Week in Review 
For the week 9/21/2009 - 9/25/2009
Brian Trumbore
President/Editor, StocksandNews.com

Iran Takes Center Stage

If you didn’t understand why I’ve had a seemingly singular focus on Iran the last few weeks in particular, you certainly do now with the revelation by the United States, France and Britain that for years, Iran has been building a second uranium-enrichment facility, hidden underground from the International Atomic Energy Agency, that could be operational next year. Recognizing that the gig was up, Iran, in a letter to the IAEA on Monday, confessed that there was a ‘pilot plant’ and on Friday, Presidents Barack Obama and France’s Nicolas Sarkozy, along with British Prime Minister Gordon Brown demanded that Iran allow the IAEA to conduct an immediate investigation. 

“The existence of this facility underscores Iran’s unwillingness to cooperate” with the rules, said President Obama. “The Iranian government must now demonstrate in deeds its peaceful intentions, or be held accountable.” 

President Sarkozy, in what was an extraordinary appearance and one for the history books, offered, “What has been revealed today is exceptional. We are now faced with a challenge made to the entire international community….If, by December, there is not an in depth change” in Iran’s behavior, “sanctions will have to be taken.” 

Prime Minister Brown added that the level of Iran’s deception “will shock and anger the whole international community.” 

Evidently, Western intelligence breached the project, a fact Iran had only recently discovered. Earlier at the UN, Iranian President Ahmadinejad would only say allegations of a nuclear weapons program were fabrications.  

So now we can expect events to move at lightspeed, especially in as much as talks between Iran and the P-5 plus one (the United States, France, Britain, Germany, Russia and China) are slated to begin Oct. 1 in Geneva. Unless Iran opens up its program, completely, to IAEA inspection and continual monitoring, harsh new sanctions are inevitable, including on the importation of gasoline, Iran’s Achilles heel. [Just to repeat, Iran, a major oil exporter, nonetheless has a severe shortage of gasoline due to its crumbling refinery operations that require the importing of at least 40% of its overall gasoline needs.] 

But here is where it gets interesting. While the United States, France, Germany and Britain will be united, what of Russia and China? We have learned in the past week that China is supplying Iran with as much as 1/3 of its gasoline imports so it’s hardly likely to want to support sanctions on same.  [Venezuela is also helping Iran in this regard.]

As for Russia, prior to Friday’s announcement, President Obama told President Medvedev about the discovery of the second nuclear facility, at which point Medvedev volunteered that increased sanctions may be “inevitable.” Will Russia thus go along? It’s unclear as of this writing, but I do have to take you back to two weeks ago when I was musing about Israeli Prime Minister Netanyahu’s now not so secret mission to Moscow. Whereas the press focused on a probable cause, that being Netanyahu’s plea that Russia not sell the advanced S-300 anti-missile system to Iran, I think that Netanyahu, in effect, sought Russia’s tacit understanding that Israel had to strike Iran, in exchange for Israel's recognition that Russia has significant commercial interests there, including future arms sales.  

We will quickly learn just where both Russia and China will line up, but understand this. Israel can not afford to wait until the end of the year, as the P-5 plus one is now targeting for Iran to move in a satisfactory fashion. I have been saying for weeks that Israel will attack in November. Of course there are a lot of moving parts, with each one needing to be examined separately. To wit, the current leader of Israel, Benjamin Netanyahu. Listen to what he said in his appearance on Thursday before the UN General Assembly. 

“Yesterday, the man who called the Holocaust a lie spoke from this podium. To those who refused to come and to those who left in protest, I commend you. But to those who gave this Holocaust denier a hearing, I say on behalf of my people, the Jewish people, and decent people everywhere: Have you no shame? Have you no decency?” 

As described in a story by Reuters:

“Netanyahu (then) held aloft two documents – a copy of the minutes of the Wansee Conference, in which Nazi officials planned the Final Solution that led to the killing of six million Jews and the original blueprints of the Auschwitz-Birkenau death camps. He received the blueprints, discovered last year, during a visit to Germany in August. 

“ ‘They contain a signature by Heinrich Himmler, Hitler’s deputy himself. Are these plans of the Auschwitz-Birkenau concentration camp where one million Jews were murdered…a lie, too? And what of the survivors whose arms still bear the tattooed numbers branded on them by the Nazis? Are those tattoos a lie, too?” he asked. 

Israeli leaders, not just Netanyahu, have consistently said they can not stand idly by while Iran gets the bomb, but Netanyahu in particular was made for these times. Oh, he has a checkered past and like all Israeli leaders it seems is hopelessly corrupt (one now on trial for corruption, former Prime Minister Olmert). But I was watching Netanyahu give some interviews this week and he is without a doubt the most impressive figure on the world stage today. He’s been a fascinating one for decades, going back to his days as UN Ambassador, and he will seize the day. He will cement his place in the history of his nation for all times.  

Netanyahu can do this without launching an attack, if Russia and China join the other four nations in bringing Iran to its knees, but the odds are he will be forced to act. If, on the other hand, Russia and China were to support harsher sanctions, President Obama will deserve the lion’s share of the credit. And there’s always that slight chance Iran’s leadership will move against Ahmadinejad as a way of placating the West (we’d have Rafsanjani to thank for this should it come to pass), but chances are this would only be part of a further stall tactic. Smaller still are the odds for complete regime change and an opening of the doors to the IAEA for all aspects of Iran’s nuclear program. 

So while I will wait to see how the talks progress in the first week or so, for today I am sticking with my original thesis that come mid-month, it will probably be a good time to hit the sidelines for a spell. 100% in cash. More next week as we see how Iran responds and gauge the tone in Geneva. 

Wall Street 

President Obama hosted the G20 nations in Pittsburgh and the White House released a statement that read: “The G20 leaders reached a historic agreement to put the G20 at the center of their efforts to work together to build a durable recovery while avoiding the financial fragilities that led to the crisis.” A good move, especially as it consigns the G7 or G8 to focus on international relations and security issues. It makes sense that the G20 will now consolidate all their information on individual policies and that this in turn will be monitored by the International Monetary Fund. 

On the issue of the financial system and bankers’ bonuses, the G20 seeks to have bonuses linked to long-term success of financial companies and not excessive risk taking. Bonus payments should be deferred and clawback provisions put in place, but no cap on individual bankers’ bonuses. I don’t have a problem with any of this either, but implementation will take months, if ever. 

This was a week where the economic data was less than expected and stocks reacted accordingly, closing with the worst returns in 11 weeks after hitting new yearly highs on Tuesday. 

Data on the housing sector was disappointing, with existing home sales for August down 2.7%, while new home sales for the month rose a less than expected 0.7%. On the all important median home price gauge, which is how I’m judging my own predictions, the existing home price fell to $177,700, down from June and July but still above the April low of $166,000. [I said we’d bottom in this category in the April/May time period.] The median price of a new home, though, fell to the lowest level since October ’03. However, in my defense, new home sales are but 8% of the total; ergo, I’m still OK. 

That said, remember, going back to last year I predicted that when the housing market bottomed, we’d sit there for an extended period. Obviously, nothing has changed to warrant reconsidering this position. [Incidentally, my own home has officially been on the market for about four weeks with little activity, beyond compliments on my art work. Well, at least Civil War history buffs like it….but I digress.] 

Overseas, the news was light. For the euro nations, service and manufacturing indices were above the key 50 mark for a second straight month, but a little shy of expectations, while the Asia Development Bank said China’s stimulus program was hurting efforts to reform the economy from an export-led growth engine to one of private consumption, a fact echoed by the G20 (and which China readily admits), but the ADB also hiked its forecast for China’s GDP growth in 2010 to 8.9%. [Should this pan out, I’d be shocked if I didn’t do well with my China investment…mused the editor with legs crossed.] Also, a separate survey in China has consumers saying they will spend more the next 12 months. 

Elsewhere in Asia, Japan’s exports fell in August for an 11th straight month, though only off 0.7% from July’s pace. Nonetheless, it calls into question the strength of this nation’s recovery. 

Back in the States, the Federal Reserve Open Market Committee met and in holding the line on rates said the economy was picking up, as was housing, but consumers were still victim to the sour labor market. Importantly, the Fed also said it would continue to support housing by gradually slowing its purchase of mortgage-backed securities (as opposed to slamming the door on this key emergency program), which means that any rise in mortgage rates will not be as sharp as it otherwise might be. The Fed also continued to say inflation will remain subdued. 

Lastly, at Tuesday’s close the S&P 500 was up 18.6% for the year and Nasdaq up 36% before turning negative the next three days. But at least for a moment we were almost exactly where I said we’d finish the year…the S&P up 20% and Nasdaq up 30%. I mention this because as stated in the opening, and for the past few weeks, unless events change dramatically I will be going to the sidelines shortly. 

At the same time, though, a lot of us were shocked to pick up the Wall Street Journal last weekend and see a bullish column by James Grant, editor of Grant’s Interest Rate Observer and a perma-bear, which has actually held him in good stead when looking at the past ten+ years in total, who suddenly appeared with some highly bullish remarks. 

Mr. Grant: 

“As if they really knew, leading economists predict that recovery from our Great Recession will be plodding, gray and jobless. But they don’t know, and can’t. The future is unfathomable. 

“Not famously a glass half-full kind of fellow, I am about to propose that the recovery will be a bit of a barn burner. Not that I can really know, either, the future being what it is. However, though I can’t predict, I can guess. No, not ‘guess.’ Let us say infer…. 

“Americans are blessedly out of practice at bearing up under economic adversity. Individuals take their knocks, always, as do companies and communities. But it has been a generation since a business cycle downturn exacted the collective pain that this one has done. Knocked for a loop, we forget a truism. With regard to the recession that precedes the recovery, worse is subsequently better. The deeper the slump, the zippier the recovery. To quote a dissenter from the forecasting consensus, Michael T. Darda, chief economist of MKM Partners, Greenwich, Conn.: ‘[The] most important determinant of the strength of an economic recovery is the depth of the downturn that preceded it. There are no exceptions to this rule, including the 1929-1939 period.’…. 

“To the English economist Arthur C. Pigou is credited a bon mot that exactly frames the issue. ‘The error of optimism dies in the crisis, but in dying it gives birth to an error of pessimism. This new error is born not an infant, but a giant.’…. 

“[When looking at the markets since March] By rallying, equities and corporate bonds not only anticipate recovery, but they also help to bring it to fruition….One year ago, the Wall Street liquidation stopped world commerce in its tracks. Today’s bull markets are helping to revive it…. 

“[But] in economic and financial matters, the world rarely gets what it expects. Pigou had humanity’s number. The ‘error of pessimism’ is born the size of a full-grown man – the size of the average adult economist, for example.” 

Street Bytes 

--Stocks fell, thanks to the weaker than expected economic news, including a poor durable goods number for August (down, when up was expected), as well as some not so great earnings reports. For example, Research in Motion, maker of the BlackBerry phone, offered up a tepid sales forecast for the quarter ending Nov. 28 as it is hit by heightened competition from the likes of Apple’s iPhone, Palm Inc.’s Pre and others, and RIM shares plummeted 16%. 

On the week the Dow Jones declined 1.6% to 9665, the S&P 500 lost 2.2% and Nasdaq fell 2.0%. 

--U.S. Treasury Yields 

6-mo. 0.19% 2-yr. 0.98% 10-yr. 3.32% 30-yr. 4.10% 

Bonds rallied on the punk economic data, as well as a slight flight to quality on the heels of the Iranian news, and in spite of the following… 

In an important op-ed for the Wall Street Journal on Friday, Federal Reserve Board Governor Kevin M. Warsh said some of the following as it relates to future Fed policy. 

“Today, even more than usual, we should maintain considerable humility about optimal policy. Financial market developments bear especially careful watching. They may impart more forward-looking signs of growth and inflation prospects than arithmetic readings of stimulus-induced gross domestic product or lagged composite readings of inflation. For example, the level of asset prices and associated risk premiums, and gauging their trend and durability, will demand careful assessment.” 

Warsh added that in terms of taking away the punch bowl (i.e., zero interest rates), “prudent risk management indicates that policy likely will need to begin normalization before it is obvious that it is necessary, possibly with greater force than is customary, and taking proper account of the policies being instituted by other authorities.” 
So is the Fed about to raise rates sooner than later, despite its policy statement of this week that rates will remain low for an extended period? Not likely. It’s possible Warsh’s wife was giving him a bad time and he decided to take it out on the markets. 

--H1N1 continues to spread and there is a looming showdown over the distribution of the vaccine over the coming weeks, but no signs as yet that commerce is about to shut down.

--All manner of talk on the oil front with the New York Times running a story on the big recent finds, worldwide, while Thursday’s L.A. Times reported on a potential large scale discovery of oil and natural gas by Occidental Petroleum in an undisclosed part of Kern County “using techniques that the oil company’s executives would rather not talk about. It was California’s biggest find in 35 years.” 

California is the nation’s fourth largest producer behind the combined offshore sites and Texas and Alaska, but production there has declined to 214 million barrels in 2008 from 394 million barrels at the 1985 peak. So the Occidental discovery bears watching. 

Meanwhile, inventory figures released this week continue to show that the U.S. is awash in crude, even as the economy improves, and oil tumbled to the $66 level, the lowest in 10 weeks. 

Regarding OPEC, Saudi Arabia said it plans on holding its own output at 8 million barrels per day owing to the lack of a rebound in global demand. 

--China is forecasting auto sales of 12.6 million units this year, up 35 percent from 2008. And as a reflection of this, Ford said it plans to spend $490 million on building a third assembly plant in the country. 

--Australia’s foreign investment regulator said the government wants to limit foreign investments to 15 percent, though he hastened to add foreign investors had been “extremely welcome” in the country and that investments were treated on a case-by-case basis. The statement was seen as a shot at China, which has been seeking significant stakes in Australia’s mining sector. Over the past 18 months, 90 investments proposals from Chinese entities had been reviewed. 

Separately, the same day a senior British minister said that foreign ownership of some British companies could “disadvantage” the country, though Lord Peter Mandelson didn’t set any limits. 

--Joe Granville has turned bearish on gold. [Yes, he’s still around and over the years has made some good calls on the precious metal.] 

--U.S. steel production rose for a 20th time in 21 weeks. [While I’ve been tracking this since 1990, I’ll do a better job passing the info along.] 

--A Barron’s article by Steve Bergsman on the Florida condo market had some good stats for the archives. 
“Median condo prices rose 129% in Dade County from 2001 until the market peaked in the second quarter of 2006; they rose 189% in Palm Beach County, to the north, in the same span. Since then, prices have fallen an average of 47% to 50%.” 

--Get this…from the Tax Foundation and BusinessWeek, the most and least business-friendly tax systems, not that I didn’t already know what state would be at the bottom. 

1. South Dakota…no wonder why I go here every two years
2. Wyoming…ditto
3. Alaska
4. Nevada
5. Florida
46. Iowa…surprise
47. Ohio
48. California
49. New York
50. New Jersey… “I’m from New Jersey and I’m proud about it…NOT!” 

[In fact, we have possibly the two worst gubernatorial candidates of all time running against each other this fall. It’s absolutely dreadful. New Jersey can not suck enough.] 

--The U.S. Department of Agriculture estimates that farm income will plummet 39% in 2009 from 2008’s record levels. Tumbling prices on pork and dairy products are a big reason. For example, hog farmers have seen the average price they get for every 100 pounds of pork drop from $60.70 to $39.70. I have some friends in the Oklahoma Panhandle who are both hog and dairy farmers…time to check up on them, though they had prospered prior to this year. 

--Goldman Sachs’ bonus pool for the year could be nearing $16 billion and CEO Lloyd Blankfein is faced with the task of how to distribute it without drawing a lot of attention. Employees should expect a ton of stock and far less cash in terms of the components. Recently, Blankfein told workers to forego big-ticket purchases and to keep a low profile, which still doesn’t account for the five homeless people I’ve identified in the town where I have my office…seeing as I really don’t believe these are Goldman workers in disguise heading to the train. But I digress… 

--According to the Wall Street Journal, Citigroup’s new strategy includes consolidating its retail-banking in six major metropolitan areas; New York, Washington, Miami, Chicago, San Francisco and Los Angeles…while scaling back in others such as Boston and Philadelphia. Citi has 1,000 branches compared to 5,200+ apiece at Bank of America, J.P. Morgan Chase and Wells Fargo; Wells leading the pack with almost 6,700. Citi also hopes to attract deposits through an intensified online-banking presence. 

--The New York Times reports that newspaper advertising has not quite hit bottom, with projected revenues down 25% in the third quarter over a year ago. 

“The drop in combined print and digital ad revenue last year, 16.6 percent, according to the Newspaper Association of America, was the worst since the Depression. But it looks rosy next to 2009, when revenue fell 28.3 percent in the first quarter and 29 percent in the second.” 

--PC-maker Dell acquired computer service provider Perot Systems in a $3.9 billion cash deal. Shares of Perot (founded by H. Ross Perot) were valued at a 68% premium to the previous close, which is a nice move. 

In fact it was so tasty that an employee of an investment firm used by Perot caught wind of the deal from a Perot Systems director (possibly H. Ross himself) and made $8.6 million in stock options ahead of the announcement. But the move was so obvious that the SEC, acting with amazing speed, charged the employee, Reza Saleh, with insider trading the very same day. 

[Ironically, Saleh played a key role in the 1979 rescue of two American hostages held in Iran, employees of Perot’s, as chronicled in the book “On Wings of Eagles” by Ken Follett.] 

--Microsoft’s Bing search engine is slowly gaining market share, now up to 9.3%, though Google is still at 64.6% and Yahoo, 19.3%. 

--For its latest fiscal year, Yale’s endowment lost 25% of its value owing to incredibly stupid investments in real estate (and to a lesser extent commodities, including timber). 

--Subway is going after McDonald’s in terms of number of stores. This week, Subway evidently reached 31,800 worldwide (23,000 in the U.S.) vs. McDonald’s 32,158. As McDonald’s slows the pace of store expansions significantly, Subway is adding 40 a week. 

--Deflation Alert: I was at the Jets-Patriots game on Sunday and introduced myself to this fellow seated nearby, Lauris E., who is Latvian but has been living here all his life (I think). Anyway, it’s one place I’d like to go and he passed along some economic info from a friend of his, Pauls [sic] R., that contained an interesting tidbit. 

As I’ve noted before, Latvia’s economy has imploded and GDP will be down at least 15% this year (Pauls says 18%), and then he notes that Latvia has the second highest unemployment rate in Europe, next to Spain, and “A recent survey indicated that close to 70 percent of companies have cut wages this year.” [I’d say that’s deflation.] 

It’s likely to get worse before it gets better as the European Union has demanded draconian budget cuts if it is to continue to receive needed aid. But as Lauris notes, Latvia has a history of beating the odds, “while raising everybody’s blood pressure in the process.” 

--Russia’s wealthiest man (as listed by Forbes), Mikhail Prokhorov, bought a majority share in the NBA’s New Jersey Nets, as well as a stake in their new arena project in Brooklyn, which ensures that the real estate venture will finally get done after years of uncertainty and eminent domain lawsuits. Prokhorov is the first Russian owner of a major U.S. sports franchise. 

--Speaking of wealthy folks, PIMCO’s Bill Gross, an avid stamp collector, is giving $8 million to the National Postal Museum in Washington to create a gallery that will exhibit some of his collection. It will be called the William H. Gross Stamp Gallery and will showcase his “Inverted Jennys” from 1918 that are the most famous of all U.S. stamps. Very cool of Mr. Gross to do this.  

--Ken Howard, star of 1970s’ “The White Shadow,” one of the great television shows of all time, has been elected Screen Actors Guild president, Howard having the support of moderates in the 125,000-member union that plays a key role in the shaping of our culture. 

--For those of you planning a trip to New York City, Gotham is on pace for another record-low in murders, around 460. The low was in 2007 at 497. The homicide rate peaked in 1990 at 2,245 during the crack boom…and with David Dinkins as mayor…before Sheriff Rudy came in and began to clean up the mess. And that’s a memo. 

--You know those commercials for sites such as LegalZoom and Legal Web for creating your own corporation, such as an LLC? I used to think, what a great idea. Maybe it still is, but as Elaine Profeldt of Crain’s New York Business recently reported, you need to watch out for hidden fees. For example, two women were incorporating their PR firm through LegalZoom, “spending $359 to use the site’s package of services and another $443 to pay other expenses, such as a state filing fee.” 

But then they faced a couple of surprises. “While they knew they had to publish a ‘notice of formation,’ they didn’t expect the ads to cost them $1,000. Also, they realized that the operating agreement they bought wasn’t tailored to their unique partnership arrangement.” 

So they had to turn to an attorney and he estimates they could have saved at least $500 on the ads. That’s enough for me.  

Foreign Affairs 

Afghanistan: This was the week when details of Gen. Stanley McChrystal’s report to superiors at the Pentagon and the White House leaked out as McChrystal, commander of U.S. and NATO forces in Afghanistan, concludes that without a significant increase in troops (up to 40,000), the war effort “will likely result in failure.” McChrystal also says the Afghan army needs to grow far more rapidly than the current pace, while noting the Taliban is a muscular, sophisticated enemy. At the same time, corruption in the government is as big a threat to the mission as the insurgency. 

McChrystal added the International Security Assistance Force (ISAF), the NATO-led coalition, is too interested in its own security and not that of the Afghan people. And the general blamed Pakistan’s ISI and Iran’s Revolutionary Guard for aiding the Taliban. Separately, Mullah Omar (remember him?) said an “unequivocal defeat” is imminent. 

In other words, there’s a lot for President Obama to chew on, including the status of the recent presidential election that has yet to be certified by the UN. Should the UN throw out enough votes to take President Karzai below 50%, the UN would call for a run-off but winter is fast approaching here and that means the UN has to act quickly or look to next spring…which would only increase the level of chaos and violence in the interim. 

In various surveys, a majority of Americans are “less confident” of victory [NBC/Wall Street Journal] or against sending more troops [USA TODAY/Gallup], including 6 in 10 Democrats in the case of the latter. So what will President Obama do? 

Editorial / Washington Post 

“It was only last March 27 that President Obama outlined in a major speech what he called ‘a comprehensive new strategy for Afghanistan’ that, he added, ‘marks the conclusion of a careful policy review.’ That strategy unambiguously stated that the United States would prevent the return of a Taliban government and ‘enhance the military, governance and economic capacity’ of the country. We strongly supported the president’s conclusion that those goals were essential to preventing another attack on the United States by al-Qaeda and its extremist allies. 

“So it was a little startling to hear Mr. Obama suggest in several televised interviews on Sunday that he had second thoughts…. 

“What has changed since March? As Mr. Obama noted, Afghanistan’s presidential election has been plagued by allegations of fraud, sharpening questions about whether the government can be a reliable partner…. 

“It’s hard to see, however, how Mr. Obama can refute the analysis he offered last March. ‘If the Afghan government falls to the Taliban or allows al-Qaeda to go unchallenged,’ he said then, ‘that country will again be a base for terrorists who want to kill as many of our people as they possibly can.’ Afghanistan, he continued, ‘is inextricably linked to the future of its neighbor, Pakistan,’ where al-Qaeda and the Taliban now aim at seizing control of a state that possesses nuclear weapons…. 

“As the president put it, ‘the world cannot afford the price that will come due if Afghanistan slides back into chaos.” 

Israel, part two: Just a word on the Palestinian issue. Much was made of President Obama’s criticism of the Israeli position on settlements during his UN address. Prime Minister Netanyahu, though, said the speech was “good and positive” for Israel and for moving the peace process forward. [Of course the prime minister has already said, “The Iranian issue overshadows everything.”] 

Obama: “All of us, not just the Israelis and the Palestinians but all of us, must decide whether we are serious about peace, or whether we only lend it lip service. To break the old patterns – to break the cycle of insecurity and despair – all of us must say publicly what we could acknowledge in private…. 

“Nations within this body do the Palestinians no favors when they choose vitriolic attacks over a constructive willingness to recognize Israel’s legitimacy, and its right to exist in peace and security.” 

Obama then added, “The United States does Israel no favors when we fail to couple an unwavering commitment to its security with an insistence that Israel respect the legitimate claims and rights of the Palestinians.” 

Obama wants to relaunch negotiations, but fat chance that will happen until the Iranian situation is resolved. In the end, though, Israeli leaders were pleased the president referred to Israel as a “Jewish state,” recognition Israel is insisting on as part of any final-status deal with the Palestinians. Obama also reiterated U.S. commitment to Israeli security. Believe me, Israel doesn’t care about being chastised on settlements at this time. 

And just a note on the Palestinians. Pitifully, President Mahmoud Abbas said he wants to give President Obama 3-4 months for him to pass healthcare reform before Abbas presses Obama further on talks with Israel. 

Lastly, on one item Israel is indisputably in the wrong; that being its jet overflights of Lebanon in total violation of UN Security Council Resolution 1701 following the end of the summer war in 2006. They occur daily.  On Thursday, for example, 10 Israeli warplanes flew all over the country. 

Pakistan: I gave a presentation, ironically on Iran for the most part, to a local civic group on Monday and the president of the organization is a Pakistani. As he walked me to my car afterwards, out of nowhere he said, “We (his fellow Pakistanis) should have killed A.Q. Khan when we had the chance, don’t you think?” 

Now I hadn’t brought up Khan in my discussion, but he knew where my head was at and I had to agree. 

Then on Friday I get this note from the Nuclear Threat Initiative, to which I give a few dollars, and it reads as follows: 

“Former top Pakistani nuclear scientist and proliferator A.Q. Khan refused to comment on a letter in which he allegedly detailed his government’s involvement in spreading nuclear materials and knowledge to Iran, North Korea and Libya, the Indo-Asian News Service reported today.” 

Khan refused to answer questions on the nuclear smuggling ring he confessed to leading in 2004. “I have become tired of clarifying my position, but I know that this is an unending controversy,” he added. 

The century is early, but A.Q. Khan may yet go down as one of the top five worst players of the hundred years. 

Russia and the missile shield: Moscow dropped its threat to deploy missiles near Poland in response to President Obama’s shift in U.S. missile shield plans, but I want to note U.S. Defense Secretary Robert Gates’ reply to administration critics, as put forward in a New York Times op-ed. 

“The future of missile defense in Europe is secure. This reality is contrary to what some critics have alleged about President Obama’s proposed shift in America’s missile-defense plans on the continent – and it is important to understand how and why. 

“First, to be clear, there is now no strategic missile defense in Europe. In December 2006, just days after becoming secretary of defense, I recommended to President George W. Bush that the United States place 10 ground-based interceptors in Poland and an advanced radar in the Czech Republic. This system was designed to identify and destroy up to about five long-range missiles potentially armed with nuclear warheads fired from the Middle East – the greatest and most likely danger being from Iran. At the time, it was the best plan based on the technology and threat assessment available.” 

[But the plan would not have been implemented until 2015 at the earliest.] 

“Last week, President Obama – on my recommendation and with the advice of his national-security team and the unanimous support of our senior military leadership – decided to discard that plan in favor of a vastly more suitable approach. In the first phase, to be completed by 2011, we will deploy proven, sea-based SM-3 interceptor missiles – weapons that are growing in capability – in the areas where we see the greatest threat to Europe.” 

[Gates goes on to describe the second phase and so on, including how airborne, space- and ground-based sensors would be more adaptable than the fixed radar slated for the Czech Republic.] 

“The new approach to European missile defense actually provides us with greater flexibility to adapt as new threats develop and old ones recede…. 

“Those who say we are scrapping missile defense in Europe are either misinformed or misrepresenting what we are doing….Russia’s attitude and possible reaction played no part in my recommendation to the president on this issue…. 

“I have been a strong supporter of missile defense ever since President Ronald Reagan first proposed it in 1983. But I want to have real capacity as soon as possible, and to take maximum advantage of new technologies to combat future threats…. 

“The new proposal provides needed capacity years earlier than the original plan, and will provide even more robust protection against longer-range threats on about the same timeline as the previous program. We are strengthening – not scrapping – missile defense in Europe.” 

So with the above in mind, I found an editorial in Russia’s Pravda quite interesting. 

“President Medvedev stated shortly before the visit to the United States that Mr. Obama’s decision (to scrap the original missile defense plan) was obviously a positive sign…. 

“Nevertheless, the new missile defense plans of the United States may still contain a significant threat for Russia.” 

Pravda goes on to cite some of what Gates writes above in terms of the implementation of the new plan. 

“Therefore, the USA will use dozens of SM-3 missiles instead of only ten interceptor missiles that were stipulated in the previous missile defense program. In addition, the radar station, which was supposed to be deployed in the Czech Republic, will be replaced with air-based, sea-based and ground-based detectors…. 

“It just so happens that the new concept of a missile defense system in Europe is not a concession to Russia at all. The new system…can be a lot more dangerous than what George W. Bush was intending to make.” 

Pravda notes, for example, that one vessel equipped with the Aegis system “is capable of taking up to 100 SM-3 missiles on board. A Ticonderoga class cruiser of the US Navy has 122 containers with missiles installed in the vertical launching systems.” 

And Pravda notes that the ground-based proponent of the new system could be based in Turkey, still situated very close to Russia.  

Bottom line, “Russia should not underestimate the danger that might be hidden in the new missile defense doctrine.” 

The plot thickens.  

[And a note on Ukraine…the presidential election is set for Jan. 17. Mark this down. It’s the day Russia in essence retakes Ukraine in a bloodless coup.] 

North Korea: A top general in South Korea said his nation is prepared to conduct rapid strikes on North Korea’s nuclear facilities and that the military has identified those sites that need to be taken out first, starting with the nuclear bases. Gen. Lee Sang-Eui said North Korea had enough plutonium for six weapons. 

Meanwhile, Japan’s new leader, Yukio Hatoyama, emphasized he does not expect the U.S. to reach any agreements in potential bilateral talks with North Korea without consulting Japan first. 

Lebanon: For a second time, Prime Minister-designate Saad Hariri is trying to assemble a cabinet, now almost four months after the election. Just to give you an idea of how corrupt and dysfunctional Lebanon’s political system is, the leader of one faction, Michel Aoun, warned that he will not allow the Telecommunications Ministry to be taken away from his party. Gee, I wonder why? You think it has something to do with the doling out of contracts and such? Then again, Hariri’s Future Movement party has been controlling the Finance Ministry. [Also, I didn’t realize Lebanon was slated to take over one of the rotating seats on the UN Security Council for the period 2010 to 2012, so there is an incentive to resolve all issues quickly or they will lose the opportunity to influence events in the region.] 

Germany: Chancellor Angela Merkel is slated to win a second four-year term in Sunday’s election, but the polls show the race has tightened considerably and there are quirks in Germany’s election laws that could cause an uproar. 

Somalia: There is growing evidence the U.S. has done a terrific job in dealing a severe blow to al-Qaeda here, including with a daylight commando raid that took out a key figure two weeks ago, Saleh Ali Saleh Nabhan; a man wanted for 11 years in the bombings of U.S. embassies in Kenya and Tanzania. It shows a certain resolve and a warning to young jihadists, as Jack Cloonan, a counterterrorism expert and former member of the FBI’s bin Laden unit, told the South China Morning Post. 

But there is also growing evidence Somali militants are now recruiting American Somalis to the cause in a disturbing development.

Honduras: Deposed President Manuel Zelaya snuck back into the country and made a beeline for the Brazilian Embassy, forcing the government to surround the place which in turn sparked violence.  Now there's a stalemate with him holed up inside.

Zimbabwe: Since the power-sharing deal between President Robert Mugabe and Morgan Tsvangirai, at least six white farmers have been abducted and 16 arrested for alleged illegal occupation of their own land. Mugabe, in recent days, also indicated that his “land reform” program could be kicked into a final gear to eliminate the last white presence.  

As the Financial Times reported, the damage to Zimbabwean farming is already extensive. “Fewer than 500 commercial farmers are still producing compared with an estimated 4,500 when Zimbabwe became independent in 1980.” Production of corn and wheat is barely 1/3 of 2008 production, let alone prior years. 

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

God bless America.

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Gold closed at $990
Oil, $66.07 

Returns for the week 9/21-9/25 

Dow Jones -1.6% [9665]
S&P 500 -2.2% [1044]
S&P MidCap -3.3%
Russell 2000 -3.1%
Nasdaq -2.0% [2090] 

Returns for the period 1/1/09-9/25/09 

Dow Jones   +10.1%
S&P 500 +15.6%
S&P MidCap +26.0%
Russell 2000 +19.9%
Nasdaq +32.6%

Bulls  46.7
Bears 24.4 [Source: Chartcraft / Investors Intelligence] 

Off to Ireland for a few days. Have a great week. 

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