Educate Yourself

Week in Review
For the week 5/8/2006 - 5/12/2006
Brian Trumbore
President/Editor, StocksandNews.com

The Federal Reserve raised its key short-term funds rate a 16th time, another ? percent or 25 basis points, to 5% on Wednesday. But as I noted last week we all were waiting to see if they'd provide a bit more clarity about future rate decisions and the Street was disappointed.

While many were hoping the Fed would finally 'pause' when it next gets together June 28-29, instead it averred that "further policy firming may yet be needed to address inflation risks," depending on future data.

Well, this caused quite an uproar among the Wall Street cognoscenti. 'Whaddya mean further policy firming may be needed?! You've got to be kidding me!'

Message to all you incredibly overpaid Street strategists. Try doing your own homework for a change. You want the Fed to do it all for you?

Heck, far be it for me to be a Fed defender, but no one knows where we're going from here. True, I've given you my outlook and it isn't pretty. And you shouldn't be surprised I'm sticking with it.

But the Fed can't do anything but analyze a slew of coming data on prices and economic growth over the next six weeks; it's only right they do so.

Now it's the strategist's job to stick their neck out and give their clients some real analysis. If they have no conviction, they should be fired; especially those working for broker/dealers where management wants commission-generating ideas.

[Just wanted to get a rise out of my former wholesalers out there. They heard this from me every week.]

Anyway, the Fed concluded for now that while "inflation expectations remain contained," pricing pressures could emerge with the surge in commodity prices. So the real bottom line is: will the consumer buckle under, finally, to higher energy prices and/or a stagnating, verging on crumbling, housing market?

I've argued it would be housing, pointing specifically to the second half. As for energy, it's mostly about Iran for the foreseeable future; that and weather in the Gulf of Mexico. It's almost time for our first tropical wave, after all.

The markets thus took none too kindly to the prospect of further rate increases and runaway commodity prices and it was a two- day bloodbath on Thursday and Friday.

China remains the top story in terms of the global economy with a government think tank forecasting GDP growth of 9.8% in the second quarter and 10% in the third. China also helped fuel the metals surge - copper, zinc, nickel, and platinum among the items hitting record highs, with gold at a 26-year best - in announcing it was going to start building its strategic reserves in uranium, iron, copper and other key materials, plus it was accelerating construction of strategic reserves for oil and coal.

But back to the Fed and Wall Street's loss of faith in Chairman Bernanke and Co., one major concern, and the one with most currency, is the fact the Bank of Japan and the European Central Bank will both be hiking interest rates this summer (as will China) while the Fed could be pausing; ergo, will the Fed then be behind the curve? I don't think they'll put themselves in that position.

We're going higher on rates, in other words, and if we haven't already reached the tipping point, a move to 5.25% end of June would do it.

--So a funny thing happened on the way to Dow 11722. We got close, but after a 260-point drop on Thursday and Friday, and 1.7% for the week, the Dow resides at 11380 instead. The damage elsewhere was far worse with the S&P 500 losing 2.6% to 1291, Nasdaq 4.2% to 2243 (100 points on the week) and our stellar performer for '06, the Russell 2000 index of little guys yearning to breath, down a whopping 5%.

So is this the start of the first real correction in well over two years? Since I said one must have conviction, I'll say, yes, though you have to give me one bounce-back week.

It certainly doesn't look good that despite this roaring economy of ours, consumer confidence by one key measurement is plummeting. Yes, I guess it's oil prices though I believe we've peaked at the pump for a while, but the real issues are the ones like healthcare that are killing the middle class. I just received a note from an old friend in the business, Liz S., who is pretty good with this kind of thing, figuring out the pulse and all, and she gave me a number of examples of how premiums are skyrocketing. And Mark R. told me of how property insurance is soaring for everyone living along the coast, though in this case for obvious reasons.

But while I could have put all the above in my opening monologue, here's something else. My new canary in the mine is Chile. If we're all so interconnected these days, as I think you'd agree, and our economies are increasingly tied, consider that the Central Bank of Chile announced this week that personal debt there is up to 51.3% of disposable income, an increase from 34% in 2000. I've mentioned Chile a lot recently because it is a classic emerging market, with a booming economy thanks to the fact it's King Copper, yet look at what the people are doing? tacking on more and more debt so when the inevitable downturn hits it could easily evolve into a Crash. I would submit China and India will be in the same boat, though statistics such as those out of the Central Bank in Chile are not as easily ascertained in these two.

The bond market was spooked not just by the lack of conviction on the part of the Fed, but also a reading on import prices; part of the March trade data which showed prices rising faster than the Fed deems comfortable. Again, bond traders are complaining Bernanke isn't Alan Greenspan, but you'll recall in his early days, leading up to the 1987 Crash, Alan Greenspan was no Paul Volcker. Uh oh?bad analogy.

And I haven't really mentioned the falling dollar, have I? It's been hitting new lows versus the euro and yen for weeks now. Of course while this is good for exports and helps shrink the trade deficit, it's also inflationary. But to be fair, for the first time strength in the euro is somewhat warranted as Europe's economy is recovering for the most part. EU retail sales are at their highest level in years, for example.

Lastly, the Treasury Department issued its semi-annual report on China and its currency. It didn't label China a currency "manipulator," which is what some in Congress wanted and which of course it is. But on this one I think the Treasury did the right thing. We do not need a fight with China just yet?more on this below.

--Energy: Oil rebounded back above $73 before slipping Friday on, frankly, conflicting thoughts on demand. Some think it's succumbing to high prices, around the world, but I'm not so sure of that just yet. There is no doubt $70 oil and $3 a gallon gasoline in the U.S. curbs demand somewhat but if you're also telling me the global economy is still operating on all cylinders, then demand will remain strong and the International Energy Agency basically concedes as much.

And not for nothing, but as the Journal's Alan Murray wrote the other day, the debate on the energy front deserves a big, fat "F" for economic literacy. It's about supply/demand, folks, first and foremost.

Meanwhile, our friends to the South, Venezuela's Hugo Chavez and his sidekick Evo Morales of Bolivia, were once again feeling their oats. Chavez is talking of a new "extraction tax" as well as hiking royalty rates further for foreign producers on his soil, while Little Evo said there is no need to compensate the oil companies for his move to nationalize the energy sector because companies like Total, Repsol and Petrobras have already been amply rewarded for their investments. If everyone else in the world felt this way, economic activity would grind to a halt and we'd have nothing else to do but go to soccer games and beat each other up.

--Among the reasons for Nasdaq's drubbing this week were the tepid forecasts from the likes of heavyweights Cisco and Dell. Dell cited it was a victim of price-cutting, thereby proving that technology is still one sector where you have visible signs of deflation. And fear not, friends. I haven't abandoned my overall deflation outlook.

--Both the Senate and House passed an extension of the tax cuts for another two years through 2010, so the 15% maximum rate on capital gains and dividends remains in place while a patch for the alternative minimum tax was approved for 2006. Since day one, I have been vehemently opposed to the lower rate on dividends because this is truly a sop to the rich and nothing more. The little guy has few, if any, dividends, with those he does already taxed at a lower rate.

--Warren Buffett warned anew that the dollar would continue to weaken, though his route these days is to acquire overseas companies to take advantage of this. [He also sees a speculative bubble in the commodities markets.]

--But regarding the dollar, I have long argued that China could easily use it as a political tool, specifically regarding Taiwan. China launches a lightning attack to take out Taipei's leadership, the U.S. ponders a military response, and China then threatens the U.S., saying "stand back?or we sell the greenback."

"The notion that China or some other American rival could someday use its vast holdings of U.S. debt as a geopolitical weapon, despite the great harm that would also cause to the attacker's own economy, is gaining (forgive the term) currency in some quarters.

"The reason: the dramatic growth of global foreign reserves, and thus of U.S. debt, in the hands of developing countries - frequently, undemocratic rivals - already resentful of America's excessive influence. Those gaming the odds typically speak of the danger that a rising China, in defending its vital interests - Taiwan's status or threats to a key ally - might risk such a move despite the economic backlash."

"The irony is that the three countries in the world adding to reserves the fastest, and thus buying the most U.S. debt now, are China, Saudi Arabia and Russia, none of them democracies," says Setser. Throw in Venezuela and Iran, and "We are increasingly counting on a group of creditors who are not our closest friends but have a bigger and bigger stake in America."

Today, the U.S. dollar represents 66.5% of total global foreign exchange reserves, with the Euro at 24.4%. And developing nations have been reducing the share of their dollar holdings to 60.5% from a high of 71% in 1998, according to the IMF.

--Significantly, as the New York Times reported, bird flu has not exploded as a result of the spring migration back to old stomping grounds. So was this all just another Y2K? It's far too early to tell, but that would be a dangerous attitude for governments to take. Any preparation for bird flu will at some point pay off and in most cases has been money well spent.

--Wachovia acquired California-based Golden West Financial for $25 billion, leaving many scratching their heads. With Golden West's huge exposure to the California real estate market, why would Wachovia want to purchase a mortgage portfolio, an aggressive one at that, in the midst of a slowdown?

Not that Golden West itself is bad - it has a great reputation - but it has been a leader in the increasingly hard hit adjustable rate field. One expert estimates, by the way, that a full 29% of those taking out a mortgage or refinancing in 2005 have zero or negative equity at a time when values are flat-lining in the hot segments, if not outright declining.

Joshua P., my spy for the San Diego market, said home sales there fell 15% from March's pace and are off 33% year over year. The median home price has also now declined, albeit slightly, the past two months. Josh also reports those two homes in his neighborhood that have been on the market since the Spanish-American War, it would seem, have now been joined by two others on the block.

--Fannie Mae said it had uncovered yet more accounting errors. They haven't filed a 10-Q, or quarterly report, since Nov. 2004. So the question should be why are these shares still trading? No way investors have accurate information. The whole operation is rife with fraud. But it's giant Fannie Mae so we look the other way. Yes, years ago I asked, "Do you think these guys know what they own?" Do you think today the situation is any better and that the risk of a massive financial accident has been lessened any? I think not.

--Just an awful situation in Spain, for pensioners in particular, as the government raided the offices of the 3rd-largest collectibles company in the world, behind Sotheby's and Christie's, Afinsa Bienes Tangibles, and another outfit, Forum Filatelico, for running a Ponzi scheme. Up to 350,000 investors have anywhere from $4.8 to $6.4 billion at risk. From a police statement:

"Potential investors were offered high returns from the purchase and management of a stamp fund which was apparently made up of overvalued - or even fake - stamps and whose returns did not apparently come (from the fund) but from money received from new clients." [London Times]

Afinsa guaranteed 6 to 10 percent over a fixed period, with a money back guarantee when contracts expired. The stamp angle was key because Spaniards are big collectors and believed in their ever-rising value. Of course these accounts were not government guaranteed in any way. Your heart goes out to these folks?.and the death penalty would be more than appropriate for those carrying out this fraud. But then Europe doesn't believe in the death penalty?so maybe the rack would be another option; only up to a point, of course.

Following are some diverse opinions, not necessarily all shared by yours truly, on this growing topic.

"Something flashed into my mind (the other day) - something that my late father used to say?that it is 'unlovely' to see the extremes of wealth and nonwealth that are evident in contemporary America.

"We may be able to live with it. Some of us may even be able to prosper amid it. But it's not pretty. The rich should simply not be that much richer than everyone else - especially those whose lives protect them from terrorism.

"As I thought that, I had a revelation about oil. We all know - and I mean all, even Congress - that the oil companies are not fixing prices. We all know that the oil companies are not creating these wild prices out of thin air.

"The worldwide market is at work, and traders and speculators are driving up the price, based on uncertainty of supplies and inventories, and presumably becoming very rich in the process (at least some of them). That's the market at work. It's not up to the government to set the price or to fix the situation except by opening more space for exploration, and even that may not help. ?.

"The real problem is the difference between the rich - including rich oil people, of whom there are not many, but there are enough - and the poor. It is up to the government to redress the extraordinary difference in incomes of the rich and the nonrich, even at the margins.

"What Congress can do, and should do, is address the stunning underpayment of military men and women and the staggering budget deficits that will be a burden on our posterity for decades, by raising the taxes on the rich. It's fine that there are rich people. It's even fine that there are superrich people.

"But if they are superrich, they derive special benefits from life in the United States that the nonrich don't. For one thing, they can make the money in a safe environment, which is not true for the rich in many countries. It is just common decency that they should pay much higher income taxes than they do?.

"America is becoming a nation of many rich people. I recently read that there were close to 10 million millionaire households. I read that there were hundreds of thousands who made more than $1 million a year. Good for them.

"But it's unlovely for them to pay as little tax as they now pay. The real problem in this country is only temporarily about oil. That will right itself, or we'll get used to it and adjust.

"The real problem is saving a nation that is beset by terrorism, and we cannot do that unless we feel that we are all in the same boat, pulling the oars together. That includes the rich.

"Whatever rationale there may have been in 2001 for lowering taxes is long gone. It's time for them - us, because it includes me - to pay their (our) share.

"In the risk-taking society of the United States, entrepreneurship has retained a relative advantage in areas such as information and biological technology, entertainment, and high finance. The rewards have been very high for successful entrepreneurs, and for executives in a position to reward themselves.

"Employment has remained high because the new technologies have created jobs, particularly in supporting business and personal services, but many of these jobs are at wages much lower than the manufacturing jobs, which are moving abroad. The costs to the United States have been growing insecurity and inequality, compounded by deteriorating public infrastructure, physical and social.

"In much of Europe, the 'security society' has used regulations, expensive programs and high taxes to maintain services, leisure and equality as well as security. The costs have been sluggish growth and high unemployment (but many of the unemployed have remained comfortable).

"Neither American growth nor European comfort is sustainable at current levels in the face of globalization. For Europe, this should be obvious: slow growth, compounded annually, will leave it further behind the United States and ultimately much of Asia, until Western Europe becomes an immense quaint Venice, supported by tourism.

"America is in equal danger, however. According to the Federal Reserve chairman, Ben Bernanke, not a noted radical: 'Our society is based on opportunity, it's based on flexibility in labor markets and product markets, it's based on open and fair trade. And all of those things are at risk if a growing portion of the population feels they are not sharing in the benefits from those changes.'"

"It's often said that only the rich are getting ahead; everyone else is standing still or falling behind. Well, there are many undeserving rich - overpaid chief executives, for instance. But over any meaningful period, most people's incomes are increasing. From 1995 to 2004, inflation-adjusted median family income - for families precisely in the middle - rose 14.3 percent, to $43,200, the Federal Reserve says. People feel 'squeezed' because their rising incomes often don't satisfy their rising wants - for bigger homes, more health care, more education, faster Internet connections.

"The other great frustration is that it has not eliminated insecurity. People regard job stability as part of their standard of living. As corporate layoffs increased, that part has eroded. More workers fear they've become 'the disposable American,' as Louis Uchitelle puts it in his book by the same name. (John Kenneth) Galbraith expected the affluent society to be a placid society. Giant corporations would control markets and provide safe jobs; government would regulate business cycles. Underestimated were the disruptive effects of new technologies, globalization and activist shareholders.

"Ours is a post-affluent society. Because so much previous suffering and social conflict stemmed from poverty, the advent of widespread affluence suggested utopian possibilities. Up to a point, affluence succeeds. There is much less physical misery than before. People are better off. Unfortunately, affluence also creates new complaints and contradictions.

"Advanced societies need economic growth to satisfy the multiplying wants - public and private - of their citizens. The social order depends on it. But the quest for growth unleashes new anxieties and economic conflicts that disturb the social order. Affluence liberates the individual, promising that everyone can choose a 'unique way to self-fulfillment,' writes historian Avner Offer. But the promise is so extravagant that it preordains many disappointments and sometimes inspires choices that have antisocial consequences, including family breakdown and obesity. Statistical indicators of happiness, Offer notes, have not risen with incomes.

"Should we be surprised? Not really. We've simply reaffirmed an old truth: The pursuit of affluence does not always end with bliss."

--Corporate donations as a percentage of pre-tax profits actually fell last year to 0.9% from 1.1%.

--Business Week reports that many smaller universities have far too great an exposure to hedge funds in their endowments, some at more than 40%, in what's bound to be an ill-fated attempt to emulate their bigger brethren.

--I know there are a lot of Jim Cramer fans out there, and he did select my carbon fiber stock?a mere nine months after David P. and I first discovered it?but it just so happens I saw his appearances on the "Today" show, 3/17 and 5/11.

As I documented in WIR, 3/18/06, Cramer was a raging bull on 3/17 and the S&P 500 closed at 1307 that day. This Thursday morning his timing couldn't have been worse. "We could go to 15000 on the Dow before we get really expensive," he confidently told Katie Couric. Of course the Dow dropped 140 points on Thursday and another 120 Friday. To compare apples to apples, though, the S&P 500 finished the week at the above- mentioned 1291.

But to give Cramer his due, his followers have done well in the materials sector, in particular, and it only takes one or two home runs to more than make up for some pain.

--Paid newspaper circulation continues to decline, off another 2.6% for the six months ending in March, but newspaper-run Web sites are up 8% in the first quarter alone. Back to paid, USA Today remains #1, overall, with the Wall Street Journal #2. Meanwhile the Los Angeles Times' paid circulation declined a whopping 5%+ over the reporting period.

--Tourism during China's Golden Week was up 20% over last year's pace in yet another sign of the economic boom. A total of 146 million were on the road. Glad I wasn't among them, though I saw a bit of the crush the day I left South Korea.

--I don't have a Wal-Mart too close to my home so when I'm in small town America I like to hit one for my clothing needs. Just went to the one here in Savannah (which labels itself the "Catfish Capital of the World" by the way) and for $50 I bought two shirts and two pair of jeans. Now let's look at the labels. The shirts were made in China and Bangladesh, and the jeans were put together by slaves in Mexico and Nicaragua. Now that's globalization.

--New Jersey's government debt is now over $33 billion, which ranks our little place 3rd behind New York ($49.6 billion) and California ($64.4 billion). Do we know how to spend or what?!

As passengers boarded a Cathay Pacific flight from Hong Kong to London, it felt very warm inside the cabin. The captain said it would cool once the plane was airborne. It didn't?and many of the passengers began to feel like they were suffocating. A few laid down in the aisles.

But for some reason the pilot didn't turn back until the flight was two hours out?so it ended up being four hours before the plane returned to Hong Kong. Cathay is extremely lucky no one died, and, yes, it was diagnosed as a broken hose.

--You know what I'm tired of? Actors doing drug commercials. Like the one for Bayer Aspirin.

"Two years ago I had a heart attack." No you didn't. "And if it wasn't for Bayer?blah blah blah?" as his fake family gathers around.

--Inflation in Zimbabwe hit an annualized rate of 1,046% in April. You're reading that right. For example, a loaf of bread cost 7 cents a year ago (though government subsidized) while today it costs between $0.79 and $1.08.

It's not known if Zimbabwe's Federal Reserve equivalent is opting to pause or raise rates further.

--Lastly, I've had a fair amount of success with my carbon fiber stock, as some of you have recognized. Seeing as it was once 15% of my overall portfolio and is now far more, I just thought I'd tell you I continue to be a pig?oink oink?and haven't sold any. This week the company reported its first operating profit since 1999 and the sales pipeline is strong.

Carbon fiber is interesting. My company makes the lion's share of its money by supplying the wind power industry, with other, lesser, applications being in sectors such as oil drilling and the auto industry. [BMW, for example, is looking at the possibility of an all-carbon fiber body down the road.]

And as Charles K. keeps reminding me, any success Boeing has with its new Dreamliner jet will largely be because of its new reliance on C.F. It's lighter (as well as stronger than traditional materials), which makes the aircraft 15% more fuel efficient; rather important for an airline's bottom line these days.

Iran: President Mahmoud Ahmadinejad wrote a letter to President Bush, the first such direct correspondence between the two countries in 27 years. Promising "new solutions," Ahmadinejad's rambling missive showcased his naivety and, as Ray Takeyh of the Council on Foreign Relations put it, his "deep-seated religious devotion?the hubris of a committed Islamist." The White House properly ignored it since there was nothing about resolving Tehran's nuclear ambitions.

Later, in Indonesia, Ahmadinejad labeled Israel a "tyrannical regime" in one of his many speeches - don't you wish he'd shut up for at least a day? - while earlier he questioned the creation of the State of Israel.

But when it comes to action in the UN Security Council, forget it. The U.S., Britain and France want a resolution under Chapter 7 of the UN Charter that would make it binding for Iran to cooperate or face possible military action. But Russia and China can veto such a proposal?and would. Instead, the EU-3 plus the U.S. are reworking the same old economic incentives in return for Iran's dismantling of its uranium enrichment program. Time ticks by?and Iran gets ever closer to having enough enriched uranium for a test.

Iraq: Shia discontent over U.S. Ambassador Khalilzad, an Afghan-born Sunni, continues to grow. A banner in Karbala summed it up, "The American ambassador is the gate through which terrorism enters Iraq." [London Times] Of course in this war it goes both ways as the British were pelted by Shia protesters in Basra following the downing of a helicopter that killed five British soldiers.

Overall, the government said there were 1,091 deaths in April directly tied to sectarian violence, while for its part officials announced they would attempt to create a unified security force in Baghdad as a way of dismantling the militias. But who's to say they'll join, or if they do, truly cooperate?

Israel: A boat filled with high-tech explosives was thankfully seized off Gaza. These were far more sophisticated than what Israel is used to facing.

But an even bigger story is the growing split between Hamas and Fatah thanks to the fiscal emergency the Palestinian government faces; a fuel crisis being the latest result of the cut off of funds from Israel, the European Union and the United States. By week's end, though, all agreed that some humanitarian support must be forthcoming to avoid a disaster, particularly on the PR front. Hospitals, for instance, were in dire need of medical supplies.

Russia: While President Vladimir Putin focused primarily on domestic issues and national defense in his state of the nation address, he did throw in this zinger, without mentioning the United States by name.

"Comrade Wolf knows who to eat. He eats and doesn't listen to anyone else, and he doesn't plan to listen to anybody."

Putin talked of modernizing Russia's strategic nuclear forces, but like past Soviet leaders he chose to highlight his nation's rapidly declining population in issuing a series of proposals. Pending Duma approval (just had to throw that in?it's a rubber stamp as you know), mothers will receive $55 a month for their first child's initial 18 months and then $110 a month for the second child over the same time period, plus other health and child care benefits. Sounds like a diet of gruel to me, not that kids that age are eating much better in the U.S.

Meanwhile, Amnesty International said racist killings in Russia are "out of control" and in response Putin proclaimed in a Victory Day speech that neo-Nazis are "leading the world to a dead end" and would not be tolerated in Russia. Of course he has.

And this week Russia banned two makes of Georgian mineral water for "health reasons." Right. Just this past March, Russia had banned the importation of Georgian wines, also for health reasons, they said. Can you say "Bullsheetsky"?

China / Taiwan: Kind of funny that after I talked about the battle between these two over the South Pacific islands, some of which still recognize Taiwan over China, the Wall Street Journal had a front page story on the same topic.

But then there was Taiwan's wandering President Chen Shui- bian. Denied a layover in the U.S., except Alaska for refueling, on his way to Latin America, Chen stayed away from our shores.

However, while in Costa Rica (which along with Paraguay recognizes Taiwan) for the inauguration of President Oscar Arias, he made the most of an opportunity to see First Lady Laura Bush, there to represent her husband. The following is both comical and pitiful.

"In a television broadcast shown live in Taiwan, Mr. Chen was first seen looking across to where Mrs. Bush?was standing. He then walked towards her, introduced himself and shook hands. The entire meeting took no more than a minute before Mr. Chen walked back to his place to observe the ceremony.

"As if the first meeting with Mrs. Bush was too brief, Mr. Chen approached her for a second time after the ceremony. He was better prepared that time, with his interpreter taking out a small digital camera and recording the encounter."

Taiwanese television reports said the meeting was a planned "diplomatic encounter."

Sounds more like me approaching a girl at dance school when I was in 5th grade. "Hi." "Hi."

Korea: South Korean President Roh said he would meet with his counterpart, Kim Jong il, anytime, anywhere, "to talk about anything." Roh said he was committed to provide significant aid without conditions. Of course this is just what Washington doesn't want to hear in light of the dispute over Kim's nuclear weapons program, but Roh argues the talks are going nowhere and his plan is better. This is what I was commenting on following my recent visit to the region. A majority of South Koreans are convinced that through economic integration, North Korea will come around and act responsibly. Maybe Roh is right, but I choose to believe it's incredibly na?ve.

Separately, North Korea did say it would allow U.S. passport holders to enter with visas from Aug. 10 to Oct. 10 for the purposes of attending one of those terrific synchronized gymnastics competitions as well as some awesome flash card displays! But if you think you'll then be allowed to wander all over the country and interview starving mothers and children, it ain't gonna happen.

Sri Lanka: It's a civil war, despite the ceasefire of 2002, and it took a decided turn for the worse on Thursday as suicide bombers in a speed boat rammed a Sri Lankan naval vessel, killing 17, and then the military bombed the Tamil Tigers. Total killed about 70.

Britain: Prime Minister Tony Blair acted like he was now willing to turn over the job to Gordon Brown, but not for another year. Brown must be close to suicidal.

Germany: The government allegedly paid $10 million for the release of some hostages in Iraq.

Latvia: While the full parliament and the president can veto it, a parliamentary committee has approved a plan whereby the government will publish the names of 4,500 who worked for the KGB. This wouldn't be done until Nov. 1, after parliamentary elections, but you can imagine how such a move would roil the nation.

Dow Jones -1.7% [11380]
S&P 500 -2.6% [1291]
S&P MidCap -3.3%
Russell 2000 -5.0%
Nasdaq -4.2% [2243]

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