Educate Yourself

Week in Review
For the week 1/16/2006 - 1/20/2006
Brian Trumbore
President/Editor, StocksandNews.com

25 years after the end of the Iranian hostage crisis, a new one continues to unfold. An emergency meeting of the International Atomic Energy Agency is slated for February 2, but as of this writing IAEA chief Mohamed ElBaradei is refusing to advance the release of his already scheduled March 6 final report on Iran's nuclear program.

The 35-member IAEA board is where a referral to the UN Security Council must originate, but even if a resolution to do so passes, Russia and China have already said they are against levying sanctions if it got to the Council. China believes "all relevant sides should remain restrained" and Russian President Vladimir Putin has warned against "abrupt, erroneous steps."

I urge you to take a quick look at my 1/19 edition of "Hott Spotts" and refresh your memory as to the timeline. For well over two years, as I've been writing, Iran has "brilliantly" stalled for time and for now the game continues.

"(The EU-3?France, Germany and Britain) will still be talking when the Iranians detonate their first bomb. (Iranian President) Ahmadinejad's rantings are deeply rooted in an apocalyptic concept of the 12th imam which welcomes mass destruction."

Crazy? Don't count on it. Perle concludes the "Bush administration has become paralyzed." [Times of London]

"Instead of being years away from the point of no return for an Iranian bomb, as we were before we allowed Europe to divert anti-proliferation efforts into transparently useless talks, Iran is probably just months away. And now, of course, Iran is run by an even more radical government, led by a president who fervently believes in the imminence of the apocalypse."

Senator John McCain, appearing on "Face the Nation," labeled Iran the "gravest threat since the end of the Cold War" and he favors levying sanctions even if it meant skyrocketing oil. But it would appear we won't get that far.

Today, even Israel is uncertain. Ariel Sharon had said, "Israel will not accept a nuclear weapon equipped Iran." The defense forces are ready to attack. But the army chief of staff this week ruled out a preemptive strike.

How would Iran counter? Ballistic missiles loaded with chemical weapons? A wave of terrorism unleashed against Israeli and other Jewish targets?

"Unfortunately, much of the debate concerning a hypothetical Israeli strike on Iran remains mired in the dry algorithms of logisticians, who frequently remind the world just how difficult it would be for Israel to attack Iranian nuclear installations. Take, for example, a U.S. Army-sponsored report last year concerning the geopolitical repercussions of a nuclear-armed Iran. While thousands of words were devoted to the minutiae of the Israeli Air Force's operational range and payload figures, relatively little effort was expended on outlining the regional repercussions of such an act.

"Suffering from this narrow-minded analysis is Lebanon, which, more than any other local actor, could find itself in an unfortunate strategic position were hostilities to commence between Israel and Iran. Not only does Lebanon abut northern Israel, but it plays host to Hizbullah, which has made no secret of its fealty to the regime in Tehran.

"In the event of an Israeli attack, Iran would likely respond with a Hizbullah missile barrage against Israel, thereby exacting revenge while maintaining its own distance. Recent Iranian- supplied upgrades to Hizbullah's rocket arsenal?have placed major Israeli population centers - such as Haifa - within range. With Hizbullah's recent buildup, the aggregate Israeli conventional threat against the Iranian nuclear program has been rendered relatively minor in comparison to a potential Hizbullah response targeting Israel and its economy. Iran's leaders are well aware of this fact, and are likely to view Hizbullah's rockets as their primary deterrent against an Israeli attack.

"These same leaders would have little trouble in convincing their allies in Hizbullah to unleash its arsenal, considering that the party's leadership maintains tight contacts with Iran's rulers and its ever-present security apparatus. Hizbullah religious leaders have trained in Iranian seminaries and maintain close connections with ruling Iranian clerics."

"As they cleanse their home front, the theocrats may use their nuclear capability to act upon their ideological imperative to destroy Israel. The West once ignored Saddam Hussein's threats against Kuwait. But dictators often mean what they say. Even if Iran does not use its bomb, a nuclear deterrent will enable it to lash out conventionally without fear of consequence.

"Diplomacy can only work when both sides are sincere. Like an abused spouse, Western policy makers blame themselves rather than understand the fault is not theirs. There is no magic formula waiting to be discovered. To Tehran, the West is na?ve. More diplomacy will only give the Islamic Republic time to achieve its nuclear goal. The only solutions that can rectify the problem are those that deny the Islamic Republic its nuclear arsenal or those that enable Iranians to cast aside theocracy and its aggressive ideology and instead embrace freedom."

Mr. Hannaford quotes Hassan Abassi of the Revolutionary Guard, the forces that helped bring Ahmadinejad to power, from a May 2004 speech.

"We have a strategy drawn up for the destruction of Anglo- Saxon civilization and for the uprooting of the Americans and the English."

"(Abassi) claimed that there are 29 sites in the United States, and elsewhere in the West, that Iran has targeted, and 'we have already spied on these sites and we know how we are going to attack them.'"

And in our ongoing effort to know the enemy, this week I quote from a weekend speech by President Ahmadinejad:

"Unfortunately, today people face rulers who think they have more rights than other nations because their arsenals are stocked with nuclear, biological, and chemical weapons?.

"Each year, tens of new nuclear power plants are constructed, but a few Western countries which have nuclear weapons are questioning Iran, even though, with unprecedented inspections and supervision, there is not the slightest evidence against us.

"They think they have the power and want to deprive Iran of its rights. They clearly announced that they are against research. They want to monopolize nuclear energy and impose their policies on other nations.

"These countries supplied Iran's previous regime with weapons and power plants and helped (its attempts) to master the nuclear fuel cycle, but after the victory of the Islamic Revolution they changed course and stood against us."

This is propaganda of the first order?and highly effective when the audience is largely comprised of those whose knowledge of history is limited to what they have been force fed, including hatred for Israel and the West. That said, there is a core in Iran that desires positive change but we are far, if ever, from effecting it. And many of these same people still view developing the bomb as a source of national pride.

Lastly, Ahmadinejad said at one point this week, "ultimately they need us more than we need them." Four million barrels of oil worth.

At year end, complacency was the order of the day and I can't help but note what I wrote 12/31/05 in attempting to forecast '06.

"(The) U.S. economy will stay positive for the first quarter, but since I look for major foreign policy issues to potentially dominate the 24-hour news cycle before April, the outlook for the rest of 2006 is, at best, cloudy."

I also added earnings would disappoint, but I didn't realize just how soon. I thought by the second quarter, not this last one!

And to those who continue to believe capital spending is going to pick up in a big way, with corporations finally carrying their share of the load after watching housing and the consumer dominate for years, I thought this was indeed possible, but "with one important caveat":

"Corporate CEOs are far more fickle than the average American and if one of my hot spots flares up in a big way, they will be the first ones heading to the door."

So here we are?Iran, skyrocketing oil all over again, and earnings guidance that is less than spectacular. Stocks responded in kind, staging a broad-based sell-off on Friday and finishing down 2% and more on the week as measured by the major averages.

Crude oil ended up at $68.48, its highest weekly close ever and back near the all-time high of $70.85 on concerns the Iranian nuke crisis is on the verge of spinning out of control. But there was another key ingredient this week?Nigeria.

Nigeria is the 3rd-largest OPEC producer behind Saudi Arabia and Iran, as well as the 8th-largest exporter overall at some 2.4 million barrels per day; most of which goes to the United States.

For decades Nigeria has faced unrest in the oil-rich Delta region, where most of the crude is produced, and the people here have seen zero change in their pitiful lives. It's the classic case of one corrupt regime after another sopping up the wealth for its own gain while the people suffer. Western oil companies, such as Shell and ExxonMobil, have been pulling their workers or are threatening to.

And on the natural gas front, while the price of this has been collapsing and is far more sensitive to weather patterns than geopolitical concerns, for the second time in weeks, Russia has proved it is not a reliable source of energy. Suffering through a historic cold wave, Russia cut off a portion of supply intended for the likes of Italy to meet the soaring needs of its own populace. By week's end, with the cold mass having hit Ukraine, it, too, was forced to cut back on the gas passing through to the rest of Europe through its pipeline in order to meet domestic demand.

On the earnings front, it wasn't just technology that disappointed, but even the likes of General Electric and Citigroup reported either results that missed expectations or issued tepid outlooks for the first quarter. Prior to these two Friday morning, tech heavyweights IBM, Intel, Yahoo, eBay, Motorola and Apple all had one thing or another that upset analysts and traders who in most cases had these stocks priced for perfection. Separately, the higher oil prices did a number on airline issues that had finished up '05 in fine fettle but are collapsing anew.

Broadly speaking, the economic news of the week was mixed, with the Fed's regional survey of the economy showing continued moderate to robust growth in most areas, but also softer housing in a majority of markets. This latter bit was confirmed by the weak numbers on December housing starts, while a storyline in USA Today captured a lot of attention:

I've talked about this topic ad nauseum for years now, but here's a summary of the issue from PIMCO's Bill Gross, as stated in Barron's Annual Roundtable.

"The fact is the American homeowner has learned to use his home as an ATM machine, whether in Des Moines or Miami or Las Vegas or Orange County, Calif. There is a lot of equity in Des Moines, just as there is in Miami. Homeowners have been able to extract it by taking out 'funny-money' mortgages and by borrowing money at 1% and 2% initially.

"Beginning in January of '06, a substantial percentage of adjustable-rate mortgages begin to adjust upward. They have had a grace period in the past year or two. We have a long stretch ahead of us in which prior Fed policy affects the economy ?Typically, when the Fed marches interest rates up, 12 to 18 months later there is a slowdown in the economy. We are beginning to see that, but the funny-money phenomenon and adjustables and the like have postponed the pain. Slower growth in '06, '07 and '08 will be the result."

And economist Ed Hyman of ISI, one of the best on the Street, weighed in on the message of the bond market these days, as told to Greg Ip of the Wall Street Journal.

"Mr. Hyman thinks long-term interest rates are a reason to be less, not more, optimistic about the outlook. They're low, he says, because 'alternative returns aren't very attractive.' Low expectations for investment - in new businesses, for example - are detrimental to economic growth. Investors are putting money into long-term bonds 'because they can't figure out how to get better than 4%.' Such an environment means short-term rates of about 4.5% might actually be more restrictive than previous experience suggests."

As for the international scene, Tokyo took center stage this week and not because of a continuation of its spectacular bull run. Instead, the Nikkei index collapsed 1,000 points (about 6%) in the span of three days before settling down. The chief culprit was an Internet services company called Livedoor, which through an aggressive series of acquisitions had become a $6.3 billion Web empire; all headed up by a 33-year-old nonconformist who embraced the limelight.

Well, authorities raided Livedoor's offices amidst allegations of stock manipulation and funny accounting when it came to the 50 or so companies it cobbled together and, to top it off, for now, a former Livedoor executive committed suicide.

Tokyo's market is replete with day traders and speculators of all stripes and the resulting activity short-circuited its computer system; with the lack of capacity forcing the exchange to shut down?a huge embarrassment. More days of this sort will likely occur, including this coming Monday after Wall Street's ugly finish.

Staying overseas, China announced it has accumulated reserves of $819 billion, rivaling Japan's $846 billion; a staggering total amassed for the most part in just the past ten years. But what remains most worrisome is the fact about 3/4s of China's holdings are in U.S. Treasuries.

For now, however, the United States continues to attract foreign buyers of its stocks and bonds; $89 billion worth in November (the last month for such data), including $54 billion in our bonds. So, still no problem funding our massive deficits, but these things have a way of reversing in a flash under the right circumstances.

Lastly, a word on North Korean dictator Kim Jong il's excellent adventure to China. While details are virtually impossible to confirm, the little guy with the bad hairdo and about 10-15 nukes in his portfolio was supposedly looking at examples of China's economic miracle and how he might be able to replicate it.

At first blush one could easily conclude, 'Hey, this isn't all bad. Better than the alternative, that's for sure.'

But I have spoken in the past about China's problems with Kim and his destitute hordes. It's not only an issue of the regime collapsing at some point and China being faced with a massive wave of refugees. It's also about North Korea suddenly becoming the new low-cost producer. If?[emphasize, If]?an agreement on the nuclear front was ever reached, the North would be granted all manner of economic incentives. What if Kim or whoever succeeds him got religion? Deng Xiaoping did, beginning in the late 1970s, and laid the groundwork for China's spectacular progress. The last thing China thus wants is a new competitor on its border. It's having a tough enough time finding employment for all of its own citizens these days.

Just something else to chew on. For the darker side of Kim, I have further fodder below.

--We keep hearing of a continuation of double-digit earnings growth but outside of the energy sector, and a few other selected issues, I just don't see it for all of 2006. Thanks to the above mentioned disappointments, the Dow Jones had its first 200- point loss since May 2003 on Friday and finished off 2.7% for the week, thus wiping out its early 2006 gains. The S&P 500 lost 2% and Nasdaq fell 3% to 2247. Even Google took it on the chin in a big way, off $36 on Friday alone to $399. [Its recent high was $475.]

General Electric was symptomatic. While it's earnings were in- line, revenue growth was a mere 3% and the outlook for all of '06 failed to provide cause for any new optimism.

This week's release of the consumer price index confirmed that core inflation, ex-food and energy, remained tame; up 2.2% for all of 2005. But the overall rate, including stuff you and I use daily, was up 3.4%. Treasuries were little changed, though buffeted by two countervailing forces; the impact of higher energy prices, inflationary, against a flight to quality over the cause of the skittishness, Iran. Once the overall economy shows real signs of a slowdown, however, I would expect the longer end of the yield curve to rally?that is if we can avoid a dollar crisis.

--Ford will be formally announcing a restructuring plan on Monday that will include 25,000 layoffs over the next four years.

--With Merrill Lynch's record earnings, the top five Wall Street firms earned $20 billion in 2005. Thanks to still surging mergers & acquisition activity, the big boys will continue to rake it in.

--Oil stocks surged to new highs, led by the likes of oil services giant Schlumberger. And my friends at Pritchard Capital tell me President Bush will be highlighting clean coal technology in his upcoming "State of the Union" address.

--Entrepreneur Mark Cuban, appearing on CNBC, opened up a real can of worms (as he is wont to do) in discussing a topic I've raised on these pages over the years, click fraud. This is where search engines bang away at the pop-up ads a company is paying for, thus generating excess revenue.

A few years back I noticed the traffic on StocksandNews was soaring in one Latin American country, I grew suspicious, and pulled an ad campaign I was running on a search engine (not Google or Yahoo). Immediately the traffic dropped there and it was obviously a case of outright fraud where the engine uses partners all over the world to just keep clicking on your spots. Yes, Cuban is right.

Of course where he was really going with the discussion is that if some day Google or Yahoo are found to be doing the same thing (knowing the lion's share of each of their businesses is still paid search), it would be a bloodbath and I firmly believe that Cuban's comments had at least a little to do with the pounding Google's shares took on the week.

I have also consistently written over the years that paid search is incredibly overrated and that when corporations finally catch on, the game will be over. But that's just my opinion, I could be very wrong.

Separately, involving Google, the Bush administration has subpoenaed the company for the search records of its users as part of a court case involving the protection of children from Internet pornography; the 1998 Child Online Protection Act having been struck down by the U.S. Supreme Court two years ago.

Google said it wouldn't release the random data requested because it violated the rights of its users. I certainly agree with the stance it's taking but at the same time, isn't it ironic that Google would act in such a fashion? After all, just like some of its brethren, at the drop of a hat it has kowtowed to China and its demands for information on dissidents.

--Yahoo's share of Internet search ads is down to 19% from 27% a year earlier, while Google's share is up to 60% from 47% over the same period (not including Asia).

--30,000 are employed in China to scan the Web for offensive material. The entire CIA employs 16,000.

--Some upstate New York operation stupidly shipped spinal column bone tissue with an order of veal, Japanese inspectors discovered it, and just six weeks after the ban on U.S. beef was lifted, it was re-imposed.

--Boston Scientific raised the stakes in the battle for Guidant to $80 per share, up from Johnson & Johnson's $71. It will have buyer's remorse should this go through.

--Hedge funds generated $25 billion in revenue for Wall Street in 2004 (the final figure for '05 isn't known as yet), or 1/8th of the total. The hedge funds also represent 30% of total stock commissions.

--The couple involved in the Wendy's extortion plot over the finger in the bowl of chili received 9 and 12 years in prison. It's not known whether they will get kitchen duty.

--An article in a leading medical journal, The Lancet, reports Tamiflu is not effective against the H5N1 virus, but Roche, the makers of the drug, say it has been proved effective in tests in Turkey which has a major bird flu problem today.

--Beijing city planners have proposed a Disney theme park for 2010, thus beating out Shanghai which failed to formalize its plans. If Beijing officials are smart, they'll insist Disney not install the "It's A Small World" ride, which tends to drive people crazy.

--The FCC is probing those companies that are selling cellphone records. It is absolutely outrageous this is so easy to do. Concurrently, I've raised my estimate on the percentage of dirtballs in the world from 47 to 53.

--Speaking of outrageous, property taxes in my home state of New Jersey are up 29% in four years. But not that some here can't afford it. Two new golf courses are opening up across the river from Wall Street; one with an initiation fee of $150,000, the other at $500,000.

--My portfolio: My new best friend, Jim Cramer, favorably mentioned my carbon fiber play on Friday. That's worth a $1 or $2. And the rest of my meager holdings hung in there this week, as it was one where an 80 / 20 split between cash and stocks looked alright.

The coldest weather since 1950 pummeled the nation, including Moscow, as temperatures plunged below minus 20 degrees Fahrenheit for days on end, bursting water pipes and closing factories amidst the highest demand for energy in the nation's history.

Separately, Russia has a new dispute with Ukraine, related to its earlier tussle over Gazprom and natural gas. Ukraine seized a lighthouse on the Black Sea at Sevastopol, even though Russia has a lease on it until 2017. Sounds like a small deal, but it's yet another example of the tension between these two. Some in Ukraine wanted this done because of the Gazprom issue as a way of sticking it to Russian President Vladimir Putin. But the upcoming parliamentary elections in Ukraine, March 26, could see Putin get his revenge as it appears increasingly likely President Yushchenko will suffer a crushing defeat.

But recently I've commented extensively on Putin's use of the energy weapon, as well as Defense Minister Sergei Ivanov's op- ed in the Wall Street Journal. Here is more food for thought; first Gazprom.

"A lot has been written about the recent gas deal that Gazprom reached with Ukraine, but most of it only proves that no one has the slightest idea what really happened. Everyone arrives at different numbers, and everyone has a different estimate of how much money will be siphoned off under the deal. No one has the slightest doubt that huge sums will disappear, however.

"To the outside observer, public reaction to the deal in Russia must have seemed highly peculiar. If an agreement this murky, dubious and nontransparent had been reached in a country with freedom of speech and at least a minimal system of checks and balances among the branches of government, it would have resulted in an enormous scandal, a huge public outcry, a parliamentary inquiry and, most likely, high-level resignations and high-profile court cases. But not here.

"It came as no surprise that the State Duma kept quiet about the deal. The current Duma always keeps its nose clean in such situations. The opposition also found nothing objectionable in the deal that it could turn against the Kremlin in order to make a little political hay?.

"What we have as a result is a social paradox. On the one hand, when sociologists ask people what concerns them about life in this country and what they think is hindering Russia's development, the overwhelming majority cite corruption, especially in the government, and the bureaucracy. Yet on the other hand, when Gazprom brazenly cuts a shady deal with Ukraine, the public couldn't care less."

"Unlike corrupt politicians who view their country's oil wealth as a means of elite enrichment, President Vladimir Putin is methodically consolidating state control over Russia's energy resources and deploying them as a tool of international statecraft. Russia's energy exports have replaced both nuclear arms and the Communist International as the principal agent of Russian influence abroad?.

"Rather than liberalizing its economy, as China has done to such explosive effect, Moscow is reasserting state control, in a concerted strategy to make Russia a great power once again.

"A closer look at the way Russia has wielded energy supplies to support its allies and bludgeon its rivals in Eurasia suggests that major economies increasingly dependent on Russian gas and oil exports - including great powers in Europe and Asia, and even the United States - are rendering themselves vulnerable to the ambitions of an autocratic, imperial state that has not refrained from using energy as a geopolitical weapon and has been ruthless in its treatment of both internal political opponents and neighboring states."

On Gazprom, which is now one of the five largest companies in the world in terms of market capitalization:

" 'Many observers wonder whether Gazprom?is really a company at all,' writes the Economist. 'Often, it seems more like an arm of the state,' pursuing 'the Kremlin's ambitions as well as its own.'

"Gazprom's chairman is Dmitri Medvedev, Russia's first deputy prime minister. He previously served as Kremlin chief of staff and is perhaps President Putin's most trusted aide. Medvedev is the leading candidate to replace Putin in 2008."

Gazprom, primarily a natural-gas giant, also controls significant oil reserves. But one oil company it doesn't own is Rosneft, "the state oil giant that acquired the biggest production unit of what had been the largest private oil company in Russia, Yukos, when the government arrested that firm's chief executive, Mikhail Khodorkovsky, and banished him to prison camp in Siberia for daring to fund opposition political parties."

"Rosneft's chairman is Putin's powerful deputy chief of staff, Igor Sechin. From the Kremlin, he is reported to have masterminded the attack on Yukos' leadership - from which Rosneft benefited handsomely. Sechin leads the 'siloviki' faction in the Kremlin composed of former military and secret police officers. According to the Financial Times, Rosneft is viewed in Russia as 'the oil company of the siloviki,' of which Putin and the other leading candidate to replace him as president, second deputy prime minister Sergei Ivanov, are themselves members?.

"There may be no better evidence that Russian energy policy is at the core of Russian political power and strategy than the expectation that President Putin will assume Gazprom's chairmanship when his term ends in 2008. 'I intend to leave the Kremlin, but I don't intend to leave Russia,' he says enigmatically. He has already mastered the role. 'Those who have dealt with Putin,' said one commentator, 'may have gotten the impression that they were talking not with the president of Russia but with the CEO of Gazprom.'"

I still say Putin remains president for a third term, but I have to admit I hadn't thought of the Gazprom angle.

As for Sergei Ivanov's op-ed that I highlighted last week, on Monday, Alexander Golts wrote in the Moscow Times:

"In theory, (Ivanov's) opinion piece in The Wall Street Journal last Wednesday should have struck fear into the international community. Ivanov seriously asserted that the scope of the use of military force was on the rise, 'not least because more challenges to national security have emerged.' Chief among these threats, Ivanov held, was 'interference in Russia's internal affairs by foreign states - either directly or through structures that they support.'"

"Such a declaration of imperialist foreign policy ought to inspire fear, but it doesn't. Here's why: In 2002, the Kremlin opted not to launch a preemptive strike against fighters in Georgia's Pankisi Gorge. Last year, it chose not to intervene in events in Kyrgyzstan. The reason is simple: Putin doesn't believe the military can get the job done. His doubts are well founded. For all of Ivanov's cheerleading, the combat readiness of the armed forces is at an extremely low level?.

"Maintaining a million-man army while attempting to preserve nuclear parity with the United States simply requires greater financial resources than Russia has at its disposal, even with the current sky-high price of oil. There can only be one rational conclusion: The size of the army must be reduced. Instead, the Defense Ministry is doing everything possible to hang on to its enormous conscript force. After all, small mobile units are obviously incompatible with imperial ambitions. If we are to take Ivanov's opinion seriously, 'imperialism without a leg to stand on' has become Russia's new military doctrine."

Lastly, in the January / February 2006 issue of The Atlantic Monthly, Benjamin Schwarz has an eye-opening commentary tied to the above discussion titled "The Perils of Primacy."

"The news media and the nation's leaders have almost entirely ignored a startling and perilous development in the old sphere of nuclear confrontation, the one involving nuclear-armed major powers: the U.S. threat to the stability of deterrence. The past fifteen years have seen a profound and dangerous shift in the nuclear balance."

During the Cold War, Washington and Moscow maintained a balance of terror, the doctrine of mutually assured destruction (MAD).

"Today, however, one country - the United States - appears to be on the verge of establishing true nuclear primacy. Ironically, America's nuclear dominance may dramatically diminish its security."

"More important than (the) quantitative reduction, though, has been the even steeper qualitative decline. Owing to financial constraints, Russia can't ensure unbroken monitoring of American ICBM fields, and can't plug the holes in its missile- warning networks that render it blind to attacks from U.S. submarines in launch areas in the Pacific. Maintenance, supply, and training deficiencies afflict Russia's nuclear forces generally and its submarines most crucially."

The Russians have carried out just a handful of ballistic-missile submarine patrols in the past four years, for example.

"Equally noteworthy has been the sluggish pace of modernization in the nuclear forces of China?Whatever Russia's vulnerabilities, China's are far more pronounced. Beijing has no operational ballistic-missile submarines (the component of a nuclear arsenal most likely to survive a first strike). Moscow's arsenal contains approximately 800 missiles that could reach the continental United States; Beijing's contains about eighteen. Most important, the military personnel devoted to China's nuclear forces have nothing like the training, experience, and institutional history of even Russia's - let alone America's, who have been training and preparing for nuclear war for well over half a century.

"But whereas Russia's nuclear capabilities have decayed, and China's have remained largely static, America's have become far more lethal."

Schwarz notes the spectacular gains in the United States' nuclear force "are inconsistent with the aim of simply deterring an adversary's nuclear attack - a goal that would require merely a 'countervalue' strike on the enemy's cities. They are necessary for a disarming 'counterforce' strike, aimed at preempting a nuclear attack - and hence wining a nuclear war."

"What the planned force appears best suited to provide beyond the needs of traditional deterrence is a preemptive counterforce capability against Russia and China. Otherwise, the numbers and the operating procedures simply do not add up."

Schwarz details "a brilliant and sobering study" that has recently been prepared by Keir A. Lieber and Daryl G. Press and presented to the Council on Foreign Relations in October.

"To grossly oversimplify: the erosion of Russian capabilities, combined with new, overwhelming warhead yields and the 'accuracy revolution' in U.S. nuclear forces, has largely obviated the problems of 'fratricide' (the prospect that U.S. missiles on the attack would destroy each other, leaving their targets safe) that once helped make a disarming strike impossible to achieve.

"Lieber and Press emphasize that their analysis doesn't prove that a U.S. first strike would succeed, but it highlights a development that is grave if only because it's one that prudent planners in Russia and China who conduct similar analyses, are no doubt already surmising: that their countries can no longer be confident of having a viable deterrent."

And this nuclear imbalance is only going to grow over the coming years. But Schwarz doesn't detail the rapid advances China has made on the short- and medium-range missile front, weapons designed to take out U.S. aircraft carriers in the event of a conflict over Taiwan and the sea lanes.

"Until a nuclear stalemate is restored - if it ever is - Moscow and Beijing will surely buy deterrence by spreading out their nuclear forces, decentralizing their command-and-control systems, and implementing 'launch on warning' policies. If more than half a century of analyzing nuclear dangers and 'crisis stability' has taught us anything, it is that all these steps can cause crises to escalate uncontrollably. They could trigger the unauthorized or accidental use of nuclear weapons; this could lead to inadvertent nuclear war."

North Korea: Dan Rather did an interesting piece on "60 Minutes" last week. Needless to say it was disturbing. And if you read an article by Professor Bradley Thayer, a defense expert, in the latest issue of Defense News you wouldn't come away reassured either.

"One of the most compelling reasons why this is so is because decisions are limited to a tiny circle: Kim Jong il and his cronies. Whenever this situation arises, as in North Korea or Iran, there is significant risk deterrence will fail. Unlike leaders in democracies, dictators face no checks and balances. Accordingly, the leader's psychology is critical for deterrence to work.

"During the Cold War, deterrence theorists gave comparatively little attention to the psychology of individual leaders. That made sense in the first nuclear age. It was reasonable to assume the leaders of superpowers would be rational and their actions could be checked by bureaucracies and other countervailing pressures. But the future of nuclear deterrence will not repeat the past."

Professor Thayer postulates that today there is great variation in how people think and react to threats.

"While most people will be deterred by nuclear weapons most of the time, some people, in some situations, will not be because their brain is different. How they reason in critical situations is dissimilar from the rest of the population. Furthermore, these people are bolder, take greater risks, and are more likely to be leaders?.

Thayer talks about "gut feelings" and how this impacted decision-makers such as Napoleon, Stalin and Hitler. "A leader who depends on his gut to make decisions cannot be deterred."

"Today, we worry that Kim may base his decisions on his gut feelings and so is as difficult to deter as Hitler."

But leaders "are sensitive to personal threats. To ensure that deterrence will work against a leader as dangerous as Kim, the United States must have the conventional and nuclear capabilities to threaten him and his loved ones with personal destruction, even in their hard and deeply buried bunkers."

Iraq: The vote has finally been tallied (five weeks after the election) and the Shia religious alliance, coupled with the Kurds, do not have a clear cut majority so they're forced to deal with the Sunnis in some form or another. The Sunnis actually picked up 58 of the 275 seats, an encouraging development. But while it is still way too soon to tell how this will all shake out, one thing is certain; initially it's basically about divvying up the oil revenues. The Sunnis will demand a significant share as payment for their cooperation.

Afghanistan: There were some disturbing suicide attacks here that killed 24 on Monday. Disturbing because it was the first real sign tactics are being imported from Iraq. And then you had the detailed report from the Wall Street Journal and the UN Office on Drugs and Crime that 52% of Afghanistan's economy is based on opium exports. What's equally depressing is to think of how an entire generation of young people, throughout the region, is being lost at lightning speed.

Syria: President Bashar Assad released five political prisoners, including two prominent ones, in an effort to get some of the heat off him. Of course Assad is not one of the brighter bulbs on the planet (though he's a survivor) as he met with Iran's Ahmadinejad and voiced his full support for the latter's nuclear efforts.

Pakistan: Yes, President Musharraf can be frustrating to deal with, and by necessity he has to play both sides at times, but no doubt this is also a man of amazing courage. Following the CIA operation that intended to kill Zawahiri and the cries from his people, Musharraf told them Pakistan "has to stop harboring terrorists." In other words, "Shut up."

Israel: Thankfully, Thursday's suicide bomber was inept, but the bigger picture is all about the Palestinian parliamentary elections on Wednesday and the percentage Hamas ends up with.

As for Israel's own election in March, acting Prime Minister Ehud Olmert has a decisive lead.

France: President Jacques Chirac raised a few eyebrows with the following statement.

"The leaders of states who use terrorist means against us?.must understand that they would lay themselves open to a firm and adapted response on our part. This response could be a conventional one. It could also be of a different kind."

France has an estimated 350 nuclear warheads. But Chirac's comment may have greatly complicated any negotiations with Iran.

Kuwait: Sheikh Jaber al-Sabah, who ruled Kuwait since 1977, died. The new emir is 76 and in poor health. As stable as it's appeared over the years, the leadership situation here now bears watching.

Saudi Arabia: U.S. intelligence is convinced the kingdom has cracked down internally on militants (as spelled out in a good piece by the Los Angeles Times the other day), but at the same time the Saudis' efforts have been minimal in stopping the flow of insurgents into Iraq or financial support to the terrorists. Related to this, Charles K. passed along a story by author Raymond Learsy who brings up a point that on the surface certainly makes sense; the Saudis have every incentive to keep the price of oil high and one easy way of doing so is keeping Iraqi production down. Thus it can accomplish this by fueling the insurgency and disrupting the oil flow, while at the same time cracking down on those who mean it harm at home. Learsy's conclusion is eventually the U.S. has to confront "the head of the snake."

China / Taiwan: In a survey for United Daily News, 60% of Taiwanese want direct trade, transport and postal links with the mainland; while Taiwan's President Chen Shui-bian has had to reorganize his government yet another time, the 4th since he took over in 2000, with the resignation of his premier. I can see why the people want what's known as "the three links," but if they also think China would give them a fair shake politically ("one China, two systems"), they need only look to Hong Kong and the broken promises there on the democracy front.

As for the mainland itself, there was another large protest over land use, this time in a rural area near giant Shenzhen. But in a rare admission, China's Premier Wen Jiabao admitted the land conflicts and backward conditions in the farm sector threaten not only the country's stability but also its food supply.

"In some areas, illegal seizures of farmland without reasonable compensation and resettlement have provoked uprisings; this is still a key source of instability in rural areas and even the whole society."

As reporter Elaine Kurtenbach of the AP notes, "Such seizures are draining the supply of farmland in a country where even with bumper harvests grain output is failing to keep pace with rising demand." [South China Morning Post]

Canada: Election time, Monday, and conservative Stephen Harper evidently has a sizable lead over Prime Minister Paul Martin and his Liberal Party. Harper may fall short of a clear cut majority in parliament, but cobbling together a workable coalition for real change appears within range. For starters, Harper has vowed to rebuild Canada's military.

Chile: Michelle Bachelet became Chile's first female leader, garnering 54% of the vote in a runoff.

Liberia: Ellen Johnson-Sirleaf was inaugurated as Africa's first elected female leader.

Ivory Coast: But next door to Liberia, this country, which has been split since 2002 following a failed coup, has witnessed a sharp escalation in unrest and UN peacekeepers trying to keep the warring factions apart have been routed in some instances. Ms. Johnson-Sirleaf must be on guard to the potential for renewed violence spreading to her own historically troubled nation.

Slovakia: What a tragedy. 44 soldiers, part of the NATO-led peacekeeping force in the Balkans, died when the transport plane returning them to their homes crashed.

Pray for the men and women of our armed forces. [Speaking of those who take action.]

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