Saturday, April 16, 2011

EU faces fight with 'critically low' sugar stocks


High grain prices look set to stymie European plans for a rebound in sugar production, leaving the region reliant on record imports – if it can get hold of them – to replenish inventories on their way to the lowest in at least 50 years.
Grain has become a "tough competitor for high cost, high risk" sugar beet plantings in the European Union thanks to the improved returns on offer, and growers' dismal experience this season, when 2m tonnes of the root crop were lost to weather damage in the UK alone.
"European Union sugar processors are asking sugar beet growers they contract with to increase acreage by at least 10-15% for the 2011 harvest, but it can be doubted whether farmers will follow suit," US Department of Agriculture attaches said in a report.
"Farmers may resist increasing their harvest risk without receiving adequate compensation in their contractual arrangements."
The attaches estimated at just 1.4%, or 209,000 tonnes, growth in EU beet sugar production in 2011-12, taking it to 15.3m tonnes.
'Critically low supplies'
This will be way short of the amount need to meet consumption, and replenish "critically low" supplies weakened by last year's poor harvest and the difficulty in wrenching imports from a tight international market.
Indeed, EU inventories are expected to end 2010-11 at 1.13m tonnes, the lowest since at least 1960 and representing a stocks-to-use ratio of a thin 6.1% - half that of a year before.
The attaches, terming Europe's sugar squeeze "unprecedented", forecast imports hitting an all-time high of 3.7m tonnes next season to replenish stocks and avoid the kind of shortages which have forced supermarkets in Portugal to limit customers' sugar purchases.
However, it highlighted the difficulty that the EU has had in buying in foreign sugar, despite the announcement of a zero-duty quota.
"High world prices for sugar continue to have a negative effect on sugar imports, despite the temporary lifting of the EU import duty," the report said.
Longer season
The EU has, besides facilitating sugar imports, pre-announced 650,000 in exports for 2011-12 in an attempt to reassure beet farmers that the region will not put block off the region's market from potentially higher international prices.
However, beet farmers are being deterred by a knock-on effect from the imposition of tough sugar market restrictions in the last decade, agreed with the World Trade Organization, following complaints over cheap EU sugar exports.
A shutdown of production facilities has increased the beet processing season to 100-105 days, extending the period to which crops are exposed to winter weather.
An extra 10-15% increase in output implying a rise in the processing season to 110-120 days.
"Sugar beet farmers were already complaining that a 100-day processing season creates an unacceptable level of risk on them.
"It can hence be seriously questioned whether beet farmers will be willing to increase their risk, especially in light of a market situation, in which grain production is almost guaranteed to bring higher profits to the farm."
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Has the missing link in the US feed chain been found?


Have analysts found the missing link to US animal feed supply chain?
The market has been puzzling over how livestock farmers will keep their animals fed since the US Department of Agriculture on April 8 cut its estimate for American feed usage of corn in 2010-11 by 50m bushels.
This despite data implying that America consumed a record 7.2bn bushels in the first half of the crop year – with much of the increase assumed down to animal feeding fostered by record cattle and hog prices, which are allowing livestock farmers to cash in even while paying elevated prices for grain.
"Cattle on feed in February increase 5% year on year, the poultry industry continues to grow at a pace of 2% year on year, and hogs kept for the breeding increased for the first since 2008-09," Rabobank said.
If the USDA is right, overall corn consumption plunge to 4.4bn bushels in the second half of the crop year, the biggest drop for nearly 20 years, with livestock farms expected to bear the brunt of the decline.
Analysts have come up with three answers so far for filling the apparent hole in feed supplies.
Damn lies and statistics
The first is to doubt the USDA forecast, which is predicated on an idea of US corn stocks ending the year at 675m bushels – way above market expectations.
Goldman Sachs on Friday became the latest in a series of commentators to question an inventory figure branded "a joke" by one commentator.
"While the USDA continues to report stabilisation in old-crop inventories at low levels, strong near-term demand, especially for corn from exports, feed and ethanol, points to further declines in inventories," Goldman said.
Informa Economics on Wednesday, in the first estimate from a major analyst since April 8, pooh-poohed the USDA figure, pegging year-end stocks at 575m bushels.
If correct, that would allow some loosening of the supply corset. Especially when combined with supplies rushed to feedlots and hog farms from the early corn harvest, which starts before the 2010-11 year finishes in August.
Big saving
The second answer is to take the USDA's own assessment on board.
The department believes that soft red winter wheat, which is already in decent supply and for which an abundant harvest is expected, will take over from corn in animal feed.
That certainly makes financial sense.
At prices as of Wednesday's close, livestock farmers buying wheat would save $0.70 a bushel, using 100 pounds of the grain to replace 92 pounds of corn and eight pounds of soymeal, according to a report by Paragon Economics and Steiner Consulting.
Not so easy
The trouble is that switching over from corn to wheat is not as simple as it might appear.
"To include a new feed requires more than just replacing corn with wheat, it requires a change of the entire feeding regimen, the feed also needs to be handled differently and may require additional work," the groups said.
"It takes time to transition cattle into a ration that contains wheat. Some of the research we have seen recommends a transition period between 30-45 days," they added, noting that wheat's high starch content "causes digestive problems".
For poultry farmers, meat attributes such as fat colour may be an issue for customers used to, for example, corn-fed chicken.
"We will likely see some wheat feeding. But we think that this will not be as quick to implement as some may think," the groups concluded.
Missing link?
So can a byproduct of ethanol plants square the circle?
Dried distiller's grains, or DDGs, have a lower starch content than wheat. They do not need to be processed or ground to put into a feed rations. And, while their supplies are less closely monitored than those of the main grains, they are undoubtedly increasingly available, thanks to the growing proportion of US corn, nearly 40%, going to make ethanol.
The USDA itself highlighted the "substantial" rise in "available supplies of feed byproducts" prompted by use of corn in biofuel plants.
Nearly 30m tonnes of DDGs will be available in 2010-11 for domestic US feed use – double that five years before - according to Australia & New Zealand Bank.
Adding this to corn supplies, as proposed by the USDA, "leaves the animal feed sector with 1% greater feed rations for 2010-11" than in 2009-10.
Combined with a switch to soft red winter wheat, "these factors could well mean more downside risks already exist to 2010-11 corn animal feed usage", ANZ said.
Two birds, one stone
It's an attractive idea, and not just for livestock farmers.
The ethanol industry is attempting to deflect criticism over levels of crops used in biofuels by highlighting its DDG production, and indeed won a concession last week over its labelling by the USDA.
And DDGs do have potential for taking up a bigger proportion of feed rations. Canadian hog farms are using DDGs at up to 40% in feed rations, according to the US Grains Council.
US cattle farmers can use it at rates of 35%, according to Steiner Consulting.
Fear of the new
However, there is still the problem that animals tend do better if kept on a constant diet.
"And there is the matter over whether farmers are happy to use it," Steiner analyst Alton Kalo told
"They need to be comfortable with handling it, and may be reluctant to start using something new."
Especially, after all, when live cattle are worth approaching 120 cents a pound on the Chicago futures market, and lean hogs more than $1 a pound too.
Only time may provide the answer as to how US animals get fed this summer.

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Why We Are Totally Finished, Corporatocracy Has Replaced Capitalism

By: D_Sherman_Okst

Capitalism Fixes Problems & Preserves Democracy: Capitalism is what we should be relying on to fix our problems. Capitalism has it's own ecosystem, just like biology's ecosystem. An economic ecosystem that weeds out the weak, has parasites that eat the failures and new bacteria that evolves and grows replacements for that which failed. A system that keeps everything in balance.

The problem is we are no longer a capitalistic society. What we were taught in school is now utter and absolute nonsense. Capitalism is a thing of the past.

As outlined in "It's Not A Financial Crisis - It's A Stupidity Crisis", we created two back to back bubbles. The air out of the Tech Bubble was sucked up for fuel by our next stupidity crisis: The Housing Bubble.
Now, after the second Stupidity Crisis there isn't a third bubble to inflate. If we still lived in a capitalistic environment the banks and financial institutions that created loans for folks who should have remained renters and then sold those loans as investments to pensions and countries would have been cleansed by capitalism's ecosystem.

But that isn't what happened.

In a very anti-capitalistic move the government decided that stupidity and criminal activity should be rewarded. I'd say they took our money, but it is worse, we didn't have that much money. So they borrowed the money in our name. The loan has a variable rate. They borrowed so much money that our kids cosigned the loan. In fact, our kid's future kid's signed on the dotted line.

That is unequivocally immoral.

They gave that borrowed money to a bunch of morons as a reward for stupidity. Morons who created subprime loans, liar loans, no income no documentation loans and other fraudulent instruments. Morons bundled that trash, got it rated AAA and then sold these turds or weapons of mass destruction that they had the audacity to name complex financial instruments or derivatives to pension funds, countries and other "investors".

Then it all blew up.

Big surprise.

For blowing up the world's economy this Stupidity Crisis was falsely named an Economic Crisis by CNBC and 535 morons on a hill in DC (Ron Paul and a few other fiscally responsible adults excluded). The idiots who created the mess were rewarded with a 700 billion dollar "bailout". This "bailout" was anything but a bailout and had a price tag of anything but 700 billion. The actual price tag is closer to 11 trillion and puts us on the hook for another 13-17 trillion - not counting interest.

Think about that for a second. This stupidity crisis is the equivalent of our Federal Debt which took a generations of politicians over a hundred years to wrack-up.

For anyone who still believes we live in a free country where capitalism reigns please show me one economic textbook which states that failure, and fraud get rewarded with borrowed taxpayer money. For anyone who believes we live in a democracy please show me a textbook that says the government will en-debt you and your kids and their kids to pay for a failed business. How is that democratic?

"Law of Morons": Years ago, while serving on a committee I came to a sad realization. Like gravity, there is the another invisible force which I dubbed "The Law of Morons". Put a group of very intelligent, well meaning people in a room together, put them on a committee or some governmental body that is devoid of guiding principles or merit-based decision making and "The Law of Morons" will prevail. The collective IQ will drop to the smallest shoe size in the room. And hope for loafers, because collectively this body won't be able to tie anything together - not even a single shoelace.

Government Creates Problems: Basically our government is comprised of many well meaning intelligent people who for whatever reason, re-election, greed the "Law of Morons", corporate puppet strings (read: lobbyist), self interest, corporatocracy or whatever else, do nothing but create massive problems. Lack of regulation, too much regulation.

And without any uncertainty --- too much DEBT along with a deficit that will NEVER be paid.

They have failed us.


With debt and a failed capitalistic society our democracy is now at risk. Serious risk.
A democratic society requires a stable and effectively functioning economy. I trust that we and our successors at the Federal Reserve will be important contributors to that end.~ Alan Greenspan
Serious irony there unless he was talking about the end of a democratic society. Greenspan was primarily responsible for muzzling Brooksley Born's attempt to regulate derivatives. 

Our deficit requires that we counterfeit "money" to service our debt payments.

Forget about GDP, it is a bogus measure cooked by the BEA (US Bureau of Economic Analysis) . GDP is so baked that it makes the folks who cooked Enron's books look like saints. Let's focus on what we take in and what we pay out. We take in about 2 trillion in taxes and other revenues. We borrow about 2 trillion of which about 1 trillion must be taken off for debt service, and we spend well over 4 trillion.

To deal with the 1.6 trillion ++ shortfall we just print/counterfeit it. This debases the value of every dollar we hold, stealing wealth from every hard working American. It causes the need for more dollars to be injected into the system, which increases the amount of taxes that Americans pay.

There are only two crimes listed in our Constitution: Treason and counterfeiting.
"Solutions Create More Problems" ~ Al Bartlett (Worked on the Manhattan Project).
Another asked, "Is there any intelligent life on earth to change our future to a sustainable one?"
Dr. Bartlett replied, "Is there any intelligent life in Washington, DC is the bigger question?"

We Have a Corporatocracy: Not capitalism.

Corporatocracy: A government that serves the interest of, and may de facto be run by corporations.
Some states have government workers who have powerful unions that influence the government's decisions. California has a massive pension mess, created in large part by government unions and elected officials who have catered to these unions.

"Too Big To Fail" is living proof that capitalism is dead. These TBTF institutions that blew up the economy in 2008 with their stupidity crisis, at the very least deserved to fail. They blew it. That is the definition of capitalism. You do well you are rewarded, you screw up you close shop. You commit fraud and you do time.
But with a Corporatocracy you have Hank Paulson - a former Goldman Sachs CEO worth about 700 million dollars who winds up becoming our past Secretary of the Treasury. There is a serious distinction between a civil servant and someone who serves a corporation, especially the last corporation he worked for. His salary was only six figures, but his benefit was that he got to cash out of his stocks and pay no taxes. He gave the morons who blew up the economy 700 billion dollars. He had another former Goldman Sachs employee disperse the funds while the current CEO of Goldman Sachs professed to be "Doing God's work."

In Summary: Our debt and our inability to revive capitalism and cut the waste in government will be our demise. Sadly, the only glimmer of hope I see is that Corporatocracy will destroy itself. I say sadly because it will destroy the average American citizen like some parasite that kills it's host.

Capitalism is dead and that is why we are totally screwed.

In Summary: My faith in the 5Gs: (G*(religious edit)d, Gold, Guns, Grub & The Government Will Continue to Screw It Up) remains strong.

By D. Sherman Okst,
Bernardston MA USA
davossherman @

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What Does Silver’s Recent Performance Relative to Crude Oil Mean For Investors?

Gold market witnessed a bumpy roller coaster ride during the week. An interesting thing to observe was the reasons that economic commentators gave for price fluctuations. On Tuesday gold for June delivery lost $14.50 to settle at $1,453.60 an ounce at the Comex division of the New York Mercantile Exchange. The gold price has traded as high as $1,468.50 and as low as $1,445 while the spot gold price was shedding more than $11. The reasons for the decline were explained by falling oil prices and by a Goldman Sachs report with a short-term bearish call on oil and copper, the industrial bellwethers. (The term “bellwether” refers to the practice of placing a bell around the neck of a castrated ram leading his flock of sheep so that the movements of the flock could be noted by hearing the bell).

Precious metals were particularly hard hit by the Goldman-induced selling even though they were not – platinum aside – directly mentioned in the note. Silver had hit a 31-year high of $41.93 an ounce but fell back at one point to $39.75, a 5.2 per cent reversal. The explanation for this in Bloomberg is that an investor took an outsized option bet that SLV will drop 37% by July. Bloomberg reports: "A trader’s almost $1 million bet that an exchange-traded fund tracking silver will plunge 37 percent by July was today’s biggest single options trade on U.S. exchanges as futures on the metal reached a 31-year high. The 100,000 options to buy 100 shares each of the iShares Silver Trust (SLV) at $25 by July changed hands at the ask price of about 10 cents and exceeded the open interest of 6,054 outstanding contracts before today, indicating that a buyer of a new bearish position initiated the transaction. The ETF rose to the highest intraday level since trading began five years ago, $40.33, before erasing gains. It fell 0.5 percent to $39.67 at 12:54 p.m. It hasn’t closed below $25 since November."

On Wednesday, gold rose recovering after its biggest one-day drop in nearly a month. The explanation for the upward move was that the dollar retreated amid expectations the US Federal Reserve will maintain its accommodative monetary policy for now. Also, the market reacted to the positive industry report issued by metals consultancy GFMS group saying that gold’s decade-long price rally could take the metal above $1,600 an ounce by year-end, as investors’ appetite for gold sharpens further (notice the food metaphor.) 

The company sees gold prices averaging $1,455 an ounce this year and sticking to a range of $1,319-1,620 an ounce. In its Gold Survey 2011, metals consultancy GFMS said there was growing evidence that buyers may drive prices still higher this year. "There is a higher starting point for each successive investor-led rally in the price. Thus, assuming investment demand will at some point take off again this year, there remains good scope for new highs in the price to be recorded," the consulting group said.

Thursday morning when gold futures began climbing some analysts attributed it to weakness in the U.S. dollar, the euro and sovereign debt issues in Europe.

When on Friday Gold jumped to another record high to $1,479.70 an ounce on Globex, after settling at $1,472.40 on the Comex division of the New York Mercantile Exchange analysts said it was inflation fears in China that are pushing gold and silver prices higher. China's inflation jumped to a 32-month high. Another reason given for gold's performance was a softer U.S. dollar. We will have more to say on the latter relationship in the following part of this update.

We don’t know if next week investors will get their risk appetite back. While markets are not focusing on geopolitical risk in Africa and the Middle East and the Japanese natural and nuclear disasters, these problems remain and will lead to continuing safe haven demand. 

We turn to the technical portion to give you some food for thought. Actually we have only two charts for you this week (the full version of this report includes 17 of them), but both have important implications (charts courtesy by

Beginning with the short-term GLD ETF chart, we observe that it signals a bullish trend in gold market. The very bullish reverse head and shoulders pattern which was formed over the December to April period has indeed been verified. 

Price levels have recently moved above the neck portion in the pattern and this move has been verified. Furthermore, the move was accompanied by strong volume, followed by a short consolidation, a decline back to the neck level and a quick reversal and a subsequent rally on significant volume. Simply put, this is both classic and beautiful, a true textbook verification of a breakout.

The situation is clearly bullish in the short term. Meanwhile, let’s see what happens in silver market – in this case from a long-term perspective and through the oil perspective.

We now present an updated version of a chart which we discussed in the March 11th Crude Oil, Gold, and Silver – Important Timing Connection. We were asked at that time to analyze oil and the ratios between oil, gold and silver. We found only one point of interest that being a possible cup and handle pattern in the silver to oil ratio. This pattern now appears to have completed and the ratio has broken out to the upside. If this breakout holds, it is possible that it will have profound implications for silver investors. In fact, it would imply that silver will actually heavily outperform oil from an investment standpoint.

Decreases in the price of oil would not appear likely to greatly impact the price of silver if the breakout in this ratio is confirmed. Also, if oil prices rise or even stagnate, silver investors will still likely benefit. This is indeed very positive news for those investing in the white metal.

Summing up, the short-term signs appear bullish for precious metals market. This sentiment is supported in several key charts and at this time. It is difficult not to be excited about the outlook for silver today. Its performance in recent months certainly has not been a fluke and it appears that further price increases are likely for the white metal.

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6 banks shuttered; makes 34 closed in '11


Regulators on Friday shut down a total of six banks in Alabama, Georgia, Minnesota and Mississippi, boosting the number of U.S. bank failures this year to 34. There were 157 bank closures in 2010 amid the shattered economy and piles of bad loans.

The Federal Deposit Insurance Corp. seized the banks, the largest by far being Superior Bank, based in Birmingham, Ala., with $3 billion in assets and about 70 branches in Alabama and Florida.

A newly chartered bank subsidiary of Houston-based Community Bancorp LLC was set up to take over Superior Bank's assets and deposits. The new subsidiary is called Superior Bank NA.

In addition, the FDIC and Superior Bank NA agreed to share losses on $1.84 billion of the failed bank's loans and other assets.

Superior Bank received $69 million in taxpayer funds in December 2008 under the government's financial bailout program, Treasury Department data show.

Its failure is expected to cost the deposit insurance fund $259.6 million.

Also shuttered were Birmingham-based Nexity Bank, with $793.7 million in assets; Bartow County Bank of Cartersville, Ga., with $330.2 million in assets; New Horizons Bank in East Ellijay, Ga., with $110.7 million in assets; Rosemount National Bank in Rosemount, Minn., with $37.6 million in assets; and Heritage Banking Group, based in Carthage, Miss., with $224 million in assets.

AloStar Bank of Commerce, also based in Birmingham, agreed to assume the assets and deposits of Nexity Bank. Hamilton State Bank, based in Hoschton, Ga., is assuming the assets and deposits of Bartow County Bank. Citizens South Bank, based in Gastonia, N.C., is acquiring the assets and deposits of New Horizons Bank. Central Bank, based in Stillwater, Minn., is assuming those of Rosemount National Bank. Trustmark National Bank, based in Jackson, Miss., is taking those of Heritage Banking Group.

In addition, the FDIC and AloStar Bank of Commerce agreed to share losses on $384.2 million of Nexity Bank's loans and other assets. The agency and Hamilton State Bank are sharing losses on $247.5 million of Bartow County Bank's loans and other assets. The agency and Citizens South Bank are sharing losses on $84.7 million of New Horizons Bank's assets. The FDIC and Trustmark National Bank are sharing losses on $156.4 million of Heritage Banking Group's assets.

The failure of Nexity Bank is expected to cost the deposit insurance fund $175.4 million. The failure of Bartow County Bank is expected to cost $69.5 million; that of New Horizons Bank $30.9 million; Rosemount National Bank, $3.6 million; and Heritage Banking Group, $49.1 million.

Georgia has been one of the hardest-hit states for bank failures. Sixteen banks were shuttered in the state last year. The shutdowns of Bartow County Bank and New Horizons Bank brought to eight the number of bank failures in the state this year.

California, Florida and Illinois also have seen large numbers of bank failures.

The 157 bank closures last year topped the 140 seized in 2009. It was the most in a year since the savings-and-loan crisis two decades ago.

The FDIC has said that 2010 likely would mark the peak for bank failures. Already this year the pace of closures has slowed: By this time last year, regulators had closed 50 banks.

The 2009 failures cost the insurance fund about $36 billion. The failures last year cost around $21 billion, a lower price tag because the banks that failed in 2010 were smaller on average. Twenty-five banks failed in 2008, the year the financial crisis struck with force; only three were closed in 2007.

From 2008, the year the financial crisis struck, through 2010 bank failures cost the fund $76.8 billion.
The growing number of bank failures has sapped billions of dollars out of the deposit insurance fund. It fell into the red in 2009, and its deficit stood at $7.4 billion as of Dec. 31.

The number of banks on the FDIC's confidential "problem" list rose to 884 in the final quarter of last year from 860 three months earlier. The 884 troubled banks is the highest number since 1993, during the savings-and-loan crisis. 

The FDIC expects the cost of resolving failed banks to total around $52 billion from 2010 through 2014.
Depositors' money — insured up to $250,000 per account — is not at risk, with the FDIC backed by the government. That insurance cap was made permanent in the financial overhaul law enacted in July.

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Earnings stumbles could awaken bears

by Reuters

Earnings could make for a bumpy ride in U.S. stocks next week if more key companies undershoot expectations, possibly causing a spike in volatility.

Disappointments from Alcoa (AA.N) , Google (GOOG.O) and others in the first week of earnings have dampened some of the enthusiasm about results, ensuring that eyes will be glued to reports in the coming days.

These include top technology and financial company results, including Yahoo (YHOO.O), Intel (INTC.O), IBM (IBM.N), Texas Instruments (TXN.N), Goldman Sachs (GS.N) and Citigroup (C.N). This blitz of numbers will come during a holiday-shortened week. U.S. financial markets will be closed on April 22nd in observance of Good Friday.

Market watchers also will be anxious to hear how much tech companies may have been affected by the disaster in Japan.

"We've all been lulled to sleep here lately. This earnings season will hopefully be a telling point to try to give people conviction to go one way or the other," said Mike Gibbs, managing director and chief market strategist at Morgan Keegan in Memphis.

"There are potential land mines out there that could create a little bit more volatile trading," he said.

The CBOE Volatility Index, a barometer of investor anxiety known as the VIX (.VIX), briefly fell on Friday to its lowest level since July 2007. It ended at 15.32, well below its mid-March high of 31.28.
Others agreed that further disappointments could stir up volatility.

"If earnings disappoint greatly from any of the major players next week in the financials or technical sector, this could be a catalyst for a return of volatility into the market," said Joe Kinahan, TD Ameritrade chief derivatives strategist, in Chicago.

For the week, the Dow Jones industrial average (.DJI) slipped 0.3 percent, while the Standard & Poor's 500 Index (.SPX) and the Nasdaq Composite Index (.IXIC) each shed 0.6 percent.


Whether the earnings season will be strong enough to propel the market higher is the question on investors' minds.

The Standard & Poor's 500 index (.SPX) is up 25.8 percent since the start of September, roughly when the recent rally began.

But sharp gains in the price of oil and other commodities, especially in the first quarter, have fueled worries about the impact on consumers and companies. Moreover, Japan's massive earthquake and tsunami, which triggered a nuclear crisis, have prompted other concerns.

Equity strategists at JPMorgan Chase cut their U.S. earnings estimates by $1 -- but for second-quarter and full-year results -- because of these "dual headwinds."

One popular view is that the market stays in sideways motion during earnings season.

"Earnings are just going to be enough to keep this market bipolar," said Mark Lamkin, CEO and chief investment strategist of Louisville,Kentucky-based Lamkin Wealth Management, with more than $200 million in assets under management.

They "are going to be good enough to keep this market toward the high end of this trading range, but they're not going to be good enough to break out of a range and set the next big leg higher." 


In aggregate, analysts' mean earnings forecast for the S&P financial sector for the first quarter is down 3.4 percent in the past 14 days, according to Thomson Reuters StarMine data. 

It was the biggest negative change for any S&P 500 sector, while energy has seen the biggest positive change, the data showed. 

The mean change in earnings estimates for Goldman Sachs (GS.N) is down 42.8 percent in the last two weeks, while the mean change in estimates for Citigroup Inc (C.N) is down 6 percent in the last 14 days, it showed. 

Analysts' mean earnings forecast for the S&P information technology sector is down 0.1 percent in the past 14 days. 

Among other tech disappointments, Infosys Technologies Ltd (INFY.O), India's No. 2 software services exporter, on Friday forecast annual sales lower than expected. 


Among others expected to report next week are several oil services companies. 

Data suggests those stocks could be vulnerable to more declines as earnings expectations have come down and bearish options bets have increased lately, according to Reuters Insider quantitative analyst Mike Tarsala. Deepwater projects in the Gulf of Mexico are being approved at a slow pace. 

Earnings sentiment for the group is waning, he said. Two of the sector's biggest names, Halliburton Co. (HAL.N) and Schlumberger Ltd. (SLB.N) are due to report next week. 

To be sure, many analysts still see many upside surprises ahead in this earnings reporting period, repeating the trend of recent earnings seasons. 

"What's happened is the global macro noise has overshadowed the fundamental earnings stories ... beneath the covers, things are actually better than people believe," said Mike Jackson, founder of Denver-based investment firm T3 Equity Labs. 

Based on his own research model, he ranks industrials (.GSPI) at the top of his earnings expectations among the S&P 500's 10 sectors, followed by telecommunications. 

Thomson Reuters data shows S&P 500 earnings are expected to have risen 11.7 percent from a year earlier. That estimate is roughly unchanged in recent weeks.

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U.S., EU: Identical Inflation, Opposite Policies

By Brian Blackstone

U.S. and euro zone inflation were at identical 2.7% annual rates in March, according to their respective statistics agencies in separate reports Friday. Core inflation is more or less the same (1.2% in the U.S., 1.3% in the euro bloc). Until last month, inflation had been running slightly faster in the euro zone.

Yet given the same set of inflation dynamics, the European Central Bank has already raised interest rates once and, based on Friday’s report, is likely to do so again as early as June. The Federal Reserve, in contrast, continues to pump money into the economy via QE2, and isn’t expected to lift interest rates from near zero for many months.

In large part, it’s a difference of emphasis. Fed officials think higher commodity prices are temporary, and that core inflation is a better gauge of underlying price trends. ECB officials target headline inflation, and worry that higher energy and food prices will filter through the economy via “second round” effects, namely higher wages and retail prices.

There are other forces at work, too. The U.S. has a higher growth potential, meaning the recession created a larger output gap there than it did in Europe. That presumably gives the Fed more time to see how long higher commodity prices stick.

The Fed also has a dual inflation-employment mandate (the ECB is only responsible for keeping inflation just below 2%). Though unemployment in the euro zone is higher than it is in the U.S., ECB officials think that is more a structural issue for governments than it is a monetary-policy problem.

Whatever the reasons, the two biggest central banks in the world can’t have such divergent views without consequences down the road.

If the ECB is right and higher commodity-driven inflation must be addressed quickly, then it may be able to keep inflation expectations under control without large-scale rate increases. If the Fed errs in waiting too long, it could be forced to play catch-up with more aggressive, and damaging, rate increases down the road.

If, however, the ECB is being unnecessarily spooked by commodity prices that are largely outside its control, it may unnecessarily damage the economy, especially in the already fragile periphery.

That may already be occurring. In a note explaining its downgrade of Ireland Friday, Moody’s Investors Service said, “the Irish government’s financial strength may suffer as a result of what may be the first of a series of policy rate increases by the European Central Bank to slow the rise in euro area inflation.”

STRATFOR’s 2011 Q2 Global Forecast

by Stratfor

STRATFOR’s 2011 Second Quarter Forecast

In our 2011 annual forecast, we highlighted three predominant issues for the year: complications with Iran surrounding the U.S. withdrawal from Iraq, the struggle of the Chinese leadership to maintain stability amid economic troubles, and a shift in Russian behavior to appear more conciliatory, or to match assertiveness with conciliation. While we see these trends remaining significant and in play, we did not anticipate the unrest that spread across North Africa to the Persian Gulf region.

In the first quarter of 2011, we saw what appeared to be a series of dominoes falling, triggered by social unrest in Tunisia. In some sense, there have been common threads to many of the uprisings: high youth unemployment, rising commodity prices, high levels of crony capitalism, illegitimate succession planning, overdrawn emergency laws, the lack of political and media freedoms and so on. But despite the surface similarities, each has also had its own unique and individual characteristics, and in the Persian Gulf region, a competition between regional powers is playing out.

When the Tunisian leadership began to fall, we were surprised at the speed with which similar unrest spread to Egypt. Once in Egypt, however, it quickly became apparent that what we were seeing was not simply a spontaneous uprising of democracy-minded youth (though there was certainly an element of that), but rather a move by the military to exploit the protests to remove Egyptian President Hosni Mubarak, whose succession plans were causing rifts within the establishment and opening up opportunities for groups like the Muslim Brotherhood.

As we noted in our annual forecast; “While the various elements that make up the state will be busy trying to reach a consensus on how best to navigate the succession issue, several political and militant forces active in Egypt will be trying to take advantage of the historic opportunity the transition presents.” In this quarter, we see the military working to consolidate its control, balance the lingering elements of the pro-democracy movement, and keep the Muslim Brotherhood and other Islamist forces in check. Cairo is watching Israel very carefully in this respect, as Israeli military actions against the Palestinians or against southern Lebanon could force the Egyptian leadership to reassess the peace treaty with Israel, and give the Islamist forces in Egypt a political boost.

In Bahrain, we saw Iran seeking to take advantage of the general regional discontent to challenge Saudi interests. The Saudis intervened militarily, and for now appear to have things locked down in their smaller neighbor. Tehran is looking throughout the region to see which levers it is willing or capable of pulling to keep Saudi Arabia unbalanced while not going so far as to convince the United States it should keep a large force structure in Iraq. Countering Iran is Turkey, which has become more active in the region. The balancing between these two regional powers will be a major element shaping the second quarter and beyond.

We are entering a very dynamic quarter. The Persian Gulf region is the center of gravity, and the center of a rising regional power competition. A war in or with Israel is a major wild card that could destabilize the area further. Amid this, the United States continues to seek ways to disengage while not leaving the region significantly unbalanced. Off to the side is China, more intensely focused on domestic instability and facing rising economic pressures from high oil prices and inflation. Russia, perhaps, is in the best position this quarter, as Europe and Japan look for additional sources of energy, and Moscow can pack away some cash for later days.

Middle East

Regional Trend: Iran’s Confrontation with the Arab World

The instability in the Middle East carrying the most strategic weight is centered on the Persian Gulf, where Bahrain has become a proxy battleground between Iran and its Sunni Arab rivals. Iran appears to have used its influence and networks to encourage or exploit rising unrest in Bahrain as part of a covert destabilization campaign in eastern Arabia, relying on a Shiite uprising in Bahrain to attempt to produce a cascade of unrest that would spill into the Shiite-heavy areas of Saudi Arabia’s oil-rich Eastern Province. Saudi Arabia responded by sending military forces into its island neighbor.

Continued crackdowns and delays in political reforms will quietly fuel tensions between the United States and many of the Gulf Cooperation Council (GCC) states as Washington struggles between its need to complete the withdrawal from Iraq and to find a way to counterbalance Iran. The Iranians hope to exploit this dilemma by fomenting enough instability in the region to compel the United States and Saudi Arabia to come to Tehran for a settlement on Iranian terms or to fracture U.S.-Saudi ties, thereby drawing Washington into negotiations to end the unrest and thus obtain the opportunity to withdraw from Iraq. So far, that appears unlikely. Iran has successfully spread alarm throughout the GCC states, but it will face a much more difficult time in sustaining unrest in eastern Arabia in the face of intensifying GCC crackdowns.

Iran probably will have to resort to other arenas to exploit the Arab uprisings. In each of these arenas, Iran also will face considerable constraints. In Iraq, for example, Iran has a number of covert assets at its disposal to raise sectarian tensions, but in doing so, it risks upsetting the U.S. timetable for withdrawal and undermining the security of Iran’s western flank in the long term.

In the Levant, Iran could look to its militant proxy relationships with Hezbollah in Lebanon and Palestinian Islamic Jihad in the Palestinian territories to provoke Israel into a military confrontation on at least one front, and possibly on two. An Israeli military intervention in the Gaza Strip would put pressure on the military-led regime in Egypt as it attempts to constrain domestic Islamist political forces. Syria, which carries influence over the actions of the principal Palestinian militant factions, can be swayed by regional players like Turkey to keep this theater contained, but calm in the Levant is not assured for the second quarter given the broader regional dynamic.

In the Arabian Peninsula, Iran can look to the Yemeni-Saudi borderland, where it can fuel an already-active al-Houthi rebellion with the intent of inciting the Ismaili Muslim communities in Saudi Arabia’s southern provinces in hopes of sparking Shiite unrest in Saudi Arabia’s Eastern Province. This represents a much more roundabout method for trying to threaten the Saudi kingdom, but the current instability in Yemen affords Iran the opportunity to meddle amid the chaos.

Regional Trend: War in Libya, Fears in Egypt

Libya probably will remain in a protracted crisis through the next quarter. Though the Western leaders of the NATO-led military campaign have tied themselves to an unstated mission of regime change, an air campaign alone is unlikely to achieve that goal. Gadhafi’s support base, while under immense pressure, largely appears to be holding on in western Libya. The eastern rebels meanwhile remain an amateurish group that is not going to transform into a competent militant force within three months. The more the rebels attempt to advance westward across hundreds of miles of desert toward Tripoli, the easier Gadhafi’s forces can fall back to populated areas where NATO is increasingly unable to provide close air support for fear of inflicting civilian casualties. The geography and military realities in Libya promote a stalemate, and the historic split between western Tripolitania and eastern Cyrenaica will persist. The elimination of Gadhafi by hostile forces or by someone within his regime cannot be ruled out in this time frame, nor can a potential political accommodation involving one of Gadhafi’s sons or another tribal regime loyalist. Though neither scenario is likely to rapidly resolve the situation, a stalemate could allow some energy production and exports to resume in the east.

Coming out of its own political crisis, Egypt sees an opportunity in the Libya affair to project influence over the oil-rich eastern region and position itself as the Arab power broker for Western countries looking to earn a stake in a post-Gadhafi scenario. However, domestic constraints probably will inhibit Egyptian attempts to extend influence beyond its borders as Cairo continues its attempts to resuscitate the Egyptian economy and prepare for elections slated for September. Egypt also has a great deal to worry about in Gaza, where it fears that a flare-up between Palestinian militant factions and Israeli military forces could embolden the Egyptian opposition Muslim Brotherhood and place strains on the Egypt-Israel peace treaty.

Regional Trend: Syria Locking Down

The minority Alawite Syrian regime will resort to more forceful crackdowns in an attempt to quell spreading unrest. There is no guarantee that the regime’s traditional tactics will work, but Syrian President Bashar al Assad’s government appears more capable than many of its embattled neighbors in dealing with the current unrest. The crackdowns in Syria occurring against the backdrop of a stalemated Libyan military campaign will expose the growing contradictions in U.S. public diplomacy in the region, as the United States and Israel face an underlying imperative to maintain the al Assad regime in Syria which, while hostile, is weak and predictable enough to be preferable to an Islamist alternative. Both the GCC states and Iran will attempt to exploit Syria’s internal troubles in trying to sway the al Assad regime to their side in the broader Sunni-Shiite regional rivalry, but Syria will continue managing its foreign relations in a cautious manner, keeping itself open to offers but refusing commitment to any one side.

Regional Trend: Rising Turkey

The waves of unrest lapping at Turkey’s borders are accelerating Turkey’s regional rise. This quarter will be a busy one for Ankara, as the country prepares for June elections expected to see the ruling Justice and Development Party consolidate its political strength. Turkey will be forced to divide its attention between home and abroad as it tries to put out fires in its backyard. The crisis in Libya provides Turkey an opportunity to re-establish a foothold in North Africa, while in the Levant Turkey will be playing a major role in trying to manage the situation in Syria to avoid a spillover of Kurdish unrest into its own borders. Where Turkey is most needed, and where it actually holds significant influence, is in the heart of the Arab world: Iraq. Iran’s destabilization attempts in eastern Arabia and the United States’ overwhelming strategic need to end its military commitment to Iraq will put Turkey in high demand for both Washington and the GCC states as a counterbalance to a resurgent Iran.

Regional Trend: Yemen in Crisis

The gradual erosion of Yemeni President Ali Abdullah Saleh’s regime over the next quarter will plant the seeds for civil conflict. Both sides of the political divide in Yemen agree that Saleh will be making an early political exit, but there are a number of complications surrounding the transition negotiations that will extend the crisis. As tribal loyalties continue to fluctuate among the various political actors and pressures pile on the government, the writ of the Saleh regime will increasingly narrow to the capital of Sanaa, allowing rebellions elsewhere in the country to intensify.

Al-Houthi rebels of the Zaydi sect in the north are expanding their autonomy in Saada province bordering the Saudi kingdom, creating the potential for Saudi military intervention. An ongoing rebellion in the south as well as a resurgence of the Islamist old guard within the security apparatus opposing Saleh will meanwhile provide an opportunity for al Qaeda in the Arabian Peninsula to expand its areas of operation. Saleh’s eventual removal — a goal that has unified Yemen’s disparate opposition groups so far — will exacerbate these conditions, as each party falls back to their respective agendas. Saudi Arabia will be the main authority in Yemen trying to manage this crisis, with its priority being suppressing al-Houthi rebels in the north.

South Asia

Regional Trend: Intensifying Taliban Actions in Afghanistan and Pakistan

Our annual forecast remains on track for Afghanistan. With the spring thaw, operations by both sides will intensify, but decisive progress on either side is unlikely. The degree to which the Taliban is capable of mounting offensive operations and other intimidation and assassination efforts in this quarter and the next will offer an opportunity to assess the impact of International Security Assistance Force (ISAF) operations. It may also reveal the Taliban’s core strategy for the year ahead, namely, whether it intends to intensify the conflict or hunker down to encourage and wait out the ISAF withdrawal.

The Pakistani counterinsurgency effort has made some progress in the tribal areas, but the Pakistani Taliban have yet to really ramp-up operations. The tempo of operations that the Pakistani Taliban are able to mount and sustain this quarter and next will be telling in terms of the strength of the movement after Islamabad’s efforts to crack down.

The Raymond David case brought ongoing tensions between the United States and Pakistan over the U.S.-jihadist war to an all-time high in the past quarter. Though the issue of the CIA contractor killing two Pakistani nationals was resolved via a negotiated settlement, the several weeklong public drama has emboldened Islamabad, which the Pakistanis will build upon to try to shape American behavior. While a major falling out between the two countries is unlikely, the Raymond Davis incident as well as the increasing perception in the region that Washington’s position has been significantly weakened will allow Pakistan to assert itself in terms of the overall U.S. strategy for South Asia, and especially on Afghanistan.

Islamabad will be trying to leverage further gains by Afghan Taliban insurgents to move the United States toward a negotiated settlement and exit strategy that does not create problems for Pakistan. However, there is little sign of meaningful negotiation or political accommodation so far this year. While there have been efforts to reach out behind the scenes, neither side is likely ready to give enough ground for real discussions to begin.

East Asia

Regional Trend: China’s Inflation Challenge

China’s challenge in this quarter is clip_image008inflation, namely, finding a way to balance inflation’s impact on society without overcompensating. Inflation is expected to peak this quarter, and political leaders have pledged to get tougher on constraining price increases. Yet policy tightening remains cautious, and new threats to growth have emerged in the form of slackening exports, encouraged by the Japanese slowdown, and rising raw materials costs and other uncertainties in global trade and capital flows. The government will try to prevent or delay price increases for consumers, but kinks in supply and demand, including hoarding and price gouging, will occur and trigger reactions from the most affected social or occupational groups and corporations.

Government fears about economic and social instability and political dissent have triggered an unusually intense security crackdown on dissidents, journalists, newspapers and the Internet. April to June is historically the prime time for strikes, protests, and other incidents and contains sensitive anniversaries like Tiananmen. Given inflation pressures, such incidents are likely to occur in the second quarter. Beijing therefore has no inclination to relax its grip, and is more likely to squeeze harder if social unrest seems to spread more widely or become more coordinated.

The government will delicately handle relations in high-level meetings with major partners including the United States, Australia, Russia, Brazil, India and others, with economic deals preventing tensions from exploding. However, Beijing’s growing sensitivity toward dissent and potential foreign influence means its actions may attract more criticism internationally. A high-profile, serious incident in China relating to human rights or mistreatment of foreigners could invite international moves toward punitive measures, though there is no movement in that direction now.

Regional Trend: Japan’s Postwar Low

The earthquake, tsunami and nuclear crisis have brought Japan to its lowest point since World War II. The second quarter will see the full force of the negative impact on Japan’s economy and on the global economy, where the ripples will be limited but measurable. The power shortages affecting the Kanto area will be manageable because of seasonal low demand. But as the weather warms up, the power shortfalls will increase — affecting more industries — and the need to conserve will become more pressing on the public. Japan typically recovers quickly from earthquakes, but recovery will not gain momentum until after this quarter at the earliest.

The political aftermath of the disaster will focus in the short term on budgeting and stimulus for reconstruction. Political parties’ unity in the face of disaster will prove superficial. The ruling party’s perceived success at managing recovery in the devastated northeast and containing the nuclear crisis will determine its standing. But as the levels of radiation that escape from the damaged plant and the effects of contamination on water, agriculture, health and international commerce increase, so too do the chances for an extensive shakeup of political leadership.

Popular anger could lead to outbursts of large protests or social instability that are otherwise rare in Japan, but the ramifications of any such activity will be contained within the current political system.

Regional Trend: Ongoing Tensions on the Korean Peninsula

Korean Peninsula tensions have fallen since the fourth quarter of 2010, but remain relatively high. South Korea and the United States have warned that further provocative behavior from the North, such as a third nuclear test, may occur in the second or third quarter. Seoul and Washington are maintaining a high tempo of military exercises to deter the North. The next episodes in the North Korean leadership succession and indications of an impending return to international negotiations also suggest that the North may stage another surprise incident this quarter as a prelude to a return to talks.

The North is deeply engaged with back-channel discussions with the United States, and despite a potentially provocative act by the North, movement back toward the negotiating track is the overall trend for the quarter.

Former Soviet Union

Regional Trend: Russia’s Dual Foreign Policy

In terms of Russia’s dual foreign policy, Moscow is comfortable in its current position going into the second quarter. The United States has become involved in a third war, this one in Libya, which is further distracting U.S. attention away from Eurasia and toward the Middle East. The Europeans have differences over the Libyan intervention and are dealing with financial and economic turmoil and governmental shifts. Meanwhile, energy prices are rising and key countries like Italy and Japan are looking to Russia to make up for the loss of energy supplies from Libya and the Fukushima nuclear crisis, respectively.
All of these energy developments provide Moscow with opportunities, not the least of which is to fill state coffers. The last time Russia received such an infusion of cash during a time of peaking energy prices, Moscow made a serious show of force in the Russia-Georgia war in August 2008. This time, Russia is putting the cash in the bank and investing in large domestic projects in order to improve the country’s long-term internal strength.

There will be two lines of focus for Russia in the second quarter — Europe and the former Soviet states. With Europe, Russia’s maneuvers will start to take shape via its relationship with the United States. Russian President Dmitri Medvedev and U.S. President Barack Obama will have their first meeting of the year in May. Russia is focusing the talks on the issue of ballistic missile defense — something the United States is less inclined to address at present. Russia, then, will use the issue to shape perception of both the United States and Russia in Europe. The Western Europeans would like to keep out of the discussion, but Moscow will seek to draw them in as Russia tries to exploit and expand differences between the United States and its Western European allies, as well as between Washington and the Central Europeans. Russia, however, will continue to pursue its dual-track diplomacy, and will not push Washington too far away. For Moscow, it is important to balance its assertiveness with a dose of cooperation.

One potential problem that could emerge for Moscow is in the Caucasus. Tensions have been heating up between Armenia and Azerbaijan as preparations are made to reopen a rebuilt airport in the breakaway territory of Nagorno-Karabakh in May. Armenian President Serzh Sarkisian has announced he would be on the first flight from Yerevan to the rebel region’s capital, and this has set the stage for a standoff as Azerbaijan has threatened to shoot down flights that violate its airspace. If a conflict breaks out, it will draw in Russia, as well as Turkey and possibly the United States, though it is more likely this will play out politically rather than militarily.

Regional Trend: Kremlin Infighting

Kremlin infighting increased at the end of the first quarter and will continue into the second. A new evolution is emerging: pushing out old siloviki businessmen (who also happen to be politicians) and replacing them with more Western-minded businessmen (who appear more competent). Moreover, announcements of serious cuts in government jobs will start in a matter of months. A backlash is brewing among those being pushed out, something that Prime Minister Vladimir Putin and President Medvedev are already struggling to keep a handle on in the lead-up to elections at the end of 2011 and in 2012.

Regional Trend: Powder Keg in Central Asia 

Central Asia will continue to simmer in the second quarter, especially with low-level instability persisting in Kyrgyzstan and Tajikistan. However, the Kazakh elections in the beginning of April, in which incumbent President Nursultan Nazarbayev secured a comfortable re-election, have sharpened the focus on the real issue in the country — Nazarbayev’s succession crisis. STRATFOR is hearing rumblings that large reshuffles will happen right after the elections, and aside from the movement made in the political sphere, instability can be played out in other critical areas as well, such as energy and finance. This is what really scares global powers with stakes in the country, which will be watching Kazakhstan closely.


Regional Trend: Closing the Circle on the Eurozone Periphery

The eurozone’s sovereign debt crisis continues, but with social unrest and natural disaster in other parts of the world, the focus of the markets has shifted away from Europe, providing the continent with a temporary respite. As STRATFOR stated in its Annual Forecast, the EFSF, Europe’s bailout mechanism, is more than capable of accommodating the Portuguese bailout — and even bailouts for Belgium and Spain, if need be. Rising energy prices due to geopolitical instability in the Middle East could, however, hinder the recovery of private consumption. Private consumption is not as important for Europe as it is for the United States, but Mediterranean countries tend to rely on it for a greater proportion of their gross domestic product (GDP) than northern European countries. They also tend to be less efficient at using energy and oil tends to make up a higher proportion of their overall energy profiles. The last thing the Spanish economy needs is additional headwinds, as it is expected to grow only 0.8 percent in 2011. A serious revision of the 2011 Spanish GDP closely following the Portuguese bailout could refocus the markets on Madrid’s — and therefore the wider eurozone’s — sovereign debt problems.

The aspect of Europe’s economy most concerning to STRATFOR is the status of the eurozone’s financial system, specifically the health of its banks. As the sovereign debt crisis recedes, the banks are returning to the forefront. For many countries, these issues are two sides of the same coin (as in the cases of Ireland and Spain) and for others there is a danger that banks have troubled sovereign bond holdings. The ECB is expected to unveil new support mechanisms in the second quarter, particularly for restructuring banks in Ireland, and it will likely expand the mechanism to the rest of the eurozone’s restructuring banks, probably by the end of the quarter. However, many European banking systems are integrated into local politics — German Landesbanken being one example — and there could be resistance to restructuring.

Regional Trend: Austerity Measures and Political Costs

Getting to the point where it could manage the sovereign debt crisis took a great deal of work for Europe. Bailing out Greece and Ireland, setting up the EFSF and pushing through tough austerity measures across the continent was, and continues to be, politically expensive. The non-traditional, anti-establishment parties are gaining popularity. This annual trend should continue across the continent and is not only confined to the eurozone. Instability in the Balkans is growing as well, with Croatia and Bosnia-Herzegovina, both EU candidates, facing a particularly unstable quarter.

Furthermore, German Chancellor Angela Merkel has lost a number of state elections and will likely face more negative election results throughout 2011, resulting in a severe loss of political capital. This will not play an immediate role on pushing through changes to EFSF’s capacity or the ability of bailout mechanisms to purchase government bonds directly, but rather will reduce her ability to go against her conservative base in the event that a new crisis emerges. If the upcoming German Federal Constitutional Court decision on the constitutionality of the bailout mechanisms rules against the mechanisms, this would certainly precipitate a crisis, and remains the event to watch in the second quarter. Such a ruling would reopen the fundamental question of whether Berlin stands behind the eurozone — supposedly answered in the affirmative with the Greek and Irish bailouts.

Regional Trend: The Devolution of Cold War Institutions

Another trend to observe in the second quarter is the long-term devolution of two Cold War institutions: NATO and the European Union. The Libyan intervention plays into this process very well, since it has strained member state relations in both organizations. But Libya is a symptom, not a trigger, of a process long under way. Three trends in particular are evident in the Libyan situation:
  • Germany’s focus is being drawn away from NATO and transatlantic links and toward Central and Eastern Europe, a traditional sphere of influence referred to as Mitteleuropa, and Russia.
  • Central Europeans have for some time expressed their displeasure with NATO being used for operations outside the European theater. As a result, Central Europe will have little support in the second quarter in pushing back Russia on its periphery and will be forced to stand with the status quo — an uneasy acquiescence to Russia’s gains in its former Soviet sphere of influence.

Sub-Saharan Africa

Regional Trend: Fallout from North Africa

We will be watching in the second quarter for unrest from the revolutions occurring in North Africa spreading into sub-Saharan Africa. A number of governments in the region have faced low-level protests, including Senegal, Angola, Gabon, Sudan, Burkina Faso and Mauritania, but so far no protests in sub-Saharan Africa have emerged on a scale that has significantly threatened a government. We cannot say that any specific government will be vulnerable this quarter, but even so, these governments and aspiring opponents will be calculating throughout the quarter how to best advance their interests.

Regional Trend: Nigerian Elections

Nigeria will hold national elections in the second quarter, an event that could trigger considerable violence as incumbent and aspiring politicians maneuver to win office and the significant perks that accompany it. The election timetable is staggered, with parliamentary elections currently scheduled for April 9, a presidential vote April 16, and gubernatorial and local government elections April 26. A new president will be inaugurated by the end of May. Although localized protests and violence can be expected, there is a strong chance that militant activity in the oil-producing Niger Delta region will be restrained. A combination of political, financial and security measures will be used to manage Niger Delta militancy.

Reforms to the oil and natural gas sector in the form of the Petroleum Industry Bill (PIB) will be discussed before the dissolution of parliament leading up to the presidential inauguration. While the bill is unlikely to pass during this period, the speed at which the new parliament pursues its passage will indicate the level of consensus for reform that exists within the government. The PIB would restructure state participation in the sector, increasing government revenues and introducing a legal framework for the country’s natural gas operations.

Regional Trend: Southern Sudanese Independence

Sudan’s ruling National Congress Party and the Sudanese People’s Liberation Movement party will use the entire quarter to negotiate terms of Southern Sudanese independence, expected to be declared July 9. Negotiations will not likely be concluded this quarter, however, as the issues — particularly oil revenue sharing — involve deeply entrenched interests. Still, ad hoc working committee-level agreements on how to deal with oil likely will serve in place of the more difficult formalized relations. While there likely will be flare-ups along the border in Abyei and places like Malakal, a return to full-scale war is not expected.

Regional Trend: Consolidating Gains Against Somalia’s al Shabaab

African Union peacekeepers deployed in Somalia together with other pro-Somali government forces and militias will use the second quarter to try to consolidate gains against al Shabaab, a hard-line Islamist militia operating in Somalia. Efforts will focus on Mogadishu; fewer resources will be devoted to counterinsurgency operations in southern and central parts of the country. Political negotiations over the end of the Transitional Federal Government mandate in the third quarter will accelerate as Somali politicians and donor stakeholders try to cut a deal over what political groupings in Mogadishu can best isolate al Shabaab.

Regional Trend: Ongoing Tensions in Ivory Coast 

Ivory Coast is likely to remain tense this quarter as President Alassane Ouattara works to entrench his government in Abidjan following former President Laurent Gbagbo’s removal from power April 11. Ouattara and his government, led by Prime Minister and Defense Minister Guillaume Soro, will need the full quarter and then some to promote reconciliation in the country and to try to prevent residents in Abidjan loyal to Gbagbo from carrying out guerrilla attacks, including assassination attempts on Ouattara and Soro.

Both activities will be necessary to protect the Ouattara government from reprisal attacks by gunmen armed by the former Gbagbo regime. Ouattara will take the lead on political reconciliation while Soro will assume the task of disarming pro-Gbagbo loyalists. International economic sanctions applied against the Gbagbo regime will be dropped shortly after Ouattara consolidates his hold on power, and revenues that will flow again from cocoa and other commodity exports will be used to buy good will among southern Ivorians, civil servants and security personnel to reduce their hostility toward the new government.

Regional Trend: Labor Unrest in South Africa

In South Africa, the second quarter is the period when the potential for labor unrest over annual wage negotiations emerges, though any strike action usually occurs in the third quarter. Last year, the country experienced widespread strikes by civil servants and private sector employees in the wake of the 2010 World Cup.

Pretoria will be keen to avoid a repeat performance in the sectors where negotiations are taking place, but will unlikely be able to meet wage demands due to its need to control inflation. Any significant concessions to labor will come as a result of the ruling African National Congress prioritizing its need to placate the ruling alliance’s union members at the expense of the country’s economic priorities. South Africa will also hold local government elections May 18, and while no major changes in voting trends are expected, the government will want to make sure that major labor disputes do not affect voter preferences.

Latin America

Regional Trend: Venezuela’s Delicate Stability

Venezuela continues to struggle with challenging economic conditions, but this is not likely to be the quarter when things come crashing down. Although Venezuela is not currently experiencing the drought that plagued its hydroelectric system last year, the general decline of the electricity sector after decades of neglect is causing periodic blackouts and disruptions throughout the country, which will likely worsen over the course of the second quarter. However, thanks to high oil prices — which currently hover around $100 per barrel for the Venezuelan oil basket — the government of Venezuelan President Hugo Chavez has enough extra cash on hand to ensure regime stability through the quarter. Domestic economic challenges will keep most of this cash at home, leaving Caracas with little additional money to spread around the region. Given these challenges, we should expect to see continued Chinese interest in Venezuela as China seeks additional investment opportunities and Venezuela looks to form economic and political ties with any country besides the United States.

Regional Trend: Elections in Peru

Peru will select a new president in the second quarter. The first-round election held April 10 was won by leftist candidate Ollanta Humala, who will face either Keiko Fujimori, the daughter of former President Alberto Fujimori, or Pedro Pablo Kuczynski in a June 5 runoff (the results are not yet finalized). Although Humala has forcefully distanced himself from the extreme leftism of Venezuelan President Chavez in favor of the more business-friendly leftism of former Brazilian President Luiz Inacio Lula da Silva, it is not clear at this point how much of his (relatively recent) moderated rhetoric is purely for effect, and how much will translate into policy. If elected, Humala will be constrained by the lack of a majority in the legislature, so any radical policy shifts would be difficult.

Regional Trend: Brazil Charts a Course

This quarter will be the one to watch for the evolving foreign and domestic policies of Brazilian President Dilma Rousseff. Particularly important this quarter will be any movement Brazil makes toward formulating a strategic policy regarding China, Brazil’s most important trading partner with which Brazil has an increasingly tense relationship as a result of rising Chinese exports competing with Brazilian domestic manufacturers. Some limited movement toward tougher trade rules on a number of Chinese goods can be expected as Brazil seeks to protect domestic industry from international competition. However, Brazil has no interest in alienating China, so major strategic shifts are unlikely this quarter. Brazil’s foreign policy overall will take a backseat this quarter under the Rousseff administration as she focuses on economic management. A pending decision on which fighter jet Brazil will purchase will continue to be an issue in the second quarter, with France and the United States both lobbying for the contract. With the U.S. president’s visit to Brazil out of the way and Rousseff settling on her overall policy strategy, we could possibly see movement in the second quarter on the long-delayed decision.

Regional Trend: Political Alliances in Mexico

In Mexico, negotiations continue between the Revolutionary Democratic Party (PRD) and the National Action Party (PAN) over the possibility of an alliance in Mexico state for the July 3 gubernatorial election. It is unlikely either party could beat the Institutional Revolutionary Party (PRI) on its own, so an alliance would be beneficial, but the parties would need to agree on a candidate and a platform, which is no small feat. The PRD and the PAN will have to settle their differences before the end of the quarter if the coalition candidate is to have time to campaign against the as-yet-undeclared PRI candidate. As unlikely as it is, if the PRD and the PAN can come to an agreement in Mexico state, it could set them up for further cooperation ahead of the 2012 presidential election, for which the PRI appears to be well-positioned.

Regional Trend: Persistent Cartel Violence

In the cartel war, Tamaulipas and Nuevo Leon states continue to be hotly contested territory between the Gulf cartel and Los Zetas, with the latter group most firmly entrenched in Monterrey and Nuevo Laredo. Mexican military and law enforcement have made inroads in the Zeta leadership structure, successfully capturing or killing eight mid- and upper-level leaders (including one of the original core group) in Nuevo Leon, Tamaulipas, Oaxaca and Quintana Roo states. Chihuahua, Guerrero, Sonora and Durango states all are seeing an increase in violence as the Sinaloa Federation expands into the regional cartels’ conflicts. The military is fighting an uphill battle, with cartel leaders being replaced as quickly as they are captured.

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