Week in Review 
For the week 6/29/2009 - 7/3/2009
Brian Trumbore
President/Editor, StocksandNews.com

Wall Street

I know I’ve used this before, but I couldn’t help but think again of the Buck Owens / Roy Clark lyrics, “Gloom, despair and agony on me…Deep, dark depression, excessive misery…” Only when the two sang this song on “Hee-Haw,” it was kind of funny. These days it’s far from so. In fact, it really sums up the attitude among many these days. It’s tough to celebrate a great holiday like the Fourth of July when you’re unemployed, and/or you’ve seen your life savings decimated in the crash. I’ve certainly suffered my share of pain with some of the investments I made and I’m cutting back in a few areas like everyone else is. One I’ll admit to involves my golf club, a luxury I frankly haven’t used enough due solely to time constraints. So I reduced myself to a ‘social member’ from a full one. All it means is I’m limited to 10 rounds a year when in the past I wasn’t playing more than 10 rounds to begin with (I normally go to Ireland once a year for more golf). Yes, you could say what I was doing before was idiotic, and with a simple move I’m saving a substantial amount each month. We’re all doing things like this, but I also can’t ignore the fact that in my case, a job at the club could be in jeopardy. And if, say, my portfolio turned around and a few other things happened with the business, would I suddenly then become a full-time member again? No.  

And therein is an example of the “new normal” many of you have been hearing about a lot lately, particularly if you follow the financial markets closely. The new normal, as expounded on by the likes of Bill Gross and Mohamed El-Erian at my old employer, PIMCO, is about this new era we have entered; one of drastically reduced expectations, such as 1-2 percent growth for years to come, not 3-4 percent. That means, most importantly to many of you, that when the recovery finally arrives, the unemployment rate that has now soared from 4.8% to 9.5% in just 16 months (staggering), won’t just simply reverse itself and go from, say a peak of 10.0% back down to 5.0%. Hardly. The new normal crowd, instead, has us going to 8.5% to 9.0% instead. That’s it. That’s depressing. 

But these are long-range forecasts and I have always just gone year-to-year when it comes to this column and my own economic fortune telling. I’m not prepared to state my own case for 2010 as yet, and while I’m not changing my tune on where the equity averages finish 2009, up strongly, I have been careful to say zippo about next year. So don’t count me in, or out, as yet when it comes to the new normal camp. I just may have to take a hike on the Appalachian Trail to clear the old head before coming up with my latest theories. Oops…maybe not. Perhaps a quiet week at the Jersey Shore, except last time I did that, last September, it ended up being the most chaotic week in Wall Street History and rather than walking the beach for hours on end, I was glued to CNBC. But I digress. The bottom line for now is that the groundskeeper whose job I may have cost at the club isn’t likely to get it back anytime soon. And that’s sad. 

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I said a lot last week when it comes to the economy and I’ll try and keep this segment mercifully brief. The big news was the June employment report, a loss of 467,000 jobs when minus 350,000 was expected. The unemployment rate ticked up from 9.4% to 9.5%. But this is a volatile figure and if you average out the past two months the picture, as bad as it is, is measurably improved from January. Coupled with data that was generally in line with expectations on construction spending (-0.9% in May), factory orders (+1.2%) and manufacturing (ISM 44.8 for June), it all added up to more of the same…the economy, basically around the world, has bottomed, but with one or two exceptions, such as in China, there is no actual growth. Without growth, you won’t have rising earnings, and without rising earnings, or, importantly, the expectation of same, equity markets will have a very hard time advancing much from current levels. I just have to reiterate from last week, though, that good news (not just ‘less bad’) is coming and when it hits, look out…which is the total essence of my market forecast; ‘sentiment trumping fundamentals’ at the end of the day. 

This was also a week when California began handing out IOUs, payable in October, thanks to a budget deficit of $24 billion, a revenue stream that in the 11 months thru May is $13 billion less than year earlier levels, and an impasse in Sacramento on further budget cuts. On a smaller scale, you have similar situations in many state capitals. It’s the revenue shock that is the killer. Many governors, for example, from both parties, have finally been facing the facts but then they get hit with the second whammy. 

On the housing front, the S&P/Case-Shiller index for April (I really don’t understand why these guys can’t be more current) did provide a shred of better news. While the index of 20 major cities was down 18% year over year, this represents a continuing improvement of sorts, as the numbers earlier in the year were far worse. The median home price for this index is now down 33% from the 2006 peak. But on the other hand, as the New York Times pointed out, the Obama administration’s plans to modify mortgages have been a bureaucratic disaster, this as delinquencies on prime mortgages continue to rise. 

Speaking of the Obama folks, if you think the $787 billion stimulus program is working as intended, you’re nuts…or your interests are highly parochial. Stimulus plans elsewhere around the world, such as in China and South Korea, are working because they are targeting the consumer…period! I, and countless others, said at the time it was passed that it wouldn’t work and it hasn’t. No more than 15% of the funds have gone out the door, for starters. What the hell was the purpose of it, then? Many of the programs contained in the program are fine…but should have been part of the normal, long-range legislative process. But stimulus? Are you kidding me?! Obama’s approval ratings will continue to slide largely because of this single topic…and deservedly so. He had a tremendous opportunity and he blew it. Shovel ready my butt. You and I, in all honesty, have no idea whether the highway projects we’re being routed around are just part of the highway trust fund we’ve been paying into for years…or something entirely new. Oh sure, our politicians cut a ribbon with some hard hats behind them and post a sign saying that the stimulus program was responsible for “saving” or creating new jobs, but it certainly looks to me like many of these same projects were already on the drawing board. Look, I wanted these infrastructure projects as much as the next guy, only I don’t get a sense that what we’re seeing on our nation’s highways and byways is anything more than what we normally see this time of year. 

Turning to some items on the global economy, as noted China’s news continues to be solid. Not super but pretty good, and these days pretty good is the new “Awesome, Dude!” The purchasing managers index (PMI) for June was 53.2, above the 50 dividing line between growth and contraction, though only a tick higher than May’s 53.1. And China has a new key barometer closely followed by many market watchers, power output, which for June was up 3.6% from a year earlier, though part of this increase is due to a heatwave. Nonetheless, if this figure is growing, that generally means the overall economy is as well. 

In India, the PMI for June was 55.3, though below May’s 55.7, while in Hong Kong the PMI was 47.1, but up from May’s level. 

In Japan, indicators on business confidence are still way down as the outlook remains poor for capital spending, but the government is sticking with its forecast that better times are in the not too distant future. 

South Korea said factory production was up for a fifth month in a row, and the reading on exports, while down 11% in June, was better than expected. But on the other hand, Australia’s PMI was just 38, the 13th straight month below 50 there. 

Over in Europe, eurozone retail sales were down a 13th straight month and unemployment hit the exact same 9.5% level as here in the U.S., though the euro figure is for May, not June. But if you’re in the camp that says inflation is a huge issue down the road, understand that the CPI in the eurozone fell 0.1% in June, year over year, the first time this has happened since 1953! 

[Reader Josh P. and I were comparing notes on deflation the other day and it still comes down to wages…as in you can’t convince me I should sleep with one eye open in fear the inflation bogeyman will appear at my door when, as economist David Rosenberg pointed out, wages and salaries have been flat or down for 9 months in a row.] 

But back to Europe, Ireland’s GDP fell a record 8.5% in the first quarter as consumer spending plummeted an amazing 9.1%. 

Some final thoughts: 

China keeps rattling the cage on finding an alternative to the dollar, but I’m sleeping like a baby on this one. Will I change my tune next year? Maybe…but right now I’m far more concerned about my Mets staying in the playoff chase through the summer before their inevitable September collapse. 

I am, however, concerned about China’s recent protectionist actions and this is where someone like Paul Volcker could be a huge help…only I suspect some in the White House (read Larry Summers) don’t want to cede too much of the spotlight to Tall Paul. Volcker has the kind of stature the Chinese respect. 

Lastly, I continue to watch the global progress of the H1N1 virus closely and there was a slew of news on this front this past week as the World Health Organization met in Cancun (a well-deserved show of support to the poor Mexican government, which could use a break or two these days). The WHO said the spread of the virus is unstoppable…BUT…it remains mild. There are, though, pockets in the Southern Hemisphere (where it’s winter, remember) that are very troubling, such as in Argentina, where the health services are being overwhelmed as the death toll rises in Buenos Aires, now in excess of 30, and over 40 nationwide. 

This is what bothers me, and should all of you. The flu strain is mild, the global death toll is infinitesimal (China just recorded its first fatality, for instance), but a second wave is on the way and some German scientists are concerned they are seeing signs the virus is mutating. 

So it’s likely to come down to health services. During New York City’s brief panic of about two months ago, many of the hospitals were totally overwhelmed. Should H1N1’s second wave hit with a vengeance, it will dominate the nightly news coverage and that, friends, will be a killer for consumer confidence, for starters. The WHO may recommend travel bans and various governments could be forced to comply, right as the global economy is beginning to recover. 
In my early missives on this topic there was little to worry about. Government officials, and the WHO, largely acted responsibly given what we knew and the virus has been highly manageable. Few of you, I imagine, have given it a second thought. But it’s still very much out there and it remains a potential game changer when it comes to the markets. Depending on how the next month or two goes, I reserve the right to change my equity predictions for year end as a result. 

Need further proof? A good friend of mine in Massachusetts said his daughter had flu symptoms for two days and he called the doctor. The doctor’s nurse said matter-of-factly, ‘She probably has swine flue…but it’s mild…don’t worry about it.’  My friend wasn't necessarily reassured.

Street Bytes 

--The first three days of the holiday-shortened week were fine, but then Thursday’s labor report led to a selloff and the major averages all took a header, with the Dow Jones finishing off 1.9% to the 8280 level. The S&P 500 lost 2.4% and Nasdaq declined 2.3%. For the year the S&P is now back in negative territory, joining the Dow. Earnings for the second quarter will begin to trickle out this week and we’ll all be reading the accompanying statements for clues as to the third quarter’s potential strength on any inventory-led rebound. 

--U.S. Treasury Yields 

6-mo. 0.29% 2-yr. 0.98% 10-yr. 3.49% 30-yr. 4.32% 

Bonds rallied on the generally disappointing economic news, particularly the June employment data, but the real test is the coming week, with the Treasury trying to pawn off $73 billion in securities. 

--Seven more banks were seized this weekend, bringing the total to 52 for the year, the most since 1992, though the good news is the FDIC has been handling the closures seamlessly. The system does work.  

--U.S. District Judge Denny Chin, in sentencing Bernard Madoff to 150 years, said: 

“This is not just a matter of money. The breach of trust was massive. Investors – individuals, charities, pension funds, institutional clients – were repeatedly lied to, as they were told their monies would be invested in stocks when they were not.” 

In dismissing Madoff’s pleas for leniency, Chin added: 

“ I simply do not get the sense that Mr. Madoff has done all that he could or told all that he knows. 

“Here, the message must be sent that Mr. Madoff’s crimes were extraordinarily evil and that this kind of irresponsible manipulation of the system is not merely a bloodless financial crime that takes place just on paper, but it is instead…one that takes a staggering human toll.” [AP] 

Incredibly, Judge Chin said not one letter of support for Madoff, vouching for his character, was submitted to the court. All were in agreement, especially Chin, that they had never heard of this before. Not one supporter…in the world. 

Nine victims were allowed to address Madoff before Chin’s ruling, describing Bernie as a “monster” and a “psychopath.” 

For his part, does anyone really care what Madoff said? I didn’t think so. And it’s hardly important for my archives. It does appear, however, as if another 10 people are going to get charged in the $multibillion fraud. 

As for Ruth Madoff, she issued a statement trying to convince us of her innocence. “Like everyone else, I feel betrayed and confused. The man who committed this horrible fraud is not the man whom I have known for all these years.” Sure, Ruth; anything you say. On Thursday, U.S. Marshalls took over the Madoff’s penthouse apartment with Ruth’s new location unknown as I write…not that anyone gives a damn. 

--While dissident GM bondholders continue to try and wreck the automaker’s plans to emerge from bankruptcy by pressing their complaints further in court, June sales for the industry were generally a little better than expected, particularly in the case of Ford, down only 10.7%. GM’s were off 33.4%, Toyota’s 32%, Honda’s 30%, Nissan’s 23% and Chrysler’s 42%...Chrysler having ended fleet sales. The industry as a whole didn’t quite get to the 10 million annual rate at which most can supposedly operate profitably. By comparison, car sales were running at 16M before the crash.
 
--Despite the hue and cry, with the House having approved climate change (cap-and-trade) legislation, the Senate is not likely to pick it up until the fall (the Dems say sooner)  and this is one case where 60 votes will definitely be needed to overcome any Republican filibuster. [A task made easier as Democrat Al Franken was finally named the winner of the Minnesota senate race by the state’s supreme court.] The 219-212 vote in the House shows that passage is highly unlikely, at least in a form approximating what the House came up with. The Congressional Budget Office says the average household would be hit with a cost of $175 a year, but Republicans and industry groups say the real figure would be much higher. Personally, I just wish any legislation would focus strictly on anti-pollution measures, particularly for the coal industry, and establishing mandatory levels of Beano in all livestock feed. This doesn’t have to be real complicated. 

Of course what does complicate matters is international pressure, particularly from Europe, ahead of December’s big climate change showdown in Copenhagen. President Obama is determined to go there with something of substance to show his critics, though we all know the real issue involves the likes of China and India, which refuse to accept strict limitations that may impede their growth. [That said, China in particular is already forging ahead with major changes, including massive plans for the use of wind and solar; far greater than our own.] 

Conservative columnist Michael Gerson / Washington Post 

“With the cap-and-trade bill passing the House of Representatives last week by seven votes, the eight Republicans who supported it were bound to feel some rapid political warming. Conservative Internet and radio accused them of single-handedly passing President Obama’s ‘cap-and-tax’ legislation, which is a myth; House Speaker Nancy Pelosi probably would have forced the requisite number of Democratic votes in the absence of Republican backing. But these eight Republicans were still termed ‘traitorous.’ 

“It is typical that we praise independent judgment and political nerve in our elected officials – until they show those qualities. 

“Admittedly, this was not the best time to display conspicuous Republican environmental conscience. Obama’s ideological overreach on issues from the fiscal stimulus to health-care nationalization has put conservatives in a scrappy mood. The recession has brought the public’s economic anxiety into sharp focus and moved environmental concerns – droughts in the Sahel or floods in Bangladesh – into the hazy distance. And the House cap-and-trade bill itself was a riot of loopholes, concessions and offsets – legislative sausage-making with an excess of offal. 

“But none of these political considerations change an underlying reality. A serious concern about global climate disruption remains the broad (not unanimous but predominant) view of the scientific community, including the National Academy of Sciences….Climate disruption has become so rapid in some places that it is overwhelming the natural process of adjustment, reducing crop yields and leading to the extinction of species. Meanwhile, global carbon emissions are increasing faster than expected…. 

“Critics argue that carbon restrictions, even if fully implemented, would reduce global temperatures only by minor amounts, which is true. We are not going to regulate our way out of global climate disruption. The only eventual solution is technological – the ability to produce affordable, clean power on a large scale. 

“But conservatives seem strangely intent on ignoring the power of markets to encourage such innovation…. 

“It is perfectly legitimate to argue that the House cap-and-trade system is flawed beyond redemption – so complex and confusing that it only benefits regulators and the lobbyists who outwit them – and that Congress should start over with a carbon tax. 

“It is also legitimate to contend that, while the cap-and-trade system is flawed, it is better than inaction and necessary to spur innovation. And for eight House Republicans who took this stand at great political risk, it is not only legitimate – it is admirable.” 

--Crude oil finished the week well below the $70 mark, closing at $65.63 as the International Energy Agency cut its five-year forecast for global demand due to the deep recession, predicting consumption wouldn’t attain last year’s level of 85.76 million barrels a day until 2012. At the same time, with falling investment, the odds of a major price spike increase whenever the day comes that the global economy returns to a solid growth mode. 

That said, last week’s spike on Tuesday from $71 to $73.50 in the span of an hour was caused by a rogue broker for PVM Oil Associates, the world’s largest over-the-counter brokerage, costing the UK-based firm over $10 million to unwind the trades. In May, a Morgan Stanley trader, under the influence of alcohol, attempted to hide potential losses from his bosses through unauthorized trading in crude oil. 

--Wal-Mart gave President Obama’s healthcare initiative a boost as the company said it supports requiring employers to provide insurance to workers, a key to the Obama plan. The White House seeks to have all but small employers provide such coverage and heretofore, most large corporations were against the idea, saying it would force companies to cut costs and jobs. 

--California’s IOUs will pay an interest rate of 3.75%, or 3.70% more than your basic money market account these days. Not a bad deal…not bad at all.  

--On-again, off-again, on-again, off-again…China and the web-filtering software, that is. Beijing postponed the deadline for PC makers to include state-backed anti-pornography software on new products, following extensive pressure from both domestic business groups as well as the United States that Green Dam could compromise security. No doubt, though, Green Dam and this issue will be back in the not too distant future. 

--The price of a two-bedroom apartment in Manhattan fell 23% in the second quarter over year ago levels…to a median price of $1.27 million. Ergo, we still have a ways to go. 

--From Crain’s New York Business: “Bank robberies in the City surged 57% last year, and on Monday a City Council committee will review a proposed law requiring bank branches to install bullet-resistant ‘bandit barriers.’ Police Department officials say the measure will deter holdups, which rose to 444 in 2008. But some bank industry officials, fearful of the barriers’ impact on their interactions with customers, say there’s no evidence the barriers prevent robberies – and there is evidence they could transform nonviolent crimes into more dangerous situations.” [Interesting debate…but I have to side with the police.] 

--Speaking of bank robberies, Allen Stanford will remain in jail until his trial on charges he masterminded a $7 billion Ponzi scheme. James Davis, the CFO, intends to plead guilty within the next ten days to the charges facing him, and then through his cooperation Mr. Davis hopes to receive a reduction in his sentence. 

--Gannett Co., which owns 80 local dailies, is laying off an additional 1,000 to 2,000 workers, though none at USA TODAY. 

--Tuition and fees at private U.S. colleges and universities for the 2009-2010 school year will rise an average 4.3%, the lowest since a survey for such costs began in 1972-73. 

--Upscale skincare brand Crabtree & Evelyn filed for Chapter 11, though it hopes to restructure and reemerge with a sustainable business model. In the meantime, I recommend Ivory Soap, girls…it’s cheaper, sports fans. 

--“Upscale” is also an issue in the hotel business as travelers, especially the business variety, trade down and cut back on spending. There have been a number of articles, for instance, concerning the Four Seasons chain. The problem here is Four Seasons manages all of its properties and insists on control of all the costs, though these are taken out of hotel income, with the actual ‘owners’ having no control. So luxury operators such as this are loath to cut room rates or staff because they want to guard their reputation, while the owners drown in debt. And when the economy recovers, just how quickly will both leisure and business travelers return?  

--The current 30-year fixed mortgage rate of 5.32% in the U.S. is nothing compared to Hong Kong. Try 2.25% as the banks there attempt to juice demand, but at the same time their net interest margins are shrinking, which could in turn impede any recovery. 

--Developing or emerging markets now comprise 24% of world market capitalization, up from 18% at the start of the year, according to MSCI Inc. Investors also poured a record $26.5 billion into developing-nation stock funds in the second quarter. China’s market cap has risen from $500 billion at the end of 2003 to over $3 trillion as of this past week. 

--Australians have lost 36% of their net worth since the peak in Sept. 2007, according to the Bureau of Statistics, but this excludes real estate which has also dived during the same period. 

--Moody’s joined S&P and Fitch in lowering Ireland’s debt rating from AAA to double AA one, owing to the continuing deterioration in its fiscal position.  

--An FDA panel of 37 experts called for sweeping safety restrictions on Tylenol and other painkillers using acetaminophen, high doses of which can lead to liver failure, with 200 cases a year being fatal. The FDA itself doesn’t have to follow the recommendation but almost always does. For example, the panel says the maximum dose for Extra Strength Tylenol should be lowered from the current eight pills a day to an as yet to be determined level. 

--The Cod Are Back! The Cod Are Back! Stocks have increased 5% in the North Sea, and a body representing the seafood industry says there has been a 40% increase in the number of fish that have reached reproductive age. So fish and chips on me! [Pour a little vinegar on both the fish and fries…a cold adult beverage…] 

But lest some of us get too excited, at least those who are tired of eating gross farmed fish, “last year’s spawning was one of the lowest we’ve seen,” said Sam Wilding, of the Marine Conservation Society. And that’s your cod update for July 4, 2009. [London Times] 

--In another sign of our times, Sony Pictures pulled the plug on what was to have been a major film project, “Moneyball,” starring Brad Pitt and directed by Steven Soderbergh. One of the big issues these days is declining home video revenue, leaving A-listers such as Pitt with less leverage, as reported by Michael Cieply of the New York Times. 

But “Moneyball” was about Oakland A’s general manager Billy Beane and his methods in building a winning team. Pitt evidently liked the book of the same name and so the project proceeded, despite stumbles on the script, though I’m thinking, ‘How the hell would this make for an entertaining movie?’  

It also turns out that in an effort to save the flick, it was passed on to other studios, all of which passed. Or you might say, it’s like an “Entourage” episode, for those of you who watch that HBO series. 

--Lastly, we note the passing of Billy Mays. Together with sometimes-collaborator Anthony Sullivan, the two racked up more than $1 billion in combined sales, according to Fortune magazine. 

David Hinckley / New York Daily News 

“Billy Mays didn’t invent the art of the television huckster, but he rode it further than almost anyone who came before him…. 

“Exactly how Mays became the dominant brand in the TV sales game is hard to explain. He represented everything Americans say we don’t like about salesmen. At some point in most of his pitches, Mays would stop explaining why the product was good and go into hard-sell overdrive, his voice rising into a cross between a yell and a bark. 

“If you don’t buy this, you’re an idiot, he seemed to be saying. It might not have been pleasant, but it helped sell a lot of OxiClean. 

“He made a smart decision, it turned out, in going the hard-sell route…. 

“Some of the great attractions in rural America a century ago were medicine shows that would roll into town, serve up some song and dance and finish with a salesman, often a bogus ‘doctor,’ pitching a quack product like Hadacol, an alleged miracle cure-all that was really just cheap booze. 

“Billy Mays was in some ways the television incarnation of a medicine-show quack. He knew the product. More important, he knew the crowd.” 

Hadacol is just cheap booze?! But I thought…..

Foreign Affairs 

Iran: For now, President Ahmadinejad has successfully crushed the rebellion, but the opposition, led by Mousavi, fellow presidential candidate Karroubi, and former president Khatami vows to regroup and form a political party to give proof of voter fraud allegations. Mousavi, though, has been banned from direct contact with the public. Separately, Rafsanjani defended Supreme Leader Ayatollah Khamenei, somewhat, in praising his decision to look at the election results, but then they were once again ratified all the same with few changes. 

Separately, 9 local British Embassy staff were arrested, 7 released, and at last word the other two were to be put on trial for helping instigate the unrest. The head of the Guardian Council, Ayatollah Jannati, is spearheading this effort, which is particularly worrisome as he is another psychopath.  The European Union is preparing further sanctions in response.

Amnesty International and Human Rights Watch report that up to 2,000 may have been arrested and a number have simply disappeared. The Basiji, the volunteer Islamic militiamen who are nothing but illiterate thugs, have been going into homes, beating suspected protesters and destroying their property. 

U.S. News & World Report publisher Mortimer B. Zuckerman 

“The rigidity and thuggery inflicted by Iran on its own people are a mirror image of its approach to outsiders. And it is more than ever clear that this emanates from the supreme religious leader, Ayatollah Khamenei. In fact, we can now see two Irans: one that supports the determination of Khamenei and Ahmadinejad to transform the republic into an emirate in the service of the Islamic cause, another that yearns to be an ordinary nation under the rule of law. 

“We can hope that the sight of millions of protesters might, in the longer term, have some effect on the internal dynamics. In the meantime, what should our policy be? Former Prime Minister Tony Blair put it well: ‘Engaging with Iran is entirely sensible…The Iranian government should not be able to claim that we have refused the opportunity for constructive dialogue…The purpose of such engagement should, however, be clear. It is to prevent Iran from acquiring nuclear weapons capability, but it is more than that. It is to put a stop to the Iranian regime’s policy of destabilization and the support of terrorism.’…. 

“The danger is that Obama’s foreign policy direction puts him on the path to becoming Jimmy Carter 2.0. Carter took office with similar illusions about the Soviet Union, promising to cure our ‘inordinate fear of communism.’ He asked America to put aside its concern with traditional issues of war and peace in favor of the ‘new global issues of justice, equity, and human rights.’ He asserted that we had betrayed our principles in the course of the Cold War. The Soviet answer to that brave, new world was the invasion of Afghanistan in December of 1979, a single event that Carter described as teaching him more about the Soviet Union than any other since he’d been president. This from the same president who refused to supply tear gas to the shah of Iran to help him control the crowds that ultimately overthrew him. We do not need Carter’s naivete back in the White House.  

“While America must not neglect, as Obama suggests, soft power, it must not forget that there are hard and cynical leaders in places like Tehran. As one Egyptian leader put it to me in a play on Obama’s approach, ‘You need to deal with them with a clenched fist and not with a handshake.’” 

[A successor to International Atomic Energy Agency chief Mohamed ElBaradei has been selected…Japanese diplomat Yukiya Amano, who was supported primarily by the industrialized nations, but not so by the developing world which sees Amano and his supporters as seeking to block them from obtaining needed nuclear power for fear it will be used to support future weapons programs. Amano will be critical in any future dealings with Iran as well as North Korea.] 

Israel: Deputy Foreign Minister Danny Ayalon told Israeli public radio that Israel would not impose a complete halt on settlement construction on occupied Palestinian land as demanded by the U.S. “Israel will not freeze natural growth and suffocate the life of 300,000 Israelis who live in settlements in all legality.” Ayalon added that he didn’t believe the Palestinians were prepared to make any concessions and thus the stalemate continues. 

But U.S. Democratic Congressman Robert Wexler (Fla.), a key supporter of Israel, called for a moratorium on settlements in a visit to Jerusalem this week, saying it was “childish” to ask first that the Arab world normalize relations with Israel, though, “if the Arab world fails to deliver (on its end…such as in meeting security requirements), you can rightly say that all bets are off.”   

On the Iranian issue, I’ve been writing that an Israeli strike is now inevitable and should even be considered a ‘foreseen’ event, not an unforeseen one. This week, former U.S. ambassador to the UN, John Bolton, wrote in the Washington Post: 

“Accordingly, with no other timely option, the already compelling logic for an Israeli strike is nearly inexorable. Israel is undoubtedly ratcheting forward its decision-making process. President Obama is almost certainly not…. 

“In short, the stolen election and its tumultuous aftermath have dramatically highlighted the strategic and tactical flaws in Obama’s game plan. With regime change off the table for the coming critical period in Iran’s nuclear program, Israel’s decision on using force is both easier and more urgent.  Since there is no likelihood that diplomacy will start or finish in time, or even progress far enough to make any real difference, there is no point waiting for negotiations to play out. In fact, given the near certainty of Obama changing his definition of ‘success,’ negotiations represent an even more dangerous trap for Israel.” 

[One proxy Iran could use almost anywhere in the world is Hizbullah and there are new fears of a coming wave of terrorism provoked by reaction to the Iranian vote. It’s estimated, for example, that there are a startling 900 Hizbullah operatives in Germany alone, according to a fellow at the European Center for Democracy, Alexander Ritzmann. I’ve been saying for years that another spot to watch is Latin America with Iran and Hizbullah’s budding base in Venezuela. While Hizbullah emphasizes it is a Lebanese political party, of course its Iran- and Syria-supplied weapons are for “resistance” against Israeli interests.] 

Lebanon: Saad Hariri is this nation’s next prime minister. The son of Rafik has begun assembling a coalition cabinet. Hariri received 85 of the 128 votes in Parliament, including 14 from the opposition. General David Petraeus, head of Central Command, visited Beirut on Monday and said he saw “significant improvement” on the domestic front since he visited last year. Petraeus pledged further military and humanitarian aid. But Lebanese President Michel Sleiman told Petraeus he was disturbed that Israeli Prime Minister Netanyahu said the government in Beirut was accountable for any assault against his country if Hizbullah takes part in the next cabinet. Don’t look for the new government to confront Hizbullah on the issue of its arms. 

Iraq: U.S. forces completed their withdrawal from Iraq’s urban areas, even as U.S. officials concede that with Iran’s successful crackdown on opposition there, it has emboldened Tehran to support Shia extremists further in Iraq. All U.S. forces are to be out of Iraq by Dec. 31, 2011, per previous agreement, while President Obama has said combat troops will be gone by August 2010.  Vice President Joe Biden, however, on the scene yesterday in Baghdad, said the U.S. could become disengaged if Iraq descended back into sectarian warfare.

On the economic front, Iraq is having trouble concluding agreements for the right to invest in and explore for oil, the source of 90% of government revenues. Iraq badly needs foreign expertise but it is offering the companies enough of an incentive to make it worthwhile, there being huge costs involved in reviving old fields. 

Back to Iraq’s newfound sovereignty, Ralph Peters / New York Post. 

“Our effort in Iraq passed a major milestone today: Our troops are leaving the cities…. 

“Terrorists have already begun testing the new security arrangements. Iraqi forces won’t always pass with flying colors. 

“Yet this situation seemed a pipe dream not so long ago: Iraq’s security forces, serving an elected government, assume primary responsibility for the good order of their own country…. 

“Looking back over six years of good intentions, tragic errors, generosity, arrogance, partisan vituperation, painful deaths and ultimate vindication, two things strike me: the ever-resisted lesson that human affairs are more complex than academic theories claim, and the simple truth that most human beings prefer a measure of freedom to immeasurable repression…. 

“The ‘cradle of civilization’ is rising from the grave again. 

“Yes, sectarianism, old grievances, and the greed for power may deliver future crises – even an eventual civil war. An unnatural state with grossly flawed borders, Iraq has more obstacles to overcome than any of its neighbors except Lebanon. 

“But our achievement remains profound: We gave one key Arab state a chance at freedom and democracy. We deposed a monstrous dictator who butchered his own people and invaded two foreign countries. And we didn’t quit, despite the scorn of the global intelligentsia. 

“Human events aren’t linear, nor do they conform to political programs. In Iraq, unintended consequences ultimately gave us an unexpected victory…. 

“And it’s a day of vindication for a former president who saw clearly, but spoke poorly (to the delighted mortification of the media). 

“Now we have a president who expresses himself beautifully, but seems blind to international reality. And it’s up to him to determine whether Iraq was a new beginning or a dead end.” 

[As an aside, this week we learned that Saddam Hussein, in interviews with the FBI before he was hanged, admitted he let the world believe he had weapons of mass destruction to protect Iraq from Iran, Saddam not wanting to appear weak.] 

Afghanistan: The U.S. launched its largest offensive by far of the war, as some 4,000 Marines and 650 Afghan soldiers invaded the Helmand River valley, the heartland of the Taliban and the world’s biggest opium producing region. The U.S. general in charge said the goal was to “go big, go strong and go fast.” 

North Korea: The Commies fired off 4 short-range missiles, then 6 Scuds with a range of about 300 miles, but as of this writing were showing no signs of launching a long-range ballistic missile. The Financial Times reported that Kim Jong-il’s anointed successor, 26-year-old son Kim Jong-Un, spent a top-secret week in China in mid-June to establish his credentials there and assure the North’s key ally that there will be a smooth transition of power. The younger Kim has apparently been given the title “bright leader,” following in the tradition of the label accorded his father, “dear leader,” and his grandfather Kim Il-sung, “great leader.”  [I would have opted for the title "erudite leader."]

Russia: Big week ahead as President Obama travels to Moscow to meet with both Prime Minister Putin and President Medvedev, though the key summit is between Obama and the latter over reducing nuclear missiles, as well as disposition of the U.S. missile defense shield. Medvedev will hit back hard, even if Obama says he is reconsidering the shield, while Obama will pressure the Russians on energy, especially the ongoing issue over the flow of Russian gas through Ukraine; 80% of nat-gas giant Gazprom’s shipments to Europe. 

But even as both sides agree to reduce their nuclear forces to 1,500 warheads each, down from the current ceiling of 2,200, the real elephant in the room these days is Georgia, even more so than cooperation over issues such as Iran and North Korea. Currently, more than 8,000 Russian troops are taking part in military exercises near the Georgian border, a clear provocation. Yet the U.S. and NATO seem powerless, this as Russia maintains large forces in South Ossetia and Abkhazia, totally against the rules of the ceasefire.  

On an entirely different, yet highly critical, issue for Russia’s future, both Medvedev and Putin are trying to deal with a demographic crisis exacerbated by the fact alcohol abuse is responsible for a full 52% of deaths in Russia; 13 times greater than the world average. 

As reported by Paul Goble in the Moscow Times: 

“The birthrate in Russia over the last 40 years has fallen to West European levels and is now well below the replacement level of 2.15 children per woman per lifetime. ‘But if in the West, women do not want to give birth in order to live as they want,’ reporter Nikita Mironov wrote in an article for ‘Pravda’ this week, ‘Russian women cry with one voice: ‘there aren’t any men.’’ 

“According to Mironov, there are currently a total of 22 million men aged 20 to 40, the prime age group for new fathers. ‘Of these,’ however, ‘about 700,000 are in prison, 2.1 million are registered alcoholics – and how many of those are uncounted,’ Mironov continues. There are also 2.5 million drug addicts. As a result, 5.3 million potential fathers are not as available as others.” 

And with fewer children being born, working men are dying in large numbers. President Medvedev said this week, “The alcohol consumption we have is colossal.” 

Then you have the employment crisis created by the dissolution of the casino industry in Russia, with the exception of a few designated areas. The Kremlin shut down every legal casino and slot-machine parlor under Putin’s anti-vice plan. Most estimates have up to 400,000 being thrown out of work. Putin first put the law in place in 2006, but no one seems to have believed he would follow through with the deadline. Medvedev concurred with the action. Moscow’s long-time mayor, Yuri Luzhkov, said, “There was a time when all these clubs and casinos grew like a cancer tumor. We will close them all. By July 1, Moscow will be clean.” I just have to add on a personal level that in all my travels, one of the few times I ever thought I was in danger was in a Moscow casino where the Russian next to me at the blackjack table got furious over how I was playing and started screaming at me in Russian. [I was playing correctly…he was a total idiot, though I had no clue if he was packing heat or not and I later learned a fellow was shot at this very nice establishment about a year later.] 

Honduras: Out of nowhere, President Manuel Zelaya was removed in a military coup and sent packing, in his pajamas, to Costa Rica. While I admit to having zero knowledge of the issues here beforehand, it’s a fascinating situation. Zelaya, a leftist who calls the likes of Venezuela’s Hugo Chavez and like-minded leaders in the region, friends and allies, was preparing to hold a referendum on the constitution that would have allowed him to scrap term limits and extend his power. Opponents said the referendum and the premise of it were unconstitutional to start out with, and the Supreme Court ruled he couldn’t hold it. But Zelaya went ahead anyway, thus precipitating the coup. 

But since the military was involved, with eerie shades of a bygone era in the region, the United States joined Chavez and the other members of the Organization of American States in condemning the move. Zelaya said he would now opt to step down in January and not seek reelection if he’s allowed to return, in a major concession, but at last word the interim government said Zelaya had to stay away, though negotiations were possible. For his part, Chavez said this was a “coup against all of us,” which if you just read the line would have some truth to it except for whose mouth it came out of. 

The new leadership in Honduras, though, will indeed have to compromise because otherwise all aid will be cut off to the impoverished nation of 7 million, with the banning of exports as well. To its credit, the caretaker leader, Roberto Micheletti said “I do not want even one drop of blood spilt in this country” in saying Chavez was steering Zelaya’s moves. The Honduran people appear to be split down the middle. 

China: Anyone who’s been to Shanghai can’t help but marvel at the mammoth apartment complexes that line the road from the airport into the city. But you also can’t help but wonder about the quality of the buildings. They go up so fast, and you just know corners are being cut. But even still, the total collapse of a nearly completed 13-story apartment building in Shanghai the other day was shocking. If you saw the pictures, even the windows were finished and glassed in. Incredibly just one person died, but imagine if it was occupied. [Over 480 of 620 units had been sold.] 

A prominent engineer at Shanghai’s Tongji University said, “In my 46 years of work, I’ve never seen or heard of such a thing.” And imagine the embarrassment for city officials, especially since Shanghai is hosting next year’s World Expo. 

The initial cause appears to be piles of earth, that were excavated to build an underground parking garage and that was then placed right next to the complex, thus pressuring the structure as the dirt shifted. Then again I’m not a real engineer, myself; I just play one on TV. 

Meanwhile, Taiwan will begin allowing mainland investment in many of its businesses, except critical ones such as the semiconductor industry. Tourism between the two is booming. But Taiwan’s opposition correctly notes there are dangers as Taiwan’s President Ma is also exploring ways he could deal directly with Chinese President Hu Jintao. As Defense News reports there is a legal loophole that if the two conducted talks as political parties, and not as nations, this might be acceptable to the Chinese. But China could then slowly wrap its tentacles around the island with Taiwan becoming too reliant on China for its economic survival.  

Plus, if China were to secure Taiwan as a cooperative security partner, the implications for both Japan and the United States could be serious. It would mean the closure of covert radar and signal intelligence operations on the island and the end of intelligence-sharing agreements. “The U.S. will lose its eyes and ears on China,” a former Taiwan Defense Minister told Defense News. “The worst-case scenario would be the creation of a new Chinese military region on Taiwan.” 

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Pray for the men and women of our armed forces, and all the fallen. We thank them for preserving our freedom. 

God bless America.

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Gold closed at $932
Oil, $65.63

Returns for the week 6/29-7/3

Dow Jones -1.9%
S&P 500 -2.4%
S&P MidCap -2.0%
Russell 2000 -3.1%
Nasdaq -2.3%

Returns for the period 1/1/09-7/3/09

Dow Jones -5.6%
S&P 500 -0.8%
S&P MidCap +5.0%
Russell 2000 -0.4%
Nasdaq +13.9%

*See my Wall Street History link for a full review of the 2nd quarter's stats.

Bulls 41.4
Bears 29.9 [Source: Chartcraft / Investors Intelligence]
 
Have a great week. Next time I’ll be coming to you from Calgary, Canada, and the Calgary Stampede.  

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