Week in Review 
For the week 3/20/2006 - 3/24/2006
Brian Trumbore
President/Editor, StocksandNews.com

Note: The end of this week proved to be a little hectic as I traveled back from Ukraine through Paris, arriving home about 12 hours ago. I was able to keep up on most of the world's events but you'll have to forgive me if I fill in some blanks next time. I'm running on fumes.

Iraq

It's been three bloody, costly years and in a blistering attack on the White House, conservative commentator George Will concluded "conditions in Iraq have worsened in the (now 100) days that have passed since Iraq's elections in December." Former interim Prime Minister Ayad Allawi said the nation is embroiled in a "civil war."

But Secretary of Defense Donald Rumsfeld writes in a Washington Post op-ed, "The terrorists seem to recognize that they are losing in Iraq" and touted growing Sunni participation in the political process, while President Bush, when pressured in a press conference, said Rumsfeld shouldn't resign. Then Bush added:

"Every war plan looks good on paper until you meet the enemy."

This from an administration that had no plan?no post-war plan of operations. Bush later said, "We're making progress because we've got a strategy for victory." As you can see from the polls, a majority of Americans these days are concluding "whatever."

My bottom line is this. Yes, the Kurd north and Shia south are relatively calm, but there is no success overall without the center and as for the south it is essentially becoming part of Iran.

I would also add that as everyone looks back on the war thus far, I documented in this space how our president was AWOL during the summers of 2003 and 2004, critical periods for the insurgency when real leadership was required. This is part of the history, though as a supporter of the war from the outset, I still cling to the belief, however misguided, that ten years from now the criticisms will seem small when measured against a region that has taken a decisive turn for the better.

Wall Street

It wasn't a bad time to be overseas because little of real consequence occurred as the Street just marked time, waiting for this week's Federal Reserve Open Market Committee meeting; the first to be chaired by Ben Bernanke.

But I want to bring up a front page story in the Wall Street Journal that addressed the ongoing turnaround in the European and Japanese economies. Will it be much stronger than expected? And if so, is the world less dependent on the United States and the American consumer to pick up the slack should the U.S. in turn slow down? In a speech earlier in the week, Fed Chairman Bernanke also touched on this and then we had further evidence Japan's prospects were indeed looking quite bright with news land prices had risen in its three biggest cities for the first time since 1990, while imports have been soaring as a further sign the consumer is back after being in the doldrums for about 15 years.

So I have to note something I wrote on Aug. 13, 2005?warts and all as you'll see.

"But something else has been on my mind a lot recently as I ponder my own recession forecast for early next year. It would appear we are in a race against time, economically speaking. Is it possible that the world, ex-U.S. and China, will finally carry its share of the load in time to save the two big engines of growth before they themselves take a header? Certainly Japan is stirring ?There are also some indications, perhaps ex-the U.K., that Europe has bottomed. I have no real conclusions but I'm wrestling with it all."

Well, today we are closer to an actual conclusion. Should others now be picking up the slack it's certainly good on paper for all of us, though at the same time it has the potential to totally roil global bond markets as central banks are faced with the prospects of ever-rising interest rates to combat potential overheating and inflation; this as the U.S. is dependent on many of these same nations to finance its deficits.

Back to Bernanke, he gave a speech in New York early in the week wherein he did a masterful job in not telegraphing the Fed's next moves. But he was bullish on the U.S. economy and he noted that consumers' finances were healthy due to replacing consumer debt with lower-rated home loans. "Families have made a lot of progress in restructuring their liabilities," adding that on the real estate front only 10% of mortgages will reprice this year.

But it was impossible to glean much on the bond front, as he addressed the conundrum of yields on the longer end of the curve being so low, despite the Fed hiking the short-term funds rate from 1 to 4.5%, by saying bond yields were important only in tandem with other data such as growth and inflation. A touch of Greenspeak, from our new chairman.

As for that recession forecast of mine from last summer?never mind.

Street Bytes

--The major averages virtually flat-lined, with the Dow Jones unchanged (up a fraction of a point), while the S&P 500 lost 0.3% and Nasdaq gained a similar amount.

--U.S. Treasury Yields

6-mo. 4.77% 2-yr. 4.71% 10-yr. 4.67% 30-yr. 4.69%

Bonds were unchanged, with the exception of the two-year which rose 7 basis points in yield, as the market digested Bernanke's comments as well as some key economic data.

The producer price index fell 1.4%, but the core rate, ex-food and energy, rose 0.3%...the latter figure not good if you want the Fed to stop after this Tuesday's expected ?-point hike in rates.

But then Friday saw a huge drop in new home sales, 10.5%, the largest such decline in nine years. Plus the median price dropped a 4th straight month. Taken alone, this would suggest the Fed may be able to take a breather if this key engine of past growth continues to stumble.

[New home sales in the West plunged 29%, while rising 13% in the Northeast. And earlier in the week existing home sales actually rose a bit.]

--The head of the European Commission labeled "absurd" the economic nationalism sweeping Europe; Anglo-Saxon free market economics vs. French protectionism. And tensions are growing between the U.S. and China as Beijing says it's wrong for it to be labeled the scapegoat, including for our own problems such as on the deficits front. President Hu Jintao's trip to Washington next month will be great fun.

--Oil continued to rally back, finishing the week at $64.27. Here's the bottom line. The International Energy Agency recently projected demand for 2006 to be 84.7 mm barrels per day. Call it 85, which they had originally forecast. Demand has actually been falling in Southeast Asia where high prices have the biggest impact.

But inventories of oil and gas throughout much of the world are at 5-7 year highs so why does the price of crude (natural gas is a different story altogether) remain near all-time levels?

Of course it's the "terror premium," or variations thereon, such as with Iran's issues with the UN Security Council, Nigeria's war in the oil-rich Delta, Saudi Arabia's security problems and Venezuela's El Loco. And now you're hearing legitimate concerns over the coming hurricane season.

Personally, I have been out of the energy sector with regards to my own portfolio since the spring of 2005. I missed the last big spike because I kept waiting for the global slowdown that would chill demand amidst a high supply environment. I was wrong.

But there are other factors that play into sentiment these days. Like word that Norway's February production was off 18% compared to two years ago. Or on the flip side that Mexico's Pemex has a new giant find in the Gulf. Yet in the case of Norway, the good news is it is ramping up production across the board while the Pemex story, though great, is one for 10 years down the road when it is finally commercially available. Confused? For every item that supports the bulls case, you can find one that gives sustenance to the bears.

For now, though, as hackneyed as it sounds, it's going to be about the weather as much as terrorism and political upheaval. Don't expect a big drop at the pump?it's just not in the cards until the global economy flips. And now Europe and Japan are worth even closer scrutiny on that front.

--The airline industry, a big user of oil, is rocking and rolling these days despite the high price of jet fuel thanks to big-time cost cutting and full flights. The best thing the industry has done is reduce routes and its schedule. Have you had a lot of empty seats on your recent flights? I haven't.

--In an interview for the Wall Street Journal, Treasury Secretary John Snow commented on executive compensation.

"We've moved into a star system for some reason which is not fully understood. Across virtually all professions there have been growing gaps."

Since the 1970s, CEO pay has gone from 40Xs the average worker to 300 Xs. And one of the problems is most beneficiaries, in all fields, are not stars.

--General Motors offered early retirement and severance packages to all 113,000 blue-collar workers in the U.S., including parts supplier Delphi. Buyouts are up to $140,000 each, though the highest numbers apply to younger workers who would then sever all ties to the company and lose their medical benefits. Word to the wise; these packages are terrible. Keep your job as long as you can and hope for a big time turnaround.

--Bird flu has evolved into two strains and the suspected human case in Shanghai is most troubling.

--France's Alcatel is in discussions to acquire Lucent, thus creating the world's largest telecom equipment manufacturer. But Lucent barely rose above $3 on the news and those of us living under its headquarters' shadow here in New Jersey are left to wonder what the impact will be on the local real estate market, assuming big changes are coming. I'll try and remember to report on the lawn as spring takes hold.

--Shares in Google were up big on Friday on word it will finally be added to the S&P 500 on March 31. Index fund managers are now forced to buy it. Once again the 'shorts' got squeezed.

--The Los Angeles Times reported that real estate speculators are fleeing California for Las Vegas and Arizona. Separately, while homebuilding is slowing down, commercial construction is slated to rise 9% for 2006, the best pace since 2001.

--Orange juice futures soared on forecasts for a busy hurricane season, as well as the prevalence of crop diseases such as citrus canker.

--Royal Dutch Shell paid $400 million to explore 219,000 acres in Alberta, part of the Canadian oil sands. $billions in cap-ex will follow should early tests prove as fruitful as expected. [And as long as the price of oil holds above $40.]

--Microsoft is delaying yet again the launch of its new operating system, Vista; this time until after the critical Christmas season.

--Investment banker Frank Quattrone had his obstruction of justice conviction (part of the IPO allocation scandal) overturned by a Federal Appeals Court in a big blow to the government's efforts against white-collar crime.

--Remember the China Aviation Oil (Singapore) derivatives scandal from 2004? The lead trader, Chen Jiulin, was sentenced to over four years in prison for his role in a $550 million loss.

--The average take per gaming table in Macau is $8,500; three times that of Las Vegas. [Business Week] Of course this is also a commentary on Asians' penchant for gambling in the stock market.

--I met an Irish kid in Newark Airport at the bar last Saturday, (watching the NCAAs, of course) and we had a great conversation about the economy in his region. He's been working construction in Cambridge, England - building roundabouts - and he couldn't be happier. He's a foreman and oversees about 50 others, but with the London Olympics in 2012 he already has a job locked up for the next six years. [He was catching a connection to Naples, Florida, to visit his parents who have a place down there. Dad also made his money in construction. Ergo, blow off college, kids?.as long as the economy is sound.]

--Dell Computer is doubling its staff in India to 20,000 over the next three years.

--Wendy's Tim Hortons doughnut unit jumped about 25% on its first day of trading Friday. A great product, endorsed by Homer Simpson.

--My portfolio: Well, if you've figured out the carbon fiber play that makes up a lion's share of my equity holdings these days you know I'm a happy camper. A big mistake I've made in investing the past few years is not letting my winner's ride and this time I'm going to be a pig?.at least until the next earnings release and I see if the company is finally truly executing on the business plan. Let's just say last spring's trip to Abilene, Texas to visit the plant provided valuable insight into an already intriguing story. Most importantly, I came away with a full understanding of the risks on the manufacturing side. [And I have to thank David P. for the original idea.]

Foreign Affairs

Iran: Talks on the mullahs' nuclear program are at a standstill as Russia and China refuse to levy sanctions. For its part the United States, France and Britain, the other permanent members of the UN Security Council, continue to seek an agreement whereby Iran is at least given a deadline for cessation of its uranium enrichment activities, which could then lead to putting Iran on the record as violating the UN's mandate.

Afghanistan: As I go to post, it appears there will be a resolution in the case of the Afghan man facing execution for converting to Christianity, but it won't be anything the White House likes. If moderate Muslims don't stand up now they never will and this single case has huge ramifications. For starters, Germany, Italy and Canada have threatened to pull their troops from Afghanistan and President Hamid Karzai's days could be numbered. I'm not talking through the ballot box.

Israel: Israelis go to the polls on Tuesday and Ariel Sharon's creation, Kadima, is well ahead and projected to win 36 of 120 seats in the Knesset, or over twice as many as either Likud or Labour. Of course this means a governing coalition will have to be cobbled together but this won't be a problem compared to other post-election debates.

And acting Prime Minister Ehud Olmert said Israel cannot wait for Hamas to "mature" so it will unilaterally establish its border on the West Bank; this after Hamas proposed a cabinet with hardliners occupying the top three slots and with zero support from the PLO.

Hamas now faces a true cut-off of aid from the European Union and once again the Palestinian people have a choice?either move forward and negotiate or fall further into the abyss. Remember, one large terror attack against Israel and Israel will deal a devastating blow from which the Palestinians may never recover.

China / Russia: President Vladimir Putin traveled to China for a visit accompanied by Russian oil executives and a total entourage of 800(!), as the two sides worked feverishly on various projects including two proposed gas pipelines between Siberia and China. Early on, however, there was no consensus on China's highly sought oil pipeline; Putin having reached agreement last year with Japan that it would be the prime beneficiary.

But then on Wednesday, Putin hinted China, not Japan, would get the pipeline after all and China National Petroleum Corp. said it was committed to spending $400 million on the project. [Two distinct pipelines, one to the mainland and one to Japan, just isn't a feasible proposition, but a feeder line off one is possible.]

Meanwhile, Japan has halted talks with China on a variety of sensitive issues, essentially calling a time out.

China / Taiwan: President Chen Shui-bian told the new U.S. representative on the island that he would behave, while the opposition on Taiwan is rallying against Chen's pro- independence talk. At the same time Washington is highly irritated that Chen is having problems selling a weapons deal between the two that the White House insists on, as in 'We can't help you if you won't help yourselves.' Chen is also receiving heat for removing up to 100 statues of founder Chiang Kai-shek (most from military bases), Chiang having favored reunification with the mainland.

North Korea: Last week I quoted from the administration's National Security Strategy to try to prove the Bush administration hasn't forgotten Kim Jong-il. This week George Will noted "North Korea has received less attention lately than have Denmark and Dubai."

Belarus: President Lukashenko (who some say will replace Putin one day when Belarus is formally folded into Russia) captured 82.6% of the vote in his reelection bid vs. only 6% for leading opposition figure Alexander Milinkevich. Europe and the U.S. screamed the tally was rigged, while Putin sent his heartfelt congratulations. Thousands of brave souls defied authorities' warnings and demonstrated for a new election, but then early Friday Lukashenko had the remaining 200 or so rounded up. So it's the EU and U.S. vs. Russia and the farce that passes for the G-8 grows bigger by the day.

France: I was watching all the local news in Paris on Thursday night from an airport hotel and glad I hadn't decided to go into town. The criminal element hijacked what were largely peaceful protests and turned it into a riot. Richard Bernstein, a reporter for the International Herald Tribune, commented that France insists on "fighting the revolution over and over again." And to what purpose?

Prime Minister de Villepin is under intense pressure to withdraw or drastically scale back his employment law proposal wherein workers under the age of 26 could be laid off without cause in the first two years. The protesters claim it leaves them vulnerable to unscrupulous employers with some women, for example, saying an employer could make a sexual advance and fire her if she didn't comply?or be fired for getting pregnant. De Villepin's approval rating is just 37% and the man who would replace Jacques Chirac for president is in a box. Business will abandon him in droves if he gives in to the students. A general strike has been set for Tuesday.

On a different matter, Chirac looked like a total jerk when he walked out of an EU summit meeting after a French industrialist addressed the leaders in English while urging economic reform.

And lastly, the International Herald Tribune had a front page story on Friday addressing the growing anti-Semitism in France, a topic I've broached here often in the past. To put it bluntly, this nation is a seething cauldron filled with hate-mongers of all stripes and while on one hand outsiders could say "So what?" remember a crisis here threatens the stability of the entire continent.

India: I have a tremendous amount of respect for former Senator Sam Nunn and thus was deeply disappointed to see he is voicing major concerns with the U.S. - India nuclear pact; stating it will foster a regional arms race with China and Pakistan. But in pointing to the Nuclear Nonproliferation Treaty as some kind of model, how can you ignore existing proliferation within the club? And at the same time does anyone believe China and Pakistan will cease their own buildups, let alone Iran's current quest, regardless of any deal between the two biggest democracies? This debate is just getting started but for now the bottom line is supporters of the pact such as yours truly will need Nunn to get on board, as well as his colleague at the Nuclear Threat Initiative, Sen. Richard Lugar. It's going to take some heavy lifting by the White House to get it done.

Lebanon: President Emile Lahoud told al-Jazeera that weapons of resistance held by Palestinians and Hizbullah in Lebanon should remain in their hands until the Arab-Israeli conflict is over and the Palestinians regain their homes.

To which Druze leader Walid Jumblatt (clearly my favorite politician in the truest sense of the word) said "Let the Palestinians solve their own problems and not tie up Lebanon." Jumblatt again also called for Hizbullah to lay down its arms. I'm surprised Jumblatt has lasted this long with the price that is on his head.

Thailand: The election is April 2 and a leading opposition leader has called for a coup to take down Prime Minister Thaksin's regime. A demonstration slated for Sunday could turn violent.

Spain: After four decades of conflict that claimed 800 lives, the Basque movement ETA declared a permanent ceasefire. Wait a few months before throwing them a parade.

Australia: Cyclone Larry, with winds of 180 mph, was the worst storm to hit the Aussie coast in decades and did major damage; including to a strip of the Great Barrier Reef. But it was truly remarkable there were no serious injuries.

Ukraine: I went here this week to get a sense of the mood before Sunday's critical parliamentary election, the first big vote since the Orange Revolution of late 2004 / early 2005.

But first I have to go off on somewhat of a tangent after reading an account in the BBC on Friday concerning the political climate in Ukraine, particularly in the capital, Kiev. The reporter vastly overstated the enthusiasm among the people as if there was some glorious, exhilarating exercise in democracy going on here.

In fact, after all my travels of the past seven years in particular, I'm struck by the downright inaccurate "man on the scene" reporting. In fact, much of what I read in this regard (and you know I read from all sides by the sources I've cited) are flat out lies.

Recently, I read a comment from a multi-Pulitzer Prize winner that he had it on good authority Dale Carnegie books on "management" were flying off the shelves in Gaza following Hamas' election victory. Right. For starters, this esteemed reporter / commentator takes us all for chumps.

But here's the deal in Ukraine. I probably spent as much time on the main boulevard as the BBC reporter did and yes, it's like a tent city as the political parties have little shelters that hold a table for literature and two or three volunteers; but that's to shelter them from the cold as much as anything else. 90% of the tents are orange, for President Viktor Yushchenko's Orange Revolutionists, or the Our Ukraine Party. But I saw one?one? person pass out a little flag as Ukrainians simply went about their business. The reporter made it sound like there were thousands. In fact if there was one word that summed up the mood I saw it was total indifference.

Don't get me wrong, this is a useful exercise in democracy for a people just learning to play the game and the election is expected to be free and fair, but also know these facts. Yushchenko has been a huge disappointment and now he'll face a parliament and new prime minister with greatly expanded powers.

Yushchenko will lose to 2004's rival, former prime minister Viktor Yanukovych and his Party of the Regions. Yanukovych is projected to capture 30% of the vote and Yushchenko could actually finish 3rd with about 15% behind his own former prime minister, whom he fired, Tymoshenko, the charismatic, if not half-crazy, woman with the braids. [Tymoshenko did have some drop-dead gorgeous women working her limited booths?to give you a little better color than the female BBC reporter would give you.]

What's important, though, is that Yanukovych is Vladimir Putin's boy. It was Putin, you'll recall, who unintentionally threw the 2004 vote to Yushchenko when he blatantly campaigned for Yanukovych. [Picture the uproar in this country if, say, Mexico's Vicente Fox campaigned with one of our presidential candidates.] And Putin, faced with losses in Georgia and elsewhere among the former republics of the Soviet Union, sees a way to get Ukraine back in his sphere, though this time he's smartly taking a low-profile.

Ukrainians will repudiate Yushchenko (who nonetheless stays on as a weakened president until 2009) in no small part because of the shady gas deal he cut with the Russians and the mob- affiliated 3rd party I wrote of early this year.

It goes deeper than this but I won't bore you with the details. The bottom line is that on March 26 voters will elect a new parliament that will usurp Yushchenko's powers. Yanukovych, who has served two terms in prison, incidentally, for hard crimes, will then do Putin's bidding.

But?there are 45 parties putting up candidates and once again a messy coalition will be the order of the day.

Ukraine, though, will muddle through. In fact I found things to be quite prosperous. You see lots of construction cranes in Kiev (not Shanghai-type activity, but more than most U.S. cities these days) and the people appear reasonably happy. And that to me is why indifference is the watchword.

[One overzealous policeman, though, did shoot a campaign worker in the back one night when I was walking the main drag, though I didn't know this until afterwards.]

But I want to close this segment on a different note. I hired out an English-speaking driver to take me around for four hours and this young fellow, Maxsim, was a nice, earnest sort who was anxious to learn more about America and to tell me about his country.

So we're going through the World War II museum and he asked, "Do you know your country's history?"

"I think I know a fair amount."

"Our children don't know any history."

"Well, on this we're the same. My generation knows some history, but young people in America today aren't taught much, if any, real history in the schools."

Around the world today so many of us have the same shortcomings; a general lack of curiosity being one of them. But in the case of Ukraine, it's charting a new history that could yet capture the headlines depending on how much influence Vladimir Putin wants to exert with his ever-present gas card.

---

Pray for the men and women of our armed forces.

God bless America.

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Gold closed at $560
Oil, $64.27

Returns for the week 3/20-3/24

Dow Jones +0.0% [11279]
S&P 500 -0.3% [1302]
S&P MidCap +0.2%
Russell 2000 +1.0%
Nasdaq +0.3% [2312]

Returns for the period 1/1/06-3/24/06

Dow Jones +5.3%
S&P 500 +4.4%
S&P MidCap +6.5%
Russell 2000 +12.0%
Nasdaq +4.9%

Bulls 46.3
Bears 30.5 [Source: Chartcraft / Investors Intelligence?I gave you all a real heads up with this data the past few weeks. It flashed a classic contrarian signal, even if I didn't believe it myself, but the major press didn't pick up on it until about 10 days later.]

Have a great week. I appreciate your support.

Brian Trumbore

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