Daily Sources 8/4

1. IEA WARNS THAT $70 OIL COULD UNDERMINE ECONOMIC RECOVERY

Kate Mackenzie at the Financial Times reports that the IEA's chief economist, Fatih Birol, told the newspaper in an interview that oil prices above $70/b would likely undermine any economic recovery.

"'If we go one step further, if we see prices go much higher than that, we may see it slow down and strangle economic recovery,' he said of oil prices on Friday, when the European benchmark was around $70."

2. CHINA MAY CHANGE RULES TO MAKE SUBORDINATED BONDS INELIGIBLE AS CAPITAL, WHICH SHOULD REDUCE THE VOLUME OF CREDIT

Wang Ming and Rose Yu at the Wall Street Journal report that the China Banking Regulatory Commission

"may deem subordinated bonds issued by a bank ineligible as capital if those bonds are held by another bank, the person said. The banking regulator estimates about half the subordinated bonds in circulation are held by other banks.

The amount that banks in China can lend is governed by technical capital ratios -- the more capital, the more room to lend. A big way banks have raised capital is by selling yuan-denominated subordinated bonds, or debt instruments that offer investors less protection in the event an issuer can't repay but also a higher yield than regular bonds."

"Analysts said any curb on how subordinated debt can be used would likely slow lending, because it would limit the appetite of the market's biggest investors, which are banks.

'If the regulator excludes cross-held subordinated bonds from being classified as part of banks' capital, banks will have to try to sell their bonds to nonbanking investors,' said Guo Tianyong, the director of the Finance Research Center at Beijing's Central University of Finance and Economics. That will be difficult, Mr Guo said, and 'as a result, banks will slow the pace of subordinated-bond issues, which would eventually lead to a slowdown in credit growth.'

She Minhua, an analyst at Haitong Securities, said, 'Changing the rules would effectively cause a further decline in banks' capital adequacy ratios, so the fastest way for them to maintain a healthy ratio would be to cut loans.'"

3. CHINESE SEABORNE OIL IMPORTS UP 26% IN JULY YOY

Bloomberg reports that preliminary data from the Chinese Ministry of Transportation indicates that Chinese seaborne imports grew by 26% in July from a year previous.

"Chinese ports unloaded about 16.27 million metric tons, or 3.8 million barrels a day, of imported crude last month ... ."

4. NORTH KOREA RELEASES US JOURNALISTS DURING FORMER POTUS VISIT

Heejin Koo at Bloomberg reports that North Korean leader Kim Jong Il pardoned and ordered the release of two American journalists who had been arrested after allegedly crossing into North Korean territory.

"By seeking an amnesty, the US appears to be conceding that the two reporters broke North Korea’s laws, Paik [Hak Soon, a researcher on North Korean issues at Sejong Institute] said.

'The visit indicates that the US and North Korea are willing to resolve this matter through dialogue,' he said. 'We’ll have to see if this expands to the nuclear issue.'"

"The former president and the North Korean leader 'had an exhaustive conversation' and a 'wide-ranging exchange of views on the matters of common concern,' [the] Korean Central News Agency said without giving further details. The country’s National Defense Commission hosted Clinton at a dinner in his honor, the agency said."

Pyongyang has been long seeking direct bilateral talks with the US regarding its disputes with the international community.

5. AUSTRALIAN CENTRAL BANK LEAVES BENCHMARK INTEREST RATE UNCHANGED AT 3%, RETAIL SALES ARE DOWN 1.4% IN JUNE FROM MAY

EcPulse reports that the Reserve Bank of Australia decided today to maintain their benchmark interest rate at 3%.

"[Reserve Bank Governor] Stevens said in his statement that the world economy started to show clear signs of stability, thanks for the global stimulus plans set by governments around the world that led to an improving outlook for the world economy. He added that the US economy reached a turning point, while the economy in the euro zone is still weak."

Meanwhile, Jacob Greber at Bloomberg reports that Australian retail sales fell by 1.4% in June from May.

"Today’s report suggests the impact from A$12 billion ($10 billion) in government cash handouts to households is waning after consumer spending helped Australia avoid a recession in the first quarter. Still, the economy may expand in the second quarter after retail sales rose 2% in the three months through June. Economists forecast a 1.3% gain.

'We still have retail sales at a very strong levels,' said Ben Dinte, an economist at Macquarie Group Ltd. in Sydney. 'With the strengthening consumer sentiment, we should see retail sales hold up.'

The quarterly retail sales figure accounts for as much as 25% of Australia’s gross domestic product, Dinte added."

6. RUSSIA AND TURKEY TO SIGN PACT TO BUILD OIL PIPELINE WHICH WOULD BYPASS THE BOSPHORUS

Ali Berat Meric and Stephen Bierman at Bloomberg report that Russia and Turkey will sign an accord to build a pipeline to send oil to the Mediterranean bypassing the Strait of Bosphorus.

"OAO Gazprom, Russia’s largest company, and Turkey’s Calik Holding AS will sign an accord to build a pipeline between the northeastern port of Samsun and a terminal at Ceyhan on Turkey’s Mediterranean coast, Russian Energy Minister Sergei Shmatko told reporters in Ankara today before a visit by Russian Prime Minister Vladimir Putin later this week."

7. GERMAN BIRTH RATE MAY HAVE DECLINED

Der Spiegel reports that a report released yesterday by Eurostat indicates that

"for every thousand inhabitants in Germany, only 8.2 children were born in 2008. Which indicates a decrease of 0.1% in the German birth rate and makes Germany the only EU member in which the crude birth rate did not increase between 2007 and 2008."

8. HILLARY CLINTON EXPRESSES CONCERN REGARDING HIKERS ARRESTED NEAR IRANIAN BORDER

Nada Bakri at the Washington Post reports that yesterday Secretary of State Hillary Clinton expressed concern about the welfare of three American hikers who were arrested after entering an area near the Iranian border. Of course, the incident will be used by elements in Tehran as evidence that the recent elections unrest is the result of foreign meddling.

9. MEXICO MAY INTRODUCE FUEL EFFICIENCY STANDARDS

Robert Campbell at Reuters reported yesterday that the head of the Mexican National Ecology Institute, Adrian Fernandez, said in an interview that Mexico is planning to introduce fuel efficiency standards for all new cars sold in the country.

"The government is currently studying which type of standards to impose but it is leaning towards a plan that would be similar to proposed fuel efficiency rules in California or other parts of the United States, ... Fernandez said in an interview.

'The standard will cut gasoline imports by as much as a new refinery.'"

Imprecise, but it would have a significant effect.

10. VENEZUELA TO NATIONALIZE COFFEE COMPANIES, LAUNCHES INVESTIGATION INTO SWEDISH ARMS FOUND IN FARC CAMP

Steven Bodzin and Daniel Cancel at Bloomberg report that Venezuelan President Hugo Chávez said today on state television that he was considering nationalizing two coffee companies after having seized their processing plants yesterday. He said,

"We’ve intervened in these big companies. Now we are conducting a study to expropriate them. They will become property of the nation."

Meanwhile, the Associated Press reports that Caracas has indicated it has launched a probe into how arms purchased from Sweden ended up in the hands of FARC guerrillas in Colombia.

"Justice Minister Tareck El Aissami said authorities had launched 'an internal investigation ... to determine the origin and destination of these weapons,' referring to Swedish-made AT-4 launchers that Colombia says were found in a cache belonging to guerrillas.

El Aissami gave no indication, however, that Chavez's administration was easing its stance toward Colombia amid a diplomatic fight that erupted last week after Colombian President Alvaro Uribe complained the weapons had been acquired by the Revolutionary Armed Forces of Colombia ... ."

12. RUSSIA SIGNS ACCORD WITH NICARAGUA TO EXPLORE FOR OIL AND GAS

Eric Watkins at the Oil & Gas Journal reports that the Nicaraguan government has signed accords with a Russian consortium allowing for oil and gas exploration and production in the country.

"'The concessions include the Caribbean and Pacific, both offshore and on land,' said Francisco Lopez, president of the Nicaraguan Petroleum Enterprise. He said a technical board would be installed to analyze implementation of the agreement.

Russia’s Deputy Prime Minister Igor Sechin said the proposed exploration in Nicaragua would be carried out by the Russian National Oil Consortium, created on Oct. 8, 2008, and comprising Rosneft, Gazprom, Lukoil, TNK-BP, and Surgutneftegaz."

13. ANTIGUA AND BARBUDA NAMES HIGHEST PEAK ON ISLANDS "MOUNT OBAMA"

Nika Kentish at the Associated Press reports that the Antiguan Prime Minister, Baldwin Spencer, today renamed the highest mountain in Antigua and Barbuda "Mount Obama." He said at the dedication ceremony:

"This great political achievement by Barack Obama resonated with me in a way that I felt compelled to do something symbolic and inspiring. As an emancipated people linked to our common ancestral heritage and a history of dehumanizing enslavement, we need to at all times celebrate our heroes and leaders who through their actions inspire us to do great and noble things."

14. HAVIV ARGUES 'SHADOW INVENTORY' LOOMS OVER US HOUSING MARKET

Julie Haviv at Reuters reports that so-called "shadow inventory" is hanging over the US home market.

"'The number of homes listed officially on the market, while still at historically high levels, might be only the tip of the iceberg,' said Stan Humphries, chief economist at real estate website Zillow.com in Seattle, Washington.

According to Zillow's latest Homeowner Confidence Survey, 12% of homeowners said they would be 'very likely' to put their home on the market in the next 12 months if they saw signs of a real estate market turnaround, 8% said 'likely,' while 12 percent said 'somewhat likely.'

The survey of 2,123 adults aged 18 and older, of whom 1,357 are homeowners, was conducted online.

Survey results could translate into around 20 million homeowners trying to sell their homes, a startling number given that the Census bureau indicates there are 93 million US houses, condos and co-ops, Humphries said."

15. HURRICANE SEASON UNDERWAY IN US, GAO STUDY FINDS REFINERY OUTAGES HAVE VERY SMALL AFFECT UPON PRICE

Jesse's Café Américain notes that the hurricane season is underway, and that the peak is usually in mid-September. He notes that "Hurricanes offer a tempting opportunity for energy 'investment.'" I would note, however, that insofar as a legitimate reason for hedging goes, hurricanes are certainly one--and those who want to hedge will need counterparties. Meanwhile, Michael Giberson at Knowledge Problem has the fascinating news that the Government Accountability Office has released a report showing that refinery outages generally have a very small affect upon prices. The report, which I have not had time to read, can be found here.

16. WAL-MART LAST WEEK ISSUED $1.1 BILLION IN SAMURAI BONDS

In a story I missed last week, Lisa Twaronite at MarketWatch reported that Wal-Mart issued US$1.1 billion in yen-denominated bonds (¥100 billion).

"The market for samurai bonds--yen-denominated bonds issued by foreign institutions in Japan--evaporated in the global credit storm. But including Wal-Mart's offering, samurai issuances in July are expected to exceed 200 billion yen--the largest amount since June 2008, Japanese business daily Nikkei reported Wednesday."

Apparently the market is drowning in dollars. (h/t Chuck Butler's Daily Pfenning.)

Daily Sources 8/3

1. EUROPE RETURNING TO NUCLEAR POWER

Kate Mackenzie at FT Energy Source has a good summary of the nuclear renaissance in Europe--where several countries have reversed, or are in the process of reversing, decisions to eliminate nuclear power from the generation mix.

2. TBLISI SAYS MOSCOW ATTEMPTING LAND GRAB FROM SOUTH OSSETIA

Misha Dzhindzhikhashvili at the Associated Press reports that Tblisi today accused Russia of attempting to take more territory outside the breakaway province of South Ossetia.

"'It's very alarming that as the first anniversary of the Russian aggression against Georgia comes close, Russia and its puppets are deliberately inciting tensions and behave defiantly,' the Georgian Foreign Ministry said.

But South Ossetia's spokeswoman Irina Gagloyeva told The Associated Press that the border move was legitimate and rejected any land-grabbing ambitions.

'Let the Georgians relax about their territory. We don't need a single centimeter of their soil,' Gagloyeva said."

3. CHINESE CRUDE STOCKS FALL 2.7% IN JUNE FROM MAY, REFINERIES PRODUCED 7.77 MB/D

Jim Bai and Aizhu Chen at Reuters write that Xinhua reported that Chinese crude stocks fell by 2.7% in June from May to 275 million barrels.

"Chinese refineries boosted production by 6% in June to a record 7.77 mb/d after a rise in domestic motor fuel prices aided margins."

4. TOKYO CONCERNED BY SLATE OF IRANIAN NEWS OF NEW CHINESE-IRANIAN OIL DEALS

Kyodo News reports that Tokyo has responded to the news aired in Iran that CNPC was to take a 70% share in South Azadegan, a field which Japan had secured interest earlier but dropped it on international concern about Tehran's nuclear program, by calling for renewed international cooperation on the issue. Japanese Vice Economy, Trade and Industry Minister Harufumi Mochizuki said "It is not desirable that international cooperation collapses this way." CNPC on Friday had denied that a new MOU regarding the field had been signed--see Daily Sources 7/31 #7. Tamsin Carlisle at the National reports that on Saturday a Chinese consortium signed a deal to build a new 360 kb/d refinery in Khuzestan province and expand the capacity of a refinery in Abadan to 360 kb/d from 210 kb/d. Carlisle provides a decent summary of Chinese-Iranian energy deals this year and further in the past as well as different details on the CNPC Azadegan deal:

"The agreement called for CNPC to purchase a 63% stake in the $2.5bn project from NIOC, leaving the Iranian state oil company with a 27% interest and Japan’s Inpex with 10%."

5. INDIA AND CHINA TO COOPERATE ON MONITORING HIMALAYAN MELTING GLACIERS

James Lamont at the Financial Times reports that India and China will collaborate on monitoring melting glaciers in the Himalayas, a crucial source of water supply for both countries.

"Jairam Ramesh, India's environment minister, said academic research bodies on both sides would share information. He also told the FT that New Delhi was also open to a dialogue about water resources with Beijing, saying the two countries had shared concerns."

6. SAUDI ARAMCO TO CUT PRICES, OPEC PRODUCING SLIGHTLY MORE IN JULY FROM JUNE

Christian Schmollinger at Bloomberg report that Saudi Aramco may cut the price of Arab Light crude oil by as average of $1.30/b,

"according to a survey of refiners from South Korea, Japan, Singapore and India. The company is expected to set new official levels this week. Extra Light may fall by $1.40/b, said the traders who asked not to be identified, citing confidentiality agreements.

Saudi Arabian Oil, known as Saudi Aramco, last month raised Arab Light by 10 cents to a premium of $1.50/b to the average of Persian Gulf benchmark’s Oman and Dubai. That was the highest price since July 2008. Asian refiners have been reducing their output as falling consumer demand has cut their so-called crack spreads, or profit margins."

Meanwhile, Karyn Peterson and Mark Shenk at Bloomberg report that the news wire's latest survey showed that OPEC increased oil output by 45kb/d to 28.39 mb/d in July from June."The 11 OPEC members with quotas ... pumped 26.035 mb/d, 1.19 million more than their target."

"Iran, the member that’s least compliant with output limits, according to the survey, expects oil prices to reach $80/b by the end of the year on 'optimistic' signs in the market, the country’s OPEC Governor, Mohammad Ali Khatibi, said.

Angola increased production by 20,000 barrels to 1.81 mb/d. The gain left output 293,000 barrels above the nation’s target, the second-biggest excess in the group. Output in the African country surpassed Nigeria’s for the first time since June 2008.

Venezuela raised output by 10,000 barrels to 2.21 mb/d. The South American country pumped 224 kb/d above its target of 1.986 million last month, the survey showed."

7. 100 IRANIAN POLITICIANS PUT ON TRIAL FOR FOMENTING UNREST IN COOPERATION WITH FOREIGNERS, LOTR FORMERLY INAUGURATES AHMADINEJAD'S SECOND TERM

Borzou Daragahi at the LA Times reported yesterday that Iran put 100 prominent politicians on trial, charging them with fomenting unrest in conspiracy with foreigners.

"Analysts say the confessions read at the trials are meant to lift the morale of hard-liners upset by coverage by reformist news outlets and Persian-language news channels abroad as well as to frighten opponents and take the wind out of the sails of the protest movement.

But as night fell, Tehran, the capital, erupted in angry cries of 'Allahu Akbar!' or 'God is great!' in what has become a daily rooftop ritual of protest."

The nighttime chants deliberately mirror events of the 1979 revolution. Thomas Erdbrink at the Washington Post reports that today Mahmoud Ahmadinejad was inaugurated by Leader of the Revolution Ayatollah Ali Khamenei as president for a second term. Karroubi, Mousavi, and Rafsanjani all elected not to attend the ceremony.

"Relatives of the late Ayatollah Ruhollah Khomeini, who led Iran's 1979 Islamic revolution, also failed to show up. According to pro-opposition Web sites, Hassan Khomeini, a grandson who usually attends such ceremonies, left for Pakistan some days ago. Other prominent absentees were two Friday prayer leaders from the Shiite holy city of Qom, the Parlemannews Web site reported."

8. NIGERIAN AGRICULTURAL POTENTIAL UNTAPPED, LEAVING FOOD SUPPLY VULNERABLE

David Hecht at the Washington Post notes that Nigeria's food supply is especially vulnerable to a disruption caused by low rainfall or other climate-driven variables. He concludes:

"The good news is that Nigeria has boundless agricultural potential. Of the 3.14 million irrigable hectares of land in the country, the World Bank says only 7% is currently being utilized. And though large tracts of farmland have been lost to desertification, more than half the country's estimated 98 million hectares of arable land currently lie fallow.

'The opportunities for our farmers are enormous if only they were to get the right institutional support,' said Sabo Nanono, the head of Kano state's commercial farmers association. 'We could feed the entire West African region; we could produce enough rice in just two or three [of Nigeria's 36] states to feed the nation and even to export.'

Somehow, the supply chain that feeds 140 million people keeps cranking along. The country has not seen a major famine for nearly four decades, since the Biafran civil war. But Nanono warned that it wouldn't take much to send this vulnerable country--and region--over the edge.

'The reality is that if the rains are bad throughout the region or the price of inputs became unaffordable, there could be massive food shortages, and neither the government nor any other institution stands ready to help,' he said. 'Then only God could save us.'"

Hecht's report is part of the Food Insecurity Project.

9. SOUTH AFRICAN PMI DOWN TO 37.3 IN JULY

Nasreen Seria at Bloomberg reports that South Africa's PMI fell to 37.3 in July from 37.9 in June. It is the first fall in PMI seen in three months.

"Manufacturing output, which makes up 15% of the economy, fell 17.1% in May from a year ago, after dropping a record 21.8% in the previous month, the statistics office said on July 9. Production has dropped every month since October 2008."

10. SETSER AND ZIEMBA ESTIMATE MAJOR SOVEREIGN WEALTH FUNDS HOLD ABOUT $1.5 TRILLION IN FOREIGN ASSETS, DOWN FROM $1.8 TRILLION LAST YEAR

Brad Setser and Rachel Ziemba at Follow the Money estimate, in contrast to other estimates, that total external assets of major sovereign wealth funds roughly were about $1.5 trillion as of June 2009, down from their estimate of roughly $1.8 trillion held in the middle of 2008.

"$1.5 trillion is lot of money. But it is substantially less than $7 trillion or so held as traditional foreign exchange reserves."

The post includes an extremely interesting table of estimated assets held by each major sovereign wealth funds at the bottom.

11. 1.5 MILLION TO EXHAUST INITIAL UNEMPLOYMENT INSURANCE IN THE NEXT FEW MONTHS, 1-IN-3 GROCERY SHOPPERS NOW ONLY PURCHASE ITEMS ON SALE

Barry Ritholtz has a pair of posts looking at the rate of people who have exhausted their unemployment insurance. In the first, he notes that the New York Times estimates that about 1.5 million more people will have exhausted their unemployment insurance over the course of the next few months. He links to a helpful graph from the NY Times:



In the second, he notes, as have others such as Rebecca Wilder at News and Economics, that there are additional unemployment programs available after one exhausts the initial unemployment insurance:

"[T]he Emergency Unemployment Compensation (EUC) which is good for 20 weeks. Then, there is the Supplemental EUC, which depending upon what your state thinks of the Federal largesse of handing out money to the recently unemployed, ranges anywhere from 13 to 20 more weeks."

Evidently, as of July 11, the number of people who have exhausted their initial unemployment insurance and are now on EUC or supplemental EUC, has gone from 127,000 a year ago to 2.66 million. The worry is that given that 70% of the economy is based on household consumption, growing unemployment will undermine any nascent recovery. In that vein, Credit Bubble Stocks notes that Information Resources Inc. has published market research which concludes that now

"about 1 in 3 [grocery] shoppers buy exclusively items on sale, twice as many as 18 months ago."

12. US PMI UP TO 48.9 IN JULY

Mark Shenk at Bloomberg reports that the Institute for Supply Management released its PMI today showing an uptick to 48.9 in July from 44.8 in June. (A reading above 50 indicates expansion; below 50 indicates contraction.) It is the highest reading seen since August 2008.

13. CHEVRON TO END ALL ONSHORE GAS DRILLING IN THE US

I missed the interesting factoid reported Friday by the Associated Press that Chevron will stop all US onshore gas rigs on low profitability this year.

"'By the end of the year, we will not have a single gas land-rig running,' George Kirkland, Chevron’s executive vice president for global upstream and gas said in a conference call."

Daily Sources 7/29

1. UN WARNS THAT DEVELOPED WORLD WILL FACE WATER PROBLEMS DRIVEN BY GLOBAL WARNING AND OUTLINES GRIM SCENARIO FOR DEVELOPING WORLD

Thalif Deen at IPS reports that UN Secretary-General Ban Ki-moon yesterday said that

"The United States, Spain, Australia and the Netherlands are likely to face the consequences of climate change resulting in water-related disasters, including droughts, floods, hurricanes and sea-level rise.

'Even the world's richest nations are not immune,' UN Secretary-General Ban Ki-moon warned Tuesday.

Citing official US figures, he said the state of California, the world's fifth largest economy, 'could see prime farmland reduced to a dustbowl, and major cities running out of water by the end of the century'.

Blaming it on the negative impact of global warming, he said that climate is changing--globally. 'And so, therefore, must we.'

He quoted scientists as saying that by 2020, 75 to 250 million people in Africa will face growing shortages of water due to climate change.

'Yields from rain-fed agriculture could fall by half in some African countries in the next 10 years. These are frightening scenarios,' he declared."

(h/t Aqua Blog Maven at Aquafornia.)

2. JAPANESE RETAIL SALES DOWN 3% YOY IN JUNE

Toru Fujioka at Bloomberg reports that Japanese retail sales fell 3% year over year in June, from May they fell 0.3%.

"'The worst is over but that doesn’t completely wipe out households’ concerns,' said Takeshi Minami, chief economist at Norinchukin Research Institute in Tokyo. 'Japan’s recovery will be weak until a pickup in jobs and wages boosts consumer spending.'"

3. CHINA CUTS GASOLINE AND DIESEL PRICES

Wan Zhihong at China Daily reports that Beijing has cut the prices of gasoline and diesel by 220 yuan per ton or 3%, effective today.

"This equals price cut of 0.16 yuan per liter in gasoline prices (~$0.089/gallon) and 0.19 yuan per liter (~$0.105/gallon) in diesel prices. It is the second price cut on fuel prices this year.

The price cut was in response to recent falls in global crude prices, according to the National Development and Reform Commission (NDRC), the country's top economic planning body.

China adopted a new oil pricing system this year, under which domestic fuel prices would be adjusted when the moving average of a basket of international crude (Brent, Dubai and Cinta) changes more than 4% over a period of 22 working days."

Bloomberg reports:

"Pump prices for 90 octane gasoline will be set at a maximum of 5.7 yuan ($0.83) a liter, or about $3.14 a gallon, in Beijing, the National Development and Reform Commission said in a statement on its Web site. Prices were adjusted to reflect the decline in global crude prices, said China’s top planning agency."

The reduction in price will encourage demand, of course.

4. MANUFACTURERS SAYS CHINESE COST OF LABOR NOT FALLING IN RESPONSE TO GLOBAL DOWNTURN, REPORTS OF ILLUSORY REAL ESTATE BOOM

The American Chamber of Commerce recently released a report which says that the cost of labor is not falling substantially in China despite the global economic slowdown.

"Even with the current economic conditions, manufacturing in China has become more expensive. Companies reported that costs are still rising--up to 15% in 2008 compared to an increase of 10% in 2007--particularly in compensation costs for management, support staff and blue-collar workers as well as raw materials. Although labor and raw materials costs have come down from the premium levels of last summer, they are expected to rise again once market conditions improve.

Finding reliable, experienced talent has always been a challenge in China and despite rising unemployment during the current downturn, companies must ensure turnover remains at a minimum for when growth resumes.

• 86% of companies reported implementing pay-for-performance compensation plans.
• 62% of companies said they were providing training and development programs."

(h/t Carlos Tejada at the China Journal.) Meanwhile, China Stakes reports that while the Chinese real estate market appears to be in the midst of a boom, defaults are on the rise.

"Statistics show that from May 1 to July 24, which seemed to be good days for Shanghai's real estate market, many housing projects were seeing over 30% cancellations, and the cancellation rate of some projects was as high as 125%. Behind the 'boom' of the housing market are irregular behaviors such as getting bank loans by cheating and making fake housing purchasing contracts.

Among the top ten housing projects with the highest cancellation rates, 60% are developments by small and medium real estate companies. 'In fact, it is still difficult for small and medium developer to get credit support from banks,' said a sales manager of a medium real estate company.

Now it is common for developers to sell an apartment to an employee as a "reward" and then secure a loan from a bank with the housing purchasing contract signed by the employee. 'There's a window between the sale and the issuance of housing ownership certificate, during which employees can decide whether to keep or cancel the contract,' the sales manager added."

Prieur du Plessis at Investment Postcards from Cape Town links to a video of Hugh Hendry

"walking around the streets of China (presumably Beijing or Shanghai) and pointing out numerous empty buildings. Huge debt must have been incurred in erecting these buildings and without tenants there is no prospect of servicing the debt. What’s more, the workmanship also seems shoddy as a nearly-completed 13-story building in Shanghai collapsed last month.

Who will pick up the tab for creating all the overcapacity in the Chinese economy?"

Worth checking out.

5. EUROZONE BANKERS TIGHTENING CREDIT, FRUSTRATING STIMULUS EFFORTS

Margot Patrick, Laurence Norman, and Nina Koeppen at the Wall Street Journal report that the European Central Bank released a report today showing that eurozone banks continued to tighten credit in the second quarter, frustrating efforts at stimulus.

"Banks in the 16-country euro zone further tightened their credit standards in the second quarter, and companies and households may even face slightly tougher requirements in the current quarter, the European Central Bank said in a report on bank lending released Wednesday."

"'Access to credit has become clearly more difficult,' said Ifo Institute President Hans-Werner Sinn, commenting on the think-tank's latest credit constraint survey for German industry and trade, also published Wednesday. 'Despite the expansive monetary policy of the ECB, banks have become more restrictive in granting credit,' Mr Sinn said."

Worth reading in full.

6. TURKISH CENTRAL BANK GOVERNOR INDICATES RATE CUTS TO CONTINUE


Ali Berat Meric and Steve Bryant at Bloomberg report that the governor of the Turkish central bank--Durmus Yilmaz--has indicated that it will continue to cut the benchmark interest rate and is unlikely to raise the rate until some point in 2011.

"The bank reduced its forecast for year-end inflation to 5.9% from 6%, assuming that 'policy rates are further lowered in the short term and held unchanged until the end of 2010,' Yilmaz said at a news conference in Ankara today. Inflation was 5.7% in June, compared with the bank’s year-end target of 7.5%."

7. BAGHDAD PLEDGES SUPPORT IN SUPPRESSING THE PKK

Thomas Grove and Pinar Aydinli at Reuters report that Iraqi Minister of State for National Security Shirwan al-Waeli told a news conference in Ankara that Baghdad will cooperate with Turkish and American efforts to suppress the Kurdish Workers' Party (PKK) until it is eliminated.

"Waeli and Turkish Interior Minister Besir Atalay told the joint news conference they expected concrete results of their cooperation by the time they meet again in Iraq in October but provided no further details."

8. IRAQI CABINET APPROVES THE RE-INCORPORATION OF A NATIONAL OIL COMPANY, OIL EXPORTS AND REVENUES INCREASE

Dow Jones Newswires reports that the Iraqi cabinet yesterday approved a law which would establish an Iraqi national oil company; it now must be approved by the parliament.

"The reinstated national oil company would act as the parent of the existing three major Iraqi oil operators--the South Oil Co., Iraq's largest petroleum company in Basra; North Oil Co. in Kirkuk; and Missan Oil Co. in Ammarh in southern Iraq."

"'In the new draft law we didn't mention the fields that the new company would run,' [Thamir] Ghadhban [an energy adviser to Prime Minister Nouri al-Maliki] said. 'The fields to be operated by the company would be determined by a federal oil and gas council yet to be established,' he said.

The previous law stated that the INOC would have authority to conclude service and management contracts with international oil companies to improve oil recovery from producing fields. It isn't known if that provision was retained in the new law."

Meanwhile, Ben Lando at the Iraqi Oil Report reports that the Iraqi Oil Ministry announced that oil exports and revenues increased in June.

"The Oil Ministry data show oil exports reached 1.923 mb/d last month, up from 1.906 mb/d in May. Iraqi crude fetched an average $64.37/b, a more than $7/b increase on May.

Iraq earned nearly $62 billion in oil revenue last year and through July 22 this year’s exports have brought in $17.11 billion, according to the U.S. State Department’s most recent Iraq Status Report. It also estimated July production thus far at 2.46 mb/d and exports at 1.99 mb/d."

9. KYRGYZ POLICE BREAK UP ELECTION PROTESTS

The Associated Press reports that Kyrgyz police broke up opposition rallies protesting the recent Kyrgyz election results, which they contend were rigged.

"The opposition planned separate rallies and marches around the country Wednesday, rather than call all of its supporters to the center of the capital, Bishkek, in an effort to avoid a confrontation with police."

10. IRANIAN DEATHS IN DETENTION FUELING PUBLIC ANGER

Robert F Worth at the New York Times reports that accounts regarding the abuse of protesters arrested in Iran is fueling widespread anger at the administration.

"The head of Iran’s Supreme Administrative Court, Ayatollah Ghorbanali Dorri-Najafabadi, said more prisoners would be released by the end of the week. He added that a 'serious judicial inquiry' was being conducted into the deaths that have occurred in prisons since the June 12 election.

On Wednesday, there were conflicting reports about whether the government had released Saeed Hajjarian, a prominent reformist figure whose family said he was being subjected to torture.

Iran plans to put 20 people accused of rioting on trial starting Saturday, the official IRNA news agency reported. They are charged with 'attacking military units and universities, carrying firearms and explosives, organizing thugs and rioters, and vandalizing public property.'

On Tuesday, the state-financed English-language broadcaster Press TV quoted Farhad Tajari, deputy head of the parliamentary judicial commission, as saying that the former deputy interior minister, Mostafa Tajzadeh, and former deputy speaker of Parliament, Behzad Nabavi, were in detention facing major security charges and could be released on bail.

The prisoner releases appear to be the act of a government desperate to defuse the issue, coming quickly after the head of Iran’s judiciary promised Monday that the detainees’ cases would be expedited."

11. OBAMA ADMINISTRATION TO EASE SANCTIONS ON A CASE-BY-CASE BASIS WITH SYRIA

Sharon Otterman at the New York Times reports that Obama Administration officials yesterday indicated that a message was conveyed by George Mitchell to Syrian President Bashar al-Assad that the US will take new actions to ease sanctions on Syria on a case-by-case basis.

"[T]he American government [will] try to expedite the process for obtaining individual exemptions to the sanctions, which prohibit the export of all American products to Syria except food and medicine.

The move will particularly affect 'requests to export products related to information technology and telecommunication equipment and parts and components related to the safety of civil aviation,' said a State Department spokesman, Andrew J Laine."

The law imposing sanctions on Syria itself will, at this stage, remain untouched, but the Administration is indicating that OFAC will take a broader view when considering corporate requests for individual waivers.

12. UN WARNS OF WORSENING SITUATION IN SOUTH LEBANON

Naharnet News Desk reports that the UN has warned of a deteriorating situation in south Lebanon.

"The warning was made by Oscar Fernandez-Taranco, Assistant Secretary-General for Political Affairs, during a Security Council meeting on the Middle East.

Taranco urged both the Israeli and Lebanese sides to 'end' their violations of Security Council Resolution 1701 which halted a 34-day war between the Jewish state and Hizbullah in the summer of 2006."

(h/t Michael Collins Dunn at the MEI's Editor's Blog.)

13. VENEZUELA RECALLS COLOMBIAN AMBASSADOR, THREATENS TO SHUT OFF TRADE, FARC SAYS HAD MADE NO ELECTION CAMPAIGN CONTRIBUTIONS TO ANY FOREIGN CANDIDATE, VENEZUELAN OIL MINISTER SAYS JAPAN-VENEZUELAN ORINOCO E&P JV WILL BE FINALIZED BY YEAR END

Christopher Toothaker at the Associated Press reported yesterday that Venezuela has recalled its ambassador to Colombia and threatened to halt imports from the country on the accusation aired by Bogota that anti-tank weapons found in a FARC stash came from Venezuela.

"Chávez also said he would sever diplomatic ties completely and seize control of Colombian-owned businesses 'if there's one more accusation against Venezuela.'"

"Chávez also raised the possibility of shutting down a 139-mile (224-kilometer) pipeline that carries 5.7 million to 8.5 million cubic meters (200 million to 300 million cubic feet) of natural gas daily from Colombia to oil installations in western Venezuela.

'The gas that comes from Colombia isn't indispensable for us. We could shut down that gas pipeline,' he said."

Tensions between Caracas and Bogota have long been tense, most recently inflamed by US plans to expand our military presence at three military bases in Colombia--see Daily Sources 7/22 #12. Meanwhile, the Associated Press reported yesterday that FARC officially denied that it had contributed to the 2006 election campaign of Ecuadorian President Rafael Correa. Correa recently publicly asked FARC to confirm that he had received no campaign contributions from the militant organization. FARC stated that it had at no time contributed to any election campaign in any foreign state.

"The FARC's ruling secretariat contends in a July 25 communique that video given to The Associated Press earlier this month by Colombian officials was manipulated by Bogota and Washington. The video shows the FARC's No 2 leader reading a letter in which contributions to Correa's campaign are mentioned."

Meanwhile, Carlos Camacho and Takeo Kumagai at Platts report that Venezuelan oil minister Rafael Ramirez announced yesterday that Japan and Venezuela will have an exploration and production plan for the Junin area of the Orinoco belt ready by October and a JV to carry out the E&P activity will be launched by year-end.

"Ramirez did not mention, which Japanese companies would be given the E&P contract (in a minority role, by law) together with PDVSA, but Mitsubishi, Itochu, Mitsui and Marubeni all have ongoing energy projects in Venezuela."

14. US MANUFACTURED DURABLE GOODS DOWN 2.5% IN JUNE FROM MAY, DOWN 27.7% YOY, MORTGAGE ASSOCIATION WARNS THAT INCENTIVES FOR MODIFYING MORTGAGES INSUFFICIENT

The Commerce Department today announced that new orders for manufactured durable goods in June fell $4.1 billion or 2.5% from May. Excluding transportation equipment, new orders rose 1.1%. Un-seasonally adjusted year over year new orders were down 26.7%, excluding transportation they are down 23.4% year over year. Meanwhile, Al Yoon at Reuters reports that the Independent Mortgage Servicers Coalition has issued a warning that the government incentives to modify bad mortgages may prove counterproductive.

"'We are in a position where it's a very tough balance act, and that's weighing heavily on us now,' said [Bruce] Rose [CEO of Carrington Capital Management, LLC], in an interview on Monday. 'This is a classic case of an unfunded government mandate.'

The costs of borrowing to finance delinquent payments to bond investors far outweigh expected revenue from incentives paid by the government, Rose said. The government will pay servicers $1,000 for every loan modified, and another $1,000 a year for three years if the borrower stays current.

The group since September has approached the Treasury, the Federal Reserve and Congress for help in funding the temporary 'advances' that are fully reimbursed when a loan is modified or foreclosed, Rose said. Help offered through the Fed's Term Asset-Backed Securities Loan Facility (TALF,) which allows for the pooling of advances for sale to investors, has backfired, and is increasing financing costs, he said."

(h/t Yves Smith at naked capitalism.)

15. COMMERCIAL CRUDE STOCKS WAY UP, REFINING UTILIZATION DOWN, IEA SUGGESTS $50-60 BOTTOM FOR OIL PRICE

The EIA reports that commercial crude stocks built by a whopping 5.1 million barrels in the week ended July 24 to 347.8 million barrels. The stock levels are above the five year historical range for this time of year and the build was versus the median expectation of analysts of a 1.5 million barrel draw, per a Bloomberg survey. Gasoline stocks were drawn down by 2.3 million barrels and are near the top of the five year historical range. Distillate stocks, on the other hand, continued to build by another 2.1 million barrels versus analyst expectations of a 1 million barrel build. Distillate--diesel and heating oil--stocks are well above the historical range for this time of year, there are 32.1 million barrels more distillate held in commercial stocks than the equivalent week last year, or 24.6% more.



The ongoing build is consistent with the reports from the American Truckers Association, the American Association of Railroads, and US major ports. Total US refining utilization fell to 84.57% from the 85.84% reported for the week previous. For the week ended July 27, the national average of regular gasoline prices rose by 4 cents to $250.3/gallon, just inside the range where you start to see demand fall. The EIA report includes the following observation:

"On May 21, NOAA predicted a 70% probability that nine to 14 named storms will form within the Atlantic Basin during the current hurricane season, including four to seven total hurricanes of which one to three will be intense. These ranges are slightly above the seasonal average. Using these storm projections, the STEO analysis estimates the uncertainty surrounding seasonal shut-in projections. The median of the probability distribution represents an outage of 4.5 million barrels for the entire season, which is the assumption that the STEO uses for its forecasts for crude oil production."

Upstream online reports that Eduardo Lopez, a senior oil demand analyst at the International Energy Agency told Reuters that

"The evidence so far suggests that prices have probably reached a floor which maybe around $50 to $60. So, unless something dramatic were to happen, its plausible...prices will remain again at around that level, of course with probably a lot of volatility."

Monday Mark Shenk at Bloomberg noted that the current demand projections from the IEA do not correlate well with its past correlation with global GDP growth--see Daily Sources 7/27 #12.

16. FARM STATES INFLUENCE ON FOREIGN ENERGY POLICY--SHOCKED, JUST SHOCKED

Keith Johnson at Environmental Capital has a nice anecdote of how farm-state congressmen influence US foreign policy--including energy policy.

"Iowa’s Republican Sen. Chuck Grassley is holding up the nomination of Thomas Shannon to become ambassador to Brazil. The problem? Mr. Shannon has hinted he’s in favor of repealing the $0.54 cent-per-gallon tariff the US levies on imports of Brazilian sugar-cane ethanol—a direct threat to the farm-state interests Mr. Grassley represents."

Worth reading in full.

Francis Fukuyama on Iran and Rule of Law

Francis Fukuyama has an op ed in today's Wall Street Journal which argues that the Constitution of revolutionary Iran provides avenues for the development of a more integrated state:

"Compared to Section Eight [of the Constitution], the references in the Iranian Constitution to God and religion as the sources of law are much less problematic. They could, under the right circumstances, be the basis for Iran’s eventual evolution into a moderate, law-governed country.

The rule of law was originally rooted in religion in all societies where it came to prevail, including the West. The great economist Friedrich Hayek noted that law should be prior to legislation. That is, the law should reflect a broad social consensus on the rules of justice. In Europe, it was the church that originally defined the law and acted as its custodian. European monarchs respected the rule of law because it was written by an authority higher and more legitimate than themselves.

Something similar happened in the pre-modern Middle East. There was a functional separation of church and state. The ulama were legal scholars and custodians of Shariah law while the sultans exercised political authority. The sultans conceded they were not the ultimate source of law but had to live within rules established by Muslim case law. There was no democracy, but there was something resembling a rule of law."

I agree with much of his analysis. Indeed, I made similar observations early last year in my post Law and Revolution in Iran, though of course Fukuyama's prose is much easier on the ears.

Daily Sources 7/27

1. US-CHINA STRATEGIC AND ECONOMIC DIALOGUE KICKS OFF TODAY

Secretary of State Hillary Clinton and Treasury Secretary Timothy Geithner have an op ed in today's Wall Street Journal to outline the aims of the US-China Strategic and Economic Dialogue which kicks off today. Key excerpt:

"To keep up with these changes that affect our citizens and our planet, we need to update our official ties with Beijing. During their first meeting in April, President Barack Obama and President Hu Jintao announced a new dialogue as part of the administration’s efforts to build a positive, cooperative and comprehensive relationship with Beijing. So this week we will meet together in Washington with two of the highest-ranking officials in the Chinese government, Vice Premier Wang Qishan and State Councilor Dai Bingguo, to develop a new framework for US-China relations. Many of our cabinet colleagues will join us in this 'Strategic and Economic Dialogue,' along with an equally large number of the most senior leaders of the Chinese government. Why are we doing this with China, and what does it mean for Americans?

Simply put, few global problems can be solved by the US or China alone. And few can be solved without the US and China together. The strength of the global economy, the health of the global environment, the stability of fragile states and the solution to nonproliferation challenges turn in large measure on cooperation between the US and China. While our two-day dialogue will break new ground in combining discussions of both economic and foreign policies, we will be building on the efforts of the past seven US administrations and on the existing tapestry of government-to-government exchanges and cooperation in several dozen different areas.

At the top of the list will be assuring recovery from the most serious global economic crisis in generations and assuring balanced and sustained global growth once recovery has taken hold. When the current crisis struck, the US and China acted quickly and aggressively to support economic activity and to create and save jobs. The success of the world’s major economies in blunting the force of the global recession and setting the stage for recovery is due in substantial measure to the bold steps our two nations have taken.

As we move toward recovery, we must take additional steps to lay the foundation for balanced and sustainable growth in the years to come. That will involve Americans rebuilding our savings, strengthening our financial system and investing in energy, education and health care to make our nation more productive and prosperous. For China it involves continuing financial sector reform and development. It also involves spurring domestic demand growth and making the Chinese economy less reliant on exports. Raising personal incomes and strengthening the social safety net to address the reasons why Chinese feel compelled to save so much would provide a powerful boost to Chinese domestic demand and global growth."

2. CHINA TO LAUNCH ARABIC-LANGUAGE TV STATION IN MIDDLE EAST AND AFRICA

The AFP reported on Saturday that China Central Television launched an Arabic-language channel which will air in the Middle East and Africa.

"Beijing is carrying out a multibillion-dollar effort to raise the profile of its state media abroad by expanding CCTV, the Communist Party newspaper People's Daily and the official Xinhua News Agency.

The effort has a budget of 45 billion yuan ($6.6 billion), according to a report last month by the Hong Kong newspaper South China Morning Post.

The Arabic channel will carry news, feature stories, entertainment and education programs and will gradually expand its offerings, CCTV said. The network already broadcasts in English, French and Spanish as well as in Mandarin."

It also has plans for a Russian language channel. (h/t Sky Canaves at China Journal.)

3. FIRST PUBLIC PRESIDENT-TO-PRESIDENT EXCHANGE BETWEEN BEIJING AND TAIPEI IN 60 YEARS


Weiyi Lim at Bloomberg reports that China’s President Hu Jintao sent a message congratulating Taiwanese President Ma Ying-jeou on his election to the head of the Kuomintang Party. It was the first public exchange between the leaders of mainland China and Taiwan in 60 years.

4. PETROCHINA BUYS 70.13% OF SINGAPORE PETROLEUM COMPANY

Norazlina Juma'at at Platts reports that PetroChina International on Friday announced it had increased its holdings of Singapore Petroleum Company to approximately 70.13% of the shares outstanding.

"On June 21 PetroChina had completed a deal to buy 45.51% in SPC from Singapore's Keppel Corp. for just over $1 billion and had launched an offer for all remaining shares."

SPC operates one of the three major refining projects in Singapore, which is a major trading and shipping hub for petroleum products in the Asia Pacific. The city state's total refining capacity is about 1.3 mb/d. SPC owns 50% of Singapore Refining Company Private Limited which has a 50% stake in the 273.6 kb/d refinery joint venture with Chevron on Jurong Island.

5. INDIA LAUNCHES FIRST INDIGENOUS NUCLEAR POWER SUBMARINE FOR SEA TEST

Voice of America reports that India has launched its first indigenously built nuclear-powered submarine, the Arihant or "Destroyer of Enemies," for sea trials in the Bay of Bengal. The Arihant was built with the assistance of Russia, has a crew of about 100 men, and will be armed with ballistic missiles.

"India already has fighter aircraft and missiles capable of carrying nuclear warheads. If all goes well with the trials, the Arihant will give India an underwater ballistic missile capability after the tests are conducted.

After launching the submarine, Prime Minister Singh said 'we do not have any aggressive designs nor do we seek to threaten anyone.' But he said that the sea is increasingly becoming relevant in the context of India's security interests, making it necessary to 're-adjust our military preparedness to this changing environment.'"

Galrahn at Information Dissemination comments:

"This beings India closer to becoming the first nation in decades to develop a nuclear triad, and the first nation to do so in the Indian Ocean area. While this development does not shift any balance of power in the region, it certainly gives both Pakistan and China something to think about. There is something else though, it will also give India a case for becoming a permanent member of the UN Security Council, a discussion the current permanent five members are not looking forward to."

6. RUSSIAN ORTHODOX CHURCH PATRIARCH IN KIEV TO TRY AND MEND RIFT WITH UKRAINIAN METROPOLITAN

Maria Danilova at the Associated Press reports that the Russian Orthodox Church Patriarch Kirill led a prayer service in Kiev today in part of a 10-day visit intended to mend the rift between the Russian Orthodox Church and a breakaway Ukrainian Orthodox church.

"Currently, Ukraine's main Orthodox church answers to Kirill, but a breakaway church that has proclaimed itself independent from Moscow in the 1990's has been gaining popularity and political support in this predominantly Orthodox country of 46 million.

[Ukrainian President Viktor] Yushchenko, who has sought to break free from Russia's centuries-old political dominance and integrate with the West, has appealed to the spiritual leader of the world's 250 million Orthodox believers, Patriarch Bartholomew I of Constantinople, to recognize a local Ukrainian church that would be independent of the powerful Moscow patriarchate.

Bartholomew, who visited Kiev last summer, has not given a clear response.

Kirill is to meet with Yushchenko later in the day. He told reporters after the prayers that he had no immediate plans to meet with the representatives of the breakaway church, the Ukrainian Orthodox Church Kiev Patriarchate."

7. TURKMENISTAN SAYS IT WILL HONOR DECISION OF INTERNATIONAL ARBITRATION COURT'S RULING ON CASPIAN BORDER WITH AZERBAIJAN

John Roberts at Platts reports that Turkmen President Gurbanguly Berdimukhammedov on Friday officially asked foreign minister Rashid Meredov to file a request before an international court of arbitration asking it to settle a long-standing dispute between Ashgabat and Baku on their Caspian borders.

"'The issue of demarcation of the sea bed and the sea's mineral resources between Turkmenistan and Azerbaijan, as well as the definition of median line there, remain unresolved for a long time due to Azerbaijan's specific position,' Berdimukhammedov [reportedly said on Saturday].

'Turkmenistan will be ready to accept any ruling to be issued by the International Court of Arbitration on this issue,' he said.

In its first response to the Berdymukhammedov declaration, Azerbaijan made no direct reference to arbitration, but the statement from deputy foreign minister Xalaf Xalafov to Azerbaijan's ANS television Saturday that Baku would defend its position could be interpreted as an indication that it was prepared to submit its case to arbitration."

Any planned natural gas pipeline that would traverse the Caspian would theoretically at least require the demarcation and sea bed issues resolved previous to construction. One potential pipeline to be routed through the Caspian is Nabucco. Worth reading in full.

8. 80-90% VOTER TURNOUT REPORTED IN KURDISH REGIONAL GOVERNMENT ELECTIONS THIS WKEND

Ben Lando, Serage Malik, Rawsam Latif and Istifan Braymok at Iraq Oil Report that turnout in the Kurdish Regional Government's elections this weekend was at, according to early estimates, between 80 and 90% of eligible voters.

"To be sure, there have been complaints, during the campaign and at the polls, and it’s up to the Independent High Electoral Commission in the coming days to determine how serious they are. Preliminary results are expected by Sunday, and final results certified by the IHEC within five days. But in a region specifically and in a country generally where the challenger has seen bullets and prison instead of campaign flyers, the general sentiment is forward looking."

9. IRANIAN PARLIAMENTARIANS CRITICIZE PRESIDENT'S RELUCTANCE TO IMMEDIATELY HONOR LOTR'S INSTRUCTIONS, SOME CALL FOR VOTE OF CONFIDENCE

Press TV reports that more than 200 members of Iran's parliament, the Majlis, have called upon President Ahmadinejad to "fully and promptly comply with the Leader's instructions."

"[T]he president's reluctance to reverse the decision [to appoint his son in law first Vice President] was called into question even by his own ministers. As a sign of protest, three of the ministers--Intelligence Minister Gholam-Hossein Mohseni-Ejei, Culture and Islamic Guidance Minister Mohammad-Hassan Saffar-Harandi and Labor Minister Mohammad Jahromi--walked out of a Cabinet meeting on Thursday.

Although news broke out that the Ahmadinejad administration had sacked the ministers, the government moved to clarify the issue after a senior member of parliament suggested that the administration had lost its legitimacy with the measure as it had removed too many Cabinet members during the first Ahmadinejad tenure.

Only the intelligence minister has been removed, said an official working for the presidential office.

The dismissal has intensified pressures on Ahmadinejad by parliament members who contend that the ninth government is obliged to seek a new vote of confidence in its remaining 7 days in office.

According to parliament Vice Speaker Mohammad-Reza Bahonar, all Cabinet sessions of the current government are 'illegal' until the official second-term inauguration of the president."

Article 136 of the Constitution requires the President to call for a vote of confidence at the Majlis is half or more of his cabinet is replaced.

10. KUWAIT, QATAR, BAHRAIN LINK ELECTRICITY GRIDS

Miriam Amie at Platts writes that KUNA reported today that Sunday Kuwait, Qatar, and Bahrain successfully linked their electrical power grid networks.

"Over a decade ago, the six GCC states agreed at a summit to set up the power grid to cope with the regions rapidly increasing electricity consumption. Draws on electrical power stations throughout the GCC increase dramatically during peak usage times in summer between April and September.

The estimated $1.4 billion electrical network is being initiated one year later than previously expected.

Earlier this month, five of the GCC states, except Oman, signed a power trading agreement setting terms between transmission system operators, and power procurement companies for the purpose of exchanging or trading electrical power."

11. DECOUPLING WAS ALWAYS A MYTH, ARGUES WÄLTI

Sébastien Wälti at VoxEU argues that the notion that the developing economies were decoupling from the developed economies was always a myth, and that the process of globalization leads, intuitively even, to greater business cycle synchronization.

"Figure 2 shows that the degree of business cycle synchronicity between emerging markets and advanced economies has not decreased in recent years. The evidence on individual emerging markets shows that there is no country (except for Peru) which reports a general decline in its degree of synchronicity with all four groups of advanced economies."

12. IEA OIL DEMAND FORECAST AHISTORICAL RELATIONSHIP TO GDP PREDICTION

Mark Shenk at Bloomberg notes that the most recent IEA forecast of a 1.7% increase in oil consumption in 2010 does not fit the historical relationship between GDP growth as forecast by the IMF and oil consumption.

"[T]he IEA’s projections for oil demand growth will trail the World Bank’s forecast for GDP growth by 0.8 percentage points, the least in 14 years. Since 1997, oil use has followed GDP by an average of more than 2 percentage points and in 2006 the spread widened to 3.9 percentage points."

"'There’s been a remarkable correlation between GDP and oil demand growth,' said Edward Morse, head of economic research at LCM Commodities LLC in New York. 'The IEA numbers are implausible.'"

(h/t Joshua Keating at the FP Morning Brief.)

13. NEW SINGLE FAMILY HOME SALES DOWN 21.3% (±11.4%) FROM JUNE 2008

Barry Ritholtz at the Big Picture reports that US Census Bureau and Department of Housing and Urban Development announced today that sales of new one-family homes were up 11.0% (±13.2%) in June from May, which is statistically insignificant. They are down 21.3% (±11.4%) from June 2008, which is statistically significant.

14. 80% OF DERIVATIVE ASSETS AND LIABILITIES HELD BY 5 FIRMS (ENERGY FIRMS USING DERIVATIVES MOSTLY FOR HEDGING) PER FITCH REPORT

In a story picked up on in the econoblogosphere over the weekend, David M Katz at CFO.com wrote on July 24 that a Fitch Ratings report released a week prior to his story indicated that about 80% of derivative assets and liabilities are held by five firms--JP Morgan Chase, Bank of America, Goldman Sachs, Citigroup, and Morgan Stanley.

"Those five banks also account for more than 96% of the companies' exposure to credit derivatives.

About 52% of the companies reviewed disclosed there were credit-risk-related contingent features in their derivative positions. Such features require a company to post collateral or settle outstanding derivative liabilities if there's a downgrade of the company's credit rating.

The Fitch analysts also found that just 22 companies disclosed the use of equity derivatives. Just six nonfinancial firms--IBM, General Motors, Verizon, Comcast, Textron, and PG&E--reported exposure to share-based derivatives.

For the report, the rating agency reviewed first-quarter 2009 filings of the companies, which come from a range of industries and represent almost $6.4 trillion in aggregate outstanding debt. The companies also recorded a total notional amount of derivative positions of more than $296 trillion.

Unlike the financial firms, which both use derivatives and issue them for profit, nonfinancial companies seem mostly to use derivatives just to hedge specific risks, according to Fitch. While 'derivatives trading by utilities and energy companies appear to be very limited,' for instance, 'most of the companies reviewed in both industries report the use of derivatives for hedging commodity risks,' the report found."

It is rather hard to disaggregate hedging from speculative use of derivatives by major energy firms, I would be rather interested to see the methodology for that in this report.

Daily Sources 7/23

1. UNEMPLOYMENT GROWING RAPIDLY IN THE G-7, BUT BRAZILIAN UNEMPLOYMENT UNEXPECTEDLY DOWN

Rebbeca Wilder at News N Economics notes that unemployment continues to grow quickly in the G7, which should damper consumption:



However, Helder Marinho and Andre Soliani at Bloomberg reported that Brazil's June jobless rate in six main metropolitan areas fell to 8.1% from 8.8% in May.

"Policy makers cut the so-called Selic rate by a half-point to a record 8.75 percent yesterday and said that level was adequate to spur growth and bring inflation back to target.

The drop in the jobless rate 'indicates how strong the domestic market is,' Pedro Tuesta, senior economist for Latin America with 4Cast Inc., said in a telephone interview. 'It reinforces the idea the bank should stop cutting rates.'"

"Annual inflation, as measured by Brazil’s IPCA index, slowed to 4.8% in June, down from 5.2% in May and the lowest since March 2008. Policy makers last month reaffirmed that they seek to slow inflation to 4.5% by year-end."

Average wages, however, are not keeping pace with inflation.

2. ICELAND FORMALLY APPLIES FOR EU MEMBERSHIP

Karl Ritter at the Associated Press reports that Iceland formally applied for membership in the EU today.

"'To be frank with you, if we would get a rotten deal on the fisheries, the Icelandic people would get quite angry,' Foreign Minister Ossur Skarphedinsson said after presenting the EU application to his Swedish counterpart, Carl Bildt. Sweden currently holds the EU presidency.

'This is not only an issue of economics. It is also an emotional issue. It is also an issue that is related to sovereignty,' said Skarphedinsson, a former fisherman."

3. UK RETAIL SALES UP 1.2% IN JUNE FROM MAY, 2.9% YOY, GOVT ANNOUNCES £1.1 BN PLAN TO ELECTRIFY MORE OF ITS RAIL SYSTEM

Svenja O’Donnell at Bloomberg reports that UK retail sales rose 1.2% in June from May, and 2.9% from June 2008.

"Sales at food stores increased by 0.7%, while they rose 1.6% at non-food retailers, the statistics office said. Textile, clothing and footwear shops saw sales increase for the first time in three months, by 4.7%."

Meanwhile, Nicholas Winning at the Wall Street Journal reports that the UK has announced plans to spend £1.1 billion ($1.81 billion) on electrifying two rail routes.

"The works represent the first big electrification of the rail network since the 1980s and will increase the proportion of electric rail journeys in the UK to 67% from 60%, the government said."

4. RUSSIAN MINISTERS TO CONSIDER 0% TAX ON INITIAL MINERAL EXTRACTION IN THE BLACK SEA AND SEA OF OKHTOSK, BUT WARNS MOL THAT IT HAD BETTER COMPLY WITH LICENSING IN SIBERIAN FIELD

Kate Mackenzie at FT Energy Source reports that Russian ministers today will discuss setting a zero rate of taxation for mineral extraction for the initial stages of development in the Black Sea and the Sea of Okhotsk.

"The tax breaks will apply until accumulative output reaches 20 million metric tons (~ 144 million barrels) at Black Sea fields and 30 million metric tons (~210 million barrels) in the Sea of Okhotsk, off Russia’s Pacific Coast. Alternatively, the zero rate may be applicable for 10 years or 15 years for fields being developed under combined exploration and production licenses, according to the statement."

Though I feel sure that it will be tempting enough to make some majors bite, the problem is that when the price of oil rises, Moscow will likely take measures to re-nationalize production at the fields, given their view of their strategic value. Meanwhile, Stephen Bierman and Edith Balazs at Bloomberg report that Mol--Hungary's largest refiner--pledged to meet all requirements in the license terms of a Siberian oil-production venture with OAO Russneft.

"'Mol always acts in accordance with the rules of the Russian Federation and the company will do everything on its part to fulfill all the requirements described in the license agreement,' Mol said today in an e-mailed statement.

On July 2 Russia’s subsoil agency, Rosnedra, gave the Zapadno-Malobalykskoye LLC oil venture six months to correct violations relating to its drilling plan and its use of so-called associated gas, Larisa Kalacheva, a spokeswoman for Russneft, said today. 'The time allotted to correct license infractions is very tight,' she said. 'Action is needed.'

Tensions between Mol and the Russian government have increased since Moscow-based OAO Surgutneftegaz bought a 21.2% share in the Budapest-based refiner in March. Mol called the move hostile and has barred the Russian company from participating in corporate meetings."

5. BIDEN CALLS ON RUSSIA TO REMOVE TROOPS FROM GEORGIAN BREAKAWAY REGIONS, BUT ALSO INDICATES THERE IS NO MILITARY OPTION FOR THEIR REMOVAL

Philip P Pan at the Washington Post reports that in Tblisi today Vice President Joe Biden urged Russia to withdraw its troops from the breakaway regions of Georgia.

"'What we can do is make clear to the whole world, and to the Russians particularly, that we stand with you, and that if they fail to meet their commitments, that it is a problem for them,' Biden told the children, referring to a ceasefire agreement that the Georgia and the United States say Russia is violating.

'A lot of you think maybe Russia did what they did, and they paid no price,' Biden added. 'They paid a pretty big price already diplomatically. The countries that surround Russia, even those that have been very, very loyal to Russia in their freedom, are now saying very harsh things.'"

However, earlier in the day in a speech before the Georgian parliament, Biden said there was "no military option" for Georgia to regain sovereignty over the breakaway regions.

6. CHINESE DEFENSE MINISTRY TO LAUNCH CHINESE / ENGLISH WEB SITE, CENTRAL BANKS OF CHINA, JAPAN, AND SOUTH KOREA ATTEND FIRST TRIPARTITE MEETING

Tini Tran at the Associated Press reports that the Chinese defense ministry will launch an official web site in both Chinese and English on August 1.

"The Web site appears aimed at reassuring Asian and Western nations that the PLA is becoming more accessible to the outside world, experts told the China Daily.

'As more attention is being given to online information, the Chinese army has moved one step forward in its public diplomacy,' Professor Li Xiguang, dean of Tsinghua University's journalism school, was quoted as saying.

The Web site's launch 'is a major step for the PLA to open up to the outside world,' Sr Col Huang Xueping, deputy director of the ministry's information office, said in an interview with the newspaper. The office was only set up last year.

The site will 'cover a large amount of information,' featuring regular activities and background of the Chinese military."

(h/t Sky Canaves at China Journal.) Meanwhile, the first tripartite meeting of the central banks of China, Japan, and South Korea took place today in Shenzhen.

"On December 10, 2008, in order to strengthen their mutual cooperation and communication and better safeguard economic and financial stability in the region, the three central banks jointly announced the establishment of a formal Tripartite Governors’ Meeting mechanism, based on the existing dialogue, which will take place once a year."

(h/t Rebecca Wilder at News N Economics.)

7. CLINTON SAYS US PREPARED TO EXPAND COMMERCIAL RELATIONSHIP WITH MYANMAR IF THEY RELEASE POLITICAL PRISONERS

Glenn Kessler at the Washington Post reports that Secretary Clinton told the media that the US was prepared to expand its commercial and aid relationship with Myanmar if it were to release political prisoners, and specifically Nobel Peace Prize laureate Aung San Suu Kyi.

8. AHMADINEJAD APPARENTLY DEFYING LOTR CALL FOR HIM TO WITHDRAW VP NOMINATION, IRAN SAYS IT HAS FOUND 46 OIL FIELDS IN THE CASPIAN

Ali Akbar Dareini and Lee Keath at the Associated Press report that Iranian President Mahmoud Ahmadinejad has apparently chosen to defy the Leader of the Revolution, Ayatollah Khamenei, who has called upon the president to withdraw his choice for first Vice President,Ahmadinejad's son-in-law.

"Arguing for a further chance to make his case, Ahmadinejad said, 'there is a need for time and another opportunity to fully explain my real feelings and assessment about Mr Mashai.'"

Dareini and Keath observe

"Now Khamenei is facing tests to his authority on two fronts. One is from Ahmadinejad, the other is the open defiance from the reformist opposition, which has continued its campaign against Ahmadinejad despite the supreme leader's declarations that the election dispute is over."

I would put it more as tests of authority from those who see the representative elements of the Constitution in their best interests and those who see it as protecting the vested interests of the old guard, but the point is salient nonetheless. Meanwhile, Xinhua reports that Iran's Oil Minister Gholam Hossein Nozari has reportedly said that Iran has identified 46 oil fields in the Caspian Sea, of which eight are ready for exploitation immediately. (h/t Leanan at the Oil Drum.)

9. MOODY'S UPGRADES PHILLIPINE SOVEREIGN DEBT

Karl Lester M Yap at Bloomberg reports that Moody's rating on Philippine sovereign debt was raised to Ba3 from B1, the highest the country has received in more than three years.

"'The upgrade was prompted by the relatively high degree of resiliency exhibited by both the country’s financial system and external payments position in face of the global financial and economic crises,' Moody’s said. 'International reserves of the central bank are at a historical high and exceptional policy measures have not been required to shield the banking system.'

Philippine international reserves climbed to a record $39.56 billion in January, as rising remittances sent home by citizens abroad countered collapsing exports. Higher debt ratings reduce the cost of borrowing, making it easier for the Philippines to sell debt to fund government spending plans."

10. MEXICAN IMMIGRATION TO THE US HAS SLOWED MARKEDLY SINCE 2006, BUT EMIGRATION BACK TO MEXICO HOLDING STEADY

In a report released yesterday, the Pew Hispanic Center concluded that:

"The flow of immigrants from Mexico to the United States has declined sharply since mid-decade, but there is no evidence of an increase in Mexican-born migrants returning home from the US.

Survey data from the US and Mexico reveal a large flow of migrants back to Mexico, but the size of the return flow appears to be stable since 2006."

(h/t Conor Dougherty at Real Time Economics.)

11. NAR ANNOUNCES THAT EXISTING HOME SALES ROSE 3.6% IN JUNE FROM MAY, DOWN 0.2% YOY; MEDIAN PRICES DOWN 15.4% FROM JUNE 2008

Maya Jackson Randall at the Wall Street Journal writes that the National Association of Realtors announced that existing home sales in June rose 3.6% from May, but are still down 0.2% from June 2008.

"Foreclosures and short sales reflect 31% of sales in June. Distressed property sales have pushed prices lower, year over year. The median price for an existing home last month was $181,800, a 15.4% decrease from June 2008."

Meanwhile, the Department of Labor announced today that seasonally adjusted initial unemployment insurance claims for the week ended July 18 were

"554,000, an increase of 30,000 from the previous week's revised figure of 524,000. The 4-week moving average was 566,000, a decrease of 19,000 from the previous week's average of 585,000."

12. USDA REPORT CONCLUDES FARMERS SITTING ON GOLD MINE IN CARBON OFFSETS INCLUDED IN CLIMATE BILL

Keith Johnson at Environmental Capital writes that a new report from the Agricultural Department concludes that farmers stand to make a fortune from the carbon offsets included in the climate bill.

"To wit: Farmer’s incomes will take a hit in the short term, falling by 1% through 2018. Things will get worse by 2027 (a 3.5% decline) and even worse by 2048 (a 7.2% decline.) That’s because things like fuel and fertilizer will cost more under the climate bill.

But farmers’ net incomes will keep rising, because they will be literally standing on a gold mine in the form of carbon offsets, which will become increasingly valuable. The goods:

'EPA’s analysis projects annual net returns to farmers of about $1-2 billion per year from 2012-18, rising to $20 billion per year in 2050. USDA’s analysis strongly suggests that revenue from agricultural offsets (afforestation, soil carbon, methane reduction, nitrous oxide reductions) rise faster than costs to agriculture from cap and trade legislation. It appears that in the medium to long term, net revenue from offsets will likely overtake net costs from HR 2454, perhaps substantially.'

It might be even juicier; the EPA’s Ms. Jackson estimated the value of agricultural offsets at more than $3 billion in 2020.

And wait—there’s more. '[W]e believe our analysis is conservative--it’s quite possible farmers will actually do better,' Secretary Vilsack said.

That’s because farmers also stand to make a fortune off of other government energy policies, such as ambitious mandates for renewable energy and biofuels that will create lucrative, mandatory markets for crops and even agricultural waste."

Today's must read. The USDA report itself can be found here.

13. OCCIDENTAL FINDS SIZABLE NEW OIL FIELD IN CALIFORNIA

The Los Angeles Business Journal reports that Occidental has announced a significant oil and gas find in Kern County, California.

"The company said in a statement that it believes there are between 150 million and 250 million gross barrels of oil equivalent reserves within the area. Approximately two-thirds of the discovery is believed to be natural gas.

Occidental holds an approximate 80% stake in the property, with Chevron Corp. holding the remaining interest."

That represents about 1.8-3 global days of oil demand.

Rafsanjani's Friday Prayers Sermon

Open Source Center has translated the entire second July 17 Friday prayer sermon delivered by Ayatollah Akbar Rafsanjani--via Juan Cole's Informed Comment:

". . . I will briefly speak about another issue, the killings in China. Muslims in China are experiencing some bitter days. I would like to mention a few points to the Chinese government. The Chinese government is expected to exercise patience in the face of aggressions that people are facing.

(At this point a number of people began chanting: 'Down with China.' Rafsanjani continued with his sermons and told worshipers:)

Please allow me. Dear gentlemen! I, as the leader of the Friday prayers, pleaded with you not to chant any slogans. Considering the situation here (the venue of the Friday prayers), the adjacent streets and the entire area, I would like to ask you not to chant slogans. Please allow (me to continue) Thank you.

We would like to give a friendly word of advice to the Chinese government which we believe is a wise government working towards the progress of China. We would like to tell the Chinese government that what is going on is not in its interests. They (Chinese officials) are aware that there one billion and 600 million Muslims in the world. They live in around 60 independent countries. Muslims in all parts of the world enjoy their own identity and character and all their hearts are linked to those of Muslims in China who are experiencing acts of oppression today. China must be careful and consider its own interests and its relations with the world of Islam and the hearts of Muslims. And, God willing, from now on we would not witness such acts of oppression against Muslims in China or other parts of the world.

Problems in Iraq, Palestine, Afghanistan and Pakistan are unfortunately the same as they have been in previous weeks and months, and bloodshed, corruption and clashes continue. Those problems will be solved one day, God willing.

And now to an issue which concerns us and the discussions to which I promised to dedicate the second and third part of my remarks.

As far as the (presidential) election which was held (on 12 June) is concerned, praise be to God we made a very good start. A sound competition took shape and good preparations were made. The four candidates who were approved by the Guardian Council competed against each other and demonstrated a good competition. The people became hopeful that the elections were completely free and they truly demonstrated an unprecedented participation. In these circumstances the conditions were set for the creation of a proud moment for the country. We have to present this glory to the people. It is their right. It was the people who demonstrated a good presence. The people broke a record as far as the presence at the ballot boxes was concerned. We all have to thank the people who participated freely in the election at a time when no other country has seen such a level of participation. That was very valuable.

I wish those conditions could have continued until today, and today we would have been experiencing the most proud moments in the world regardless of the election results.

However, developments did not take shape as we wished them to, and I will explain them now.

The principle issue concerns what we want, as I mentioned earlier, and, secondly, to ask what is required by the revolution.

What you are hearing now is from a person who has been with the revolution second by second from the very beginning of the struggle which was started by our leader the Imam (Khomeini). We are talking about 60 years ago up until today. I know what the Imam wanted and am familiar with the basis of the Imam's thinking.

Even during the time of the struggles, when it came to a suggestion, for example to use arms, terror (preceding in English), this party (words indistinct), the Imam would always say, all I am concerned about is the people. He would say, you do as much as you can to solve the people's problems and familiarize them with the struggle. He would tell those of us who were theology students that our mission was to go to mosques, prayer houses and villages and explain what we were after.

We have everything if people are with us. (Words indistinct) The Islamic Revolution was based on what the Prophet (Muhammad) did, bringing people on board who themselves wished to take part based on their own will and beliefs.

That was (?the secret) of the Imam's victory.

It took less than 20 years for people to become alert. Obviously the price was also paid in terms of people who were martyred, people who were put in prison, the Imam himself was sent to exile and many other things. However, our gains were much more. People became so alert that those whose ages allow have seen how, in the final couple of years, people poured into the streets.

All the streets were full of the Imam's supporters. And all the forces which were supporters and believers in the Imam were alongside the Imam, all ranged against the very arrogant forces of the Pahlavi regime.

(Poor reception) The Shah whose coffers were filled to the brim from oil revenues could do anything it wanted. The people came to the fore and the demands of the people were such that they had to abandon everything and go.

(Loss of reception) the Revolution, we worked round the clock for it and all on the basis of (loss of reception) all his [presumably Imam Khomeini] worry was that Islamic rule is not possible without the people.

Whatever the people will, will be done! And I have a story to recount; one which I have heard from the era of the Imam. I did not ask where the proof for this is. I then went and asked his eminence about this. It is a very interesting story. It formed the basis of the Imam's reasoning. Of course, it is far greater than that. His (poor reception) the role that Imam accords to the people. I noted this from a book called Kashf ol-Mohajjam which belongs to Seyyed Ibn-Tavus who is one of our very erudite Ulema from the seventh century. He is a great personality. Please listen to this story.

This is one of the (indistinct words)

Ali Ibn-Abi-Talib himself says that when the prophet (Mohammad) was (indistinct words) rather worried in the last year of his life. He said this to Abi-Talib; (reads a short verse from Koran) This is after Eid-e Ghadir. He said that you are the Guardian of this Ummah [nation] this is a Guardianship that belongs to you, and is something that God has given you.

(Reads a passage from Koran) If you felt that these people are satisfied (with you) and they accept you, and felt that you are a worthy person [ruler] and there was consensus, of course consensus is always relative it can never be absolute; if the majority coalesced around you, then have to accept it. You will become the Guardian and see to their day to day affairs and resolve their problems.

(Reads another passage) If you saw that they opposed you, and that they do not come along with you, then you have to leave them. Let them do what they want to; they know themselves what they need to do with their lives.

(Reads another passage) God will find a way for you to realize your goals. This chronicle is one from authoritative sources. It is using these authoritative sources that Seyyed Ibn-Tavus uses; not that we just have this chronicle; we have many others. We have books on this. This was just a one off chronicle that I read.

This test was what formed the basis of later rule. It was the basis of the rule of the prophet, and we in the Islamic Republic set ourselves the mission of practicing exactly this.

We have to be with the people; this people acted very wisely.

The same thought of the Imam [the late Ayatollah Khomeini] can be witnessed when he appointed Mr Bazargan as the head of the interim government. The power had not been handed over to us and Bakhtiar (the last prime minister of the shah) was still in power in Tehran at that time. The Imam was in a hurry to handover the power to the people. As you know, in his decree to Bazargan, which I also read, the Imam said that the Revolution Council should keep on working for a short term, the Majles should be established as soon as possible, the constitution should be drafted so that the people can live under the new (word indistinct) constitution. When we were preparing the draft of the constitution, before it was handed to the Assembly of Experts, the Imam gave his advice on that and stressed and strengthened the principles which related to the people. The issue of the councils (presumably the municipality councils) had actually been proposed by other individuals, but the Imam strengthened them and assigned the tasks to the people. Later on, when we had meetings with the leaders of other countries, they were surprised about that. The Algerian leaders said that it took them 20 years after their revolution, before they could draw up their constitution. They asked: How could you do so in a hasty manner? We said that since we achieved the victory by people's power (word indistinct) and since the people support their revolution and religion, we were not worried. That was a fact.

As you are aware, according to the constitution, everything in the country is determined by people's vote. People elect the members of the Assembly of Expert and then they elect leader, that is, the leader is (indirectly) elected by people's vote. Presidents, MPs, members of the councils are elected by direct votes of the people. Other officials are also appointed (indirectly) through people's vote. Everything depends on people. This is the religious system. The title of Islamic Republic is not used as a formality. It includes both the republican and Islamic nature.

(People chant in support)

I asked you not to chant slogans so that I can finish sooner. Thank you very much.

The title of Islamic Republic is not just a formality. This is a reality passed on to us on the basis of Koran, as well as the religious sayings of the (Shiite) Imams and prophet. We believe in them. We should have them at the same time. Rest assured if one of those two aspects are damaged we will loose our revolution. If it loses its Islamic aspect, we will go astray. If it looses its republican aspect, it [The Islamic Republic] will not be realized. Based on the reasons that I have offered, without people and their vote there would be no Islamic system. Ali bin Abi-Talib [the first Shiite Imam] stayed at home for 19 years for the same reason. When the people came forward (word indistinct), Ali bin Abi-Talib accepted to come to power after people's insistence, despite the difficulties he faced.

This was our path. We should reach the destination. We should strengthen it day by day. If the problems after the [presidential] election had not emerged, we would have had taken the best largest step towards realizing the Islamic [aspect of the establishment] at the 30th anniversary of the revolution. I am not going to say that we have not taken the step. I want to explain why this happened.

What I understand is that towards the end of the election campaign we were taken over by doubt. In other words, people started to have doubts and the seeds of doubt were sown, for whatever reason. Whether it was unfavorable publicity or the Voice and Vision's inappropriate actions or other things, seeds of doubt were planted in the minds of the people. We consider doubt the worst disaster. (Talking to some people in the audience) Please allow me; I am saying it much better than you would. Your slogan and approval is enough. Leave it.

Doubt came down on our nation like the plague. Of course, there are two separate currents. There is a group of people who have no doubts, they (word indistinct) and mind their own business. But there is also another group, whose numbers are not few and include a great section of our erudite and knowledgeable people, who say: "We doubt." We should take measures to remove this doubt. This period, after the results of the elections, is a bitter era. I do not believe anyone from any faction wanted this to happen. We have all lost in this event. We have all lost, and now ask ourselves: why did it happen? We need unity today, more than ever.

Our county should be united against all the dangers that threaten us. They have now upped their ransom demands and are coming forward to take away our achievements in the fields of hi-tech and particularly nuclear technology. Of course, God will not give them the opportunity to do so, but they are greedy. My brothers and sisters, first of all, you all know me; I have never wanted to abuse this platform in favor of a particular faction, and my remarks have always concerned issues beyond factionalism. I am talking in the same manner today. I am not interested in any faction. In my view, we should all think and find a way that will unite us, to take our country forward and save ourselves from these dangerous and bad effects, and the emerging grudges. We should disappoint our enemies so that they would not covet our country. What should we do? I have a few suggestions. Of course, I have discussed these suggestions with a few jurists and members of the Expediency Council, with whom I can intellectually connect. We have decided, and I will read them out as solutions and maybe others will accept them and God willing, put them into force with sincerity.

Our important issue is that the trust that brought so many people to the polls, and is now harmed, will be restored. This should be our holy objective, that this trust is returned. Whether (words indistinct), I will tell you later.

One, we should all, the system, government, Majles, security forces, police and the people, ie the protesters, move in line with the law. If we violate the law, then there will be no boundaries left. We should raise our issues in the context of the law and find solutions for them within the framework of the law. We should accept whatever the law says and if there are some people who have problems with some laws, they should wait until those laws are corrected. God willing, all these problems that we have seen, will be resolved one day. But everything should be within the framework of the law.

Two, we must act in a way that the trust of the people is restored. Of course this cannot be achieved in one day. This is a relatively long process.

We have to create an atmosphere that all sides can come and express their views. And all sides must act rationally and without quarrel. Logic should rule. Of course the main task here falls on the Voice and Vision (of the Islamic Republic, meaning state broadcaster) as it has a greater audience. And all other media outlets must do the same. (Sentence indistinct). They should sit down and talk to each other in a brotherly and sisterly manner and point out their reasons. Eventually the people will find out the truth and we can ask the people too. We have to provide the ground to return this trust to the people. Unfortunately, good use was not made of the opportunity that the Supreme Leader (Ali Khamene'i) gave the Guardian Council in which an extra five days was given to them to talk to the ulema. I do not of course want to blame anyone for this lost opportunity, but, nonetheless, it did not happen. (Crowd chanting) We have passed that stage. We are going through another stage now. I believe that, for the sake of the future and our unity and for preventing the danger facing the system and for safeguarding the values created by the Revolution and for the sake of the martyrs and the efforts of those who struggled on this path whose achievements are now passed on to us and in order for these achievement to be passed on to the third and forth and following generation, at this juncture we can move along this path. If we accept the above two points that we move in line with the law and leave the door to debate, negotiations and reasoning open, perhaps in a short while we will be satisfied.

Meanwhile, we have to do other things. Under current circumstances, there is no need for us to have people in prisons. Allow them to return to their families. (Chants of indistinct slogans from the masses in support of the cleric's comment). Let's not allow our enemies to reprimand and laugh at us and hatch plots against us just because a few certain people are in prison. We should be brave and patient enough to tolerate one another. Sympathy should be shown to the victims of the recent incidents which took place. We should offer condolences to those who are mourning and bring their hearts closer to the establishment. And this is possible. Those who are faithful to the Revolution and know that the system needs them, can cooperate with us with their heart and soul. We have to do this, be tolerant and show them sympathy.

There is no need to make haste here and place ourselves in trouble. We should not limit our media, which have legal permission for their activities. They should be able to work within the framework of the law. As I mentioned before, the law is the criteria. Neither should the media expect to have activities beyond the legal framework, nor should the establishment expect them to ignore their legal rights. All should let a calm, open, critical, or even confirming atmosphere be created. I think that our officials, Law Enforcement Force, military and security forces should help to create that atmosphere.

We are all members of a family. All of us have endured hardship in the path of the revolution. All of us have invested in this long holy jihad and given martyrs. All of us (word indistinct). We have our own idea. Why should others from long distances come and make up a prescription for us (give us advice)? We are independent (word indistinct). Don't we have 30-years experience of running the country? Do we not have the ulema? Why should our Sources (of Emulation, meaning senior clerics), who have always been supportive, and our seminary schools, which have never had any expectations for their efforts, be upset today. We should keep their support and rely on them. If we preserve the unity, God willing, I hope that this Friday prayer sermon will be a turning point for the future and we will be able to successfully resolve this problem, which unfortunately can be described as a crisis. I hope that unity, fraternity, and fair competition (in elections) will again prevail, so that people can elect whoever they like.

(People chant in support)

May God bless you. May God support all of you. May God protect you and help you (word indistinct) to be present at the scene. Thank you very much."