The race towards an attack on Syria came to an abrupt halt on Saturday.
Analysts believed the U.S. was waiting for the UN inspectors to leave Syria on Saturday before launching the missile attack. However, President Obama called a press briefing early Saturday afternoon in the Rose Garden and shocked the press by calling off the attack.
He said he had decided to go forward with the military attack against Syria BUT he had also decided to present his request for force to Congress for approval. Since he never asked Congress for approval for the much more involved Libyan excursion that removed Gaddafi the decision to ask Congress for permission on Syria was not expected.
The major reason he was not expected to ask for Congressional permission is because they are not expected to approve it. Nearly 200 senators and representatives have gone on record as opposing the attack. It takes 60 votes in the Senate to approve the use of military force. Getting 60 votes is going to be very tough if not impossible.
Deciding to ask Congress is basically the easy way out of a tough situation. If Congress refuses to grant permission the president can say he tried to hold Assad accountable but he was prevented by Congress. It is not his fault.
In reality this was a very shrewd political decision. After Britain vetoed Cameron's request to join in the attack and Russia began moving warships into the Mediterranean to counter potential "acts of aggression" the temperature in the oval office was rising sharply.
There was no good option. Attacking Syria may have backed up candidate Obama's red line comments in August 2012 but it would have come at a great price. A year ago he tried to gain votes and tough talk Syria into not using chemical weapons with the red line speech. He never thought Syria would actually call his bluff. The first time the Syrians used chemical weapons in March the U.S. officially refused to acknowledge it actually happened. The president successfully avoided having the red line broken even though there was sufficient evidence the rest of the world believed it. The recent attack was so blatant it could not be ignored. More than 1,429 people were killed including 426 children. There was plenty of evidence in first person accounts, pictures and video. There was no escaping this event.
Regional war worries came from comments from Syria's neighbors. Iran said it would attack Israel if Syria was attacked although I believe it was a bluff since an attack on Israel would bring immediate retaliation by the U.S. and Israel. Iran has 5-6 battalions of Revolutionary Guard forces fighting alongside Assad's worn out military.
Syria said if the U.S. attacked they would retaliate against Israel and turn Israel into a ball of fire and hinted they could retaliate against "others" in the region that sponsored the attack. That would be Saudi Arabia, Kuwait, Oman, Jordan, etc. Hezbollah said it would attack Israel and also Jordan if that country aided in the attack. Jordan has since said it wanted no part in the Syrian scenario but the U.S. is installing Patriot missile batteries in Jordan anyway. Jordan has been the staging area for U.S. and Israeli intelligence operations against Syria so the country is on the Syrian hit list.
A Syrian attack could have started a conflagration all across the Middle East as an excuse to increase sectarian rivalry. The Middle East is a smoldering hotbed of internal conflicts that could instantly be fanned into flames given the right stimulation. By waiting to act for the nearly two weeks since the Syrian chemical attack the unrest has been mounting. Instead of ripping the band-aid off 48 hours after the chemical attack the drumbeat to an attack two weeks later has provided ample fodder for those trying to incite rebellion and hostility all across the Middle East.
The civil war in Syria is being fought against nine rebel militias. Two of those militias are moderate and deserve our support. Seven are aligned with Al Qaeda in some form. The strongest two are firmly Al Qaeda and are the ones that would likely take over the government if Al-Assad were to lose or resign.
The battle raging in Syria and across the Middle East has been fought for more than 1,000 years. Assad is Shiite and the majority of Syrians are Sunni Muslims. Sunni and Shia are doomed to fight forever. Saudi Arabia and Qatar have been pouring billions of dollars into the conflict because they want to see Assad eliminated and a Sunni government come to power. Iran is shipping weapons and soldiers into Syria in an effort to prevent that from happening.
Assad has killed over 100,000 of Syrian citizens in the last 30 months using guns, missiles, rockets, tanks and bombs. Suddenly the entire world is polarizing around the death of 1,429 by chemical weapon. The prior 100,000 were ignored by world leaders because civil wars are by definition internal affairs. If you believe the news headlines the death of 1,429 has set the stage for a regional conflagration.
The real problem is that Syria has the largest stockpile of chemical and biological weapons of mass destruction in the Middle East. I would bet some of them have Iraq labeling since it was thought that Saddam moved his weapons to Syria for safekeeping when the U.S. was pressing for a search in Iraq. The real danger is that Syria will give its chemical weapons to Hezbollah for use against Israel and Jordan or they end up in the hands of Al Qaeda for use against everyone.
President Obama was getting plenty of kickback both home and abroad for the potential attack. Polls in the U.S. are strongly against any attack because citizens have been subjected to recent wars in Iraq and Afghanistan that did not turn out well. We lost thousands of soldiers and tens of thousands were wounded since the 2003 move into Iraq. The president himself has been a vocal opponent of these wars and used them as a campaign platform against Bush.
When confronted with the kickback on the global front the president suddenly began to soften his tone. On Friday it appeared he was walking back his attack plans and was trying to find some way out of the trap he created for himself. On Saturday he launched his escape plan in a masterful piece of political strategy.
Unfortunately it will come at a great price. Ambassador John Bolton said the expected denial by Congress would be a green light for Iran and North Korea to accelerate their nuclear efforts. A no vote would be the equivalent of the U.S. abdicating its leadership responsibilities for the entire Middle East. If the U.S. is not going to proceed with Obama's "pin prick" attack on Syria for a blatantly illegal use of WMDs then why should other countries fear the U.S. will attack them for "suspected" development of WMDs? Syrian TV was full of celebrations with signs "We Won, America Backed Down. Americans are Cowards, Etc."
The president also said a potential attack was not time dependent. It would have the same effect if it was next day, next week or next month. Therefore he had asked congressional leaders to discuss and debate the proposal when they came back from their August recess. They return to Washington on September 9th. (I am sure Assad was glad to hear that because it gives him three more weeks to hide his critical assets.) The way the House and Senate work it will probably take them two weeks to come up with a proposal, debate it and then finally take a vote. At the same time the debt ceiling debate and budget debate will be producing daily headlines and occupying lawmakers time.
By not calling for a special emergency session like Cameron did in Britain it will allow the urgency and importance to fade. That will allow protestors like the ones already gathered outside the White House to organize further and apply more pressure on lawmakers and increase the possibility the vote for the use of force fails.
The president has blamed Congress for nearly everything over the last four years. If the vote fails he will be able to blame them for allowing Assad to continue using chemical weapons on his people. Obviously if the vote fails there is nothing to stop Assad from unloading his entire chemical weapons stockpile on his citizens because the U.S. has been the only moderating pressure so far. Eliminate the U.S. threat and it is open season on the rebels with WMDs.
Another reason to pause attack preparation was the coming G20 meeting in Russia on Thr/Fri. President Obama will be face to face with those leaders that oppose him on the topic. Having already attacked Syria would have produced some uncomfortable moments. Now he can attend as the constitutionalist president not a trigger happy missile thrower.
The Secretary General of the UN had asked Obama to wait until the tests done by the UN inspectors are completed. That could take two weeks. It would be beneficial to have those results. If they found no trace of chemical weapons then Obama would be off the hook completely. If they did find residue from weapons then Obama would have his smoking gun evidence to submit to the Security Council. Unfortunately the UN will not say which side fired the rockets.
This was another reason for the delay in the potential attack. With all the retaliation threats the U.S. and other countries needed time to get all their preparations in place to repel those attacks if they occur. Shipping Patriot anti-missile batteries and crews to multiple countries does not happen overnight. Israel sent several more Iron Dome anti-missile systems to the Syrian border in preparation. Everything needs to be in place and tested before the U.S. pulls the trigger.
The president has repeatedly said there would be no "boots on the ground" but the USS San Antonio, an amphibious assault ship with helicopters and 800 marines has been added to the fleet offshore Syria. Why put them in harm's way if they are not going to be used? Russia is sending a guided missile cruiser and a large anti-submarine ship to "protect national security interests" in Syria. The missile cruiser can provide Assad with early warning of a cruise missile launch by U.S. ships as well as jam radars and missile navigation systems. The anti-submarine ship could cause trouble for U.S. submarines brought into the Mediterranean to launch cruise missiles. Clearly these Russian ships are headed offshore Syria as an intimidation factor. Russia has already stationed 16 warships in the Mediterranean.
Middle East Map
This indecision or at least the appearance of indecision kept the markets off balance on Friday. Secretary Kerry gave a call to arms speech midday that was very forceful and did everything but specify the targets and the day for the attack. It left little doubt there would be an attack. Later in the afternoon the president spoke and reiterated "I have been talking with my military and my team and no decision has been reached." This calmed the markets for a few minutes and then the holiday Friday doldrums settled in and the indexes went to sleep.
The postponement and probable cancellation of the attack should provide a lift to the markets on Tuesday and oil prices should decline significantly. The headline focus for the market should return to the economics, the coming budget battle in Washington and the FOMC meeting.
The economics last week put the taper back on the table for September. The Richmond Manufacturing Survey for August rebounded from -6 to +14. The GDP revision saw the Q2 number jump from 1.67% growth to 2.52%. That was well above the consensus estimates for a decline to +1.0%. The gain was almost entirely in net exports with U.S. consumption spending actually declining from +2.3% in Q1 to +1.8% in Q2. This was not a positive report despite the rise in the headline number. The only really negative report for the week was the Durable Goods for July, which fell from +4.2% to -7.3%.
Weekly jobless claims continue to hover in the 330,000 range and some say that suggests a stronger than expected Nonfarm Payroll report next Friday. Personally I think a lot of people that became unemployed in the summer put off applying for benefits until after Labor Day. Who wants to spend the last few weeks of summer looking for a job? I expect claims to rise over the next several weeks.
Friday's ISM Chicago, formerly PMI, rose slightly in August from 52.3 to 53.0. Moody's was expecting a rise to 54.2. This report was expected to be stronger than the other regional reports because of Chicago's exposure to the auto industry. The underlying components were mixed with new orders rising +4 points to 57.2, backlogs up +4 points to 46.5 but employment declining -2 points to 54.9. There was nothing here to get excited about.
The final revision of consumer sentiment for August rose from 80.0 to 82.1. That is still a decline from 85.1 in July. No big surprise here.
Personal income for July rose only +0.1% compared to a +0.3% gain in June. Wage income fell -0.3% with the only gains coming in rental income and dividends. That is not what the consuming public uses to pay their bills and spend at Wal-Mart. Spending rose by +0.1% and prices rose by +0.1%. Let's see, wages down by -0.3%, prices up by +0.1%. So how is that recovery working out for you?
The economic calendar for next week is headlined by the Nonfarm Payrolls on Friday. The consensus estimate is for a slight gain to +170,000 from +162,000 in July. The payroll report is going to be a major hurdle for the markets. A strong report will just about guarantee a taper announcement at the September meeting. A weak report, say under 100,000 should guarantee the Fed will continue QE for another month. Something in the 125K to 150K rage would be an unknown and produce more uncertainty about future Fed actions.
The national ISM on Tuesday should set the economic tone for the week. Expectations are for a small decline because of the recent volatility in the regional reports.
The Fed Beige Book on Wednesday should show the economy is continuing to grow at a modest pace in all 12 Fed regions. In the last report housing and auto manufacturing were the key components providing that growth. With the recent weakness in housing we could see that trend slow over the coming months. Auto manufacturing is still going strong with annualized sales of 15.8 million expected in Wednesday's report.
Thursday will begin the employment data with the ADP and Challenger reports. The ADP Employment report is expected to show new jobs in the 200,000 range and level with July. The Challenger Report is expected to show that layoffs remained steady at around 38,000 job cuts announced per month.
The following week is when the real trouble begins with the debt ceiling debate and a possible government shutdown being discussed under every major headline. That negativity will set the stage for the FOMC meeting and QE announcement the following week. If you thought the uncertainty was bad last week just wait until we get into September.
Stock news was limited on Friday and volume was meager at 5.0 billion shares. That was only slightly above the 4.7 billion on Thursday. Traders were headed out the door for the long weekend and not worried about which retail stock would hit single digits first (ARO was the answer). The month end passed quietly and the Dow had the worst monthly loss since May 2012 at -4.4% and the S&P at -3.1%.
September is historically the worst month of the year for the markets and this one is shaping up to be a major volatility event. Fortunately when the month is over all those big headlines will be behind us and it should be relatively clear sailing into yearend (famous last words). There is no such thing as "clear sailing" in the market. The Fed will continue to be a thorn in our foot and every step a cautious one.
The president has said he will announce a replacement for Bernanke in September. Today the smart money is on Larry Summers. Unfortunately that is not the person the market would have chosen. Janet Yellen is the market's choice because she would continue the programs started by Bernanke and unwind the QE carefully. Summer is not thought to be a fan of QE and would likely attempt to unwind it quickly. He is also rumored to be in favor of quickly returning interest rates to a "normal" level. Even the newest investor reading this commentary understands that shocking the system by a quick removal of QE and then rapidly raising the Fed Funds Rate would potentially result in a bear market.
Granted nobody actually knows what Summers would do but he has been in politics for so long there are numerous speeches and interviews for analysts to review and that is how the "assumptions" were born. After the Congressional decision on Syria he may be looking for some event to distract the public and create some new headlines. Summers may be the headline distracter he is looking for. Obviously the market will not be happy but he still has to be confirmed and that takes time. Bernanke will still be in charge until the end of January. That may smooth the market's reaction to a Summers nomination but eventually he will take the reins.
Summers has been described as a "bull in every china shop he ever entered." He has a blustery style of debate and drama seems to follow him everywhere. He served in the Clinton administration as Secretary of the Treasury and director of the White House National Economic Council for two years under Obama. In April 2010 he left the White House Economic Council reportedly because he was frustrated he was not nominated to chair the Federal Reserve instead of Bernanke. He also gave a speech in 2010 saying increased government involvement in healthcare was a risky idea. I bet that went over big in the Obama White House.
He was the 27th president of Harvard University until he resigned after a no confidence vote by the faculty in 2006. In a high profile speech he said the under representation of women in science and engineering could be due to a "different availability of aptitude at the high end" and less to patterns of discrimination and socialization. In other words, women were not smart enough. There were also financial conflict of interest questions during his tenure. During his tenure at Harvard he approved the decision to enter into $3.52 billion in interest rate swaps, financial derivatives that are used for hedging or speculation. Summers has always been a big fan of unregulated derivatives. By 2008 the positions had lost more than $1 billion. The school had to pay $497 billion in termination fees and agreed to pay $425 million over the next 30 years to exit the positions. The decision to invest in the swaps was credited to Summers and it ended badly for Harvard.
It is surprising that Summers would get the nod by Obama because Summers has long believed that unemployment insurance and welfare payments are a major contributor to unemployment and therefore should be scaled back. That is not exactly a democratic position.
He also does not subscribe to the global warming theory and said, "There are no... limits to the carrying capacity of the earth that are likely to bind any time in the foreseeable future. There isn't a risk of an apocalypse due to global warming or anything else. The idea that we should put limits on growth because of some natural limit, is a profound error and one that, were it ever to prove influential, would have staggering social costs." While working in the Clinton administration he argued against American leadership in greenhouse gas reductions and against U.S. participation in the Kyoto Protocol. Also, not a democratic position.
He also signed a memo in 1991 while working as the chief economist at the World Bank saying "The economic logic behind dumping a load of toxic waste in the lowest wage country is impeccable and we should face up to that.... I've always thought that under-populated countries in Africa are vastly under polluted." When the memo ignited a firestorm of conflict he later tried to pass it off as sarcasm. Lant Pritchett later claimed the memo was his and had been doctored to remove context and was a deliberate fraud to discredit Summers. The firestorm eventually passed.
Since he worked for Clinton in 1999 until he left the Obama administration his wealth grew dramatically. When he filed disclosures when he was nominated for Treasury Secretary in 1999 he listed assets of $900,000 and debts of $500,000. His 2009 disclosures to work in the White House for President Obama listed a net worth of between $17-$39 million.
In the book Democracy Matters in 2004 he was called an "unprincipled power player." In 2009 when questioned about his flip-flop on positions on Wall Street deregulation he quoted John Maynard Keynes saying, "When circumstances change, I change my opinion."
If the president does nominate Summers as expected the confirmation process is going to be a circus. The market does not want a bull in a china shop in charge of the Fed and this will be imparted to lawmakers voting on the confirmation. If Summers is confirmed he will become a lightning rod in his role as Fed Chairman and that will only increase market volatility.
Headlining the little stock news out on Friday was SalesForce.com (CRM). The company rallied +13% to a new high at $49.11 after reporting better than expected earnings and raising guidance. The company reported earnings of 9 cents on revenue of $957 million. Both beat analyst estimates. Revenue rose +31%. CRM said full year revenue would be in the range of $4.0-$4.03 billion. The big gains are coming from the conversion to a monthly subscription model instead of the one-time acquisition price.
Krispy Kreme (KKD) fell -15% after reporting earnings that missed estimates. The 76-year old company went public in 2000 and gained +800% before the wheels came off the rally. Shares fell to $1.76 in November 2008. A new uptrend began in October 2012 at $7 and closed at $23.29 on Thursday. The CEO said the earnings challenge came from an aggressive store opening campaign. They opened 19 stores in Q2. The new store format is smaller with full doughnut making capability but less costly to operate. They expect to expand to 900 stores by 2017.
These chains always believe they can grow their way out of any problem. Some do, some don't. Remember, Boston Chicken? They were the hot franchise until suddenly they were no longer trendy and the chain crashed. KKD ran into the same problem in 2003 and shares plunged. Suddenly high fat, high sugar donuts were no longer in demand and the company had to close unprofitable stores and go through several years of lean times. They came close to being delisted in 2005 for not filling financials since November 2004. It appears they weathered the storm but Friday's earnings brought back those investor growth fears.
YUM Brands can open 39,000 stores worldwide because they have the scale and multiple product lines. Starbucks (SBUX) hit the growth wall several years ago and had to backup and rethink the plan. At one time there were three Starbucks stores on the same Denver area intersection. Now they have gone back to intelligent expansion and they are adding multiple product lines to make the stores more appealing all day long, not just for morning coffee. KKD is stuck with a single product line. I wish them luck.
Pacific Sunwear (PSUN) reported earnings on Friday that beat the street by two cents but they warned for the rest of the year. Revenue rose +9% o $215.2 million. Same store sales rose +3%. Compared to other retailers these were actually good results. The bad news came in the warning. The company expects a loss of 4-9 cents in Q3 and for same store sales to possibly decline. Shares of PSUN dropped -17% on the news.
Sears Hometown and Outlet Stores (SHOS) reported earnings of 40 cents and a +2% increase in revenue. Same store sales rose +1.4% helped by a +8.2% increase in the outlet stores. The company was spun off from Sears Holding (SHLD) in October. Results were hurt due to continuing expenses related to the spinoff. Shares of SHOS dropped -18%.
The Dow lost -200 points for the week, Nasdaq -68 and S&P -30. The big loser was the Dow Transports at -229 points or -3.55%.
The S&P found support at 1630 on Wednesday and that is about where it closed on Friday at 1632. The key point on the S&P chart is the 100-day average at 1639. The last three days the S&P has fought that resistance every day and lost.
Given the headline hurdles we are facing in September I still expect the S&P to retest the June lows at 1560.
The Dow dropped below support at 14,880 and was never able to rebound back over that level. The Dow has been the weakest link recently and that has not changed. The big decline in the Dow Transports last week only cements the expected weakness in the Dow Industrials. Obviously the drop in the transports was due to sharp spike in oil prices but weak economics also played a role.
I am expecting the Dow to return to 14,400 and possibly lower. It is already well below the 50 and 100-day averages and the 200-day is just over the 14,400 level. The Dow is not normally reactive to moving averages because of the small number of stocks. A single stock can add or subtract 30-40 points in a single day.
Initial support is 14,760 but it is not strong. The next material support would be in the 14,650 range.
The 3575 support level on the Nasdaq continues to hold. This is amazing given the decline in the other indexes. However, the longer a level holds the sharper the drop when it finally breaks. The next support level is 3500 followed by 3300.
Danger Will Robinson! (Lost in Space, Nov 22nd, 1967) The Russell 2000 finally broke support and closed at a two-month low. It was not a big break but it was a break. The Russell lost -16 points on Friday. That was -1.56% compared to the Dow -0.2%, S&P -0.3% and Nasdaq -0.8%. Clearly something changed.
It was only a 2 point break of support at 1012 but the magnitude of the Friday decline is screaming a warning for next week. If fund managers are finally bailing on the small caps the rest of the indexes will follow the Russell lower.
For those who understand economics and money flows there are some disturbing signs on the horizon. When the Fed started QE and yields in the U.S. fell to almost nothing more than $4 trillion fled to the higher yielding emerging markets. This influx of cash gave them the appearance of stability and growth. Governments relaxed, spending increased and prosperity was good. Now that the Fed is about to pull the QE plug the emerging markets are crashing. Money is flowing out of their markets and currencies are in a downward spiral. India, Indonesia, Brazil, South Africa, Turkey, etc are all declining. Historically this cycle tends to precede a "dislocation" in U.S. markets.
Pimco's El-Erian said on Saturday the decline in emerging markets is creating headwinds for the U.S. recovery. Emerging market growth is slowing and U.S. corporations are going to have a harder time getting top line growth. For many emerging nations "capital is reversing, flowing out and putting these countries under tremendous pressure. There are certain countries that learned the lessons from the previous crisis and have self-insured tremendously. There are a second set of countries that maintained twin deficits, whose growth dynamics are low and have limited reserves. Turkey is an example of that and there are others." When the global economy declines it begins in the emerging markets and they are falling fast. We could be only weeks away from a major market dislocation in the USA according to Chris Martenson. Morgan Stanley's chief economist, Stephen Roach, echoes the points made above. Roach said QE was so large it impacted the entire global economy and the end and eventual retraction of that QE is also going to impact the global economy negatively. Emerging markets are about to face the Fed's day of reckoning and it will not be pretty.
There is a new movie coming out next week about the Federal Reserve. It is called Money for Nothing and attempts to disclose the inner workings of the Fed and point out Fed induced victories and disasters. It is coming out in limited release but it could color the market response to the results of the September FOMC meeting. View Trailer Here
I expect a market bounce on Tuesday as a result of the change in outlook for an attack on Syria. Month end retirement contributions will be put to work and the headlines should be mellow. The following week will be a maelstrom of competing headlines and most will be market negative. I expect fund managers to use any uptick in the market this week to unload some positions and raise cash for a further decline in the weeks ahead.
Enter passively and exit aggressively!
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"Nothing in the world can take the place of persistence. Talent will not; nothing is more common than unsuccessful men with talent. Genius will not; unrewarded genius is almost a proverb. Education will not; the world is full of educated derelicts. Persistence and determination alone are omnipotent. The slogan 'Press On!' has solved and always will solve the problems of the human race."