Week in Review 
For the week 1/5/2009 - 1/9/2009
Brian Trumbore
President/Editor, StocksandNews.com

The Financial Crisis and Obama
 
“For too many families, this new year brings new unease and uncertainty as bills pile up, debts continue to mount and parents worry that their children won’t have the same opportunities they had.”

--President-elect Barack Obama 

It’s hard to argue with the above sentiment. Certainly nothing we learned this week when it comes to the global economy changed matters. The December jobs report in the U.S. was again dreadful with the loss of 524,000 jobs and a big revision downward for November to a loss of 584,000. The unemployment rate now stands at 7.2%, the highest since 1993. 

For all of 2008, the economy shed 2.6 million jobs, a figure not reached in America since 1945. 1.9 million have been lost in just the past four months and the outlook for 2009 is for perhaps another 3 million to lose their jobs, after the positive impact of the coming stimulus program. 

The picture is even bleaker than this, however, when one looks at the millions underemployed and a further 4.6 million who are currently calculated to be long-term unemployed. 

In other economic news for the week, the National Association of Realtors, the group that at the top of the market was still urging everyone to buy without reservations, said pending home sales in November hit a record low. 

November factory orders were down a whopping 4.6%, double expectations, but construction spending, off 0.6% for the same month, was slightly better than analysts forecast. And the ISM measure of the service sector came in at 40.6, also a little better than expected but still obviously in deep recession mode. 

Then there is retail. I always feel like I’m not much different than the average Joe and so since November I’ve been waiting until after Christmas to hit the local mall and, in my case, pick up a sweater or two on sale. There was a headline in the Wall Street Journal this week that read: 

“Retailers Keep Cutting Prices…Deals on Early Spring Merchandise Reflect Fears Consumers Want Only Bargains Now” 

That’s me, though I have to tell you I was never that way before. But I went to Macy’s, spent way more time looking for the right item than usual (I’ve been known to buy a home in three minutes, a car in 30 seconds) and I finally picked up a Hilfiger sweater, originally $80, for $29; and a shirt, originally $39.50, for $13.50. If I’m acting this way, I know everyone else is. And as the above headline reads, for the foreseeable future I’m doing nothing but buying sale items. 

In the retail universe, for December, Wal-Mart’s same-store sales gains, ex-fuel, were up less than expected, 1.7%, and the company warned on earnings, breaking a nice string of nothing but good news from the world’s biggest retailer. 

Sears’ same-store sales were down 7.3% for December, Macy’s down 4%, Gap down 14%, Abercrombie (which refused to cut prices) down 24%, Target down 4%, Kohl’s down 1.4%, J.C. Penney down 8%, Nordstrom’s down 14% (these last four better than expected), and Saks down 20% (worse). 

Overall, when looking at the various surveys it appears holidays sales were off 2-4% for November and December. 

Around the world, China’s manufacturing index for December came in at 41.2 (reminder, for all such indices 50 is the dividing line between contraction and growth), though this was ever so slightly an improvement over the previous month. However, China’s biggest PC manufacturer, Lenovo, announced the first layoffs in its history, 2,500, or 11%. 

Taiwan’s exports in the month of December crashed a record 42%. Japan’s domestic auto sales cratered (more below), Germany’s unemployment rate spiked higher (after holding up until now), the U.K.’s Chancellor of the Exchequer John Darling said a 2nd half recovery was out the window, and inflation rates continue to tumble all over; normally a good thing except the fear now is deflation.  

Back in the U.S., Intel announced its 4th quarter sales would fall woefully short of already lowered expectations, down 23% from year ago levels; Time Warner, amidst the crash in advertising, cable and all media, is writing off $25 billion; aluminum giant Alcoa said it was shedding 13% of its workforce, or 13,500, as well as reducing output 18%; and Boeing announced on Friday it was laying off 4,500. 

And in the banking sector, superstar Oppenheimer analyst Meredith Whitney (it’s funny how many in her industry are immensely jealous of her success…get over it, guys!) reiterated that the banks will continue to need more capital as the securities they carry suffer further downgrades (i.e., mortgage-backed securities) as housing continues to worsen. Ergo, they’ll need far more capital and just where they will get it these days is anyone’s guess. Certainly the sovereign wealth funds have learned a painful lesson in this regard. 

As for our incoming president and his stimulus program, the Street isn’t too happy details have been lacking but it’s because many on both sides of the political aisle have problems with the broad structure that has been floated thus far, a sizable tax cut combined with a massive infrastructure rebuilding initiative. Some Democrats don’t like the former and some Republicans aren’t too keen on the latter. So Mr. Obama will have the first test of his pragmatism and how well he can get the two sides to compromise.  

Economist Robert Shiller said of the outline of the Obama plan, “If we have massive infrastructure spending and people feel that it is working, it could create a sense that we are O.K. and people will go back to normal. The real problem is that we are on hold. Everyone is.” 

Of course whatever Obama’s plan turns out to be it will be costly, and as he said in a speech this week we could see $1 trillion deficits “for years to come.” So we sit around and ask ourselves who is going to fund them? Economist Robert Samuelson notes in his Washington Post op-ed: 

“To convince (the likes of China and Japan), interest rates might have to rise, which might perversely worsen the crisis. There might even be a panicky flight from the dollar. So far, the opposite has happened. Scared investors have crowded into ‘safe’ Treasuries and driven their interest rates to astonishing lows. Still, psychology has governed this unpredictable crisis; a sudden shift in sentiment isn’t inconceivable. 

“Even if this unpleasant surprise and others don’t materialize, the stimulus remains a stopgap. The present crisis represents a fundamental break in the recent pattern of American economic growth. For the past quarter-century, the economy has advanced on an ever-rising tide of personal borrowing that supported expanded purchases of consumer goods – contributing to U.S. trade deficits – and a housing boom. But lending became reckless, and many households overborrowed. In its simplest terms, the ‘stimulus’ substitutes the federal government’s superior credit for damaged private credit. 

“But this cannot continue indefinitely. Rapid increases in the federal debt – much faster than in recent years – would threaten a further loss of confidence that might prolong today’s financial crisis or, someday, trigger a new one. A growing federal debt burden would also compound the problem of paying the staggering retirement costs of aging baby boomers. So: Neither rising household nor government debt provides a plausible foundation for future economic growth. 

“What the United States needs is export-led growth. The rub is that many other countries want that, too.” 

Meanwhile, when it comes to spending taxpayer funds, as in the $700 billion TARP program, a congressional oversight panel blasted Treasury’s implementation of it. There has been zero accountability, including on the issue of whether or not the recipients of TARP funds are actually lending.  

Yale Professor Jeffrey Garten told Bloomberg, “The government isn’t acting aggressively enough to demand a quid pro quo. The public good is the key to the private good in this case. It’s not the other way around.” Former assistant Treasury secretary Roger Altman said, “Right now there is no new lending, and without new lending it’s going to be difficult for the economy to recover.” And a Government Accountability Office report found recently, “Although Treasury has said that it expects the institutions to increase the flow of credit,” the department “has not yet determined whether it will impose reporting requirements on the participating financial institutions.”  

Lastly, just to reiterate my own outlook for 2009, I wrote last time: 

“This will remain a deep global recession, with pockets of rising unrest overseas helping to feed the doom and gloom…. 

“The inauguration of Barack Obama, though, will supply some good feeling and both Wall and Main Streets will initially like the stimulus program that he signs shortly after taking office…. 

“But…to then draw a line and say beginning in the second half it’s ‘Oh happy days!’ doesn’t strike me as being rational given the many facets of the crisis that make this all so historic. [The behavior of the stock market, though, is a far different story.]” 

Like everyone else I’m focused on housing, the loosening of credit, and any signs of good news overseas where you can look at two consecutive months of better sentiment, retail sales, industrial production…anything. 

But when it comes to stocks, I’m separating the economy from the market and already we have seen a better tone in sentiment the past two weeks in some respects, despite the negative returns this past one. I’m looking for 20% gains in the Dow and S&P on the year, 30% in the Russell 2000 and Nasdaq. 

I was questioned a bit this week on these figures, as in how could I be so optimistic given my economic viewpoints? 

Easy. We saw a collapse in the S&P 500 from an October 2007 high of 1565 to 752, November 2008. We finished the year at 903. Another 20% (on top of the yearend 20% rally off the lows) takes us just to 1080, still 30% from the all-time high. Whoopty-damn-do. 

In my self-flagellation exercise of last week, I mentioned a solar holding of mine that closed January 2 at $1.80. On Monday alone it rose 25% to $2.25. Nice move for one day. But the same stock was over $16 a year ago, to give you a sense of my feeling on the overall market. It’s better than the alternative, just don’t get too hung up on the fact a small part of me is bullish. We were never going to zero, after all, even if some of my own holdings still may. 

Street Bytes 

--It’s been a rather bizarre opening six trading days. I’m a big believer in the January barometer – as the month goes so goes the year – as well as the first five days indicator, also a past predictor of success or failure for the full year. [See my "Wall Street History" column on the topic.]  As measured by the S&P 500, the market was up the first five trading days, 903 to 909, but it finished Friday at 890, off 4.5% for the week, and is thus down 1.4% for the year. The Dow Jones declined 4.8% to 8599, while Nasdaq lost 3.7% to 1571. 

But the Street was rocked late Friday as word got out, first, that Bob Rubin was leaving the board of Citigroup, a ten-year term as senior adviser that was a disaster, though his bank account was stuffed with $115 million over the same period, and then we learned there are talks between Citigroup and Morgan Stanley over Citi’s Smith Barney brokerage unit, which would be combined with Morgan Stanley’s sales force in a joint venture. Far more on this next week, but for now it looks like a done deal. 

--U.S. Treasury Yields 

6-mo. 0.27% 2-yr. 0.75% 10-yr. 2.39% 30-yr. 3.06% 

The Bank of England, serving the Empire since 1694, lowered its key lending rate to 1.50% this week, the lowest since it was founded. The European Central Bank, at 2.50%, is undoubtedly coming down further soon, while the Federal Reserve, well, we’re basically already at zero. 

--Oil tumbled back to the $40 level ($40.83), off almost $6 on the week, as inventories spiked higher with still declining demand. Natural gas didn’t fare well either as the drawdown, expected this time of year, was less than expected. 

--The chairman of one of India’s largest technology companies, B. Ramalinga Raju of Satyam Computer Services, admitted to the nation’s biggest financial fraud, including a fictitious cash balance of more than $1 billion. Satyam, an outsourcing company with many tentacles in the United States, including contracts with General Motors and Ford, previously reported it made $400 million in profits for its last fiscal year as it competes with fellow Indian outsourcers Wipro and Infosys. 

But in his letter of resignation, Raju, now under arrest, noted that for the quarter ending Sept. 30, Satyam reported $136 million in profit when the real amount was only $12.5 million. The company also said at the time it had over $1 billion in cash when the total was actually $66 million. Raju added in his statement that no other board members were aware of the ruse and said, “It was like riding a tiger, not knowing how to get off without being eaten.” I wouldn’t know. This is a huge blow to India and future foreign investment. 

--In the ongoing case of Bernie Madoff, victim and Hollywood producer Jeffrey Katzenberg told CNBC it’s a “disgrace” Madoff remains free on bail. It is certainly a perversion of justice. 

The potential number of victims of Bernie’s Ponzi scheme is at least 8,000 at this point, as we’ve learned he had $173 million in signed checks in his desk when he turned himself in, to be paid out to family, friends, and employees, as well as secretly mailing out $1 million in jewelry to friends and family members on Christmas Eve in total violation of the terms of his bail agreement. Madoff had promised the SEC not to dispose of any assets that could be used to pay off victims. And now, after admitting the crime, he refuses to cooperate, at least as of this writing. 

We continue to learn, though, just how badly the SEC missed this scam, which as recently as 2006, in reviewing documents first brought to light by whistleblower Harry Markopolos, “found no evidence of fraud.” As attorneys representing victims have said, the SEC’s failures, over a number of years, are “stunning.” Brad Friedman put it best. “They had every red flag in the world. Even with a map and a flashlight, they couldn’t find it.” 

--No one was surprised by the latest carnage in the auto sector, but for the record sales in December were atrocious. General Motors, down 31%; Ford, 32%; Chrysler, 53%; Toyota, 37%; Honda, 35%; Nissan, 31%. The uniformity of the declines says it all. 

In 2007, sales in the U.S. were running at a 16 million rate. Today it’s a 10 million annualized pace.   Further….Honda Motor announced it would delay the start of production at its first plant in Argentina by at least six months, while Toyota is suspending production at all 12 of its Japan plants for 11 days over February and March, amidst the lowest overall domestic sales in Japan since the mid-1970s. 

As for Chrysler, it is obvious this automaker should have been forced into a merger with GM last summer, while the United Auto Workers and GM commence talks on Monday to see what concessions the UAW is willing to make. 

--Deflation Watch…and related directly to the above: The 40,000 members of the International Brotherhood of Teamsters voted to approve a wage cut in order to keep an employer, trucker YRC Worldwide, afloat. 

YRC is run by William Zollars, a frequent guest on CNBC when times were good, which for CNBC junkies is a familiar pattern. Some CEOs’ egos know no bounds and there is a pattern of those who love to see their mug on TV then having problems later. See also Andrew Liveris of Dow Chemical. In this case, Zollars at least agreed to a pay cut himself. 

--There have been at least three high-profile suicides of leading executives and money managers in the past few weeks, including one of the richest men in the world, German billionaire Adolf Merckle. There is little to add in these instances, except Merckle’s was due in no small part to his losing a mini-fortune on a bet that shares in Volkswagen AG would fall when last Nov. a short-squeeze led to a spectacular spike in price. 

--It has been a brutal stretch for Ireland, the one-time Celtic Tiger, as its economy implodes. National treasure Waterford Wedgwood filed for bankruptcy this week, though a U.S. private-equity firm may help bailout parts of it. Waterford employs 800 in Ireland, 1,900 in Britain. 

And then there is the Dell manufacturing plant in Limerick. I’ll never forget what a huge deal it was when Dell announced in 1990 it was coming to Ireland. It marked the very beginning of the Celtic Tiger run as Dell received all manner of tax breaks and shortly thereafter the government formally lowered the corporate rate for all to 12.5%, fueling further expansion by multi-nationals who had the incentive to set up shop on the Emerald Isle. By 2000, emigration trends had reversed and Irish youth were opting to stay home instead of moving to New York or Boston as opportunities were abundant. 

But as I have well-chronicled in these pages due to my 16 trips here since 1989, the Irish economy was bound to crash and crash it has. In the ultimate insult, Dell is not just shutting the Limerick plant that employed 1,900 (a move rumored for a while), but it is moving its manufacturing operation to Poland. [Other Dell employees are, however, staying in Ireland.] For a nation nearing outright depression, coupled with the Waterford bankruptcy this is a killer for the national psyche. 

--Another note on Ireland. I received a letter from my club in Lahinch and as of Sept. 30, the number of rounds played by overseas members/guests was down 40%. I can only imagine how much worse it has gotten since. [No more worrying about tee times, though.] 

--It’s one thing to see that Detroit has an office vacancy rate of 24.6%, but I was surprised to see Dallas’ at 22.6%. Despite rapid weakening, New York’s is still the best among large metro areas at 7.0% as of the fourth quarter, though this is headed higher at a rapid clip. 

--Manhattan residential real estate has officially rolled over as sales dropped 34% in the fourth quarter. 

--Due to Wall Street’s crash, business tax receipt forecasts in New York City continue to be ratcheted down at startling speed. The city’s Independent Budget Office now predicts receipts will plunge from $5.4 billion in 2008 to $4.1 billion in 2009, with a further slide to $2.7 billion in 2010. Goodness gracious. 

--Singapore’s state investment fund, Temasek, has 40% of its portfolio in the financial sector. Not good. Losses on its investment in Merrill Lynch, for example, exceed $2 billion. Temasek is also a major stakeholder in Barclays, Bank of China and China Construction Bank. [See above story on sovereign wealth funds and their lack of enthusiasm in supplying more capital to the financial industry.] 

--To give you another sense of the speed of the collapse in the U.S., last April, Hard Rock Park, a large theme park in Myrtle Beach, S.C., opened up. Nine months later a bankruptcy court approved the company’s liquidation request, Hard Rock having filed for bankruptcy in September.  

The park received excellent reviews but since opening had generated just $20 million in ticket sales when annual debt service is $24 million…before other operating expenses. Hard Rock Park employed 2,000 full- and part-time workers. 

--The Journal had a story on Belgians and the staggering fact some government departments average “35 days of paid sick leave per employee each year, more than twice the national rate and seven times the U.S. average [4.5 days].” The top official at Belgium’s health ministry has launched a crackdown and inspectors now knock on doors of randomly selected civil servants. [I’d be good at that job. “Get to work you sorry….”] 

--The Australian wine industry suffered its largest-ever slump in exports, down 18% in 2008. Exports to the U.S. fell 26.5%. 

--I was reading a story on the cost of production in Canada’s oil sands projects when I came across this startling stat, at least to me. Guess how much a single tire costs on those oversize dump trucks? $60,000! 

--Apple announced it is dropping technology copyright protection technology on all songs marketed through its online iTunes store, allowing the music to be played on non-Apple devices. 

As for the health of CEO Steve Jobs, he finally issued a statement on his weight loss, saying doctors had discovered a hormonal imbalance and he will undergo a “relatively simple” treatment until he recovers, though he will remain head of the company. He did not make his normal appearance at the Macworld conference. 

--As Microsoft rushes the product launch of Windows 7, to make up for the Vista disaster, the fact is if the future of the company is about the Internet versus operating software, Microsoft’s Internet Explorer browser continues to lose market share and was down to 68% in December. Firefox’s is up to 21%, by the way. 

--I forgot to congratulate PIMCO’s Bill Gross last week; manager of the world’s largest bond fund, the PIMCO Total Return Fund, which I used to hawk in a past life. Gross totally kicked butt last year, beating his benchmark by a staggering 9.50% (when in the intermediate investment grade bond class, 0.50% is significant). He should have been Morningstar’s fixed income fund manager of the year again, but Morningstar blew it. 

--The SEC is reopening its investigation of whether hedge fund Pequot Capital Management profited from insider information on Microsoft in 2001. A former MSFT employee, David Zilkha, left the company to join Pequot in 2001, a time during which Pequot earned over $2 million in a bet on Microsoft stock in April and May of that year. Previously, investigators had found “insufficient evidence to bring a case,” but now new evidence has evidently been uncovered. The source? [And the reason why I mention this case.] Zilkha’s ex-wife, who according to Bloomberg “copied his computer hard drive before their divorce.” [Advice on protecting your computer hard drive before you head to court after being caught with your mistress…yet another free feature of StocksandNews.] 

--Top five global companies in market cap as of Dec. 15, 2008. 

Exxon Mobil $406 billion
Wal-Mart $214
China Mobile $209
Industrial & Commercial Bank of China $183
General Electric $178

[BusinessWeek] 

--Harbinger of Depression: The Rainbow Room atop Rockefeller Center is closing its restaurant due to lack of business. 

--I just saw Ivanka Trump on CNBC…The Donald should be very proud. No offense, Brian Williams, but if NBC made Ivanka Nightly News anchor, the economy would turn around much faster and the network would capture 94% of the audience. 

--Michael Phelps is being paid more than $1 million to pitch Mazda in China, the largest single sponsorship for a Western celebrity in Chinese history. Phelps, who has inked deals with Visa, PowerBar, Omega, AT&T Wireless and Kellogg’s, among others, is estimated to have a net worth of as much as $50 million. I’d say all those early morning hours in the pool and his mother’s own dedication paid off handsomely. 

--Richard L. Bond, no relation to James, quit as CEO of Tyson Foods amid the meat industry’s worst slump in decades. As the Journal added, in describing how Tyson stock has been battered, it’s about “the rising cost of fattening livestock and a glut of cheap chickens.” It’s safe to say the chickens are suffering from low self-esteem. 

--Florida Real Estate Crash Watch: Alex Rodriguez has cut the price on his Coral Gables mansion to $12.3 million, just above the $12 million he and his estranged wife paid for it in 2004. A-Rod originally listed the property for $14.9 million. No word on whether Cynthia copied his hard drive. 

Since Alex became a Yankee in 2004, the Bronx Bombers have failed to advance to the World Series and he’s 7-for-44 in his last three playoff series with one RBI. But I digress. 
--Deflation Watch, part deux: Mark R. and I were talking about former Philadelphia Phillies’ outfielder Pat Burrell, who after the season ended was offered a 2-year, $22 million contract to stay with the Phils. Burrell said ‘no thank you,’ convinced he could get a better deal elsewhere. But then reality hit baseball in the face (except in the case of the Yankees) and Burrell just signed a 2-year, $16 million contract with Tampa Bay. 

Foreign Affairs

Israel: 

The U.N. Security Council approved a resolution on Thursday calling for an “immediate, durable and fully respected ceasefire” between Hamas and Israel, but it was up to Israel and Hamas to decide when to stop their military activities and as I go to post, there is no sign of a let up on either side in the fighting that has now claimed a reported 800 lives. 

I was watching the local news and a Palestinian spokeswoman at a demonstration in New York City said “Israel’s behavior has been so disgusting it’s time for us to up the ante.” Nothing on Hamas constantly firing rockets into Israel, which precipitated the crisis, of course.  

Israel isn’t without fault itself, though, and I’ve written time and again about the settlements issue. The U.S. will never be perceived as an honest broker unless it addresses this one with our ally in a serious fashion.  

But one of the many sidelights of the current crisis, aside from Iran’s role, is keeping Egypt and Jordan stable. Both Hosni Mubarak and King Abdullah walk a constant tightrope in attempting to keep the peace domestically as they deal with restive publics glued to the biased war coverage all day, while not wanting to disturb peace pacts signed with Israel. 

As for Lebanon, things would have to go very wrong in Gaza (far more so than today) before Hizbullah and Sheikh Nasrallah would open a second front. [Friday’s rockets fired into Israel from south Lebanon were clearly the work of a Palestinian group, though likely with Hizbullah’s knowledge.] 

Hizbullah has no reason to upset the political gains it has made after the 2006 war. It can continue to expand its base through democratic means, while building up the formidable rocket force that threatens Israel’s existence far more than Hamas’ current capabilities. [Think chemical and biological warheads, for example, and soon, Iran’s enriched uranium.] 

But back to the Gaza conflict, thus far there has been one encouraging development. Relative quiet in the West Bank. There is an obvious disconnect between Hamas and the Palestinian Authority of Mahmoud Abbas. All the more reason for Israel to be as careful as possible on the collateral damage front. 

This is a big issue. At times like these I feel it’s important to gather as much opinion as possible. I selfishly start by educating myself, then I try to drag you along. 

Benjamin Netanyahu, Likud Party leader / Wall Street Journal 

“If our enemies assumed that the Israeli public would be divided on the eve of an election, they were wrong. When it comes to exercising our most basic right of self-defense, there is no opposition and no coalition. We stand united against Hamas because we know that only by defeating Hamas can we provide security for our people and hope for a future peace. 

“We fight to defend ourselves, but in so doing we are also fighting a fanatical ideology that seeks to reverse the course of history and throw the civilized world back into a new dark age. The struggle between militant Islam and modernity – whether fought in Afghanistan, Iraq, India or Gaza – will decide our common future. It is a battle we cannot afford to lose.” 

Max Boot / Wall Street Journal 

“There is little doubt that Israel is morally justified in its offensive against Hamas. No nation can sit by and allow its territory to be rocketed with impunity. Not if it wants to remain a nation for long. But to say that Israel has the right, indeed the obligation, to act is not the same thing as saying that it is acting wisely. 

“It is too early to know whether its actions are well-advised. All will depend on how the offensive turns out. But even as Israeli troops push into Gaza following a week of air strikes, it seems highly unlikely that they will be able to decisively defeat the terrorist organization on their southern border. 

“Achieving total victory would require waging war in the way that America fought Germany and Japan – all out and on many fronts until the enemy has no more capacity to resist. Then it would have to occupy the ruined land, imposing a peace at gunpoint to ensure that Gaza could never again be a launching point for attacks on Israel.” 

Editorial / Wall Street Journal 

“A nation like Israel, with enemies on all sides, must maintain an aura of invincibility if it is to have any chance at peaceful co-existence. It was that aura after two wars that induced Egypt to agree to peace with Israel in the 1970s. By contrast, the 2006 Lebanon campaign convinced radical Arabs and Persians that Israel had grown soft and could be beaten. Israel can’t let Hamas maintain a similar mythology at the end of this operation, or the costs will be far higher down the road…. 

“For the broader Middle East, the issue is the expansion of Iranian influence and terror. Like Hizbullah in Lebanon and the Sadrist ‘special groups’ in Iraq, Hamas has become part of Tehran’s bid for regional hegemony…. 

“This is where Mr. Obama comes in…. 

“Much as Mr. Obama takes office in a stronger position thanks to the Iraq surge, his foreign policy would also benefit from Israeli success in Gaza. The President-elect says he intends to pursue a grand bargain with Iran, and the mullahs are going to be more interested in diplomacy if their military proxies have been defeated. A Hamas humiliation would also show Tehran that Mahmoud Ahmadinejad’s regional militarism has more costs than benefits. 

“The Israelis have done Mr. Obama a favor by striking back at Hamas before he takes office so President Bush can endure the usual global denunciations for U.S. support for Israel. But Mr. Obama will soon need to return the favor by showing Israel – and Iran – that the new President understands the U.S. stake in the success of Israel’s Gaza surge.” 

Ralph Peters / New York Post 

“Here’s the bitter truth: Israel can’t stop its own bleeding without drowning Hamas in blood. That’s Hamas’ choice, not Israel’s. No negotiations, no compromises, and no shuttle-diplomacy bargains will ever placate terrorists who believe their god wants tributes of Jewish blood. 

“Israel may never get another such chance as this to rip the heart out of Hamas. But Israel needs the fortitude to accept painful friendly casualties on the ground and to resist international pressure – which will be fierce…. 

“Over the past 5,000 years, war may not have been the perfect answer, but there have been countless times when it was the only answer. This is one of those times.” 

Gerald Seib / Wall Street Journal 

“Even if Hamas is laid low as a military force, that wouldn’t end its role as a religious and social organization capable of uniting and rallying Palestinians. 

“Instead, Israel’s hopes are more limited. It wants to use force to deter more rocket attacks. Beyond that – and this hope is crucial – it would like to prevail decisively enough that Hamas is widely perceived as having suffered a genuine military setback. 

“If Hamas is seen as having been vanquished militarily, that might usher in some longer-term strategic changes. Palestinians in Gaza might grow angry that Hamas’ leaders led them down a path toward pointless pain and suffering at the hands of Israel, undermining Hamas’ ability to lead Palestinians. Beyond that, perhaps Hamas’ patrons in Iran would be embarrassed and diminished in the region for having used rocket shipments and rhetorical flourishes to prod Hamas to such an unhappy outcome.” 

Jackson Diehl / Washington Post 

“Israel’s bet was that it could substantially reduce Hamas’ military capacity and then force it to accept a cease-fire with improved terms for Israel. Hamas, predictably, has refused to play by those rules. It has defined victory as its own survival; by that standard, it has no incentive to agree to a new truce unless it receives major benefits in return, such as an end to Israel’s blockade. 

“That means Israel must choose among attempting to drive the Islamic movement from power (which would be hugely costly and leave its troops stuck in Gaza indefinitely), making significant concessions to Hamas or withdrawing without any assurance that rocket fire against its cities would cease. 

“At best, outgoing Prime Minister Ehud Olmert might win an agreement for international forces to help stop the smuggling of new weapons from Egypt into Gaza, something that doesn’t necessarily require Hamas’ consent. But that won’t stop Hamas from continuing to build its own rockets or from claiming that – like Hizbullah in Lebanon – it successfully resisted an Israeli invasion.” 

Diehl writes that the largest fallacy “is the persistent conceit among Israeli leaders that Hamas can somehow be wiped out by economic strangulation or force of arms.” 

Charles Krauthammer / Washington Post 

“Israel’s leaders have purposefully obscured their war aims in Gaza. But there are only two possible endgames: (A) a Lebanon-like cessation of hostilities to be supervised by international observers, or (B) the disintegration of Hamas rule in Gaza. 

“Under tremendous international pressure – including from an increasingly wobbly U.S. State Department – the government of Ehud Olmert has begun hinting that it is receptive to a French-Egyptian cease-fire plan, essentially acquiescing to Endgame A. 

“That would be a terrible mistake. 

“It would fail on its own terms. It would have the same elements as the phony peace in Lebanon: an international force that abjures any meaningful use of force, an arms embargo under which arms will most assuredly flood in, and a cessation of hostilities until the terrorist side is rearmed and ready to initiate the next round of hostilities. 

“The U.N.-mandated disarmament of Hizbullah in Lebanon is a well-known farce. Not only have foreign forces not stopped Hizbullah’s massive rearmament, their very presence makes it impossible for Israel to take any preventive military action, lest it accidentally hit a blue-helmeted Belgian crossing guard.” 

But Krauthammer argues Hamas’ leadership can be eliminated, and that Prime Minister Olmert, who blew it in Lebanon, “has a rare second chance. The one-step-from-madness gangster theocracy in Gaza – just four days before the fighting, the Hamas parliament passed a sharia criminal code, legalizing, among other niceties, crucifixion – is teetering on the brink. It can be brought down, but only if Israel is prepared – and allowed – to complete the real mission of the war. For the Bush State Department, in its last significant act, to prevent that with the premature imposition of a cease-fire would be not just self-defeating but shameful.” 

Iran: White House national security adviser Stephen Hadley notes Iran is clearly President-elect Obama’s greatest policy challenge and that his new administration must pursue economic penalties against Iran to use as “leverage” in forcing a halt to Tehran’s nuclear weapons activities. 

William Kristol / New York Times 

“The huge challenge for the Obama administration is going to be Iran. If Israel had yielded to Hamas and refrained from using force to stop terror attacks, it would have been a victory for Iran. If Israel were now to withdraw under pressure without accomplishing the objectives of severely weakening Hamas and preventing the reconstitution of a terror-exporting state in Gaza, it would be a triumph for Iran. In either case, the Iranian regime would be emboldened, and less susceptible to the pressure from the Obama administration to stop its nuclear program. 

“But a defeat of Hamas in Gaza – following on the heels of our success in Iraq – would be a real setback for Iran. It would make it easier to assemble regional and international coalitions to pressure Iran. It might positively affect the Iranian elections in June. It might make the Iranian regime more amenable to dealing. 

“With respect to Iran, Obama may well face – as the Israeli government did with Hamas – a moment when the use of force seems to be the only responsible option. But Israel’s willingness to fight makes it more possible that the United States may not have to.” 

Russia/Ukraine: As I go to post, it appears the flow of Russian gas to Europe has not yet resumed, even though both sides of the dispute have accepted the use of independent monitors. The price dispute that precipitated the latest crisis has yet to be resolved as well. 

Gazprom is seeking to raise the price Ukraine pays for gas to $450 per 1,000 cubic meters, from $179.50 last year, this as Ukrainian President Viktor Yushchenko believes his own tough negotiating stance will give the West reason to draw Ukraine closer to the EU and NATO. But, with Ukraine’s own political process in total disarray, as well as its economy, it’s hard to disagree with the take of an analyst of the scene, Katinka Barysch, who told Bloomberg, “The Russians have zero credibility but the Ukrainians don’t have much more.” 

It was thus no surprise what transpired on Jan. 1 as the Kremlin shut off natural gas to much of Europe by suspending the flow going into critical pipelines in Ukraine that then supply 80% of Russia’s exports to the rest of Europe. On Friday, hundreds of thousands of homes were without heat during a crushing cold wave and at least 15 countries were impacted, hardest hit being Serbia, Bosnia-Hercegovina, Bulgaria and Hungary. Factories were forced to close in many parts of the continent and people have been chopping down trees for firewood. 

Peter Brookes / New York Post 

“Russia’s decision to cut off natural-gas shipments to Ukraine…is a lot more than a business decision based on failed year-end contract negotiations. 

“A lot more. 

“Sure, the Russian state-owned natural gas company, Gazprom, is cranky about supposedly not getting paid for past natural gas deliveries to Ukraine as well as the below-market prices Ukraine pays…. 

“But cutting off gas in the dead of winter – especially with teeth-chattering sub-zero temps…is pretty harsh. [Happy New Year to you, too, comrade.]…. 

“Cutting off gas in the depths of winter is a warning to Kiev – now in the midst of a financial crisis and facing elections next year – reminding it that Moscow can still call some shots there…. 

“Russia also wants Ukraine to knuckle under on extending the lease for Russia’s Black Sea Fleet base in Crimea beyond the agreement’s 2017 expiration. [Kiev is on record as not wanting to renew the pact.]…. 

“This is the third time in three years Russia has cut deliveries to Ukraine. The impact on European energy supplies has counseled Russia’s customers on the perils of protesting objectionable Kremlin policies…. 

“No doubt: Russia will continue to use energy as a weapon – indeed, it has replaced the Red Army as the prime source of Russian power. It’s high time Europe diversifies its energy sources, casting off the yoke of its dogged reliance on Russian oil and gas.” 

Iraq: Sunni/Shia tensions are heightened ahead of the Jan. 31 provincial elections. In a major test of their capabilities, Iraqi forces will be in charge of security at the polls, though U.S. troops will be in the background if needed. 

Afghanistan: Five U.S. soldiers have died in two separate attacks the past two days.

India/Pakistan: Indian Prime Minister Singh accused Pakistan of using terrorism as a policy tool and said Pakistan had lent its support to the Mumbai terrorists, a major upping of the stakes. Singh said, “Terrorism is largely sponsored from outside our country, mainly Pakistan, which has utilized terrorism as an instrument of state policy. There is enough evidence to show that, given the sophistication and military precision of the attack, it must have had the support of some official agencies in Pakistan.” 

[Separately, an American drone attack on Jan. 1 evidently killed two senior leaders of Al Qaeda in Pakistan.] 

China: 670,000 small firms were forced out of business last year and the Chinese Academy of Social Services said the urban jobless rate is an unprecedented 9.4%, double the government’s official rate. If this estimate is accurate, the central government would need to find jobs for at least 33 million jobless migrant workers, fresh graduates and young people entering the job market, a third more than officially estimated. 

State-run magazine Xinhua has been blunt, saying a surge in protests and riots is inevitable. I maintain the government will keep things largely in control.  

But I didn’t realize that, according to the writer of the Xinhua piece, the government’s projected target of 8% growth would generate only 8 million new jobs for the whole country. Huang Ho writes, “If this year there is a large number of unemployed rural migrant laborers who cannot find work for half a year or longer, milling around in cities with no income, the problem will be even more serious.” 

On the Taiwan front, Taipei claims it is targeted by more than 1,300 missiles from the mainland in announcing it would not scale back weapons acquisitions even if China moved forward on a reported plan to reduce the missile force. [The argument being it doesn’t take long to redeploy them.] 

And there is the issue between China and Japan over development of a gas field in the East China Sea. Even though agreement was reached in June to end an old spat, Japan is once again complaining China’s development of a nearby field is encroaching on Japan’s potential reserves, this before the two were to jointly develop the general area.  

Lastly, bird flu continues to simmer. It resurfaced in Hong Kong for the first time in six years, and China reported a 19-year-old woman died in Beijing after coming in contact with ducks purchased at a rural market. The concern is with hundreds of millions heading home for the Lunar New Year holiday, giving the H5N1 virus more of a chance to spread. [Lunar New Year starts Jan. 26, though many hit the road before. Recall, last year this period was a total disaster due to severe weather.] 

North Korea: According to South Korean officials, the North is undergoing a shakeup in the leadership team with an eye towards “succession.” Five ministers have been replaced, though none in security-related areas. These same officials maintain Kim Jong-il remains in charge. 

Venezuela: Two days after announcing it was halting its program to provide free home heating oil to poor Americans, the government reversed course. At first, President Chavez was harshly criticized for suspending a program that had provided positive publicity for both him and his government. Aside from beneficiaries in New England, per the commercials we see with Joseph Kennedy III in these parts, I see Chavez’s Citgo oil also goes to 65 Indian tribes. 

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Pray for the men and women of our armed forces.

God bless America.

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Gold closed at $853
Oil, $40.83

Returns for the week 1/5-1/9 
Dow Jones -4.8% [8599]
S&P 500 -4.5% [890]
S&P MidCap -3.8%
Russell 2000 -4.9%
Nasdaq -3.7% [1571] 
Returns for the period 1/1/09-1/9/09

Dow Jones -2.0%
S&P 500 -1.4%
S&P MidCap -1.4%
Russell 2000 -3.6%
Nasdaq -0.3%

Bulls 41.8
Bears 34.1 [Source: Chartcraft / Investors Intelligence]
 
Have a great week. I appreciate your support. 

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