Educate Yourself

Week in Review
For the week 4/27/2009 - 5/1/2009
Brian Trumbore
President/Editor, StocksandNews.com

H1N1

Little did I know when I wrote from Reykjavik, Iceland, last Saturday morning that perhaps I should stay there until swine flu blew over that I ended up being not too far from the truth. Alas, we can be thankful that it would appear we are dealing with nothing more than another flu strain, and a not too lethal one at that, though one that still has disturbing characteristics and may yet return in the fall or winter in a more virulent fashion.

“Sometime in the last few years, as the world’s attention was focused on the bird flu that killed more than 250 people in Asia, another bird flu strain infected pigs.

“It mixed with two kinds of flu that are endemic in swine and a fourth that originally came from people.

“The resulting concoction spread among pigs, then recently – no one yet knows where or when – started infecting humans.”

Dr. Scott Layne, an epidemiologist at the UCLA School of Public Health said scientists have yet to identify which features help H1N1 spread or kill. “The microscope doesn’t tell you anything. What are the genetic correlates of virulence? Unknown. Transmissibility? Unknown.”

Because it’s summer time, many experts do believe the virus could burn itself out in the next four to six weeks. But again, reappear, as happened in 1918.

Speaking of which, John M. Barry wrote the definitive book on the topic of 1918, “The Great Influenza.” Commenting in an op-ed for the New York Times, Barry notes:

“What’s important to keep in mind in assessing the threat of the current outbreak is that all four of the well-known pandemics seem to have come in waves. The 1918 virus surfaced by March and set in motion a spring and summer wave that hit some communities and skipped others. This first wave was extremely mild, more so even than ordinary influenza: of the 10,313 sailors in the British Grand Fleet who became ill, for example, only four died. But autumn brought a second, more lethal wave, which was followed by a less severe third wave in early 1919.

“The first wave in 1918 was relatively mild, many experts speculate, because the virus had not fully adapted to humans. And as it did adapt, it also became more lethal. However, there is very good evidence that people who were exposed during the first wave developed immunity – much as people get protection from a modern vaccine.

“A similar kind of immune-building process is the most likely explanation for why, in 1918, only 2 percent of those who contracted the flu died. Having been exposed to other influenza viruses, most people had built up some protection. People in isolated regions, including American Indian reservations and Alaskan Inuit villages, had much higher case mortality – presumably because they had less exposure to influenza viruses.

“The 1889 pandemic also had a well-defined first wave that was milder than succeeding waves. The 1957 and 1968 pandemics had waves, too, though they were less well defined.

“In all four instances, the gap between the time the virus was first recognized and a second, more dangerous wave swelled was about six months. It will take a minimum of four months to produce vaccine in any volume, possibly longer, and much longer than that to produce enough vaccine to protect most Americans. The race has begun.”

I was not one of those joking about H1N1 this week, except I felt badly for our pig friends and ate a package of bacon. [I’m addicted to the pre-cooked Oscar Mayer variety…which doesn’t make me a bad person.] I kept telling friends who pooh-poohed the virus to take it seriously and I was wondering on Tuesday, for example, what Kentucky’s governor might do if, say, the state had a cluster such as that which developed in New York City. Did you then proceed with the Kentucky Derby where 150,000 would congregate? You saw the precautions taken by the likes of the Fort Worth, TX, school district, which shut down schools until May 11. Was that being overly cautious? I’m not going to question such moves.

We all should take heart that at least in the United States we have the Centers for Disease Control and the experts there. I have full confidence they are doing the best they can.

I thought President Obama handled the situation totally appropriately. [I also watch the first 30 minutes of “Today” each morning as part of my routine and was incredulous when I saw Vice President Biden do his schtick with Matt Lauer. ‘I can’t believe he is saying this,’ I mused.]

I believe many in the financial community just don’t realize how close we came to a true economic disaster. In all seriousness, I myself almost pulled the trigger on my equity holdings first thing Thursday morning because I understand the implications of a full-blown pandemic. All bets would be off at that time. But I analyzed the news as best I could and stayed put. Also, believe me, I will not just listen to the message of the markets in making a decision of this kind. I’ll trust my own pretty good instincts over those of a bunch of traders instead.

Assuming H1N1 is now relatively under control and begins to dissipate over the coming weeks, I am not going to let down my guard this coming fall.

The head of the World Health Organization on Wednesday issued a dire warning that the episode was a “time for global solidarity.” This was viewed in some quarters as an overstatement. Far from it. It was a responsible one to make because this is a huge wakeup call, though by the actions of many of our experts and policy makers, I am fairly confident that the next time a more serious wave hits, we’ll be ready to take the right steps. I do pity, however, other nations of the world. It will be each man for himself. Each nation for itself. Rich vs. poor. And this is one instance where the meek will not inherit the earth.

Before I get to the situation with Chrysler, General Motors and our activist president, while Wall Street awaits the results of the now-delayed bank stress tests, due out May 7, at last word, rather than Monday, though results were already leaking out as expected, this was a week where a number of economists, for the first time during the crisis, were in agreement that we’ve hit bottom and there are signs of a turn. Not that it’s happy days…far from it…and not that we’ll enter a period of sustained growth anytime soon…we don’t have nearly enough evidence to support that dream.

But it’s clearly been two baby steps forward for each normal one backwards the past month in particular. In some cases, such as in China, it’s two normal steps forward and one baby step backwards. China is now in a flat-out growth mode, according to various manufacturing indices, as opposed to the contraction we had been witnessing there. [A contraction from 8% growth to 6% growth…and now growth back to 8%, it would seem.] New loan origination here is soaring, witness the example last week of my own holding there obtaining a sizable line of credit. This will eventually create a new bubble but I’ll cross that bridge later.

In Japan, the Bank of Japan says GDP will contract 3.1% over the coming 12 months, not good, but at the same time many now believe the economy will expand 1.2% in the second quarter. Factory output in March was off 34% year over year, but over February was up. Yes, the government adds deflation will be the order of the day here for possibly the next two years, but Japan is bottoming.

In Taiwan, PC makers say the industry has bottomed and the market slowly improving. [On the other hand, global semiconductor sales slumped 30% in March from a year earlier, but, here again, were up over February. For its part global software king SAP was far less optimistic in releasing its latest earnings report.]

In Europe, the retail sales outlook is improving and consumer confidence rising in some key nations such as France and Italy. Previously, we had seen similar sentiment readings in Germany.

In Britain, a key manufacturing index hit an 8-month high. Still in a recession mode, mind you, but a distinct improvement.

[On the other hand, as you would expect, unemployment, a lagging indicator, continues to rise across Europe.]

In the U.S., two leading consumer confidence figures for April surged to levels far better than expected. Still poor, overall, but a plus nonetheless.

Various manufacturing indices here also exhibited better than expected readings for the month, and in the case of the Chicago Purchasing Managers Index and the national ISM barometer, both got back over the 40 level. 50 is the dividing line between actual growth and recession, so no one is as yet celebrating Chicago PMI Day, but another positive.

Earnings continue to come in mostly better than expected, but here it needs to be pointed out the bar had been lowered so far, it was almost like starting the Olympic high jump competition at 3 feet 8 inches. Earnings estimates will now be ratcheted higher and thus tougher to beat in succeeding quarters.

This week the Federal Reserve held its Open Market Committee meeting on rates (no action there) and in the accompanying statement said the pace of decline in the economy “appears to be somewhat slower,” but the economy could “remain weak for some time.” Separately, former Fed Chairman Paul Volcker added he felt the economy has leveled off, but we were still “in for a long slog.” Not great, but an improvement from previous sentiment.

Recall long ago I first touched on the three-legged stool; housing, the consumer and business spending (or cap-ex).

The bursting of the housing bubble begat the collapse of the wealth effect which begat lower consumer spending which begat decreased business investment.

Now, as I’ve been writing the past month in particular, there are distinct signs housing has bottomed. Again, not that we are near to being off to the races. Far from it. I have been totally consistent in my housing comments for years now. Once we hit bottom we sit there for an extended period in terms of housing values.

But there is increasing evidence that my belief of last fall, that we would bottom in the April-May time period, could be spot on. This week the S&P/Case-Shiller index for February (it’s latest recording period) did nothing to dispel my theory as the year over year decline for 20 major markets came in at down 18.8%...awful…but like in so many other economic readings of the past two months, a slowing in the rate of decline. Some markets, such as Phoenix, are now more than 50% off their 2006 peak. How much lower can they go? And we also learned that the median home price for existing home sales in California in March was actually up over February. Now there are a few reasons for treating this as a simple blip, but a blip, sports fans, is better than a bleep! [OK, just made this up but it makes sense.]

Bottom line, there is indeed cause for optimism. A firmer tone in housing would translate into stronger consumer spending that would then, over time, translate into higher levels of business investment that would then lead to hiring, not further layoffs.

Speaking of layoffs, I believe the employment picture will not get quite as bleak as most forecast. For starters, very few companies have accompanied their first quarter earnings statements with the levels of layoffs that they were announcing in the 2nd, 3rd and 4th quarters last year. Barring a true global pandemic, not just a hike to Level 6, I’m now saying we do not hit 10% for a formal unemployment rate in the United States.

And just a note on the banks, seeing as it appears there will be far more to say upon release of the results next time. One thing that has struck me is the stress tests are designed to look at the worst possible economic scenarios, as in a much deeper recession than we are currently experiencing, and resultant capital shortfalls. 6 of the 19 being examined, we’re told (or rather it was leaked), are in need of additional funding; Citigroup and Bank of America being the two biggest targets.

No one doubts there is a ton of bad paper, mortgages, commercial loans, etc., on the books of virtually all big banks, but the time to do stress tests was 2-3 years ago, and 4-5 years ago when it comes to derivatives. Some day I’ll go back and point out that in 2002, before Warren Buffett’s warning on derivatives being weapons of mass destruction, I was saying no one was doing stress tests on their positions. [Or if they were, it was one of those Long-Term Capital deals where the brainiacs plugged in the wrong algorithms.]

So what do these current bank stress tests really mean, especially if the global economy is bottoming? I just throw it out there. I do not doubt that some banks have serious capital issues, but as the Treasury itself is admitting at week’s end, they are concerned some good banks are going to get unfairly tainted during this process. Or as former Fed vice-chairman Alan Blinder said in a Washington Post op-ed, “Even if the Treasury and the Fed somehow thread the needle, the bank-by-bank specifics are likely to roil markets. And did I mention that getting Congress to vote more money for bank ‘bailouts’ won’t be easy?”

And now on to the bankruptcy of Chrysler and the restructuring of General Motors. On Monday, GM said that if its latest plan was approved, the resultant company would be far smaller, with some 38,000 union workers remaining compared with 395,000 in more than 150 plants at its peak employment in 1970. [In case you wondered about the genesis of the saying “What’s good for GM is good for America.”] GM is also looking to cut its dealer network from 6,500 to under 4,000, along with the previously announced step of eliminating the Pontiac brand.

In return, GM is looking to borrow another $11.6 billion, on top of $15.4 billion in federal loans.

“President Obama insisted at his press conference last night that he doesn’t want to nationalize the auto industry (or the banks, or the mortgage market, or…). But if that’s true, why has he proposed a restructuring plan for General Motors that leaves the government with a majority stake in the car maker?

“The feds have decided they should own a neat 50% of GM, yet that is not the natural outcome of the $16.2 billion that the Treasury has so far lent to the company. [Ed. not sure why my figure differs from the Journal.] Nor is the 40% ownership of GM that the plan awards to the United Auto Workers a natural result of the company’s obligations to the union.

“Yet Secretary Timothy Geithner and his auto task force, led by Steven Rattner, have somehow decided that Treasury and UAW chief Ron Gettelfinger will get to own a combined 90% of GM. If there’s a reason other than the political symbiosis among the Obama Administration, Michigan Democrats and the auto union, it’s hard to discern. From now on let’s call it Gettelfinger Motors, or perhaps simply the Obama Motor Company, though in the latter they’d have to change the nameplates.

“The biggest losers here are GM’s bondholders. According to the Treasury-GM debt-for-equity swap announced Monday, GM has $27.2 billion in unsecured bonds owned by the public. These are owned by mutual funds, pension funds, hedge funds and retail investors who bought them directly through their brokers. Under Monday’s offer, they would exchange their $27.2 billion in bonds for 10% of the stock of the restructured GM. This could amount to less than five cents on the dollar….

“Monday’s offer is so devoid of economic logic or fairness that it confirms the fears of those who said the original bailout would lead to a nationalized GM run for political ends. This fiasco will in part go down on George W. Bush’s copybook, since he first decided GM was too big to fail.

“But rather than use his early popularity to force hard decisions through the bankruptcy code, President Obama has decided in essence to have the feds run GM and Chrysler. This inevitably means running them for the benefit of the UAW that is so closely tied to the Democratic Party. Next up will be tax changes and regulations intended to coax, or coerce, Americans to buy Gettelfinger Motors cars. This tale of taxpayer woe is only beginning.”

That was the Journal on Thursday. That day we learned President Obama, the man who has a lot on his plate so why would he want to hawk cars, was in the White House hawking Chryslers as he forced the company into bankruptcy protection so it could pursue its alliance with Fiat, in what the New York Times conceded was “yet another extraordinary intervention into private industry by the federal government.” In this one, the UAW gets 55% of the equity while Fiat could eventually hold 35%. I do have to interject that I’ve been saying Americans will love Fiat. In my travels I’ve always liked the looks of their product and I have a good feeling about this one. Of course this has nothing to do with attitudes on federal intervention. They are best expressed, again, by the editorial board of the Wall Street Journal.

“President Obama’s broadside against bankers yesterday illustrates better than any argument ever could that bankruptcy court, and not the political arena, is where Chrysler belongs. Yesterday’s filing isn’t the end of the U.S. auto industry, or even necessarily of Chrysler, and it offers the best chance to protect all parties under the rule of law.

“ ‘I don’t stand with those who held out when everyone else is making sacrifices,’ Mr. Obama nonetheless declared, blaming what he called ‘a small group of speculators’ for the car maker’s Chapter 11 filing. To hear the President tell it, you’d never know that Chrysler had borrowed, and since frittered away, the $6.9 billion that it owes to those ‘speculators.’ The Administration had only offered $2 billion to those secured creditors as part of its proposed restructuring for the car maker. So it’s hardly a surprise that many lenders would rather take their chances in bankruptcy court….

“(But) it’s especially rich for Mr. Obama to blast the creditors for seeking ‘an unjustified taxpayer-funded bailout’ while offering the UAW a 55% majority stake in Chrysler. He also praised the large banks that hold most of the Chrysler debt and supported the government plan. But of course JPMorgan and the other big banks are also recipients of billions of dollars in taxpayer cash and have a strong interest in playing nice with their creditor, Uncle Sam Obama.”

--The amazing rally off the March 9 lows resumed, though for Nasdaq it never ended. Nasdaq is now up an amazing 8 weeks in a row, the longest such streak since at least 1999 (the farthest my spread sheets go for this particular mark), and up 33% during the run. The S&P 500 and Dow Jones were up 1.3% and 1.7%, respectively, this week after stumbling slightly the previous one. The S&P’s rally is 30% off the lows. Yes, I’m like everyone else, kind of hoping for a pause, but as one who said the lows are in, and as the fundamentals now begin to improve, I’m staying put with my view that stocks will finish the year up substantially. The S&P is at 877 now, however, and there are times you can’t ignore technicals and the 890 level seems to be one that is offering stiff resistance.

The International Monetary Fund said the Group of 20 leading economies would continue to run budget deficits of at least 6.5% next year compared with a similar number in 2009. In the UK, Japan and the U.S., the figures will range from 8.8% to 10.9%. That, my friends, translates into a ton of bonds that need to find a home, the paper being needed to finance said deficits. It also means higher yields, which in turn pushes up funding costs, which means more debt, which means more bonds, which means……

In the statement following its Open Market Committee meeting this week, the Federal Reserve said it would “evaluate the timing and overall amounts of its purchases of securities in light of the evolving economic outlook and conditions in financial markets” – leaving open the option of accelerating or extending the Fed’s purchases of a previously announced $300 billion in government debt and another $1.25 trillion in mortgage paper.

And so this past week the yield on the 10-year Treasury hit a new high for 2009 ahead of another $71 billion in auctions, as well as on the latest data reflecting an economy that is stabilizing. Forget the first estimate on first quarter GDP, down 6.1%, which when coupled with Q4’s slide of 6.3% is the worst six month period of economic activity for the U.S. in 50 years. It’s about the future. Remember how I’ve been saying by May-June you’ll have some corporate executives talking of a positive sign or two in their operations? Just one week after reporting miserable earnings for the quarter, Caterpillar said business was returning to previous strong levels in China, while Viacom talked of an advertising market that had finally bottomed.

--The World Bank said the global financial crisis could become “a human and development calamity” for many poor countries as money previously pledged is slow to be distributed. [Some nations will just renege outright.]

--Bank of America shareholders stripped Ken Lewis of his chairman title but allowed him to remain in place as CEO. The Wall Street Journal reported afterwards that the 18-member board isn’t looking to replace Lewis and that the subject of succession did not arise. Walter Massey, president emeritus of Morehouse College, is the new chairman even though he has zero banking experience, which seems kind of absurd. [I’m assuming Massey at least was banker when he played Monopoly as a kid.]

--Citigroup, scrambling to avoid the wrath of the government and raise capital on its own terms, is selling its Japanese retail brokerage division and parts of its investment banking business to Sumitomo Mitsui Financial Group Inc. for $5.5 billion. [Late rumors are that the feds are demanding Citi raise $10 billion in new capital.]

--Chrysler’s bankruptcy filing was the first for a major American automaker since Studebaker in 1933.

--As for April auto sales, Chrysler’s were down 48%, GM’s down 34%, Ford’s off 32%, Toyota’s 42%, and Nissan’s 38%. No doubt, bankruptcy talk surrounding GM and Chrysler didn’t exactly entice people back into the showroom.

--There was no greater example of changes in the energy market the past year than Exxon Mobil’s profit report for the first quarter as the world’s largest publicly traded company earned $4.55 billion. Not too shabby, but down 58% from last year’s $10.89 billion. Importantly, Exxon spent $5.8 billion on exploration and development, always a closely watched figure, up 5% from a year earlier. Many say it should be higher but there just aren’t that many great projects/prospects these days, especially at existing prices.

--Authorities at the Department of Justice and the SEC are delving into the actions of former AIG executive Joseph Cassano, along with at least two others, who ran the financial products division that brought down the global banking system. Investigators are looking at ways the executives may have misled company auditors and shareholders about the value of the derivatives contracts the firm was selling. Cassano must face the music.

--The House (233-193) and the Senate (53-43) passed the Obama budget outline of $3.4 trillion. Now we’ll see how details emerge on healthcare reform in particular. 17 House Democrats and 4 Senate Democrats voted against. Not one Republican in either chamber supported it. Climate change legislation was ignored by both the House and Senate.

--And now the latest edition of “As Ireland Burns.” The level of personal debt has reached record levels, more than double that of 2004. Said one expert, “The combination of the unemployment crisis, the economic crisis and the negative equity crisis has driven thousands of people into a debt trap.” Unemployment has now soared to 11.4%, though the rate of increase is slowing a bit, and the economy could shrink as much as 8%, the most of any euro-area nation. One think-tank said Ireland is suffering the worst recession of any advanced country since the 1930s, in estimating GDP could plunge 14% from 2008 to 2010. The average Irish household has lost a staggering $200,000 in wealth thus far between crashing housing prices, wage cuts and share price collapses. The savings rate has soared to 10%, up from 3% in 2007. Lastly, the Irish are taking 1/3rd fewer trips abroad.

--Crain’s New York Business reports that cargo demand at New York area ports continues to drop. [Year-over-year rate of change]

A 15-year growth streak was snapped last November. Just one small example of the economic impact…20 tugboat hands were laid off last week.

One thing to watch, though, is the contract covering 12,000 dockworkers from Maine to Texas expires next year and union officials are already charging that shipping companies are using the recession to push for concessions, overlooking the industry’s bright long-term prospects. This could be very interesting…and a real fly in the ointment for a sustained recovery next year, mused your editor (not the conclusion of Crain’s).

--But a good sign…Corning, thanks to stronger-than-expected demand for its glass that is used in flat-screen televisions, is bringing back some idled capacity.

--Chesapeake Energy Corp. Chairman and CEO Aubrey McClendon was paid $112 million last year, including a one-time $75 million bonus, plus the company agreed to acquire a collection of McClendon’s maps and artwork for $12.1 million. This is outrageous, not the least because Chesapeake shares are down about 70% from their July 2008 peak.

The package has everything to do with a screw-up by McClendon last fall when he was hit by a margin call and had to sell 94% of his shareholdings related to loans he had out. So the comp deal is an attempt to make him whole, and then some. Unbelievable.

--I worked on Wall Street, and I’m a conservative, but I can’t help but agree with the following from economist Paul Krugman of the New York Times.

“(There’s) no longer any reason to believe that the wizards of Wall Street actually contribute anything positive to society, let alone enough to justify those humongous paychecks.

“Remember that the gilded Wall Street of 2007 was a fairly new phenomenon. From the 1930s until around 1980 banking was a staid, rather boring business that paid no better, on average, than other industries, yet kept the economy’s wheels turning.

“So why did some bankers suddenly begin making vast fortunes? It was, we were told, a reward for their creativity – for financial innovation. At this point, however, it’s hard to think of any major recent financial innovations that actually aided society, as opposed to being new, improved ways to blow bubbles, evade regulations and implement de facto Ponzi schemes.

“Consider a recent speech by Ben Bernanke, the Federal Reserve chairman, in which he tried to defend financial innovation. His examples of ‘good’ financial innovations were (1) credit cards – not exactly a new idea; (2) overdraft protection; and (3) subprime mortgages. [I am not making this up.] These were the things for which bankers got paid the big bucks?”

--Starbucks reported that same-store sales fell 8%, worldwide, though in the U.S. in the first quarter the figure was 10%.

--We note the passing of Portfolio, a terrific publication from Conde Nast. Along with The Atlantic, the two best magazines out there. Sadly, ad pages at Portfolio fell 61% in the first quarter compared to an industry-wide decline of about 26% for the period. Evidently, the employees at Portfolio were treated like merde.

--Along the lines of the above, for the six months through March, weekday circulation for 395 U.S. papers dropped an average 7% from the same six months a year earlier. The Wall Street Journal was the only one among the top 25 to actually increase circulation and is now slightly behind USA Today (off 7.5%) for the No. 1 slot.

[Yikes…the New York Daily News and New York Post saw their figures plummet 14.3 and 20.5 percent, respectively.]

--The Journal did a superb job in breaking the story of Newport Beach, Calif., money manager Danny Pang and his suspected Ponzi scheme. After running a series of pieces on Pang raising suspicions, the SEC filed a complaint against him and froze assets under his control. Pang pawned himself off, mostly to Taiwanese investors, as being a former executive and investment banker at Morgan Stanley, claims that were false.

--In a rather significant development for New York City apartment residents, 90,000 units purchased at the height of the bubble by speculators in the hopes of selling the buildings for hefty profits may in turn go into foreclosure, leaving renters out to dry.

--Note to reader Chris C. Hope you saw the piece on Scotland placing a big bet on tidal and wave power in the Journal (Chris is always pounding the table on this one). Scotland has a goal of achieving 40% or more of its electricity needs from such marine power but some of the technological challenges are daunting, including developing equipment that can withstand the punishing environment off the coast, let alone the inability to obtain credit for such projects these days.

--Deflation Alert: The Yankees slashed prices in half on some of their top-end tickets.

--As reported by Cari Tuna of the Wall Street Journal, Intel avoids blogs and Twitter for investor issues, because it fears violating SEC disclosure rules or inviting public criticism in a company-hosted forum.

“Employees’ online chatter has created problems elsewhere. Two Texas lawyers last year sued Cisco Systems Inc. and an employee for defamation after the employee in a blog accused the pair of criminal activity in a case against Cisco. The case is pending, and the employee left Cisco voluntarily later last year.”

--The FDA warned consumers to stop using Hydroxycut, the weight-loss product with the ads of those sexy ‘after’ shots of buxom girls in bikinis.

--In the latest study on the benefits of statins (such as Lipitor and Crestor), findings presented at the meeting of the American Urological Association conclude statins may protect men against prostate cancer and other urological problems. You know that super pill they are talking about, the one that includes low doses of statins (as well as aspirin)? Speed up development of it. And I’m thinking McDonald’s should put statins in their burgers and fries. I don’t need anymore convincing of the benefits.

--A Dutch study published in the Journal of Epidemiology and Community Health (don’t subscribe to this one) concludes half a glass of wine a day may add five years to your life, while drinking beer adds 2 ½ years. However, the amount of beer is like a thimbleful. Time to get going on my development of Statin Beer.

Pakistan: It’s about the nukes, and for now Secretary of State Hillary Clinton said “we have very adamant assurances from the Pakistani military and government” that Pakistan’s nuclear security is “safe. But that’s given the current configuration of power in Pakistan,” she added. President Obama echoed these basic sentiments at his press conference on Wednesday.

George Perkovich, head of the Nonproliferation Program at the Carnegie Endowment for International Peace, told Radio Free Europe/Radio Liberty:

“I would say that I thought [the militant threat] was exaggerated – that there were 10 or 12 other (threats) in Pakistan that were more probable and were also very grave – (but) it’s gotten much worse in the last few years, and you have a sense of parts of Pakistan now becoming ungovernable by the Pakistani state.

“Today I’m feeling like we really, really have to focus on the nuclear danger in a way that I wouldn’t have said was the case until recently. It’s not an exaggeration to say that there is a risk.

“The civil government is not relevant to the control of nuclear weapons in Pakistan; it is entirely an army issue. We do have a strong sense that (Pakistan’s nuclear weapons) are controlled by elements in the army that have been selected and are reliable. As long as that control by this current military leadership remains strong, then I think one can have pretty good confidence that these weapons won’t be used crazily.”

Seth Jones of the RAND Corp. has visited Pakistan’s weapons sites and compared them to “what one might see in China or, frankly, the United States.”

“Where one might get concerned,” adds Jones, “is elements of the A.Q. Khan network that were involved in building Pakistan’s atomic capability – a range of scientists that have proliferated nuclear material to North Korea, Iran, and several other places. We know in the past that there have been talks between members of the A.Q. Khan network and militants, including al-Qaeda, several years ago. So is it possible that some technology at some point falls into the hands of terrorists? I think that’s a more likely scenario than actual nuclear weapons coming out of [the Pakistani army’s] control.”

General David Petraeus, the head of the U.S. Central Command, told a congressional panel that the Pakistani government must focus on the insurgency within their borders and forget the long-time rivalry with India. “The most important, most pressing threat to the very existence of their country is the threat posed by the internal extremists and groups such as the Taliban and the syndicated extremists.” [Financial Times]

Admiral Michael Mullen, the Chairman of the U.S. Joint Chiefs of Staff, added his voice to the chorus that Pakistan was moving closer to a tipping point with its army at risk of being overrun by the Taliban.

Needless to say, the Pakistani government is under extreme pressure from Washington, which has been sending it $billions in aid since 9/11 in particular to fight the Taliban, which the army finally did this week, pushing the militants back into their new, Swat Valley stronghold where the Taliban terrorizes women, including dumping the bodies of professional ones into the town squares. The Taliban is nothing less than the face of the Devil, and it’s disheartening to know that the chief nation tasked with defeating them, Pakistan, is a corrupt, inept hellhole. I said last week that the Taliban, in moving to within 60 miles of Islamabad, before pulling back, had proved its point. It can operate virtually unimpeded anywhere it wants, and will continue to pick its spots. The Obama administration, including by extension Petraeus and Adm. Mullen, is doing the best it can given the cards its been dealt, but it seems clear to your editor more aggressive military action on our part will be necessary in the near future…aside from using the assets we already have on the ground there.

I do have to add a comment I just read from the New York Post’s Ralph Peters, a superb military analyst. One issue in Pakistan is that “Many senior Pakistani officers just don’t want to fight against ‘their people.’…The generals don’t want to fight a civil war. Yet, that reluctance may be what will bring about a catastrophic civil war. To defeat the Taliban would take a lot of killing. Pakistan’s military could do it. But it would be bloody and hard. And part of the military doesn’t want to do it.” What a mess.

Israel: Prime Minister Netanyahu holds a critical first meeting as Israel’s new leader on May 18 at the White House. Netanyahu and Foreign Minister Liberman are seeking a new “diskette” for Israeli foreign policy, including on the Palestinian issue, where they are seeking Washington approval for a more gradual program of reconciliation that could then begin to flourish. Netanyahu has long favored “economic” peacemaking with the Palestinians, first.

But at the same time it’s still as much about the settlements! According to reports, Secretary of State Clinton was startled, and depressed, by what she saw in her recent tour of the West Bank, and Clinton, no longer having to deal with her own personal political dynamic as a senator from New York, is not happy with Israel’s position of humiliating the Palestinians.

“I hear that Clinton was shocked by what she saw…This is not surprising. The transition from Israel’s first-world hustle-bustle to the donkeys, carts and idle people beyond the separation wall is brutal. If Clinton cares about one thing, it’s human suffering.

“In fact, you don’t so much drive into the Palestinian territories these days as sink into them. Everything, except the Jewish settlers’ cars on fenced settlers-only highways, slows down. The buzz of business gives way to the clunking of hammers.

“The whole desolate West Bank scene is punctuated with garrison-like settlements on hilltops. If you’re looking for a primer on colonialism, this is not a bad place to start.

“Most Israelis never see this, unless they’re in the army. Clinton witnessed it. She was, I understand, troubled by the humiliation around her.”

And so the White House wants Netanyahu to act quickly on Palestinian peace efforts, but Israel’s new leadership is loath to do so.

It’s also all about Iran, and Clinton told a congressional committee recently: “For Israel to get the kind of strong support it is looking for vis-à-vis Iran, it can’t stay on the sidelines with respect to the Palestinians…They go hand in hand.”

So it’s no wonder that many Israelis are uneasy these days. They no longer have carte blanche with Washington. For their part, the Palestinians, and any unity government that may emerge, must start by renouncing violence and recognizing Israel’s right to exist.

As for Iran, Israeli Defense Minister Ehud Barak compared it to a master chess player in its drive for a nuclear program.

“The Iranians don’t play backgammon, they play chess and in fact they invented the game,” said Barak, himself an avid chess player, in an interview with Haaretz. “They are proceeding with far greater sophistication and are far more methodical.”

Barak has recommended to the Obama administration that any coming negotiations between the U.S. and Iran over the nuclear issue be limited in time, “accompanied by ‘soft’ sanctions such as limitations on money transfers while preparing the ground for harsh sanctions that involve authorizing action afterward,” said Barak. “This has to be done in deep cooperation with the Russians and the Chinese and we say we are not removing any option from the table.” [Daily Star]

[As an aside, I saw a note on Israel’s population, according to the latest census data there. 75.5% of Israelis are Jews, 20.2% Arabs. The total population is 7,411,000.]

Egypt: President Hosni Mubarak issued a stern warning to Iran and Hizbullah. Don’t mess with Egypt’s stability…a response to the recent arrests of suspected Hizbullah agents in his country.

“The Arab region is passing through a delicate and hard stage…and facing the threats of known regional powers that embrace terrorism and extremism and clearly brag of animosity to peace. After these powers and their hirelings have encroached on Egypt’s security and sovereignty, I say clearly that I don’t allow this and will not tolerate those who try to tamper with Egypt’s security and stability.” Mubarak did not mention Iran or Hizbullah by name. No need to. [Jerusalem Post]

Lebanon: I was pleased by a surprise visit Secretary of State Clinton paid here the other day. While she only met with President Suleiman, this was totally appropriate ahead of the critical elections on June 7 that could see a Hizbullah-led sweep into power. Clinton could not meet pro-West Prime Minister Siniora for fear of being seen taking sides. Hizbullah is doing all it can these final weeks to look moderate so as not to scare anyone.

When you read stories on the election, it can get a bit confusing. Just understand the “March 14” political forces are the good guys. The “March 8” coalition (with Hizbullah at the head) represents the bad guys. Former assistant Secretary of State for Near Eastern affairs during the Bush administration, David Welch, warned against the U.S. overreacting should Hizbullah win, and instead continue to promote Lebanese sovereignty as the primary goal.

But when it comes to the vote, a new element was introduced, that being the release of four Lebanese generals who had been held as suspects for 44 months as part of the assassination of former Primer Minister Rafik Hariri. The four were released after a UN court ruled there wasn’t sufficient evidence to continue to hold them. Pro-Syrian Hizbullah supporters celebrated in Beirut.

The generals were suspected of planning the assassination and carrying out other terrorist acts in support of Syria and, now, Damascus can use the decision to say, ‘See, we told you we had nothing to do with the hit.’

Some of you know this particular issue strikes a chord with me, having filed past Hariri’s casket two months after the February 2005 terror attack that killed 22 others.

“Significantly, MP Saad Hariri, the son of the man whose assassination lies at the heart of the matter, made an emphatic response immediately after the decision, calling on the Lebanese to continue to support the Tribunal’s work….

“We should listen to Hariri’s response carefully: The Tribunal and its decisions should be supported, and we’ve seen that its work is not politicized. He said that Wednesday’s decision didn’t mean that guilty parties have escaped punishment. But Hariri also reminded us that the assassination wasn’t a ‘traffic accident,’ and that it was an organized crime, one for which someone, and likely more than one person, should ultimately be held responsible.”

Iraq: The U.S. death toll of 18 in April was the highest in seven months. Disconcerting.

Afghanistan: Details are just emerging of an attack here that killed five NATO soldiers, including three Americans.

China: The H1N1 virus has helped in one major respect on the geopolitical front; China has finally allowed Taiwan to attend the UN-sponsored World Health Assembly in May. I have railed in the past on how it was criminal that China prevented Taiwan from being an observer at the WHO. Recall that 170 nations recognize China, while only 23 still treat Taiwan as an independent entity. Back in 2003, Taiwan was excluded at the height of the SARS epidemic. This week Chinese officials promised to cooperate with Taiwan on H1N1.

There was another highly encouraging development on the commerce front in looking at relations between the two. China Mobile took a large stake (12 percent) in Far EasTone, one of Taiwan’s leading telecom services companies, “the first direct investment on the island by a mainland state-owned company in six decades,” as reported by the South China Morning Post. This is hugely significant, and for selfish reasons, seeing as I have a large position in an investment on the mainland, should lead to similar arrangements. [Taiwan’s stock market celebrated by rising almost 7%, the biggest single-day rally in 18 years.]

But not everyone is happy. Pro-independence parties on Taiwan, in particular, are exceedingly leery of any moves by Beijing to increase its political and economic influence, including, in the case of deals like China Mobile’s, the ability to get their hands on the island’s core technology.

Separately, last week I mentioned how encouraging it was that there had been little unrest in China despite the economic turmoil. On Tuesday, the Journal noted the following in a column on the huge number of China’s graduates who are flooding a weak labor market.

“Although this year marks the 20th anniversary of the student-led Tiananmen Square protests, few seem ready to take to the streets. Instead, a sense of gloom is pervasive. Jane Yang, a 21-year-old English major here, nicknames herself ‘Cheer-up Jane’ because she’s so pessimistic about the future.

“ ‘There are no job prospects for someone like me,’ she said during a quick meal at the school’s cafeteria. ‘I think I’ll just go to grad school.’”

Hang in there, Jane. The future is not so bleak. And you’re helping to show some of us an emerging maturity as a nation. [Typed the editor with fingers crossed…a neat trick.]

North Korea: These guys really are a total pain in the ass, to be undiplomatic about it. While the people scrounge up leaves from any tree limbs not turned into firewood for some leaf soup, the leadership threatened a new series of nuclear and missile tests unless the UN Security Council apologizes for imposing sanctions. Alas, we can’t just ignore Lil’ Kim, as between Iran, Pakistan and North Korea, the odds are great that some very bad characters outside the formal government apparatus at each already have significant technology and/or materiel. Plus Kim is holding the two American journalists, Laura Ling and Euna Lee, just as Iran has imprisoned Roxana Saberi. It’s also clearer than ever that on all matters related to Pyongyang, only China at this point can have a real impact on issues of importance to the United States.

Russia: In the latest episode of “CSI Kremlin,” Interpol said it has placed State Duma Deputy Adam Delimkhanov on its international wanted list at the request of Dubai police, “who accuse him of masterminding the murder of Chechen commander Sulim Yamadayev there last month,” as reported by the Moscow Times. As long as the guy stays in Russia, nothing will happen to him.

Speaking of Chechnya, just one week after saying its military operations here were over, Russia launched new counterterrorism ops after three federal soldiers were killed there last week.

As for Russian President Dmitry Medvedev, Newsweek reports that he has begun to overturn some of Prime Minister Putin’s key policies, including some of the more repressive ones, while listening to government critics instead of trying to silence them. But before we get too carried away over “Medvedev’s Moscow Spring,” there has been zero change in Russian foreign policy, with Putin maintaining his iron grip. I’m actually more convinced than ever that a third figure may yet emerge here. The knives will be increasingly exposed on both sides and we’ll then learn the identity of the puppetmaster. Kind of like a ‘24’ episode, actually.

We do congratulate the Russkies, though, on the capture of a Somali control vessel with 29 suspected pirates. The problem is, what to do with them? Russia has no handover agreements with the likes of Kenya or Tanzania. So perhaps the pirates will accidentally be thrown overboard into a school of sharks.

Netherlands: A 38-year-old man drove his car into a crowd of spectators at a parade honoring the Dutch royal family and killed five. The suspect died later of his wounds. Thankfully none of the members of the royal family were hurt in what is being treated as an assassination attempt. There were no indications, though, that the incident was a terror attack.

Britain: The Tories (Conservatives) have a 19-point lead over Prime Minister Gordon Brown’s Labour Party, 45-26, these days, with the Liberal Democrats at 17%. So the name David Cameron, leader of the Conservatives, could become far more familiar should elections be held in 2010 as looks likely.

Cuba: Never mind…don’t bother breaking out the champagne just yet, because Fidel Castro said on Thursday that the United States wants Cuba to act like a slave willing to “accept again the whip and the yoke.” Castro added, “The adversary should never be under the illusion that Cuba will surrender….Today they are willing to forgive us if we will resign ourselves to returning to the fold as slaves that, after knowing freedom, will accept again the whip and the yoke.”

Mexico: As if H1N1 isn’t bad enough, late Monday in Tijuana, seven police officers were killed in near-simultaneous attacks.

Italy: Prime Minister Silvio Berlusconi’s wife of 19 years condemned her husband’s plans to field some female beauties, including television stars and a former pageant queen, as candidates in upcoming European elections. Two years ago, Veronica Lario wrote an open letter to her husband demanding an apology after he was overheard telling a former topless model and variety show presenter that if he were single he would marry her on the spot. Now if you expect me to make any further comments on this topic, well, you’re just mistaken.

Iceland: So last Saturday night, as the polls closed at 10:00 p.m., I hit a pub in Reykjavik to view the election results with the locals and some ex-pats. It was fascinating stuff as six of the seven candidates immediately appeared on a panel to watch the results come in and comment.

In the end, the caretaker Prime Minister Johanna Sigurdardottir gained a victory as her Social Democrats will likely join with the Left Green Party to form a center-left coalition, this after conservatives had run things in Iceland for 40 years until they were booted out three months ago amidst the financial crisis. The prime minister has of course garnered some publicity for being the first openly gay world leader, and, as I was constantly reminded on my Icelandair flights to and from Reykjavik, she is a former flight attendant at the airliner.

The prime minister now wants to take Iceland into the European Union as part of the economic recovery plan and adopt the euro, but only half the people in this highly independent nation of 320,000 want to give up their sovereignty to a bunch of bureaucrats in Brussels, so it will be interesting to see how this shakes out. It’s hoped by Sigurdardottir that a referendum on EU membership could be held in 12-18 months and, if approved, the adoption of the euro would take place in about four years.

But a big reason why many will balk is the issue of fishing rights. As a member of the EU, Iceland would have to share some of their existing territorial waters, and there would be pressure on the amount of cod that could be taken, let alone quotas on whales. [Iceland takes 100 minke and 150 fin whales each year, last I heard. By the way, whale tastes like buffalo.]

And a few personal observations from my stay here. I have never seen such excessive use of credit. It’s easy to see how the nation became so indebted because I never saw anyone pay for anything (except at a hot dog stand) with other than a credit card. And consider this, as related by Robert Jackson in the Financial Times.

“Iceland is the only country in the world that indexes its loans in addition to charging interest. This means that when Icelanders borrow Kr1,000 (Krona) from the bank and inflation increases by 5%, the bank increases their debt to Kr1,050 at the end of the year. A great deal for the bank and fine for you, too – so long as the property’s value and your salary are increasing by inflation and more. The majority of Icelandic mortgages are based on this punitive system and with inflation running at nearly 20%, they will see their Kr1,000 loan turn into a Kr1,200 loan. The interest burden will increase proportionally. This is bad enough but when coupled with falling housing prices, it means that many face a particularly savage variety of negative equity.”

Think about that. It’s absolutely staggering. Add in the fact the three banks running the show encouraged older investors to put their money into higher-yielding money-market accounts (that were in turn investing in the stock market) and picture the collapse in the value of most pension funds. No wonder there was a lot of anger last fall that ended in the government being thrown out. [The current prime minister was actually part of the old government, but as Social Affairs minister avoided criticism.]

It also needs to be noted that the vaunted “Viking Raiders,” as the nouveau-riche bankers were called, largely absconded with $10s of millions (in some cases far more) and fled the country when the economy rolled over.

Then you have the case where a large amount of the foreign funds flowing into the three Icelandic banks that had the high savings yields were from Britain, including many a charity. Iceland’s government and banking authorities initially guaranteed Icelandic deposits up to a fairly minimal level (by U.S. standards), but wouldn’t do the same for, say, British holders. So the British government used anti-terror legislation, literally, to freeze the assets of the Icelandic banks, that had in turn been buying up many of Britain’s top retail establishments, for one. Icelanders viewed the use of terror laws as being hateful and unnecessary. Frankly, I wonder if the EU really wants Iceland, but for clues we’ll look no further than Britain and the stance on membership it ends up taking.

But I have what I believe to be some pretty good insight here as to the character of Icelanders. On Saturday the weather was great and I had an opportunity to walk all of Reykjavik, including the two main commercial districts…one filled with classic retail and restaurants, the other art galleries and craft shops.

Despite a crisis that has seen unemployment rocket from 1% to almost 10% at last count, I did not see one…not one…empty or boarded up store front. I also don’t recall seeing anyone holding a shopping bag. This is a place that by my reckoning remains in a total state of denial. [The credit purchases I referred to earlier were largely for necessities.]

Iceland is a classic example of Lake Wobegon, where everyone was above average. Then the bubble transformed everyone to well above average, and now we have the flip side. There are certainly lessons to be learned here and I hope to return in two years to see how well they’ve done with their studies.

I do want to conclude, however, that these are some of the nicer people in the world that I’ve come across and I wish them the very best.

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