Educate Yourself

Week in Review
For the week 1/30/2006 - 2/3/2006
Brian Trumbore
President/Editor, StocksandNews.com

As I go to post, a formal decision has yet to be reached among the 35 members of the International Atomic Energy Agency's governing board on sending Iran's nuclear program to the UN Security Council for possible action. Of course it's all really quite academic since the Council won't do anything, anyway, with Russia and China already on record as rejecting the levying of UN sanctions against Iran. So Iran's stall game continues as its scientists, including hired guns from abroad, one must assume, diligently work on the weapons-building process.

This week the IAEA's Mohamed ElBaradei said "We are reaching a critical phase but it is not a crisis situation?it is not an imminent threat." This after the IAEA admitted it had documents showing a "military-nuclear dimension" to Iran's program. And the IAEA still has no explanation for enriched uranium particles found during one of its inspections in 2003, while the Times of London ran a story that there has been increased activity at Iran's embassy in Pyongyang, possibly because Iran is negotiating with North Korea for plutonium or enriched uranium. Kim Jong-il once sold 1.7 tons of uranium to Libya.

Surprisingly, President Bush's State of the Union address was broadcast live in Farsi to Iran so the people were able to take note of the president's line that Iran was "now held hostage by a small clerical elite that is isolating and repressing its people." Iranians may not like their government, but they want the bomb.

And regarding a potential pre-emptive strike on known nuclear facilities, Iran's defense minister declared "Any attack against Iran's peaceful nuclear facilities will meet a swift and crushing response from the armed forces."

Just a lot of bluster? Probably not. This is not Saddam. This is Iran with a global terror machine, including proxies such as Hizbullah and Hamas, as well as a staggering array of missiles. A military strike may set back the nuclear program a number of years, but what would be the consequences?

For now, perhaps Iran falls off the front page before ElBaradei's March 6 final report, but don't be hoodwinked into thinking diplomatic progress is being made behind closed doors. Russia and China will not cooperate to the extent necessary to shut down the program. Russia doesn't want to lose at least $5 billion in contracts and China obviously needs the oil.

And just a reminder of the kind of leaders we are dealing with in Iran. Following Bush's speech, President Ahmadinejad addressed his people:

"I am telling those fake superpowers that the Iranian nation became independent 27 years ago and on the nuclear case it will resist until fully achieving its rights.

"Our nation cannot step back because of the bullying policies of some countries. Those whose arms are stained up to the elbow with the blood of other nations are now accusing us of violating human rights and freedom."

It doesn't get much better in discussing Israel's new neighbor, Hamas. The Quartet: EU, U.S., Russia and the UN are trying to be patient and won't immediately demand renunciation of violence, but Hamas's actions over the next few weeks are as important as its words. Israel, on the other hand, has begun holding back on some taxes and fees normally due the Palestinians.

Meanwhile, recriminations are flying in both Israel and the United States, as in how could leaders and intelligence agencies misread the Palestinian street? It's too late now. We are faced with a new regime whose 1988 charter was explicit in its hatred of Israel, let alone apocalyptic. Hamas leader Khaled Meshal reiterated this week that they would not "submit to pressure to recognize Israel" nor would it disarm. Of even more concern is the call for a Palestinian army with Hamas at the core.

"The leaders of Hamas brim with the word of God and the certainty of their cause. From here on they will lie about their ultimate aim and smilingly assure us that what they have always said they no longer mean. Their intention is clean government, efficient garbage service, good schools and level soccer fields - and also to con Europe and America into continuing to send money to the Palestinians. All over the world, people will believe them and urge the United States and Israel to do the same. Take my word for this. Anyone can see the future. It's all in the past."

Alan Greenspan slapped down his last 25 basis point (1/4%) rate hike as he rode off into the sunset and $500,000 a day consulting fees.

"Given your inevitably incomplete knowledge and the sometimes asymmetric costs or benefits of particular alternatives, the paradigm in which you have settled is the most likely future path."

The Federal Reserve said the economy was "solid" and that longer-term inflation expectations remain "contained." But it added certain strains in resources, i.e., commodities and labor, represent a potential issue and that further tightening "may be needed."

So that got everyone all lathered up, as usual, with some interpreting it to mean new Chairman Ben Bernanke may be permitted to stop raising rates, while others read the wording to mean Bernanke could have a few hikes of his own up his sleeve. Regardless, those of us with heavy cash positions continue to be rewarded with rising money market rates.

As for the economy and this week's data, both stocks and bonds were spooked a bit by readings that reflected rising labor costs, let alone the fact productivity in the 4th quarter fell, which can also augur rising wages and perhaps necessitate the need for further Fed tightening. On the bright side chain store sales for January were better than expected (Wal-Mart up 4.7%; Target, 5.2%), owing to our Caribbean-like weather, and auto sales rebounded some, though this was heavily skewed by fleet sales.

But of ongoing concern, aside from energy costs and ever present deficits, is the disastrous personal savings picture. In December, personal income rose 0.4%, but consumption rose 0.9% and for all of 2005 the savings rate was a negative 0.5%; the worst such performance since 1933.

There's another issue we need to tackle head on this week, as much as it will unnerve some of you, and that's the president's comments on energy in the State of the Union. For the week, crude slipped a bit on the misguided belief a diplomatic resolution to the Iran crisis is possible, while for its part, OPEC, despite the cries from Iran and Venezuela, agreed to hold production at existing levels when a few weeks ago there was talk of cutting it. The Saudis offered that $50 to $60 oil is "satisfactory to all." [Remember when $22 to $28 was?]

That said, President Bush blundered big time. But first, here is the opening paragraph from an op-ed on Friday in the Wall Street Journal by Peter Huber that sets the stage.

"Most instant pundits missed the cagey phrasing of the two sound bites that made headlines the next morning. 'America is addicted to oil, which is often imported from unstable parts of the world,' President Bush declared?.But new technologies, he went on, will allow us to 'replace more than 75% of our oil imports from the Middle East by 2025.' The president did not say that oil supplies most of our energy, nor that most of our oil comes from bad places. Nor did he propose any gush of new federal spending on pie-in-the-sky 'alternative' fuels."

With all due respect, Mr. Huber, the president most definitely inferred that most of our oil comes from bad places, even though, yes, that isn't necessarily the case. The U.S. receives 20% of its imports from the Middle East and 30% from Canada / Mexico, for example.

But when Bush made his comments, the camera panned to Saudi ambassador Prince Turki. He had a look of dismay on his face and for good reason. Later he told a reporter if reducing American dependence on foreign oil applied to other suppliers. "Is that a declaration that the U.S. is going to work to be independent of Canadian oil, Mexican oil and Venezuelan oil?" he asked, adding, "I see no threat from America from receiving its oil from the Middle East." [New York Times]

I know what some of you are thinking. Why defend the Saudis, especially after 9/11? There is no doubt that historically Saudi Arabia has played a duplicitous game, but I urge you to take two minutes to read my "Hott Spotts" column and a recent speech by Saudi King Abdullah, one that President Bush should have referred to in the State of the Union, but of course he hadn't seen it. Abdullah blasted extremism unlike any other Arab leader before him.

Bush's remark was ill-timed, as well as further comments pressing democratic reform in the region. Immediately, a leader of the Saudi Shura Council, the top consultative body in the kingdom, said "Saudi Arabia is the country that has been most responsive to demands for reform in the region, but reform, under the leadership of King Abdullah, is not linked to calls from the United States." Others on the council told the Daily Star of Lebanon that Bush is not the "sole agent for reform" in the world.

We live in a complex world. Every American, when sitting at their neighborhood tavern, laments that we rely as much as we do on oil from the Middle East, but it's also a ticklish time on the diplomatic front, as in the flap over the cartoons that poke fun at the Muslim faith. No doubt you saw this in the administration's immediate, and pitiful, backpedaling on Wednesday and Thursday.

Finally, the Bush presidency is in its 6th year and only now does there appear to be a sense of urgency that we must get our house in order before it's too late. For starters, as Chevron's David O'Reilly recently remarked, "the era of easy oil is over." All those rigs you hear about being put online aren't really finding anything?that's a dirty little secret between you and me, but good for shareholders of the drillers.

Yes, we have finally entered this great transition phase. It only took 30 years to see the light. It will, of course, be led by the free market and guess who's now scrambling to build hybrid automobiles? Detroit. That message is being received, loud and clear.

In the meantime, we need a stable oil supply and Saudi Arabia is the only nation in the world with any spare capacity, even if it is of a grade that isn't always usable. Extremist elements in the kingdom can take down the monarchy at a moment's notice, or blast its oil complex. We don't live in a perfect world, but it would have been better if President Bush had praised King Abdullah for his positive remarks, rather than take a shot at his country.

--One week up, the next week down. That's been the pattern recently and this one was a downer with the Dow Jones losing 1% to 10793, the S&P 500 1.5%, and Nasdaq 1.8% to 2262. Earnings have been basically in line, not great, and if you take out energy, earnings for the 4th quarter are up less than 10%, year over year. Still solid, but continuing a pattern of deceleration. And you had one high-profile miss in Google, which by week's end was down to $381, off its recent high of $475 set just three weeks ago. More in a bit.

The jobs report for January was solid, up 193,000, and previous months continue to be revised upward. But labor costs are nagging the bond market some and the 10-year spiked to 4.60% before settling back down, while the spread between the 2- and 10-year is widening?and inverted. This is not an issue, as yet, but what is clear to yours truly is that the Fed is close to overdoing it, if it hasn't already. As many of us have been saying for some time now, the real test is when those in adjustable rate or no-interest mortgages begin to see much higher payments as their paper resets. This is the major concern of PIMCO's Bill Gross and he still maintains the second half will see growth in the 2% range. I say it will be worse. And should rates spike higher over the coming weeks, that only brings us closer to the tipping point, which may also coincide with renewed concerns over Iran by April.

--January auto sales rebounded, with Ford up 2%, General Motors up 6% and DaimlerChrysler's rising 5%. But as I mentioned earlier, fleet sales to rental car companies generally accounted for 30-40% of the overall total. Meanwhile, Toyota's sales rose 14% and Honda's were up 16%, the latter thanks to booming sales of the fuel-efficient Civic, up 56%! The Big 3's market share is down to 55.7%, while Asia is up to 37.5% in the U.S.

[As an aside, the new issue of Business Week has a story that for all the hand-wringing about Detroit and job losses in the U.S. auto industry, foreign carmakers continue to expand here. And as I've written, I don't feel in the least bit guilty that I've purchased three straight Honda Accords because they were all built in Marysville, Ohio.]

--I was watching CBS' "Sunday Morning" on Jan. 22 and caught a commentary by Ben Stein on the oil industry. Knowing Exxon was set to release earnings this past week, I held off on passing along Stein's thoughts until this time. Exxon earned a world record $10.7 billion profit for the quarter on revenue of $99.7 billion.

"It is earnings season, when big companies report their last quarter's earnings to the public. Wall Street predictions are that the big oil companies are going to report larger than usual profits this quarter, as they did last quarter, and thus we can predict something else. In editorials and on Capitol Hill, there will be cries to have new taxes on the oil companies. Oil company executives will be lambasted in hearings and the witch hunt will be on.

"I don't get it. Why are we angry at the oil companies? Is it because of high gas and heating oil prices? But wait: The oil companies don't set the world price of oil. That's set in trading rooms in banking houses in New York and London and Hong Kong by young guys who make zillions each year. There is absolutely no evidence that the oil companies are colluding to fix prices at artificially high levels. Those prices are set, again, by traders with Ferraris, not by John D. Rockefeller, who has been dead for many years.

"Yes, the price rose a lot after Katrina, but that's because producing and refining capacity fell off drastically after the storm damage and thus the traders, sensing shortage, drove up the price. The oil companies benefited from this rise in price, but there have been plenty of times when the price has plummeted and the oil companies have taken it on the chin. The oil companies do help set the price at the pump and they set it based on the world price - which, again, they do not set - to replace the oil they use up. That is a standard way of setting prices and not at all a conspiracy. When the world price of oil falls, pump prices fall too and they have fallen dramatically since Katrina.

"Are the oil companies making obscene profits? No, as a general rule they have profits far lower than bankers or pharmaceutical companies, and even below the average of large companies. And anyway, profit is not a dirty word. This is a free market country that is supposed to like profits?

"And what about this: when I buy gasoline that has to be brought from Nigeria or Libya or Indonesia at great risk, refined, had huge taxes on it, and then brought to my gas station, it costs less per ounce than a lot of the bottled waters at my local grocery store. Why doesn't anyone mention that?

"How about oil executive pay? Is it criminally high? Well, it's a lot more than mine. But it's a joke compared with Wall Street pay and Hollywood pay, and what the heck does any movie star do that's even remotely as valuable as powering this whole nation and keeping the wheels of the nation moving?

"I have the sneaking suspicion that this hatred of the oil companies is largely for the reason that teenagers hate their parents: because they are so dependent on them, they respond with anger. But Senators are not supposed to be teenagers and neither are newspapers.

"Let's get smart. The oil companies are not our moms and dads. They're in business to make money. But they do it fair and square, and without them, we would be in very bad shape. Let's keep an eye on them, but let's be darned grateful they work as well as they do."

--Rebecca M. wondered why I hadn't commented last week on BB&T's decision on the eminent domain front. Just an oversight on my part, so for the archives?

Winston-Salem, NC-based bank BB&T Chairman and Chief Executive Officer John Allison announced his bank would no longer make loans to developers that plan to build on land seized under eminent domain for the purpose of putting up projects such as shopping malls. Last June, the U.S. Supreme Court, in the controversial Kelo v. the City of New London, CT, case, ruled that private developers can do just that.

"The idea that a citizen's property can be taken by the government solely for private use is extremely misguided (and) in fact it's just plain wrong," said Allison.

I agree with BB&T's decision, though obviously in the case of an airport or a major road, the issue is not as clear cut. At least that's my opinion.

--And now another word about click fraud. I've written of it extensively, in this space on 2/26/05, for example, and 4/9/05 when I cited a Wall Street Journal piece that highlighted the issue, but now everyone is catching on to this potential problem, per my discussion of last week and some comments made by billionaire Mark Cuban.

"There's a very old saying that half of every advertising dollar is wasted - the challenge to the executive is to figure out which half. Once ads are printed on pages or sent into the broadcast and cable waves, the advertiser has no good way of knowing what happened or what they achieved. How many eyeballs were fastened on that ad? How many of the eyeballs were attached to minds possibly interested in buying the product?...

"That's how old media worked in the old economy. Now, with new media, a new-economy advertiser can find out how well his ads work. It's called click-through, and it's dynamite. The question is, whom does it blow up, the advertiser or the advertising medium?

"When an advertiser buys access to a privileged position in consumers' Google searches on particular subjects, or buys ads that Google places on independent Websites, the advertiser pays Google every time someone clicks on his ad and is linked to his Website?.

"But who's clicking? Are they legitimate customers? Over the past few years, advertisers and Internet media companies have been dealing with a rising tide of click fraud?.Hire a click farm in which people are paid a little to click on ads all day - buying nothing, of course. This is a task that also can be automated, and there are many variations, but all such frauds are designed to raise costs for the advertiser and degrade the effectiveness of his ads.

"Google and similar outfits say they have the problem controlled with traffic analysis and refunds of fees generated by spurious clicks. But they don't reveal details, or report how much click defenses cost them."

You've heard my own firsthand experiences. Click fraud is rampant. It's just going to take more time before advertisers catch on to it en masse.

But let's go back to last week's issue of Google and its move to place itself under Chinese government control. John Lancaster of the Times of London had a few thoughts, including on some of Google's other practices such as publishing and the plan to scan all the books in the world.

"Besides, isn't the company policy 'Don't be evil'? But to publishers there is something outrageously hypocritical about the contrast between Google's ferocious protection of its own intellectual property rights and its contempt for everyone else's. What's to stop Google giving free online access to the books once they are scanned? At the moment Google says it has no intention of providing access to this content; but why should anybody believe it? This is why Google's activities in China have the potential to be such a disaster for the company. So far everyone who has invested in Google has made out like the proverbial bandit; but one day the share price will drop and people who have bought shares will find they have lost money. It is then that Google's leaders will come under pressure to find some uses for that goldmine of personal data?.

"Google has an extraordinary amount of information about its users. It logs all the searches made on it and stores this information indefinitely. Because every computer has a unique IP (Internet protocol) address, every visit to every Website can be traced back to the computer making it - a fact which is well known in geek circles but remarkably under-publicized outside them. [Shi Tao, the Chinese journalist, was given 10 years in jail last April for 'leaking state secrets' after Yahoo! in Hong Kong handed over information linking his IP address and his e-mail to the Chinese authorities.] Users of Google's Gmail service, who are already having their e-mails scanned to place targeted ads, have given the company their identity, a full record of all their searches and copies of all their e-mails, stored indefinitely. Users of Google's Toolbar are inadvertently giving the company a list of not just all their searches but also of every single Website they visit. And, as (one) lawsuit makes clear, all this information is potentially vulnerable to subpoena."

--Speaking of Thomas Donlan, the great Barron's columnist, I noted back in May 2000 a comment of his that was as good as any in defining the Bubble era.

"This is the kind of party where the guests, if deprived of the host's refreshment, whip out their pocket flasks and gather round the piano to sing another round of 'Brother, can you spare a dime?' They are rude and undisciplined, and they won't go home."

--A New York Times article said eBay has been downplaying a massive problem on its site, counterfeit products, and for obvious reasons. Tiffany has conducted an investigation and 3 of 4 items claiming to be Tiffany products were fakes. Tiffany is now suing eBay and the result could be damaging to eBay's future growth, to say the least. The complaint across the board is that the company facilitates the practice and doesn't investigate unless a particular complaint comes from a party holding a trademark or copyright.

--Japanese beef importers are sitting on 2,300 tons of the stuff from the U.S., costing them $17 million and all because of the dumb mistake the New York exporter made when he included spinal parts in a shipment of veal; this after Japan had finally begun allowing new shipments of American beef after a mad cow scare. A poll in Japan revealed 62% of Japanese now won't eat U.S. beef products.

--Speaking of meat, Chile exported its first shipment to the United States the other day following liberalization of trade policies between the two. Actually, it was 38 tons of pork and 12 tons of beef. So look for it on the label.

--Kraft Foods is laying off an additional 8,000. More folks these days are either eating out or going the take-out route.

--Gazprom and Ukraine have evidently reached a stable agreement on the delivery of natural gas, following the turmoil over New Year's. But if I were Ukraine I wouldn't rest easy. More below.

--Great piece of research by Carter Worth, chief market technician at Oppenheimer, that Barron's Michael Santoli passed along to his readers.

Some have talked about the price / earnings compression in the market the past few years as some large cap companies, for example, have seen their share prices go nowhere while the earnings continue to rise (thus compressing the p/e).

Oppenheimer's research really spells this out. For example, the S&P 500 and interest rates are almost exactly where they were seven years ago, even as earnings have risen by about 65%.

S&P 500?1273 (2/1/99)?1273 (1/26/06)
S&P 500 EPS*?$44.49 (2/1/99)?$74.02 (1/26/06)
10-yr. Treasury Yield?4.74% (2/1/99)?4.52% (1/26/06)

As Santoli notes, "This puts the lie to the idea that rates and earnings drive stock prices in any predictable formulaic way."

I myself focus as much as I do on 'hot spots' for the reason that I've always felt 'sentiment' was a key driver. Not the sole one? as noted in my opening Wall Street comments above... but an important one nonetheless.

--I've been a big fan of Continental Airlines, going back to the arrival of Gordon Bethune and the turnaround he engineered. Bethune has retired but the moral compass he used appears to be in place. The airline just announced its executives gave up their bonuses and options grants in light of the cuts they asked of other employees over the past year.

--Business Week listed the top annual pensions among S&P 500 CEOs and at the top of the list is Pfizer's Hank McKinnell, who upon retirement will receive $6.5 million a year. That's his pension, folks.

--I won't be commenting much on the Enron trial of Ken Lay and Jeffrey Skilling. But at least at the start, it appears the government has learned some lessons and is attempting to keep it simple for the jury as the first witness goes to the heart of the matter, the manipulation of earnings and flat out lies that Skilling and Lay (and others such as Fastow) told both the Street and the public.

--I liked this comment from an old friend in Omaha, NE, Ken S., who at age 68 is learning to be a semi-truck driver. In the past Ken has taken many a motorcycle trip with his sons across the country and Canada.

Anyway, Ken is now looking for employment and if you fall in the bullish camp on the economy, he has received six job offers already from trucking companies in the Midwest. One out of Omaha said they have 500 trucks "against the fence," meaning they had 500 trucks ready to go if they could find drivers. And they're adding 1,500 more trucks next year. Another outfit out of Ft. Dodge, Iowa, runs 2,500 flatbed trucks and told Ken they turn down 1,500 to 2,000 loads a week because they, too, don't have enough drivers. Safe travels, friend.

--Josh P. has passed along some great observations on the San Diego, CA, real estate market. Certainly the era of double-digit appreciation gains is over as much of the state begins to slow. But just as in the national figure that showed new home sales up for the month of December (existing fell), Josh notes that in San Diego:

"It seems that new home builders know the end is near and are focused on moving inventory. There have been a number of gimmicks that the builders have been using including financing credits, landscaping credits (I've seen as high as $40,000) and even new cars. Yep, buy a condo and get a new VW bug. Building permits in San Diego were also down 12.2%."

A while back I wrote of Josh's observations on his own immediate neighborhood, three houses then being on the market. One came off 15% from the 'ask' price before being sold and the other two have now been on the block for seven months.

--Update: I received my replacement Dell PC in short order following the hardware issue with the first one and all is well. I was impressed I received a call from the warranty department right away.

Separately, Dell is hiring an additional 5,000 workers in India, bringing its workforce there to 15,000. Yes, another call center or two.

--Fascinating little battle going on between Princeton University and Merrill Lynch. Merrill wants to rename its proprietary mutual funds Princeton Portfolio Research & Management. Merrill has a large campus in Princeton (actually, neighboring Plainsboro, NJ), which is where the money management division is based and one which I used to visit frequently myself during my time in the fund industry.

But Princeton University isn't pleased. A spokeswoman told the Journal, "For Merrill to trade on the university's reputation is a matter of concern."

Merrill counters, "Princeton is the area where we are located, our clients already associate us with this area and it is a logical fit from a brand standpoint."

--As you know, we aren't real fans of Oracle CEO Larry Ellison around here and I got a kick out of an article in the Journal by David Hamilton concerning a shareholder lawsuit Ellison is party to. Recently revealed court documents show that Ellison has a ton of debt, though with a net worth of around $16 billion he's not in any real danger. [Drat.]

"In mid-2000, for instance," writes Hamilton, "documents originally prepared by Mr. Ellison's personal financial adviser, Philip Simon, show that the Oracle co-founder owed a total of more than $1 billion to five different banks, just $328 million shy of tapping out his line of credit. At the time, Mr. Simon anticipated additional spending by Mr. Ellison of more than $700 million over the next three years, including $20 million a year for 'lifestyle,' $194 million for a new yacht and $80 million for Mr. Ellison's America's Cup yacht-racing team."

--Former Citigroup senior vice chairman Victor Menezes agreed to pay $2.68 million to settle insider trading charges brought by the SEC in a case going back to March 2002. Menezes allegedly sold $30 million of Citigroup shares two weeks before the bank announced surprise losses of $858 million in Argentina. Menezes, head of the emerging markets division at the time, was well aware of the coming report.

--A top executive at AIG, along with three former or current bigwigs at General Re have been indicted for securities fraud. The General Re indictments were handed down against the former CEO and CFO, as well as the assistant general counsel.

Said a U.S. attorney, "The scheme was designed to mislead analysts and the investing public" in covering up declines in the claims reserves, a key particular in this industry. We await the indictment of former AIG founder Maurice Greenberg.

--Research by the Center for Academic Integrity shows that in a survey of 50,000 students at 69 colleges and universities, 26% of business majors admitted to serious cheating on exams, and 54% admitted to cheating on written assignments. Journalism majors, at 27%, were actually the worst cheaters. The most honest were science majors. [Helena Oh / Business Week]

"Which CNBC star is sleeping on the couch these days? The blustery buffoon's wife didn't take too kindly to him when she caught him in flagrante with a comely personal assistant."

--My portfolio: I'd like to thank the president for mentioning wind power in his State of the Union address. Us holders of stocks involved in this arena, such as my carbon fiber play (used in the making of turbine blades) were grateful.

"We will also fund additional research in cutting-edge methods of producing ethanol, not just from corn but from wood chips and stalks of switch grass."

Iraq: There is little to say these days. The government still hasn't been formed, every time you think the violence is toning down a bit there is a new series of attacks, and while Newsweek reports our military is in talks with leaders of the insurgency in an attempt to drive a wedge between them and al Qaeda, who's to say any intelligence gained by the insurgents in these discussions won't come back to haunt the U.S.?

Afghanistan: As I wrote a while back, the Dutch are having second thoughts on their participation in the NATO force and without their ongoing support, it will be virtually impossible to expand the mission beyond Kabul; which must be done or the renewed insurgency by the Taliban will take hold. This is NATO's ultimate test and it's on the verge of failure.

Russia: The Kremlin reacted angrily to Georgia's charges accusing Russia of sabotaging the gas and electricity transmission lines the other week. Georgian President Mikhail Saakashvili said he wasn't saying he had proof, "but that he was most concerned about the way Russia responded once the gas was cut."

"Mr. Saakashvili said Georgian officials immediately called Russian Prime Minister Mikhail Fradkov after the explosions and that Mr. Fradkov told them he would call back in one to two days once the situation became clearer. 'He never called,' Mr. Saakashvili said. Calls to Gazprom also went unreturned, he said. Only after he began giving interviews to CNN and the BBC did Moscow begin to respond, he added." [Wall Street Journal]

Russian President Vladimir Putin pointed out in his annual news conference that it was Russian workers who were trying to fix the natural gas pipeline in freezing temperatures. Then he added:

"We only saw them spitting at us," referring to Saakashvili's government. "Georgian citizens should know that such a policy toward Russia will not help improve the conditions of ordinary people." [Moscow Times]

Putin's comment was part of his annual, wide-ranging press conference, attended by some 560 reporters this time. It's designed to highlight what a terrific democrat he is. In it we learned some of the following.

He defended Russia's participation in the G-8. " No one wants the G-8 to become a gathering of fat cats."

On the four British citizens accused of spying, "Let them stay here and keep their places at the intelligence station. It is pleasant for us to understand that we control these people."

Regarding Hamas, "(It should) refrain from extremist declarations, acknowledge Israel's right to exist and put its contacts with the international community in order." But Putin also said, "Russia has never declared Hamas a terrorist organization, but it doesn't mean we support and accept everything Hamas has done and all the statements it has made."

Alarmingly, but no surprise to readers of this space, Putin boasted that Russia has new missiles capable of penetrating any missile defense system.

"Russia?has tested missile systems that no one in the world has. These missile systems don't represent a response to a missile defense system, but they are immune to that. They are hypersonic and capable of changing their flight path."

But there has been an equally troubling case in Russia concerning a hazing incident over New Year's that involved a conscript. Demonstrations against Defense Minister Sergei Ivanov have been growing (albeit in still small numbers).

According to the Moscow Times, "Private Andrei Sychyov, 19, was tied to a chair by drunken soldiers and beaten on his legs for at least three hours?.When Sychyov finally received medical treatment four days later, gangrene had spread up his legs, forcing doctors to amputate them and his genitals."

Ivanov, when first confronted on the incident, said the hazing was "nothing serious." Supposedly he didn't even know of the case for 25 days.

This is today's Russia. Not at all dissimilar in some ways to the 1900s. Except there are more black Mercedes.

North Korea: President Bush lumped Kim Jong-il's regime in with Burma and Zimbabwe in a throwaway line during the "State of the Union." Nothing more. Meanwhile, South Korea's National Intelligence Agency told lawmakers the North is no longer making counterfeit money, and hasn't since 1998, despite Washington's claims to the contrary. This is symptomatic of the problems between the U.S. and South Korea the past year as the six-party talks on North Korea's nuclear weapons program go nowhere. South Korean President Roh has warned the Bush administration not to take too tough a stand against Kim. Personally, I have to believe North Korea is doing virtually everything the White House is saying it is. And then some.

China: According to the New York-based Committee to Protect Journalists, for the 7th-consecutive year China leads the world in number of journalists imprisoned; 32 in 2005 including 15 Internet writers. [South China Morning Post] China is scared to death of honest reporting of any unrest in the country and Paris- based Reporters Without Borders ranks it 159th on a list of 167 countries in its own global press freedom index.

Separately, U.S. Joint Chiefs of Staff Chairman Gen. Peter Pace, in South Korea, said the risk of war between the United States and China has been diminished significantly. I like Gen. Pace, he seems like a good man, but of course he's wrong; witness Beijing's rapid military buildup, the missiles arrayed against Taiwan, and a thirst for energy that threatens the stability of the entire region. Better for Pace not to have commented at all. Or if asked such a question, go, "Quick, look out the window?.see that bird?"

Europe vs. Islam: I guess no one should be really surprised with the cartoon flap that has erupted over the past few weeks. It all began when a newspaper in Denmark published some drawings that Islamic leaders said were blasphemous, such as one depicting a bearded Prophet Muhammad with a bomb in his turban. Palestinian gunmen threatened a European Union office in Gaza and protests across the Muslim world and in major European cities threaten to spiral out of control; even as many European news outlets are now publishing the cartoons as an expression of freedom of the press.

"The editor of a Jordanian newspaper that suggested Muslim anger was unreasonable was sacked by his publisher. Al-Shihan had run the cartoons, arguing: 'What brings more prejudice against Islam, these caricatures or pictures of a hostage taker slashing the throat of his victim?' Across the region, including Baghdad and Basra, Muslim leaders called for protest after Friday prayers?.

"Senior BBC executives said last night that they would not be 'bullied or censored' into dropping the images, which were only shown as glimpses to illustrate the story?.

"The BBC decided to show the images after the managing editor of the French newspaper France Soir was sacked for printing all 12 drawings in Wednesday's edition."

"Today, after the invasion of Iraq, Iran - the Islamic republic or the Persian Muslim - is more powerful. It has formed a political alliance rather than a Shiite alliance. Political allies stretch from Iran to Syria to Lebanon - and Lebanon is the weakest link?

"Syria and Iran want to fight Israel only from Lebanon. Why only in Lebanon? [Hizbullah]"

"There are trucks crossing the border from Syria, loaded with weapons and guerrillas every night. They are sending us what is called the 'Palestinian Liberation Army.'

"They have fortified the Naameh bases and the weapons in the camps are at the ready. The amount of weapons and ammunition in Lebanon now is huge."

When asked why the security situation in Lebanon remains so chaotic, Jumblatt said: "How can we implement security when you doubt the loyalty of people in the government and in the security apparatus?...

"We can say that the army's security is better, but how can I tell the officers in the Surete Generale?will protect the borders."

Many of the leaders in the military were placed there by Hizbullah or Syria. And of course Hizbullah sits on the border of Israel with 7,000 missiles. There is zero talk of disarming the group.

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