2014

For the week 7/7-7/11

[Posted 12:00 AM ET]

Edition 796

Washington and Wall Street

Outside of a smattering of earning reports, there was nothing going on this week in terms of the Street and economic news, save for the release of the Federal Reserve’s minutes from its June meeting, where we learned the Open Market Committee agreed that their bond-buying program that initially was at $85 billion a month would end with a final reduction of $15 billion at their October gathering; so another $10 billion at the July 29-30 confab and $10 billion Sept. 16-17...the program having been cut to the current $35 billion.

“Signs of increased risk-taking were viewed by some participants as an indication that market participants were not factoring in sufficient uncertainty about the path of the economy and monetary policy,” the minutes showed.

Fed officials expressed concern about low volatility in equity and fixed-income markets but at the same time, “it was noted that monetary policy needed to continue to promote the favorable financial conditions required to support the economic expansion,” according to the minutes.

So the issue is when will the Fed begin raising the funds rate off zero? Most expect the first increase in the second or third quarter of 2015, and there is no doubt the market can handle the initial few 25 basis point moves, or an initial 50-bp hike, but it’s about perception and whether the Fed is viewed as being behind the curve, particularly when it comes to inflation, which I argue is going to pick up at a pace that causes the Fed to act sooner. St. Louis Fed President James Bullard did say this week he favored the first hike being in the initial quarter of next year, but I’m saying by year end there could be real market pressure to act sooner than that.

The Fed, however, can point to underemployment and still slack wage growth, along with a weak consumer, as being reasons for maintaining a zero policy (not that it has worked) and with what we saw this week, weakness in the financial markets generated by concerns over growth in China, again, along with a credit scare in Europe, maybe the Fed’s caution is warranted. When it comes to Europe, I have certainly been consistent. I don’t see where the sustainable 2% growth the continent needs, throughout, is coming from. More on this in a bit.

I’ve just been fairly optimistic on U.S. growth, but, yes, if the rest of the world begins to roll over anew, we will too....or at best stagnate.

This week the New York Times’ Neil Irwin was awarded the lead on the front page for a column that generated some press, a piece titled “Welcome to the Everything Boom, or Maybe the Everything Bubble.”

Mr. Irwin talked of the European debt boom that I have been harping on for the better part of the past year as being a true bubble, and he talked of New York City office towers going for outrageous sums [Pssst...nice job, my friends at Bank of New York, for selling their iconic One Wall Street location for top dollar...]

“Around the world, nearly every asset class is expensive by historical standards. Stocks and bonds; emerging markets and advanced economies; urban office towers and Iowa farmland; you name it, and it is trading at prices that are high by historical standards relative to fundamentals. The inverse of that is relatively low returns for investors.

“The phenomenon is rooted in two interrelated forces. Worldwide, more money is piling into savings than businesses believe they can use to make productive investments. At the same time, the world’s major central banks have been on a six-year campaign of holding down interest rates and creating more money from thin air to try to stimulate stronger growth in the wake of the financial crisis,” writes Irwin.

It all has to unwind at some point. A new day will dawn, a new era. These transitions just never go as smoothly as planned. Like remember how great that Arab Spring was going to be? Remember how U.S. inaction in Syria led to now 170,000 deaths, nine million displaced, and an entire region convulsed in violence?

OK, I’m getting off track and those last thoughts obviously had nothing to do with Mr. Irwin’s column, but it’s also not stretching his thesis too much, that a day of reckoning could be on the horizon for the financial markets.

For today, U.S. markets paused this week, but now the second-quarter earnings reports will start flooding in in earnest, and we’ll receive a lot more economic data the next two weeks, so we’ll begin to get a clearer picture on economic growth in the U.S., or lack thereof.

But while I cover the foreign affairs mess down below in great detail, I can’t help but note some comments from Bret Stephens in his Wall Street Journal op-ed on President Obama’s “Post-Pax Americana world of collapsing U.S. will.”

“American pre-eminence isn’t being challenged by emerging powers. The challenge comes from an axis of weakness. Russia is a declining power. China is an insecure one. Groups like ISIS and other al-Qaeda offshoots are technologically primitive and comparatively weak. Iran is a Third World country trying to master 70-year old technology.

“Where does their confidence come from? It isn’t the objective correlation of forces. The GDP of New York City alone is nearly three times the size of Iran’s. Some demographers predict that Russia’s population will fall to as low as 52 million before the century is out. The anticorruption campaign being carried out by Xi Jinping in China smacks of similar efforts by Mikhail Gorbachev and suggests an equal amount of internal rot. A contingent of French Foreign Legionnaires easily turned back an ISIS-like challenge in Mali last year.

“But upstart countries and movements don’t operate according to objective criteria – if they did, they wouldn’t operate at all. Rather, they act on an intuition about their adversaries, a sense of their psychology, a nose for their weaknesses. ‘When tens of your soldiers were killed in the streets of Mogadishu,’ wrote Osama bin Laden in his 1996 fatwa declaring war on the U.S., ‘you left the area carrying disappointment, humiliation and your dead with you.’ This was not an indictment of the excess of American power. It was mockery of its timidity.

“So it is now. The U.S. could have long ago dispatched Assad with targeted airstrikes. Fearing unforeseen consequences we did not, and so we got the foreseeable consequence that is Syria and Iraq today. The U.S. could use Apache gunships to blunt the offensive of ISIS and kill a lot of jihadists. Fearing entanglement we do not, and so we risk acceding to the creation of an Islamic caliphate. The U.S. could have destroyed Iran’s nuclear infrastructure in a week-long bombing campaign, or crippled its economy with additional targeted sanctions. Fearing another Iraq-like war we will not, meaning Iran will get a bomb when the timing suits it best....

“Ours is still an American world, but it is presided over by a president who doesn’t believe in American power. The best lack all conviction while the worst are filled with passionate intensity – and a sense that the moment is theirs to seize. We know how that story ended.”

Europe and Asia

Europe was shaken a bit when Portugal’s second-largest bank, Banco Espirito Santo SA, missed a short-term debt payment, reviving memories of the euro currency crisis and Portugal’s role in it. That led to European Central Bank President Mario Draghi’s 2012 pledge to do what it takes to keep the eurozone together and there has largely been stability since.

European equity markets had calmed down by Friday after declining 3.6% in the prior five trading sessions (Euro Stoxx 600...like the S&P 500), as the Portuguese bank sought to reassure investors by revealing its exposure to related companies in a very complicated corporate structure. The lender said it has a capital buffer of 2.1 billion euros above the regulatory minimum, this while the country’s central bank said the bank’s solvency is “solid.” Now ask me if anyone believes them.

At least they are going outside the family, after Espirito has been family owned for its 94-year history, in selecting a new CEO.

But who the heck knows? Not a lot of transparency in Espirito’s books.

What we do know is that after all the uproar, the yield on Portugal’s 10-year debt rose to 3.99% before closing the week at 3.87%, which is less than one-quarter the peak 17% level at the height of the crisis. [Its stock market did, however, fall 12% in seven days.]

Italy’s 10-year yield rose from 2.81% last Friday to finish the week at 2.89%. The yield on Spain’s bond rose from 2.65% to 2.76%. Like whoopty-damn-do. Hardly a crisis, boys and girls. 

At least not yet. I’ve been pounding the table on the Euro bond bubble and I recognize some of the reasons why yields have plummeted for the periphery as they have.

But I also keep pointing out that unless you tell me the likes of Spain, Italy, Greece and Portugal are going to start growing consistently, they can’t possibly service their humongous government debt levels in the future without investors demanding a much higher return. Granted, each country will be different, but if you think Draghi and the ECB are going to be able to “do what it takes” forever, then you just don’t understand the dynamics of the European Union and the eurozone. Yes, Draghi saved the day in 2012, but as I’m about to note, the divisions in the eurozone are already reemerging and it won’t be bailout city forever.

So we turn to Greece. The troika (the IMF, ECB and EC) says Greece needs a third bailout but the Greek government is balking as it would lead to another round of conditions, austerity measures. Draghi warned Greece’s leaders that the pace of reform is slowing, and that they must make more progress in order to unlock the last 1 billion euro in aid.

Instead, what we saw this week was a state-controlled electrical utility shut down about 25% of the grid, though not to the bigger tourist areas (tourism being 20% of the economy, with bookings today at their best pace since the 2004 Olympics), and then public sector workers began a 24-hour strike over austerity measures that have led to 40% reductions to salaries and pensions. 4-0.

So Greece is not out of the woods, and many in the eurozone won’t be real sympathetic if it rolls over again.

Then you have the industrial production figures for the month of May, released this week.

Germany, down 1.8%, a third month of decline. France, down 1.7% when an increase was expected. Italy, down 1.2% over April, also when an increase was expected. [Germany’s exports were also surprisingly down 1.1% in May over April.]

[Even the U.K. saw factory output decline 1.3% in May, the first decline there in six months.]

So in the eurozone the pace of recovery has slowed from the first quarter’s. Ukraine hasn’t helped in this regard, nor is the siege of Donetsk and Luhansk (detailed below) likely to improve sentiment. Or the fear among Europe’s leaders that their home-grown Islamists will eventually return home from the theater in Iraq and Syria....or Nigeria, or Somalia, or Yemen....

Two other items.

The IMF said Spain needed to raise taxes because government revenue is falling after Prime Minister Mariano Rajoy introduced his plan to cut income and corporate taxes to boost growth amid the deepest budget cuts in Spain’s democratic history. Rajoy faces reelection next year and he’s ignoring calls from the IMF and the European Commission to hike some taxes.

And you know how Mario Draghi has been talking about his plan to hand as much as 1 trillion euros to banks, who can then lend the funds out to spur investment and economic growth? The experts are picking apart his latest “targeted longer-term refinancing operation” (TLTRO) and it’s really a lot of baloney.

Marco Valli, an economist at UniCredit SpA in Milan, told Bloomberg the other day:

“It is unlikely that companies that had no intention of investing will start to do so now. It isn’t clear that banks in peripheral countries where private sector debt needs to be reduced further will be capable of returning to flat or positive net lending in about a year. This could restrain the impact of this facility.”

Others say the TLTRO will work. I’ll go with Mr. Valli.
Turning to Asia...

China reported its inflation numbers for June and the PPI (or factory-gate prices as they like to call them) fell 1.1% year-over-year, which was actually good, the slowest rate of decline in more than two years; a sign industrial activity might be improving.

Consumer prices for the month rose 2.3%, with food up 3.7%, below the 4% level for the latter that the government finds manageable.

But exports for June rose only 7.2% when a double-digit increase was expected, and imports were up only 5.5%, also below expectations. Exports to the U.S. were up 7.5%, year-over-year, and up 13.1% to the European Union, which sounds good but if the EU recovery was really in full swing it would be even higher.

But Chinese Prime Minister Li Keqiang, said “China’s economic performance in the second quarter has improved from that in the first quarter. However, we cannot lower our guard against downward pressures. We will keep up our composure and not adopt strong stimulus. Instead, we will increase the strength of targeted measures.”

Second-quarter GDP is coming out soon. China’s numbers folks are furiously pulling all-nighters as they toy with them. “Let’s see, if we take a $1 billion from here and add to there and divide by 12...presto! 7.4%!”

There was also a highly disturbing item on Friday. The state broadcaster called a location-tracking function offered by Apple’s iPhone a “national security concern,” the latest sign of a backlash against U.S. technology firms. Recall just last month, Chinese state television raised concerns about Microsoft’s Windows 8 operating system.

It’s tit-for-tat, and an expensive game. The United States has been calling out Chinese telecom equipment suppliers like Huawei Technologies and ZTE, saying their gear could be used to spy on Americans. China then started pulling back on Cisco Systems’ equipment.

This isn’t good for anybody, and as I note further below, just another sign of rapidly deteriorating relations between our two nations

One note on Japan. Machine orders fell the most on record (since 1987) for the month of May, down 19.5% from April, when a slight gain was forecast.

Street Bytes

--U.S. equities took their cues from Europe, China and a general feeling the rally needed a rest as the Dow Jones lost 0.7% to 16943, while the S&P 500 declined 0.9% and Nasdaq 1.6%. The Russell 2000 plunged 4% and is now back in negative territory for the year, -0.3%.

--According to the Lipper unit of Thomson Reuters Corp., the average diversified U.S.-stock fund returned 3.4% in the second quarter, bringing its first half return to 4.9%.

Funds specializing in small cap growth companies, though, were up only 0.4% in the first half of the year.

Core bond funds, which are focused on intermediate-maturity, investment-grade debt, returned a solid 4.1% for the first six months.

--U.S. Treasury Yields

6-mo. 0.06% 2-yr. 0.45% 10-yr. 2.52% 30-yr. 3.34%

Yields fell, 12 basis points on the 10-year, for example, as there was a flight to safety, but also just general demand from all over for high-quality paper with a yield far greater than that of, say, the German bund (1.20% on its 10-year).

--Natural gas futures hit a six-month low this week, a big break for consumers. Any concerns on the geopolitical front have been trumped by the continuing surge in North American oil-and-gas production, with U.S. gas producers refilling storage at a record pace after the horrible winter.

One small item hitting nat gas prices this past week is the looming chill that is going to hit the Great Lakes and Upper Midwest, with temperatures falling anywhere between 10 and 20 degrees below normal for a few days, ergo natural air conditioning.   

The gasoline price is beginning to edge down as well, with the national average at $3.64 a gallon on Thursday, down from the second-highest level ever for a Fourth of July weekend of $3.67.

Thankfully, the violence in Iraq remains far from the bulk of that key country’s oil production in the south, which makes up about 90% of total production, thus Iraq is not leading to higher prices as first seen when ISIS launched its offensive.

This could yet change, however, and government instability, detailed below, doesn’t help.

Separately, Libya is looking to increase oil exports as rebels handed over two key ports to the state-run National Oil Corporation, which is another reason why oil has come off its highs.

--Bank of America reports that the U.S. will remain the world’s biggest oil producer this year after overtaking Saudi Arabia and Russia. BofA’s Francisco Blanch said, “The shale boom is playing a key role in the U.S. recovery. If the U.S. didn’t have this energy supply, prices at the pump would be completely unaffordable." [Bloomberg]

--Meanwhile, corn prices fell below $4 bushel for the first time in four years owing to perfect growing conditions in the U.S. corn belt, along with favorable weather in areas from Ukraine to China. Aside from hitting farmers’ income, land prices could slide a bit in the Midwest.

Agricultural land prices in the Midwest are up just 1% annually vs. double-digit increases in recent years, according to the University of Illinois.

Just two years ago, the U.S. growing season went up in flames in an historic heat wave and corn prices soared above $8 per bushel.

Friday’s report from the U.S. Department of Agriculture didn’t help corn as the USDA hiked its reserve forecast for the product, with the price closing the week at $3.84.

The USDA also had bearish news for soybean farmers, as it raised its forecast for the 2014 harvest. Soybean futures have declined 10 consecutive sessions, the longest streak since July 1973, with prices down 17% in the past 12 months. The above noted cool weather for next week in the Midwest also comes at a critical time in crop growth. Ergo, no heat stress on plants.

--Wells Fargo & Co. reported quarterly results that matched expectations, though revenue was down 1.7% vs. a year ago. Investors were underwhelmed by net interest margin – a key profitability figure that measures the difference between what a bank makes on lending and what it pays depositors – as it narrowed to 3.15%, compared with 3.40% a year earlier. Other facets of the report were less than exciting.

[The next week the other big five banks report.]

--Cancer-stick makers Reynolds American and Lorillard are in merger talks that could be wrapped up as early as Monday. The two would have a combined U.S. market share of 42% of the cigarette market. Reynolds is looking to bulk up in e-cigarettes, where Lorillard is the market leader.

--According to Inside Mortgage Finance, home lending, which hit a 14-year low in the first quarter of this year, rebounded strongly in the second quarter, with the trade journal saying it was up 32% from Q1.

“The Mortgage Bankers Assn. projects that lenders will originate $1.02 trillion in mortgages this year, with 42% of that being refinance loans. That’s down from $1.76 trillion last year, when the refinance share was 63%.

“Other mortgage watchers have lower projections. FBR & Co. recently cut its 2014 origination forecast 8% to $989 billion from $1.08 trillion.” [E. Scott Reckard / Los Angeles Times]

--Alibaba is racing to complete its initial public offering within the next month, setting a target date of August 7 or 8, but it’s running out of time for the roadshow.

The Chinese ecommerce company could raise about $20 billion, which would make it one of the largest ever (largest on the New York Stock Exchange, where it will be traded).

But if Alibaba starts its roadshow July 21, that bumps up against summer vacations and many investors will miss out, thus potentially stifling demand.

--Citigroup is set to pay more than $7 billion to resolve a long-running government investigation into its sales of mortgage-backed securities, with $4 billion going to the Department of Justice and $3 billion for mortgage relief for homeowners – such as principle reduction – as well as other payments to a half dozen state attorneys-general.

Analysts initially thought Citi would pay around $1.5 billion.

--More than $1.1 billion in venture capital funding was raised in the second quarter in New York, while nationally the figure of $13.9 billion is the most since the end of the 1998-2000 dot-com bubble.

As reported by Matthew Flamm of Crain’s New York Business, Uber led the way nationally with a $1.2 billion round, part of California’s $8.93 billion raised in 442 deals, according to VC database CB Insights.

--Personal computer sales showed signs of health in the second quarter, with Gartner Inc. saying shipments rose 0.1% in the period vs. a year earlier, while rival IDC said global unit shipments declined 1.7%, much better than the firm’s earlier forecast of a 7.1% sales decline.

The big three – Lenovo, Hewlett-Packard and Dell – all showed sizable shipment increases and the growth came from both the consumer and corporate segments.

At the same time, sales of some tablet models have cooled.

--Samsung Electronics forecast a 25% drop in profit for the second quarter due to a slowdown in the smartphone market and a strong Korean currency, as well as increased competition in the Chinese and some European markets during the period.

Samsung still expects an operating profit of $7.1 billion for the quarter, but it would be a third straight quarterly decline.

--Four out of 10 American households are now cellphone use only, twice the rate from just five years ago, though the pace of dumping landlines has slowed.

--Rengan Rajaratnam, the brother of imprisoned Galleon Group LLC co-founder Raj Rajaratnam, was cleared in the first loss of at least 88 people charged in the federal crackdown on insider trading. Rengan had been accused of scheming with his older brother, with Raj having been convicted of insider trading in 2011.

--Russian car sales plunged 17% year-over-year in June, according to the Association of European Businesses. A decline this year would follow a 5.5% fall in auto sales in 2013.

Meanwhile, investment in Russian real estate fell nearly 60% in the first half of 2014, according to consultancy Jones Lang LaSalle. It’s all about economic uncertainty emanating from the crisis in Ukraine.

--Corinthian Colleges Inc., a major for-profit college operator, negotiated a deal with the U.S. Department of Education to sell off the bulk of its more than 100 campuses and wind down the rest.

Corinthian has 12,000 employees serving 72,000 students. Its financial picture had been deteriorating, with total enrollment down 14% in May from a year earlier, while new student enrollment was off 13%. Revenue was down 12% for the quarter ended March 31.

Corinthian is a high-profile example of the Obama administration’s new rules that cut federal aid for for-profit schools whose students default on federal loans at high rates or who end up deeply in debt.

The school will be winding down operations over the next six months. 

--Last holiday weekend’s box-office receipts dropped 46% for the top 12 movies and were the lowest for a Fourth of July weekend since 1999.

The top movie was “Transformers: Age of Extinction,” which took in $36.4 million in domestic sales, but $50.9 million in China.

This is looking like the worst summer in a decade, with receipts down 20% thus far (the season starting in May). Year-to-date domestic numbers are down 3.8%, according to boxofficemojo.com.

But for this weekend, the big story is the release of “Dawn of the Planet of the Apes,” which has received some excellent reviews. But if I were you, I’d stay away from the monkey houses at your local zoo because once they see the flick, it could get ugly.

--The first Colorado study on the post-legalization pot market estimated that total market demand for marijuana in Colorado is about 130 metric tons a year...121 tons for residents and 9 tons for visitors.

Marijuana has an average market rate in Colorado of $220 per ounce, according to the report by pot regulators. Thus far, the state is selling a lot more medical marijuana than recreational stuff.

--Of course with all the pot smoking you need some munchies and Crumbs Bake Shop, which sells specialty cupcakes and donuts out of 65 stores (at its peak) in 12 states announced on Monday it was filing for bankruptcy.

But on Thursday, word broke that Marcus Lemonis, best known for the CNBC reality show “The Profit,” who is also CEO of Camping World, was interested in rescuing Crumbs and forming an investment group to do so.

--A company called Cynk Technology saw its stock climb about 50% on Thursday to $21.95 in over-the-counter trading before finishing at $13.90.

But Cynk was trading at six cents on May 15. The thing is, Cynk, which purportedly operates a social network, has no revenue, no assets and only one employee, who when tracked down said he no longer works with the company...if it is a company. Friday, trading in the company was suspended.

--A prostitute linked to the death of a Google executive, who died from a heroin overdose on his yacht, may also be linked to the earlier death of the owner of a popular Atlanta music venue, according to the AP.

The Google executive’s death was back in November but Alix Tichelman was just charged in the case. Police say Tichelman had many clients in Silicon Valley.

--Long Island Rail Road riders are worried sick about a potential strike that could begin as early as July 20, the LIRR being the nation’s busiest commuter railroad serving 300,000 weekday riders and tons of summer beachgoers and visitors to the Hamptons. The last LIRR strike was in June 1994 and lasted just three days.

--A new appraisal of the value of the Detroit Institute of Arts’ collection pegs it at $2.7 billion to $4.6 billion.

The appraisal is in advance of a federal bankruptcy trial in August for the city, but while some want to see the art sold off to meet debts and pension obligations, there would be significant delays in selling off the pieces due to donor lawsuits that could prevent the sale of many of the most valuable works.

Actually, the appraiser, Artvest Partners, said the bulk of the museum’s collection might raise as little as $850 million because some of it is in areas that have fallen out of favor with collectors, citing old masters and 19th-century European paintings.

The D.I.A. has works by Pieter Bruegel the Elder (have postcards of his work under my blotter), Michelangelo, Rembrandt, and van Gogh, among other greats.

Foreign Affairs

Israel: Violence escalated as Israel was on the verge of all-out war with Hamas. The Israel Defense Forces have mobilized tens of thousands of reservists for a possible ground assault into Gaza, and while many of the over 600 rockets fired by Hamas into Israel have been intercepted by the Golden Dome defense system, others have gotten through, though no Israelis have been killed as I go to post.

The same can’t be said of the Palestinians, whose death toll rose to over 100 on Friday (including nine killed when an Israeli missile hit a coffee shop where people had gathered to watch the World Cup), with 700 injured, according to the Gaza Health Ministry, as the IDF targets militant missile sites, that are often housed in ordinary homes. Israel offers warnings prior to a strike, but there are confirmed reports Hamas tells the people they should remain inside.

President Obama called Prime Minister Benjamin Netanyahu on Thursday offering U.S. help to broker a ceasefire. But Netanyahu is under immense internal pressure to take the fight into Gaza from those on the Right that are in his governing coalition. As one Knesset member, Moshe Feiglin, asked: “Why is there still electricity, water and food in Gaza?”

Feiglin expressed the opinion of many Israelis: “As long as we bury our heads in the sand and don’t make the population that calls to destroy us pay a price, we will continue living under a constant existential threat.”

Coalition leaders Avigdor Lieberman (foreign minister) and Naftali Bennett (leader of the far-right Jewish Home party) said Israeli restraint in the face of the rocket fire “was not power.”

Those on the Left in Israel, such as Meretz leader Zehava Gal-On, call for a ceasefire with international help and then accept the Arab League Peace Plan to end the conflict with the Palestinians. [Jerusalem Post]

For his part, Netanyahu has accused Hamas of “committing a double war crime by intentionally trying to hit Israeli citizens, and using the local Gaza population as human shields.”

Earlier, Netanyahu spoke to the father of the Palestinian teenager killed by Israeli extremists in retaliation for the deaths of the three Israeli teenagers that were kidnapped by Hamas.

“I want to express my shock, and the shock of all Israeli citizens, at the heinous murder of your son,” the prime minister said. “We acted immediately afterward to locate the murderers, and they will be brought to justice.”

Six Israeli nationalists were arrested in the death of the Palestinian, Mohammad Abu Khieder, with at least three later confessing.

The Haaretz newspaper, in an editorial, said there was no such thing as “Jewish extremists,” that they are instead the descendants and builders of a culture of hate and vengeance that is nurtured and fertilized by the guides of “the Jewish state”: Those for whom every Arab is a bitter enemy. The paper called for a “cultural revolution in Israel. Its political leaders and military officers...must begin raising the next generation, at least, on humanist values, and foster a tolerant public discourse. Without these, the Jewish tribe will not be worthy of its own state.”

Iraq: Last Saturday night, a video was released showing Abu Bakr al-Baghdadi making a rare public appearance in the northern city of Mosul, the self-declared caliph of the new “Islamic State,” ordering Muslims to obey him. The appearance marked a significant change for the shadowy Baghdadi, a man with a $10 million price on his head by the Americans.

“I am the wali [leader] who presides over you, though I am not the best of you. So if you see that I am right, assist me. If you see that I am wrong, advise me and put me on the right track, and obey me as long as I obey God.”

Text superimposed on the video identified Baghdadi as “Caliph Ibrahim,” the name he took when ISIS declared on June 29 a “caliphate,” a pan-Islamic state last seen in Ottoman times in which the leader is both political and religious.

Meanwhile, Prime Minister Nouri al-Maliki took to the airwaves and reminded Iraqis his State of Law bloc won the most seats in parliament in April elections and that he was prepared to run for prime minister again, assuming his bloc gained a full majority.

Parliament, which broke up on Tuesday, July 1, and then announced it would delay its next session by more than a month, abruptly changed course and said it would meet again this Sunday.

Shiite cleric Moqtada al-Sadr said Maliki’s coalition should withdraw its support for his bid for a third term and pick another candidate.

Kurdish ministers boycotted Iraq’s caretaker Cabinet and authorities in Baghdad halted cargo flights to two Kurdish cities Thursday in an escalating feud between the two sides.

The four Kurdish ministers withdrew to protest Maliki’s “provocative” branding of their provincial capital Irbil a haven for ISIS.

As to the battle in the field, as reported by Defense News’ John T. Bennett, on Tuesday, Senate Armed Services Committee Chairman Sen. Carl Levin, D-Mich., was asked by reporters if he worries that the U.S., which has upped its combat forces from 300 to nearly 800, is on its way to a much larger military footprint in Iraq.

Levin said he first wanted to review a coming Pentagon assessment of the capability of the Iraqi Army.

“The U.S. military assessment also must measure whether the Iraqi military is coming together against a common enemy.”

So what happens if the assessment is the Iraqi army can’t defeat ISIS?

“Well, there’s another half: Whether or not the political leaders in Iraq are able to come together to broaden their base, and to do what that government has not yet done: Involve the Sunnis a lot more and unify the country politically,” Levin said.

Many think-tank types believe a partition into three autonomous regions is a fate accompli. What’s most important, rather, is the defeat of ISIS.

The Iraqi government admitted ISIS seized control of a disused chemical weapons factory, though the UN and U.S. say the munitions are degraded and the rebels would be unable to make usable chemical arms from them.

As for the captured uranium ISIS got control of in Mosul, I have to go with those downplaying the risk it can be turned into a dirty bomb. Better material for that purpose has long been out there around the world.

Lastly, Iraqi security forces found 53 corpses, blindfolded and handcuffed, south of Baghdad. It wasn’t immediately clear who the victims were.

Michael Young / Daily Star

“Today, we are living through the sectarian response to Iran’s sectarian strategy throughout the region. The potential consequences are frightening, and we are already seeing the precursors of this in Syria, Iraq and Lebanon.

“There has been much debate over whether ISIS represents a majority of Sunnis, particularly in Iraq. The question is naïve. ISIS almost certainly does not represent most Sunnis, but nor did the Bolsheviks in 1917 Russia. Vanguard movements are not often democratic in nature. They seize the initiative during periods of social and political vacuum, rapidly mobilize supporters against established orders and, before anyone has had time to react, create dynamics in their own favor before systematically eliminating their rivals.

“The Iranians should know this more than anybody else, since that is how Ayatollah Ruhollah Khomeini came to power and ultimately consolidated his authority after the revolution. And it is what ISIS is doing today in Iraq, this week having started to arrest Saddam-era Sunni military officers in Mosul, in order to ensure that no political counterweight can emerge.

“In Iraq, Syria and Lebanon, Iran bolstered Shiite or Alawite regimes or parties that sought as best they could to marginalize the Sunni community. This has now blown up in Tehran’s face. Iraq is breaking apart, Syria’s regime is pursuing an active policy of partition and Hizbullah is facing an increasingly dangerous Sunni challenge in Lebanon that it will not be able to contain. Only in Yemen are Iran’s favorites making headway, and even then, for every action there is usually an equal counterreaction.

“The Lebanese situation is especially alarming. While most of Lebanon’s Sunnis have no patience for ISIS, they are caught between two very disturbing realities: The absence of a moderate leadership on the ground that can contain the more radical elements in the street; and a perception among many in the community that the regional sectarian tide is turning, so that the million and a half Syrian refugees in the country, most of them Sunnis, are regarded as a welcome addition in the perceived struggle with Hizbullah and the Shiites.

“This is extremely worrisome, because if Lebanon’s Sunnis are pushed in a direction where extremists impose on them an abandonment of coexistence, the country will be finished....

“The so-called Arab Spring broke the back of the old order of supposedly secular dictatorships, but failed to bridge the gap toward more democratic and pluralistic entities. Today we are caught in a political no-man’s land – with neither the security offered by the dictators nor the representativeness of pluralistic systems.

“The Middle East is at a foundational moment in its history, one perhaps more momentous than the post-World War I period when the region’s contours were redrawn. The optimists will say that all change brings something better. But until that time it will bring a great deal that is worse, as regional states come to the realization that their arrogance and irresponsibility has released forces with the potential of devouring them.”

Iran: As negotiations move closer to a July 20 deadline for a deal over Iran’s nuclear program, it seems clear little progress has been made, with major disagreements on the constraints Iran is willing to accept in exchange for an end to sanctions, as well as the length of time for the deal.

For example, Iran wants to be allowed to run up to 50,000 centrifuges (it currently has about 20,000) to power its one existing nuclear reactor. The U.S. wants just a small fraction of that number (Israel wants Iran to be left with zero).

And then in a speech on Monday, Supreme Leader Ayatollah Ali Khamenei reiterated to senior level officials and military personnel that Iran needs significantly greater enrichment capacity.

On Tuesday, Iran’s Deputy Foreign Minister Abbas Araghchi, Tehran’s point man in the negotiations, vowed his team won’t “back down” on any of its nuclear rights.

Also on Tuesday, French Foreign Minister Laurent Fabius said “differences” have emerged between Russia and the other nations participating in the talks, after a long period in which Russia had maintained a united front with the other five: China, France, Germany, the United States and the U.K.

[And we just learned Russian Foreign Minister Sergei Lavrov is blowing off this weekend’s talks in Vienna to be with Putin in Latin America, see below. The remainder of Russia’s negotiating team will be on hand.]

Back to Iraq and the region at large, in an op-ed for the Washington Post, David Ignatius quotes Derek Harvey, longtime Iraq intelligence analyst now teaching at the University of South Florida, and Harvey’s take on Gen. Qassem Suleimani, the “supposed strategic genius of the Iranian Revolutionary Guard Corps,” who, as Ignatius writes, “has blundered disastrously. By overreaching in Iraq and Syria and triggering a violent reaction, Iran now faces dangerous instability on its border for years to come.”

Derek Harvey:

“Suleimani’s orchestration of brutal military campaigns in both Syria and Iraq set the stage for the Sunni Arab response turning to extremism. He missed opportunities for moderation while still protecting Iranian interests. His partnership with extremism in Syria resulted in the threat growing in Syria and rebounding to Iraq. His refusal to counsel some moderation and inclusion by [Iraqi Prime Minster] Maliki developed a fertile environment for [the Islamist State] and others to exploit.”

Ignatius:

“Another aspect of Suleimani’s unfolding disaster is that the rise of the Islamic State has hastened Kurdish independence.”

Jordan: Appearing in Berlin, Israeli Foreign Minister Lieberman said Jordan’s stability is one of Israel’s vital national security interests and Jerusalem will do everything to preserve that stability. The Obama administration is also prepared to help should Jordan ask for assistance.

For now, though, ISIS is in no position to take on the Jordanian military. But as I noted last time, the kingdom is worried about ISIS spawning an internal threat.

King Abdullah is reportedly concerned that Chechen jihadis, who have been fighting with ISIS, could enter Jordan as “refugees.”

Egypt: President Abdel Fattah al-Sisi conceded the sentencing of three al-Jazeera journalists has been damaging. Sisi made this statement to Egyptian journalists during a roundtable, though he stopped short of saying whether he will issue a pardon.

Meanwhile, the Sisi government implemented a long-feared hike in energy prices as officials pledged to reduce the budget deficit by slashing fuel subsidies accounting for a fifth of state spending, as reported by the Financial Times. The new prime minister, Ibrahim Mehleb, said it would be a “crime” not to curb the subsidies. Mehleb said the funds would now be made available for essential services such as healthcare and education.

The price of diesel immediately rose 64%, up to 80% for regular gasoline. Natural gas prices for industry rose from 30% to 70%. Electricity prices are due to start rising shortly.

Public unrest thus far appears to be fairly limited. But you can imagine taxi drivers, for starters, aren’t happy.

Afghanistan: Ashraf Ghani Ahmadzai won the presidential runoff against Abdullah Abdullah, 56% to 44%, according to the Independent Election Commission, as released this week. But as I wrote recently, the evidence of fraud is overwhelming. Ghani and Abdullah agreed to an audit of about a third of the polling stations in response.

Abdullah had won the first round of the election back on April 5 with 45% of the vote to Ghani’s 32%. Abdullah is calling for 2.5 million votes in southern and eastern regions to be voided because the number of ballots exceed the population.

The electoral commission head said the results could be altered after an investigation and that the final tally is scheduled to be released on July 22.

At risk is a pact needed to keep U.S. troops in Afghanistan beyond this year.

U.S. Secretary of State John Kerry traveled to the country on Thursday to deliver a message to current President Hamid Karzai, as well as to Abdullah and Ghani, that it was a “critical moment” in Afghanistan’s history.

Abdullah was supposedly planning a “parallel government.” The U.S. was quick to respond that such a move would trigger the suspension of aid and security assistance.

Abdullah then pulled back from the brink but now he must show his frustrated supporters that he gained something in his meeting with Kerry, such as broadening the scope of the audit of the vote.

One of the fears is that the contest between the two could break down along ethnic and sectarian lines, with Ghani being Pashtun and Abdullah gaining his support primarily from Tajiks.

Separately, four Czech soldiers were among 16 killed in a suicide attack in eastern Afghanistan. The Taliban claimed responsibility.

The United Nations, in a report issued Wednesday, said the number of civilian casualties is soaring, up 24% in the first half of 2014, with 1,564 having been killed in violence. At least 1,200 of the deaths were directly blamed on the Taliban.

Ukraine: The army had its biggest victories of the three-month campaign this past week, retaking a number of separatist strongholds. Pro-Russian rebels were forced to retreat from their base in Slovyansk in the disputed east, with some driving armored vehicles flying Russian flags into Donetsk last weekend. Another force reassembled in the city of Luhansk. Kiev authorities then promised to tighten a ring around the two, though with large civilian populations, a full-blown assault is complicated and would be extremely deadly, but this is where the separatists have chosen to make their big stands.

Donetsk is a city of almost a million people, though a reported 100,000 have already fled in recent weeks. People are afraid the city will be bombed. Luhansk has 400,000 inhabitants and authorities are increasing the number of trains to allow the citizenry there to leave.

The Kiev government claims the insurgents will use the people as human shields.

Heavy fighting on Friday, however, killed at least 23 government soldiers and border guards – many in an early morning rebel rocket attack at a roadblock, in a big setback for President Poroshenko’s government, the Ukrainian leader nonetheless vowing, “For every life of our fighters, the bandits will pay with dozens or hundreds of their own.”

Russian President Vladimir Putin has been surprisingly quiet and passive as the rebels have been largely beaten back by Ukraine’s resurgent military. Dmitry Trenin, director of the Carnegie Moscow Center, said, “Time has come to change the tactics but the strategy remains the same”: keeping Ukraine out of NATO, protecting the status of the Russian language in Ukraine, and maintaining economic links with important Ukrainian enterprises, as reported by the Financial Times’ Courtney Weaver.

Putin, aside from facing increased sanctions, has to deal with some on his far right who have called for more aid to the separatists, while according to a poll, 2/3s of Russians do not want the Kremlin to intervene militarily in Ukraine. Back in March it was a different story, with a separate survey revealing 65% of Russians saying Russia has the right to intervene militarily in both Crimea and eastern Ukraine

An EU summit slated for July 16 will address the issue of further sanctions on Russia, including on industry, investment and trade.

In Washington, senior senators from both parties have threatened to introduce sanctions of their own, mocking the Obama administration for not doing more.

Sen. Bob Corker (R-Tn.) criticized what he called the White House’s “feckless” and “paper tiger” approach to Ukraine.

Senator Robert Menendez (D-N.J.) asked, “What are we waiting for?” in pointing out Russia was long told to “end support for all separatists” in eastern Ukraine and hadn’t.

Adrian Karatnycky / Wall Street Journal

“(The) reality is that no matter the outcome, President Putin’s Ukraine strategy is a shambles. By taking Crimea and fomenting a violent insurgency that has left as many as 2,000 dead, he has turned a country that had a large pro-Russian minority against him, caused a surge of Ukrainian patriotism, and contributed to the emergence of a solid pro-EU majority in Ukraine.

“Assuming that the separatist insurgency and proxy war continue to wane, Mr. Putin’s next moves will likely focus on economic sabotage of Ukraine’s pro-Western authorities through export barriers and high gas prices, accompanied by efforts to rebuild a pro-Russian political force inside the country.

“But even that approach would signal an important turning point: Having wreaked havoc and death in eastern Ukraine, Mr. Putin could be retreating from the path of war, returning for the time being to soft power in the battle for Ukraine.”

At least Putin was able to boast on Monday that Russian arms exports are flourishing, $5.6 billion worth of weapons and military hardware having been sold in the first half of 2014, about the same pace as first half of 2013.

Russia is the second leading arms exporter next to the U.S., with many of its exports being to the likes of India and China.

China: President Xi Jinping commented at an annual China-U.S. dialogue held in Beijing that confrontation with the U.S. would be a “disaster.” The U.S. delegation was led by Secretary of State John Kerry, who in his opening remarks said Washington was not seeking to “contain” China.

Xi said the two countries were now “more than ever interconnected,” with much to gain from cooperation.

“China-U.S. confrontation, to the two countries and the world, would definitely be a disaster,” he said.

“We should mutually respect and treat each other equally, and respect the other’s sovereignty and territorial integrity and respect each other’s choice on the path of development.”

President Obama, in a statement, said the U.S. “welcomes the emergence of a stable, peaceful, and prosperous China.

“We remain determined to ensure that cooperation defines the overall relationship.” [BBC News]

But many believe relations between the two nations are at their worst since normalization. Certainly East Asia is as unstable as it’s been since the Cold War. Simmering disputes in the South and East China Seas can go hot in the blink of an eye...one mistake by one pilot or one sea captain.

And then there is China’s leader.

Editorial / The Economist

“China’s president appears to have killed two eagles with one arrow in bringing down one of the nation’s highest-ranking military men. On June 30th General Xu Caihou was stripped of his Communist-Party membership and handed over to prosecutors on corruption charges. State media said he took money and other loot in exchange for arranging promotions. Until last year, General Xu was one of the two dozen most powerful men in the country.

“His fall helps consolidate Xi Jinping’s control over the army and at the same time burnishes his credentials as an anti-corruption crusader....

“Mr. Xi has already moved away from the older model of consensus-based rule in which the top handful of leaders shared responsibility and decision-making authority. He has asserted his authority as the sole head of numerous policy ‘leading groups’ of the sort that once had multiple bosses. By taking down Mr. Zhou’s cronies [Ed. Zhou Yongkang, former head of state security and formerly one of China’s most powerful men], he will control the state-security network as well as the armed forces.

“Perhaps the biggest drawback is what all of this says to the general populace. Convincing people that he is determined to root out corruption at all levels is one thing. But it is hard for Mr. Xi to do it without appearing to admit what everybody already knows: that the system itself is rotten to the core.”

Xi, in a speech in Seoul on July 4, after I posted my last column, denounced Japan’s “barbaric” wartime aggression for creating enormous suffering in China and South Korea. South Korean President Park Geun-hye echoed similar sentiments.

“In the first half of the 20th century, Japanese militarists carried out barbarous wars of aggression against China and Korea, swallowing up Korea and occupying half of China,” Xi said.

Japan hit back. Chief Cabinet Secretary Yoshihide Suga said: “Any attempt by China and South Korea to coordinate in picking apart past history unnecessarily and making it an international issue is utterly unhelpful for building peace and cooperation in the region.” [South China Morning Post]

Japanese Prime Minister Shinzo Abe said his door is always open for dialogue. Abe was in Australia this week, where he and counterpart Tony Abbott signed an agreement on closer defense ties. Australia, of course, has recently increased its military ties with the U.S.

You can see where this all is headed. Don’t throw out your Risk board.

One analyst with the Korea Institute for Defense Analyses, Kim Chul-woo, told the SCMP:

“Strategically, Seoul is still close to the United States. Economically, it tilts towards Beijing. On the historical side, Seoul and Beijing are getting along.”

Regarding the recent protest for democracy in Hong Kong, the South China Morning Post, Hong-Kong based, said its computer analysis of the crowd puts it at 140,000, well below the organizers’ claim of 510,000, which everyone, including myself, has trumpeted. The police had it at 98,000 (though this wasn’t an official figure).

The man the paper tasked with the calculation went through all manner of geographic information systems, including the density of the area and how long it took to travel the route.

I don’t know...I just looked at a ton of photos and knowing the area well, personally, it was a massive crowd.

North Korea: Pyongyang test-fired another two Scud-type ballistic missiles on Wednesday, with the missiles flying 310 miles before landing in the sea. North Korea has conducted 13 rocket and missile tests this year, firing off 90 projectiles, as reported by the New York Times. Some of the ballistic missiles flew as far as 400 miles. 

Remember, ballistic missile tests violate United Nations Security Council resolutions, but neither the UN, nor the West, nor North Korea’s direct neighbors ever do anything in response.

And the mystery is on concerning the health of leader Kim Jong Un, who visibly limped on stage at a public appearance on the anniversary of his grandfather’s death.

Normally, a state broadcast wouldn’t have shown this.

Brazil: I wrote last time, “I wasn’t going to comment on the conduct surrounding the World cup until it was over, and I will still hold off on making any broad, sweeping statements, but what a tragic embarrassment to have that construction accident in Belo Horizonte, where Tuesday’s semifinal is scheduled to be played.” Several were killed in that incident.

Well on Tuesday, there was an embarrassment of a different kind, a national humiliation, in Belo Horizonte, as Germany annihilated Brazil 7-1, scoring five goals in the first half between 11:00 and 29:00...five goals in 18 minutes. For those watching it was astounding.

For Brazilians, it was a despicable performance that is rebounding rapidly on President Dilma Rousseff, who is running for reelection.

You’ve seen over the past year how many in Brazil rioted over the $11 billion cost of holding the World Cup, money built for stadiums that will be seldom used again, and money that could have gone to improve the lot of the Brazilian people.

But because futbol is such a huge sport in the nation, had Brazil won the Cup, it’s possible the good feeling would have carried over to October’s vote.

Now, however, focus returns squarely on the government and what all will agree was a costly disaster, and not even an honorable exit.

A professor who was interviewed by the Wall Street Journal said, “The result of this game will leave a mark on a generation.”

Prior to the debacle, Rousseff was receiving 38% in the polls, with her nearest challenger in a multi-party field at 20%. Early in the tournament she was gaining. No longer. One way or another, there will be a second round of voting.

Paul Hayward / Daily Telegraph

“Brazil spent $11 billion on a national calamity. The world’s greatest football nation was left numb, humiliated and flummoxed as five German goals flew into their net in the first 29 minutes of a crushing 7-1 defeat....

“Around this ground after Oscar’s consolation goal there was dismay but also trepidation. What would it mean for public order? What incendiary mix might be sparked by embarrassment and anger?”

A fan interviewed by the Daily Telegraph said, “The only good thing is I think it will affect President Dilma in the election. But all our politicians are even worse than the team.”

Rousseff said, “Like every Brazilian, I am very, very sad about this defeat. I am immensely sorry for all of us.” She is most sorry for herself.

Germany: The government of Chancellor Angela Merkel expelled a U.S. intelligence official after the discovery of two alleged double agents spying for Washington. The timing couldn’t be worse, what with trans-Atlantic trade talks at a critical stage, let alone talks on Iran’s nuclear program rapidly approaching their deadline and all manner of separate business deals, including plans to upgrade the German military’s drones. Prior issues involving allegations from Edward Snowden have led to the German government ending a longstanding contract with Verizon over concerns about network security.

Editorial / Wall Street Journal

“The world has come a long way since 2008 when hundreds of thousands of Germans turned out to hear candidate Barack Obama speak in Berlin. On Thursday our German friends tossed out ‘the representative of the U.S. intelligence agencies,’ presumably the CIA station chief in Berlin.

“The expulsion of America’s top spy would have been rare in East Germany during the Cold War, much less in an ally the U.S. is treaty-bound to defend. Thursday’s order by Chancellor Angela Merkel’s government reflects America’s diminished standing in the world under President Obama, and perhaps some dubious CIA spycraft....

“Much of this is faux outrage because the Germans surely know that even friendly nations spy on one another. During the Cold War the top aide to Chancellor Willy Brandt was discovered to have been a spy for East Germany. And these days Russian spies are all over Europe, especially Germany....

“Germany enjoys closer commercial and political ties with both Russia and Iran than do most other Western countries. The U.S. needs to understand these relationships, and that requires intelligence. The U.S. would be irresponsible if it didn’t eavesdrop on German officials.

“The espionage flap also offers cover for an all-too familiar strain of German anti-Americanism. Steffen Seibert, the government’s apparently tone-deaf spokesman, on Wednesday declared ‘a deep-seated difference of opinion between Germany and the United States on the question of how to balance security and interference in civil liberties.’ Sorry, Mr. Seibert, the U.S. isn’t Germany’s security threat....

“The real U.S. offense isn’t the spying so much as doing it so poorly....

“Congress’ intelligence committees should do a deeper dive into the German cases and Langley’s larger failings. But Americans should also ask why even our friends now think they can expel a U.S. official and pay no price for it.”

[I’m going to have more on this next week. I’m really tired of Merkel and it’s time to let loose.]

On a totally different topic, Germany’s Environment Minister Barbara Hendricks announced that Germany wants to ban fracking. “There will be no fracking for economic purposes in Germany in the near future.” Under her proposal, most forms would be banned until 2021.

Yet as the Wall Street Journal editorialized, “Germany imports 90% of its gas supply. Yet the country has up to 2.3 trillion cubic meters of domestic shale gas. Germany already possesses much of the infrastructure to efficiently produce and distribute shale gas. It’s 438,000 kilometers of pipelines cover much of Europe. Germans are fracking pioneers, having used fracking technology to extract tight gas since the 1960s.

“If enacted, the ban would put Germany at the mercy of Vladimir Putin, who repeatedly uses Europe’s energy dependence on Russia to the Kremlin’s advantage. German Chancellor Angela Merkel and her Christian Democrats have yet to weigh in on this nutty idea.”

Russia: Out of nowhere, Vladimir Putin arrived in Cuba on Friday and announced Russia was writing off 90%, or almost $32 billion, of Cuba’s Soviet-era debt (approved by both houses of the Russian parliament prior to his departure). Putin is meeting with both Raul and Fidel Castro, as he kicks off a six-day tour of Latin America, including Brazil and Argentina.

Kenya: About 100 have been killed in terrorist attacks in the nation’s eastern coastal districts the past six weeks, Somali militant Islamist group al-Shabab claiming responsibility, including for an attack that killed at least 60 watching a World Cup match.

Indonesia: An important presidential election has taken place, but I plead total ignorance. I do see the Electoral Commission is to rule on the vote tally on July 22, which is then subject to a month of appeals, so I’ll catch up later. For now, though, the tally, a la Afghanistan, is already being highly disputed.

Random Musings

--President Obama met with Republican Texas Governor Rick Perry and urged him to support the president’s $3.7 billion emergency measure aimed at solving the border crisis.

Obama claims the funds would address Republicans’ calls for increased border security while caring for the unaccompanied children streaming into the country.

The president said in a press conference after the meeting, “The challenge is, is Congress prepared to act to put the resources in place to get this done?”

Perry said the crisis was the result of “bad public policy” and urged the president to visit the border, which Obama has refused to do.

Perry wants to see an immediate infusion of National Guard troops, while Obama said, “We’re happy to consider (this), but that’s a temporary solution.”

At issue is a 2008 law that requires extra legal protections for migrants coming from countries that do not share a border with the United States and an unintended consequence has been a flow of children from El Salvador, Guatemala and Honduras, 52,000 in the past eight months, at least, that is overwhelming the system. So Republicans want to see the 2008 law amended or repealed to expedite the children’s return to their home countries.

Some Democrats, however, say this exposes children to potentially dangerous situations back home.  Said Democratic Sen. Dianne Feinstein of California, “That’s not what this country is all about. This, in my view, has to be handled in a way which is compassionate.” [New York Times]

But given the toxic environment on the Hill, the likelihood of a deal between Democrats and Republicans on the funding measure is virtually nil. Like Gov. Perry, many Republican leaders, including Speaker John Boehner, want to see the Guard deployed, which the proposal doesn’t address.

$1.8 billion is to provide shelter and care to the immigrants; $1.6 billion for security and enforcement; and $300 million to help the Central American countries repatriate their citizens and create advertising campaigns to discourage placing children in the hands of smuggling cartels; though further detail in all three categories is lacking.

Meanwhile, the Wall Street Journal’s Laura Meckler and Ana Campoy report that “few minors are (deported) and many are able to stay for years in the U.S., if not permanently....

“In fiscal year 2013, immigration judges ordered 3,525 migrant children to be deported, according to Justice Department figures. Judges allowed an additional 888 to voluntarily return home without a formal removal order.

“Those figures pale in comparison with the number of children apprehended by the border patrol. In each of the last five years, at least 23,000 and as many as 47,000 juveniles have been apprehended....

“Separate data from the Department of Homeland Security show that in fiscal 2013, about 1,600 children were actually returned to their home countries – less than half the number who were ordered removed – suggesting that some are evading deportation orders.

“The head of the immigration court system told a Senate hearing this week that 46% of juveniles failed to appear at their hearings between the start of the 2014 fiscal year last Oct. 1 and the end of June.”

Editorial / Wall Street Journal

“The horrifying sight of children from Central America sitting in camps at the U.S. border has turned the immigration debate from mad to madder, so some basic facts about migrants and the border may be irrelevant. But allow us to try.

“The first fact to keep in mind is that America’s southern border is already far more under control than it was for most of the last 20 years....

“Apprehensions have plunged since the record 1.64 million in 2000.

“Border enforcement has increased markedly, perhaps deterring some potential migrants. But the bigger factor behind the declines is almost surely the slower-growing U.S. economy. Illegal immigration boomed in the fast-growing 1990s, fell with the slower growth at the start of the last decade, but then picked up again with the mid-decade expansion. Then it plunged sharply amid the Great Recession and miserable recovery to a low of 327,577 in 2011....

“(The) news is that illegal crossings are picking up again as the recovery gains steam and the American jobless rate falls. This ebb and flow shows that immigrants continue to come to the U.S. mainly to work and support their families, and they don’t come when there is less work....

“If the U.S. had more work visas for low-skilled immigrants, those parents could move back and forth more easily. As President Obama rightly said on Wednesday in Texas, this is another argument for immigration reform....

“A clear statement from the President that there is no automatic sanctuary in the U.S. would go far to correcting the misinformation and reduce future child migration. This is how Michael Chertoff, the Homeland Security secretary, stopped a previous influx from Central America during the Bush Administration.

“The larger tragedy of this episode is that it has done enormous and needless damage to the cause of immigration reform. The Obama Administration’s incompetence has again undermined its own agenda. But once the misery of the children is past, no one should think that illegal immigration can be stopped by more enforcement alone, by more Border Patrol agents or more harassment of American business. The way to reduce illegal immigration is by providing more work visas to enter – and leave – the U.S. legally.”

Sheldon Adelson, Warren Buffett and Bill Gates / New York Times

“American citizens are paying 535 people to take care of the legislative needs of the country. We are getting shortchanged. Here’s an example: On June 10, an incumbent congressman in Virginia lost a primary election in which his opponent garnered only 36,105 votes. Immediately, many Washington legislators threw up their hands and declared that this one event would produce paralysis in the United States Congress for at least five months. In particular, they are telling us that immigration reform – long overdue – is now hopeless.

“Americans deserve better than this....

“Most Americans believe that our country has a clear and present interest in enacting immigration legislation that is both humane to immigrants living here and a contribution to the well-being of our citizens.... Our present policy, however, fails badly on both counts.

“We believe it borders on insanity to train intelligent and motivated people in our universities – often subsidizing their education – and then to deport them when they graduate....for those who wish to stay and work in computer science or technology, fields badly in need of their services, let’s roll out the welcome mat....

“Americans are a forgiving and generous people, and who among us is not happy that their forebears – whatever their motivation or means of entry – made it to our soil?

“For the future, the United States should take all steps to ensure that every prospective immigrant follows all rules and that people breaking these rules, including any facilitators, are severely punished. No one wants a replay of the present mess....

“A Congress that does nothing about these problems is extending an irrational policy by default; that is, if lawmakers don’t act to change it, it stays the way it is, irrational. The current stalemate – in which greater pride is attached to thwarting the opposition than to advancing the nation’s interests – is depressing to most Americans and virtually all of its business managers. The impasse certainly depresses the three of us.

“Signs of a more productive attitude in Washington – which passage of a well-designed immigration bill would provide – might well lift spirits and thereby stimulate the economy. It’s time for 535 of America’s citizens to remember what they owe to the 318 million who employ them.”

Charles Krauthammer / Washington Post

“As is his wont, President Obama is treating the border crisis – more than 50,000 unaccompanied children crossing illegally – as a public relations problem. Where to photo op and where not. He still hasn’t enunciated a policy. He may not even have one....

“These kids are being flown or bused to family members around the country and told to then show up for deportation hearings. Why show up? Why not just stay where they’ll get superior schooling, superior health care, superior everything? As a result, only 3% are being repatriated, to cite an internal Border Patrol memo.

“Repatriate them? How stone-hearted, you say. After what they’ve been through? To those dismal conditions back home?

“By that standard, with a sea of endemic suffering on every continent, we should have no immigration laws. Deny entry to no needy person.

“But we do. We must. We choose. And immediate deportation is exactly what happens to illegal immigrants, children or otherwise, from Mexico and Canada. By what moral logic should there be a Central American exception?

“There is no logic. Just a quirk of the law – a 2008 law intended to deter sex trafficking. It mandates that Central American kids receive temporary relocation, extensive assistance and elaborate immigration/deportation proceedings, which many simply evade.

“This leniency was designed for a small number of sex-trafficked youth. It was never intended for today’s mass migration aimed at establishing a family foothold in America under an administration correctly perceived as at best ambivalent about illegal immigration.

“Stopping this wave is not complicated. A serious president would go to Congress tomorrow proposing a change in the law, simply mandating that Central American kids get the same treatment as Mexican kids, i.e., be subject to immediate repatriation.

“Then do so under the most humane conditions. Buses with every amenity. Kids accompanied by nurses and social workers and interpreters and everything they need on board. But going home.

“One thing is certain. When the first convoys begin rolling from town to town across Central America, the influx will stop.”

--Peggy Noonan / Wall Street Journal...on President Obama...

“This is a president with 2 ½ years to go who shows every sign of running out the clock. Normally in a game you run out the clock when you’re winning. He’s running it out when he’s losing.

“All this is weird, unprecedented. The president shows no sign – none – of being overwhelmingly concerned and anxious at his predicaments or challenges. Every president before him would have been. They’d be questioning what they’re doing wrong, changing tack. They’d be ordering frantic aides to meet and come up with what to change, how to change it, how to find common ground not only with Congress but with the electorate.

“Instead he seems disinterested, disengaged almost to the point of disembodied. He is fatalistic, passive, minimalist. He talks about hitting ‘singles’ and ‘doubles’ in foreign policy.

“ ‘The world seems to disappoint him,’ says the New Yorker’s liberal and sympathetic editor, David Remnick.

“What kind of illusions do you have to have about the world to be disappointed when it, and its players, act aggressively or foolishly? Presidents aren’t supposed to have those illusions, and they’re not supposed to check out psychologically when their illusions are shattered....

“It is weird to have a president who has given up. So many young journalists diligently covering this White House, especially those for whom it is their first, think what they’re seeing is normal.

“It is not. It is unprecedented and deeply strange. And, because the world is watching and calculating, unbelievably dangerous.”

--Juliet Eilperin / Washington Post

“Bears, beer and horse heads: What exactly is going on with the leader of the free world?

“On a single day this week in Denver, President Obama scarfed down pizza and drinks with strangers, shot pool with Colorado’s governor and shook hands with a guy on the street wearing a horse mask. His top staffers are promoting these stops on Twitter with the hashtag #TheBearIsLoose – a term one of Obama’s aides coined in 2008 when the candidate would defy his schedule.

“More than five years into his presidency, Obama is trying to free himself from the constraints of office, whether by strolling on the Mall or hopscotching the country as part of a campaign-style tour. White House senior adviser Dan Pfeiffer says the president ‘just wants to get out’ and influence ‘our overall political conversation’ by connecting with ordinary Americans.

“But to some, breaking free can also look like running away.”

--In a new Quinnipiac University survey, 46% of registered voters want the Republicans to win control of the Senate, with 44% saying they want the Democrats to retain control of the chamber. By the same 46-44 margin, voters want to see the GOP keep control of the House.

Reminder, while the Democrats have a 55-45 current margin in the Senate (including two independents who vote with the Dems), they are defending 21 of the 36 seats up for grabs.

Meanwhile, 73% disapprove of the job congressional Republicans are doing, with 63% saying they disapprove of the way Democrats are handling things.

For president, 58% of Democrats and Democratic leaning voters say if their party’s presidential primaries were held today, they’d support Hillary Clinton. Sen. Elizabeth Warren, who has said she is not running, is second at 11%, with Vice President Biden at just 9%, which is really rather remarkable.

As for the GOP, talk about no front runner. Sen. Rand Paul is at 11% among Republicans and Republican leaners, with Gov. Chris Christie, former Florida Gov. Jeb Bush, and former Arkansas Gov. Mike Huckabee, each at 10%. Sen. Ted Cruz, Wisconsin Gov. Scott Walker and Rep. Paul Ryan are at 8%. Sen. Marco Rubio is at 6%.

--Regarding Chris Christie, according to a report by The Record (N.J.), the Port Authority fast-tracked the hiring of Christie’s former law firm under pressure from the Republican governors administration and has paid the firm at least $6.3 million since 2010.

And when it comes to Christie’s presidential ambitions, I’ve been saying for over a year now that the topic cracks me up for a pretty simple reason. He hasn’t done a good job in my state. Period.

In the current Crain’s New York Business, Greg David compares the performance of the economies of New Jersey, New York State and New York City since the Great Recession. One series of stats is telling. Jobs lost in recession and jobs regained. 

To wit:

In New York State...300,200 jobs were lost in the recession.  524,600 have been regained.

In New York City...140,800 jobs were lost. 374,900 have been regained.

In New Jersey...257,900 were lost. Just 100,300 have been regained.

As Mr. David comments: “Why is this? New Jersey’s mainstay industries – pharmaceuticals, telecommunications and casino gambling – are in long-term declines. The weakness of financial services is taking a toll, too. The state has no offsetting growth sectors like technology or film and television production, which are boosting New York City and New York State.

“The question for Mr. Christie is how he can launch a presidential campaign on such an economic track record. It’s hard to see what he could say about it.”

--New York Gov. Andrew Cuomo has a 59% to 24% lead over his Republican challenger, Rob Astorino, in his reelection bid, according to a new Wall Street Journal/NBC 4 New York/Marist poll. A majority of New York state voters, 54%, still don’t know who the heck Astorino is, and that, sports fans, can be a problem.

--According to CBS White House correspondent Mark Knoller, as of this week, President Obama had attended 393 fundraisers since taking office, compared with George W. Bush’s 216 at the same point in his presidency. [Karl Rove / Wall Street Journal]

--Cleveland was selected to host the 2016 Republican National Convention, winning out over Dallas.

But why Cleveland? Ohio decides national elections and the last two it went for Obama. Plus RNC Chairman Reince Priebus has been pushing a new urban policy for the party and the importance of issues such as poverty, economic opportunity and education in big cities.

Ohio also has a strong Republican governor in John Kasich, while another Ohio Republican, Sen. Rob Portman, pressed hard for the city.

But as the Washington Post’s Paul Kane and Reid Wilson noted, LeBron James could complicate matters, turning a city famous for losing into a winner.

And there’s another potential problem. Instead of the traditional Labor Day weekend, or thereabouts, date for a convention, Priebus is pushing for an earlier primary cycle and a June convention date, which gives the nominee more time to raise cash for the general election.

But with LeBron announcing on Friday that he is returning to Cleveland, and if the team has a late playoff run, into June, what then? Conventions need up to six weeks to prepare the arena, including for installing security measures.

So the RNC will almost certainly have to move its date back into July, seeing as the Cavs would be unlikely to agree ahead of time to move their games to another venue, which would probably mean Ohio State’s arena, 140 miles away.

--A New York Times story says Chelsea Clinton is following her parents’ lead and giving paid speeches. Like try $75,000 a pop, though her spokesman told the Times all of her paid speaking engagements “are on behalf of the Clinton Foundation, and 100% of the fees are remitted directly to the foundation.”

Chelsea’s fee is apparently more than the reported $50,000 per speech earned by Jeb Bush, Colin Powell and Madeleine Albright.

[Last time I wrote of Hillary’s $1.8 million take from appearances on nine college campuses during the last year and a half and she told ABC News, after I had posted, that “All of the fees have been donated to the Clinton Foundation for it to continue its life-changing and life-saving work. So it goes from a foundation at a university to another foundation.” It’s just that simple. Or maybe not.]

--Former New Orleans mayor Ray Nagin was sentenced to 10 years in prison on corruption charges, among them kickbacks from contractors looking for city work, with many of the schemes taking place post-Katrina, when contractors were rushing into the city for rebuilding projects.

--We note the passing of Eduard Shevardnadze, 86. He played a vital role in ending the Cold War as Soviet foreign minister under Mikhail Gorbachev and then went on to lead his native Georgia in those first years of independence.

Shevardnadze always struck me as a reasonable man and he was one of the architects of Gorbachev’s reform policy of “perestroika,” though the two later had a falling out. Oh, how I wish we were dealing with someone like Mr. Shevardnadze today.

--The Washington Post reports that 90% of people identified in a tranche of communications intercepted by the NSA were ordinary Internet users, not foreign surveillance targets.

Much of the highly personal information was retained, the paper says, even though it had no intelligence value. The information was provided by former NSA contractor Edward Snowden.

The Post reviewed 160,000 emails and instant messages from some 11,000 online accounts, gathered by the NSA between 2009 and 2012.

Much of the information, the paper says, has a “startlingly intimate, even voyeuristic quality” telling stories of “love and heartbreak, illicit sexual liaisons, mental-health crises, political and religious conversions, financial anxieties and disappointed hopes.”

If my emails are part of this collection you would find mental-health crises related to being a Mets fan during the period in question. 

However, the paper says the intercepted files did contain “discoveries of considerable intelligence value.”

These included “fresh revelations about a secret overseas nuclear project, double-dealing by an ostensible ally, a military calamity that befell an unfriendly power, and the identities of aggressive intruders into U.S. computer networks.”

So therein is the policy dilemma for President Obama. As the Post writes, there are some discoveries of “considerable intelligence value” but there is also “collateral harm to privacy on a scale that the administration has not been willing to address.”

--So we have been told since we were little kids that there were only two facilities in the world where smallpox samples are allowed, by international agreement, and they are in Atlanta at the Centers for Disease Control and Prevention headquarters, and at a virology and biotechnology research center in Novosibirsk, Russia.

Wrong! Last week, a government scientist cleaning out a storage room at a lab at the National Institutes of Health’s Bethesda, Md., campus found decades-old vials of smallpox.

The vials, which date from the 1950s, were flown to Atlanta and we learned Friday that two of them were live. They will be destroyed.

Smallpox – which vanished from the United States after World War II and was eradicated globally – killed hundreds of millions of people in the 20th century alone. There is no cure.

Last month, a safety lapse involving three labs in Atlanta led to the accidental release of live anthrax bacteria. 84 employees have had to get a vaccine or take antibiotics as a precaution.

But wait...there’s more! The CDC admitted late Friday that there have been numerous incidents where its labs in Atlanta improperly sent potentially deadly pathogens to other laboratories, including a virulent bird flu virus, over the past decade.

Geezuz, my fellow Americans. We are so freakin’ overrated. 

At least CDC Director Thomas Frieden told reporters he was “angry about it.”

--Uh oh. A Colorado man is infected with pneumonic plague, last seen in the state in 2004. The man has been hospitalized and treated and he’s not transmissible, according to a Colorado Dept. of Public Health and Environment official. He may have contracted the illness from his dog, which died suddenly and was also found to be carrying the disease.

The dog probably received it from the dead animal population, according to the spokesperson. So don’t handle dead rodents; especially if you’re in Colorado... high and hallucinating.

--Nice holiday weekend in Chicago, with at least 14 killed and dozens more wounded in gun violence. Police were involved in eight shootings themselves, including two that left civilians dead. Police officers were shot at by suspects in three of the city’s 53 shooting incidents, which was more than the combined total of Detroit and New York, which had 46, 10 of which were fatal.

But, to be fair, through June 30 there had been nine fewer homicides in Chicago in 2014 than for the first half of 2013. It was 2012 when Chicago was the only city in America to register more than 500 homicides.

--NASA approved full production on the most powerful rocket ever, Boeing’s Space Launch System, which is designed to explore the deep reaches of space, including near-Earth asteroids, the moon and, ultimately, Mars.

The rocket’s initial test flight from Cape Canaveral is expected in 2017.

Critics say its assembled from already developed technology. One, Space Frontier Foundation, said SLS was “built from rotting remnants of left over congressional pork. And its budgetary footprints will stamp out all the missions it is supposed to carry, kill our astronaut program and destroy science and technology projects throughout NASA.”

Ouch.

Boeing counters the advantage of building SLS is that it can carry out a “menu of missions” that include shooting astronauts to the moon and Mars, in addition to asteroids.

I just hope I’m still around when we launch the first manned mission to the Red Planet.

---

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

God bless America.

---

Gold $1337...highest weekly close since March
Oil $100.83

Returns for the week 7/7-7/11

Dow Jones -0.7% [16943]
S&P 500 -0.9% [1967]
S&P MidCap -2.3%
Russell 2000 -4.0%
Nasdaq -1.6% [4415]

Returns for the period 1/1/14-7/11/14

Dow Jones +2.2%
S&P 500 +6.5%
S&P MidCap +5.1%
Russell 2000 -0.3%
Nasdaq +5.7%

Bulls 60.6
Bears 15.2 [Source: Investors Intelligence]

Have a great week. I appreciate your support.

For new readers, pick up the StocksandNews iPad app. Perfect for beach bars.

Brian Trumbore