Educate Yourself

Week in Review
For the week 4/17/2006 - 4/21/2006
Brian Trumbore
President/Editor, StocksandNews.com

Let me give you an example of what has really been frustrating me over the past few years, if you haven't already figured it out. The following is from "Week in Review," 11/16/02.

"Iran: Now here is something to write about and it's a potentially very exciting development for freedom-loving peoples everywhere. Student protests are growing, not just in Tehran but around the country as a result of the death sentence handed down to an academic who questioned the clerics' role in governing the country (though few expect it to be carried out). Finally, we could be witnessing the beginning of the penultimate challenge to the conservative hardliners, headed by Ayatollah Khamenei. The reformers, led by President Khatami, need to press their case, but the problem has been that in the past Khatami has been too weak of character to take on the clerics, who for their part constantly threaten use of the military to put down any serious threat to their rule. But if Khatami finally shows some spine, change could come about in Iran at lightspeed. Keep the faith. It would be a gigantic positive, surpassing the impact of Saddam's demise, especially as it pertains to the rest of the Islamic world. The Bush Administration needs to speak out more forcefully to encourage the students and Khatami, but it also must stay committed to the cause, and this is where past administrations have been seriously lacking."

That was the fall of 2002, and of course the White House didn't raise its voice one iota then and now we are paying the price. I've said time and time again that President Bush's legacy will be shaped more by outcomes in Iran and North Korea than Iraq and I stand by that. And of course this week Chinese President Hu Jintao came to America, Bush needed some kind of support for our fleeting efforts on both the Iranian and North Korean fronts and none was forthcoming.

Focusing on Iran, at this point military conflict seems a certainty if the White House seeks to prevent Iran from getting the bomb. Bush said "all options are on the table" and here he is to be believed. But our intelligence is virtually non-existent and the best we can do for now is acknowledge that satellite photos show Iran is strengthening its facilities at Natanz and Isfahan in preparation for an attack.

Iran also asserted this week it was working on a new advanced centrifuge that would greatly speed up the uranium enrichment process. The claim is questionable, but the only prudent thing to do is take it at face value, especially since Iran initially hid its program for 18 years before coming clean.

Former Iranian president Rafsanjani said "All neighboring and Muslim states should defend and stand by Iran?any attack on Iran would have implications for the region."

"So if our choice is another Rummy-led operation on Iran or Iran's going nuclear and our deterring it through classic means, I prefer deterrence. A short diplomatic note to Iran's mullahs will suffice: 'Gentlemen, should you ever use a nuclear device, or dispense one to terrorists, we will destroy every one of your nuclear sites with tactical nuclear weapons. If there is any part of this sentence you don't understand, please contact us. Thank you.'"

This is flat out stupid and Mr. Friedman clearly doesn't understand those in power in Iran. Iran can not get the bomb?period.

This week the Security Council receives the final report of the International Atomic Energy Agency. Russia and China will vote against sanctions. The U.S., France and Britain, with Germany on the side, will have reached some agreement on penalizing Iran. I have normally been with those who say sanctions, in general, don't work, but in this case the civilized world must show a united front, however limited, and get the clock started on further action. Yes, because of our failures in Iraq the credibility of the United States is shot. But we must still lead.

William M. Arkin, a military strategist, wrote the following in an op-ed for the Washington Post.

The White House must acknowledge the United States "is preparing war plans for Iran - and that this is not just routine. It is specifically a response to that country's illegal pursuit of nuclear weapons, its meddling in Iraq and its support for international terrorism.

"Iran needs to know that the administration is dead serious. But we all need to know that even absent an Iranian nuke or an Iranian attack of any kind, there is still another catastrophic scenario that could lead to war.

"In a world of ready war plans and post-9/11 jitters, there is an ever greater demand for intelligence on the enemy. That means ever greater risks taken in collecting that intelligence. Meanwhile, war plans demand that forces be ready in certain places and on alert, while the potential for WMD necessitates shorter and shorter lead times for strikes against an enemy. So the greater danger now is of an inadvertent conflict, caused by something like the shooting down of a U.S. spy plane, by the capturing of a Special Operations or CIA team, or by nervous U.S. and Iranian forces coming into contact and starting to shoot at one another.

"The war planning process is hardly neutral. It has subtle effects. As militaries stage mock attacks, potential adversaries become presumed enemies. Over time, contingency planning transforms yesterday's question marks into today's seeming certainty."

"Nothing Iran has done in recent years offers any indication it would honor (a grand bargain). It has consistently lied to the IAEA, trashed its agreements with Europe, openly flouted a UN Security council resolution, provided explosives to insurgents in Iraq, developed ballistic missiles of increasing range, selected a president with apocalyptic religious impulses, and engaged in vitriolic anti-American and anti-Semitic rhetoric.

"This is not the behavior of an ordinary state - a 'status quo power,' in diplomatic jargon - that aims to 'normalize' its position in the world through diplomacy. Rather, they are the acts of a revolutionary regime seeking to spread its ideology and power by force and intimidation?.

"The task now for the President is to begin speaking publicly about why a nuclear Iran is, as he calls it, 'unacceptable.' Far from preparing for war with Iran, the Administration has barely begun to confront the tough choices at hand. The reasons for this reluctance are easy to appreciate: The future of democratic Iraq is far from assured; Mr. Bush's approval ratings are in the tank [ed. 33% in the latest Fox News poll] and his political capital is depleted; and the military options against Iran have their own limitations and risks. But Mr. Bush remains President for 33 more months, with a Constitutional responsibility to ensure our safety. And there is no more clear and present danger than Iran's nuclear programs?.

"Above all, the President must begin to educate the American public about what is at stake in Iran and what the U.S. might be prepared to do about it. Until he does so, he will be hostage to a series of increasingly distressing Tehran 'announcements,' the pace and timing of which will be dictated by the clerics and zealots who wish us ill."

There is some hope that parliament will convene shortly now that the ruling Shia have a new candidate for prime minister, Jawad al-Maliki; al-Jaafari having finally agreed to step down. Those of us who have remained supporters of the war simply believe you have to see the mission through until the Iraqis form a government. But there is obviously a long way to go and Sunni politicians have been rapidly losing patience with the Shia military and its death squads, threatening at one point this week to join the insurgency. Al-Maliki is said to be a hardliner with ties to Syria and Iran. Wait 24 hours.

The Israeli government of Ehud Olmert has thus far not retaliated militarily for the suicide attack in Tel Aviv that killed nine, while the new Hamas government called Islamic Jihad's act a legitimate response to Israeli "aggression." Jordan then canceled a visit by Hamas's foreign minister after Jordan claimed it found weapons that were being smuggled into the country by Hamas.

Hamas then selected a prominent militant to head up a new security force and the Palestinian Authority, led by President Mahmoud Abbas, attempted to block the appointment. The PA is $1.3 billion in debt with the cut-off in aid from Israel, the U.S. and the European Union (except for humanitarian purposes) and Abbas took off for neighboring lands, tin cup in hand.

Chinese President Hu Jintao's visit to the United States was a bust, unless you were an American corporation that picked up a contract or two. And while most Americans will poo-poo the embarrassment of having a protester from Falun Gong shouting at Hu during his speech at the White House on Thursday, as well as the introduction of Hu as being from the Republic of China, the formal name for Taiwan, just understand these slights are seen as major insults to the Chinese and, being a suspicious and conspiratorial people to begin with, the trip could eventually go down as an unmitigated disaster.

The White House accomplished nothing despite a year's worth of preparations and China is not going to let its currency, the yuan, strengthen anywhere near as much as the Bush administration wants it to. [A stronger yuan makes Chinese assets more expensive for foreign investors and Chinese exports less desirable for buyers, while foreign goods, such as those from the U.S., would be more competitive in the China market; the purpose of this exercise being to reduce the exploding trade deficit.]

China's economy, meanwhile, continues to boom. Last week I supplied an estimate of first quarter growth from a government think tank that proved to be far too pessimistic as GDP for the first quarter officially came in at 10.2%, though the government still projects only 8% for all of 2006; a figure which will obviously be revised substantially upward. Fixed asset growth for items such as new factories and roads continues to soar, up 27.7%. Those of us waiting for the bubble to burst here could not have been more wrong thus far, but we'll have our day.

For now, though, China is the 4th-largest economy in the world, behind just the U.S., Japan and Germany, and the communists have to do what they can to keep the engine running on all cylinders because they are scared to death of civil unrest at the slightest hiccup.

No doubt the global economy is also booming and the real trigger to this recent leg has been Japan's recovery, helped in large part by the return of the consumer after over a decade of being in the shadows.

A potential drag, though, is Europe where recovery seemed certain but political issues in Italy, France and Germany could offer some resistance. And it's not as if the continent doesn't have its own problems with China.

"In Italy, Portugal and most worryingly in Turkey, Chinese competition is threatening key industries like textiles and shoes. These countries are facing important choices about whether to move up the value-added chain in these industries or abandon them?.

"Despite huge political challenges, China's low cost advantage may well persist for decades. Unlike exports from Eastern Europe, where low wages are likely to be short-lived, especially for high-skilled labor, Chinese exports could retain their cost advantage for many years to come. The movement of hundreds of millions of underemployed workers from rural agriculture to urban manufacturing will take at least another decade."

But enough on this topic. Stocks rose smartly in the U.S., driven both by solid earnings news as well as the release of the Federal Reserve's minutes from March 27-28, the first meeting chaired by Chairman Ben Bernanke. It would appear most members thought "the end of the tightening process was likely to be near," while some expressed fears of tightening too much.

Just what the stock jocks wanted to hear. Forget that if inflation indicators pick up, the Fed will have to continue to tighten beyond the next hike on May 9. And the full impact of past rate increases is a ways from taking hold, particularly in the case of those with adjustable rate mortgages that are slated to reset over the coming two years.

The current news on inflation, though, was pretty solid, if you believe the government's figures, and the bond market can only react to the raw data, not the pain you or I feel in paying for healthcare, property taxes and college tuition. The core producer price index, ex-food and energy, is up 1.7% year over year, while the consumer price barometer is up 2.1%.

But speaking of energy, it's pretty tough to exclude it these days, isn't it? Like try $75 for a barrel of black gold, a new world record. And then we have this issue of $3 a gallon gasoline. It's a killer, politically, but whether or not it has 'legs' and will markedly hurt consumer spending and corporate profits remains to be seen. For starters, it certainly sent a shudder through the airline industry this week as stocks in that sector were crushed.

Oil was symptomatic of the boom in commodities overall. The Goldman Sachs CRB index of 19 equally weighted items soared to a new all-time record, while gold hit $645 and silver $14 before a wild rollercoaster ride at week's end. Heck, even my Vic Roznovsky baseball card saw its value rise from 1 to 2 cents.

Of course the commodity boom is another bubble that will pop, along with housing, but these things can run a long time as I discuss further below. Money is flooding into metals and other commodities. Institutional holdings by money managers, for example, are now in the $100 to $120 billion range compared to just $6 billion in 1999. [Barclays Capital / Wall Street Journal]

And a word about real estate. There was an interesting piece in Business Week on the subprime market; those who fail to meet normal mortgage standards. Subprime lenders issued $650 billion in this paper in 2005, some 23% of all new loans vs. just 5% in 1994. In California, one in five buyers spends more than ? of pre-tax household income on housing (30% being the recommended max).

So it should be no surprise to learn, as the Journal pointed out the other day, that there is an exodus from cities such as San Francisco and Boston where affordability is a big issue.

--Earnings drove market performance, ignoring the implications of soaring oil and gold. Texas Instruments, Merrill Lynch, Yahoo, Merck, 3M, Apple Computer and even General Motors were among those beating expectations; while Motorola, Juniper Networks, Ford and eBay disappointed and were hammered. Then you had issues like Citigroup and IBM whose reports were so-so and the stocks acted in kind.

Overall, the Dow Jones hit a six-year high, up 1.9% on the week to 11347, while the S&P 500 closed at 1311, up 1.7%, and Nasdaq added 0.7% to 2342.

Don't worry. I didn't forget Google which blew away the Street with its earnings and closed the week at $437. After a brief slump, Google is back on track to take over the world and there's really nothing you and I can do about it.

Just a few tidbits. GM lost $320 million but because this was better than expected the stock rose 10%. GM's sales in Asia, in particular, were strong. Ford lost $1.2 billion and there was little good to say here, while Apple shipped 8.5 million iPods in the quarter, causing audiologists to jump for joy at the prospects for more business as users go deaf. Lastly, German software giant SAP continues to take market share from Oracle.

At first Treasuries rallied strongly on word the Fed may be finished raising rates after the next meeting, but then everyone looked around and said, "Hey, what if some of the inflation data comes in hot, say in June and July? Then what would the Fed do?" And so rates creeped back up, though the yields were still below the prior week's on the longer end of the curve.

As alluded to above, how our government measures inflation is a hot topic these days and Bloomberg's John Wasik had a good summary of the issue.

"If the full impact of consumer-price increases were accounted for, investors would have a lot more to worry about, and you should prepare for a threat that's much greater than labor Department reports indicate.

"The government has a vested interest in keeping official inflation measures low. Everything from Social Security cost-of- living increases to marginal tax rates is adjusted annually to this all-important gauge.

"The total cost of what we are paying for big-ticket items is much higher than what's reflected in the CPI.

"Take housing costs, for example. The Bureau of Labor Statistics, or BLS, the U.S. Labor Department's agency that calculates the price index, estimates housing costs by figuring 'owners' equivalent rent,' or a proxy of what homeowners would pay in average rent increases.

"As the largest component of the CPI at 23 percent, housing represents a huge portion of the overall cost of living. Yet the Labor Department's indirect measure vastly underestimates actual housing costs since it doesn't reflect home-purchase prices, financing, maintenance or property taxes. Done any roofing, remodeling or painting lately? Have you noticed how much your property-tax bill has climbed to match higher home values?

"How understated is the Labor Department's rent metric? Jim Floyd, senior analyst for Leuthold Group, notes that 'since 1996, existing-home prices are up 81 percent, but the BLS owner- equivalent rent numbers are up only 30 percent over this entire period.'"

But then there's this from Sandy Habermann of Miller Tabak (courtesy of David P.).

"Most agree that the housing market has slowed, especially after the weak data seen this week and in recent months. By the same token, those who believe (this to be true) should also expect the housing portion of the CPI to trend higher. When the housing market was strong, it suppressed the CPI because there was a large shift from renting to buying. With rents accounting for such a large part of the CPI this was a big deal. Similarly, now that the housing market has slowed, demand for rental units is increasing, putting upward pressure on rents."

So, looks like the government will have to play with the books again, doesn't it? Change the formula back to a focus on home buyers, just as values fall or stagnate, mused the editor.

--The other day in the Rose Garden, President Bush gave an embarrassing response to a question on the high cost of gasoline.

"And let me remind people that these high gasoline prices are caused by primarily three reasons: One, the increase in the price of crude oil. It's one of the reasons I stood up in front of the Congress and said we've got to have strong and active research and development to get us to diversify away from crude oil. It's tight supply worldwide, and we've got increasing demand from countries like India and China, which means that any disruption of supply or perceived disruption of supply is going to cause the price of crude to go up. And that affects the price of gasoline.

"Secondly, there's increasing demand. At this time of year people are beginning to drive more, getting out on the highways [oh brother], taking a little time off, and they're moving around. [ed. you know, like squirrels] And that increasing demand is also part of the reason the price of gasoline is going up.

"And, thirdly, we're switching fuel mixes. The summer fuel mix is different from state to state, and is different from what is being used in the winter. And, therefore, the combination of these creates higher gasoline prices. And I'm concerned about higher gasoline prices. I'm concerned what it means to the working families and small businesses, and I'm also mindful that the government has the responsibility to make sure that we watch very carefully, and to investigate possible price gouging. And we'll do just that." [whitehouse.gov]

I double-checked the transcript because I was incredulous as I was watching him. To be fair, though, his explanation has a kernel of truth to it, but just tell people what's really happening?.and forget for the time being the whole ethanol debate which is clouding the true issue.

It's about the fact Iran pumps a bunch of oil in an already tight global market and we could be headed towards a military conflict that could shut down the Strait of Hormuz, through which 25% of the world's oil flows. That, plus the lesser, though still highly important issues of Nigeria's insurgency and the wacko pronouncements of Venezuelan President Hugo Chavez. Bush should also admit the flow of oil from Iraq is still well below pre-war levels, when three years ago the plan was for it to be gushing at a rate at least a million barrels per day higher. Plus the president forgot to mention the equally significant impact Katrina and Rita had on Gulf production to this day.

Oil is $70+ and without these major issues, as well as the accompanying speculation, it would be $50, or potentially lower, and no one would be complaining about the price of gasoline.

--President Bush didn't have a good week. Another dumb move was moving Rob Portman over to Office of Management and Budget from chief trade representative. I thought Portman was doing an outstanding job in that position and instead Bush promoted Susan Schwab. No offense to all you Susan Schwab fans out there, but being outside the Beltway myself, wasn't there someone else available? We are at a critical stage in the Doha round of global trade talks and our international partners are already ridiculing the selection.

--Despite a wicked correction on Thursday, many remain bullish on commodities. And no one has been more bang on than hedge fund manager Jim Rogers. On Tuesday, Rogers was interviewed for Bloomberg News.

"The shortest bull market for commodities lasted 15 years, the longest 23 years." So if history is any guide, "they've got a long way to go."

"Supply and demand is terribly out of balance for nearly all commodities right now. This is not a bubble."

But Rogers sees the best opportunities these days in the agricultural sector. "That's where prices have moved least," with cotton, soybeans and sugar still "cheap on any historical basis."

--Chile, the world's largest producer of copper, reported exports of the product rose 63 percent in March, year over year. In the first quarter of '06 this amounted to $6 billion. The Santiago Times also reported that worldwide copper stockpiles in February were the equivalent of just four days of global consumption.

--For a third time, Yahoo helped put away a dissident who was posting his musings on the search engine. Jiang Lijun was sentenced to four years for sharing his pro-democracy views, similar to two earlier cases where online journalists received 8 and 10 years, respectively.

Former Yukos chairman Mikhail Khodorkovsky was slashed in the face in his Siberian prison. He is serving an eight-year sentence and there are obvious concerns whether or not he will survive the full term.

Russia's KBG-led gas monopoly Gazprom warned European Union nations to butt out when it comes to its expansion plans. CEO Alexei Miller told EU ambassadors, "It is necessary to note that attempts to limit Gazprom's activities in the European market and politicize questions of gas supply, which in fact are of an entire economic nature, will not lead to good results."

Gazprom is threatening to devote more of its resources to central Asia and China, once again proving that the Kremlin will wield the energy card at a moment's notice.

Meanwhile, Moscow's residential housing market continues to skyrocket (along with the Russian stock market, up 43% year to date thru Thursday). Apartment prices in March rose 7.5 percent, the largest monthly price jump in 15 years.

And surging equity prices, oil, and real estate have led to a surge in Forbes Russia's Golden 100 richest people list. To be included you now need a net worth in excess of $450 million. In one year the 100 wealthiest businessmen in Russia saw their combined assets grow 76 percent to $248 billion.

The CEO of LUKoil, Vagit Alekperov, tripled his fortune to $12.7 billion, but Roman Abramovich of oil company Sibneft is still Russia's #1 with a net worth of $18.3 billion.

But as opposed to America's wealthiest duo, Bill Gates and Warren Buffett, Russia's richest scare the hell out of me?.which I would submit is not exactly a great commentary on this nation's future direction. [Khodorkovsky was an exception, when he still had his wealth?.which is why it's unlikely he'll emerge from prison alive to lead a new political movement.]

--As evidence the retail investor has been rushing back into the U.S. market, Charles Schwab & Co. reported new accounts were up a whopping 25% in one year.

--But as the little guy reemerges from the 1999-2000 Bubble and its aftermath, much of his funds are flooding into emerging markets, thus fueling that sector's mania. There is no more seasoned investor in this realm than Templeton's Mark Mobius who told the Journal, "We're not yet at the danger stage, but we're getting there - and history does repeat itself."

--The hottest emerging market has been the Middle East until a recent major correction. Henry T. Azzam, commenting in Lebanon's Daily Star, offers this cautionary note.

"One of the main risks facing Arab banks is their sizeable exposure to the region's equity and real estate markets?. Although the large Arab banks are well equipped to deal with a major correction in the two markets, the impact on the banking sector as a whole would be noticeable if the ongoing correction in the region's stock markets is followed by a major shock in the real estate market."

You don't have to be a rocket scientist, or Bedouin, to know that when you see pictures, such as in Dubai, of gobs of new construction soaring to the sky that there is trouble ahead. Then again if you believe oil will forever remain above $60, the danger here is probably muted.

--Dow Jones is having problems with the Saturday edition of the Wall Street Journal, introduced last September. Thus far it's a big drag on earnings.

Now I have to admit I wouldn't mind seeing the company shelve it because I'd save 30 minutes out of my weekend.

--Freddie Mac, the #2 U.S. mortgage financing company next to kissing cousin Fannie Mae, agreed to pay a fine of $410 million to settle a shareholder lawsuit resulting from its accounting shenanigans.

--8.3 million Americans now have a net worth, excluding their home, of $1 million, up 800,000 from 2004. But in a study by TNS Financial Services, as reported by Investment News, 60% of affluent households use a financial adviser, a drop from 70% in 2004 and 79% in 2001. Not exactly super news for my friends in the industry. 67% of respondents simply felt they could do a better job managing their own money.

--I was in Moscow in the fall of 2002 and wrote then of how Russian art seemed to me to be a good play, though I wasn't thinking the buying would be fueled by the hedge fund crowd as much as it has been. For example, the New York Post reported that a 1919 Russian work that sold at Christie's for $30,000 in 1989 was recently purchased at auction for $2.9 million.

--In the latest on the 'haves' vs. 'have nots' front, UnitedHealth Group's William McGuire, CEO of the HMO giant, was reported by the Wall Street Journal to have $1.6 billion in unrealized gains on his stock option holdings. Regulators, though, are looking into whether or not he backdated the grants to give himself the lowest share price for a specific period?.say hitting the quarter low, each quarter. The timing is highly questionable.

But as to the issue of whether or not McGuire is entitled to such a haul, who am I to say? What got me, though, was McGuire, after getting heat following the Journal piece, suddenly recommended his company forego options for most senior executives in the future. Nothing like getting ye olde time religion.

And of course this goes back to the previous week's big story on the compensation front; former ExxonMobil's Lee Raymond and his nearly $400 million retirement package. As one shareholder, Emil Rossi, told the AP, he's done well by owning Exxon shares but the pay is a little out of whack.

"(Raymond) took over a good company. He didn't bring it out from being a bad company, so his pay is clean out of reason. It's not because of his smartness."

In other words, this isn't a case of an entrepreneur such as Bill Gates or Michael Dell?or the Google boys for that matter. No one can ever begrudge them as long as they obtained their gains legally.

But the real bottom line will be how most Americans feel and to that end it doesn't bode well when anchors such as NBC's Brian Williams are making fun of Raymond as he did on Monday's broadcast.

--And then there's Citigroup's Sandy Weill who was given a fond farewell gala attended by the likes of Bill and Hillary. I've written enough on this guy over the years and in the end history will show him to be what he was?.a vastly overrated Wall Street kingpin who bent the rules, often at the expense of clients. No doubt, those who were swept up in his orbit did well, but the returns you see quoted for shareholders are for a period of time where just about any stock did well and lately Citi has lagged badly.

If you disagree with my take on his career, just remember regulators put the clamps on Citigroup as a result of Weill's "bad business practices." If there hadn't been a Sandy Weill, the free market would have found someone else to fill any perceived gap.

--Finally, for purposes of providing a portfolio allocation I have stuck with an 80% cash / 20% stock split and I'm grading myself by using the S&P 500 as the proxy for the equity portion.

But I've also said that at the start of 2006 I had the lion's share of my own equity holdings in a carbon fiber company?about 15% overall. Well, that 15% position is up over 200% in the first four months of the year and I mentioned a few weeks ago I was sticking with this one in true pig fashion.

The point is I'm currently far from an actual 80 / 20 split in my own account until I sell the one stock, but I'm maintaining that as the recommendation and as the mechanism by which I'm graded.

China: The United States and China could be engaged in an armed conflict by 2010, and to those experts who say China is far behind the U.S. technologically when it comes to a comparison of our two militaries, as was put forward in some circles this week, may I remind them that China already has a developed capacity to take out an aircraft carrier or two; at which point the issue would become, do the American people have the stomach for full-scale war with China? Particularly after Iraq and what is almost certain to be action in Iran.

Before he left for the U.S., Chinese President Hu spoke of holding talks with Taiwan "on an equal basis as soon as possible." Taiwan's government said Beijing was being totally "insincere" as it rejected the call, citing the mainland's continued missile deployment across the Strait that is threatening the island.

Hu refers to the 1992 "consensus" with the nationalist government on Taiwan at the time, the KMT, and an agreement that said the two sides were part of "one China," with each having its own interpretation of what "one China" means.

And you saw this week how much Hu focused on the issue of Taiwan in his discussions with President Bush. Taiwan's President Chen Shui-bian, who seeks independence without publicly proclaiming this, is in power until 2008 and while polls show the Taiwanese people desire the status quo, Chen correctly feels that Taiwan should be recognized for what it is?.a thriving, independent democracy; though China treats such thoughts as an act of war.

The United States is in a box, and as Hu and his fellow commies worry about keeping civil unrest to a minimum the leadership won't hesitate to play the nationalism card when necessary to placate the masses; two of the prime targets being Washington and Taipei (the other is Tokyo).

War seems almost inevitable over natural resources alone. Michael Green, who directed policy on China at the National Security Council until late last year, told Bloomberg News that while we observe China buying up oil, for example, from every unsavory place on earth, such as Sudan and Iran, the United States looks for crude, and other commodities, elsewhere. "(China) says it is benign, because they don't interfere with the internal affairs of other nations. And we say it is anything but benign, because it finances these regimes' bad behavior."

Pang Zhongying, Director of Global Studies at Nankai University, Tianjin, China, is also a contributing editor for The National Interest.

"As an emerging great power, China must be willing and able to take on a larger and more responsible role in global affairs - but this should not occur haphazardly. Chinese universities and think tanks need to do much more in discussing the role China should be playing in the world. Regrettably, China has failed to be an 'an intellectual actor' in addressing questions of global governance. When President Hu speaks of China desiring to facilitate a 'harmonious world,' this must be translated from the realm of 'good wishes' into formulating policy recommendations, identifying the challenges requiring China to assume a greater role of leadership, and developing the norms, rules and institutions that will define the international order of the 21st century.

"China's 'peaceful rise' or 'peaceful development' has enormous implications for the international system - and in turn, China needs to be prepared to shoulder the responsibilities for global peace and stability befitting a power of its stature."

Meanwhile, looking to the Olympic Games of 2008 in Beijing, Chinese authorities are scared to death of the pollution issue. What a PR disaster if the skies turned a disgusting yellow as they did this week as a result of a massive sand and dust storm that had many fleeing indoors. China tried to combat it with artificial rain and while officials say the Games in August won't be subject to such an occurrence, which often happens in the spring, other pollutants are a constant factor. The only good thing, though, is that this experience and ones like it are getting China to focus on the nation's pitiful air and water quality standards.

Lastly, Canada is increasingly concerned about 1,000 suspected Chinese agents and informants on its soil, most of whom are probably visiting students and business people. The former Liberal government did nothing about the problem, but the new Conservative government of Prime Minister Stephen Harper has vowed to crack down; though what it will actually do is anyone's guess. Until such time, China just keeps stealing industrial and high-tech secrets.

India: The problems in Nepal and Katmandu bear watching as it threatens to spill over into India. A longstanding Maoist insurgency had sought to topple Nepal's monarchy and 13,000 have died in the conflict. But last year the king seized power and has refused to hold elections, until an announcement late Friday that he was prepared to turn over power to an as yet named prime minister. Protests continue nonetheless and the king's security forces have killed a number of protesters.

India's Prime Minister Singh is concerned because India's rural regions are breeding grounds for Maoist movements such as the one in Nepal.

Russia: Former senior adviser to President Vladimir Putin, Andrei Illarionov, in an op-ed for the Washington Post.

"Does Russia really belong in the Group of Eight - the assembly of the world's leading industrialized democracies? As things stand today, it meets only one criterion for membership; the size of its economy. So far as political rights are concerned, Russia ranks 168th out of 192 countries, according to Freedom House. In terms of corruption, the organization Transparency International ranks Russia 126th out of 159 countries. The World Economic Forum calculates that when it comes to favoritism in governmental decisions, Russia rates 85th of 108 countries, in protection of property rights 88th of 108 and in independence of the judicial system 84th out of 102.

"The principal difference between the original G-7 countries and Russia lies in their disparate approaches to nearly every essential issue on the global agenda. Russia pursues 'wars' against its neighbors on matters relating to visas, electricity, natural gas, wine and now even mineral waters.

"Russia's official media have whipped up propaganda against the hard-won democratic road chosen by Ukraine, Moldova and Georgia, as well as against the Baltic countries, Europe and the United States. These countries became the enemies in the new 'cold war' being waged by Russia's authorities. At the same time, new friends have emerged in the leaders of Belarus, Uzbekistan, Iran, Algeria, Venezuela, Burma and Hamas - a very different sort of G-8.

"The question now occupying the minds of leaders of the G-7 countries is whether to participate in the upcoming G-8 summit in St. Petersburg. Idealists have proposed a boycott. Pragmatists oppose that approach. In either case, a bad outcome is inevitable."

Ukraine: In case you were wondering what's going on here after the March 26 vote, so am I. As of this writing, a ruling coalition still hasn't been formed as Tymoshenko, the former prime minister fired by President Yushchenko last year, wants her job back in return for her party's support. It's a mess, as predicted.

And a potential disaster looms over in Chernobyl as we approach the 20th anniversary of the catastrophic explosion at the nuclear plant there. According to a report by Mara Bellaby of the AP, the sarcophagus that was constructed over reactor No. 4 is close to breaking down. A new one is being built but will it be finished in time? And could there yet be another explosion before then? Bellaby writes:

"No one knows exactly how much radioactive fuel remains since only 25 percent of the reactor is accessible. Some estimate it all was discharged during the 10 days when the reactor spewed out its insides. Others counter that as much as 90 percent is still there. Sensors constantly check for signs of new reactions taking place."

Lebanon: The latest UN report on the assassination of former Lebanese prime minister Rafik Hariri cites Syrian intelligence chiefs for threatening Hariri if he didn't move to keep Syria's lackey, President Emile Lahoud, in office longer than the constitution warranted at the time. The Security Council is to take up the report this week.

Separately, Prime Minister Fouad Siniora traveled to Washington to meet with President Bush. Afterwards, Siniora said he was "really convinced" that "Bush and the United States will stand beside Lebanon to have Lebanon remain a free, democratic, united and sovereign state."

"The significance of these words cannot be overstated, given the enormous expectations that so many Lebanese held ahead of Siniora's controversial visit to the U.S. Many had hoped that the premier would secure a promise from Bush to help end Israel's occupation of Lebanon's Shebaa Farms, halt Israel's incursions into Lebanese territory and free Lebanese detainees from Israeli prisons. Indeed, as he was setting out on his visit to America, Siniora said that he intended to seek U.S. assistance in 'enabling it (Lebanon) to recover its occupied Lebanese territories.'

"So far Bush has not met any of the high expectations of the Lebanese people. In a statement after his meeting with Siniora, Bush merely reiterated what many consider empty words of support for a 'free and independent and sovereign Lebanon.' Such words of support for Lebanon's sovereignty are of little value if they are not followed up with action. The people of the region, particularly the Lebanese, are well aware of the fact that through its annual aid packages to Israel, the U.S. holds considerable sway over Israeli policy. But they also know that the U.S. has rarely - if ever - used this influence to encourage Israel to halt its aggression and behave like a civilized neighbor?.

"As a leader in a part of the world where resentment over U.S. policy has reached unprecedented levels, Siniora has taken a dangerous step by so openly allying with Bush. He has in effect put his credibility and therefore his future as a politician in the hands of an often clumsy U.S. president. If Bush now fails to show genuine support for Lebanon's sovereignty, he will not only be once again disappointing the Lebanese, he will also be terminating the career of a man who could have proven himself to be a valuable U.S. ally."

This is sad. I continue to maintain the fate of Lebanon is just as important as that of Iraq in the long run because of the influence Syria has over the land as well as the presence of Hizbullah. Lebanon can break apart at a moment's notice.

Japan / South Korea: The two are trying to keep the lid on a simmering dispute involving a group of islands both claim called the Liancourt Rocks; a resource-rich strategic chain. Cooler heads should prevail.

Chad: The World Bank is withholding $124 million that was supposed to be used to ease poverty in the country, claiming the government wants to use it for arms. Well, it does because Sudan is being a poor neighbor. Early in the week, Chad said it would stop its flow of oil (about 160,000 barrels per day) unless it got its way but it pulled back that threat and is evidently going to buy more arms anyway with the oil revenue regardless of the World Bank's complaints.

Venezuela: Since the recall vote on President Hugo Chavez two years ago, many of the 3.4 million who signed the petition forcing the vote have been fired from the civil service and taken out of the running for government contracts. [Bloomberg News]

Chile: Neo-Nazis have been linked to a number of murders here, unsettling the country. Authorities have vowed to crack down on these self-styled "defenders of normalcy."

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Note: I'm off on a long trip?.my 4th in five years to the Far East, including the island of Yap in Micronesia. If all goes according to plan I will have a real treat for you next week. On Saturday, I hope to visit one of the world's true 'hot spots'. [With the time difference I expect to be able to post at my normal hour.] But there are a lot of moving parts to this adventure, beginning with ten flights, so we'll see what happens.

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