Educate Yourself

Week in Review
For the week 5/15/2006 - 5/19/2006
Brian Trumbore
President/Editor, StocksandNews.com

As Lucy first told Charlie Brown about 40 years ago, it's all about real estate. Former Federal Reserve chairman Alan Greenspan knows that and on Thursday he addressed a gathering of the Bond Market Association, "This has been quite an extraordinary (housing) boom. The boom is over. I think we can safely say that with a strong degree of confidence."

But Greenspan added there is "no evidence that home prices will collapse," while in a separate forum current Fed Chairman Ben Bernanke also said the housing market was cooling but that the slowdown was "moderate" and "orderly," pointing to the overall strength in the economy.

As one who has been writing of the housing bubble for years, while being far too early in calling a top, I can't say I disagree with the logic of our esteemed money mavens but that's only if you can convince me the economy is going to hold up and employment remain strong.

Alas, you know I don't think this is going to be the case and while I try hard not to make too much of one week, the evidence from this past one is overwhelming; we are nearing the tipping point.

After all, it was the Fed that fueled the boom in the first place by going low (for you golfers out there) with interest rates, but after 16 rate hikes, and perhaps more to follow, it is finally sinking in with the investor class that there is a world of hurt out there among those who were far too aggressive in their home purchases, in terms of the kind of mortgages they took on. As the short end of the yield curve has gone from 1% to 5%, and as adjustable rate and interest-only mortgages reset, you're not likely to see many of these folks at the Cannes Film Festival, if you catch my drift.

Across the nation delinquencies are up (not spectacularly so as yet, but that day is coming), inventories are rising, sales dropping, and last but not least pricing is increasingly shaky.

To wit. The pace of home sales in southern California in the month of April was at the slowest rate in 11 years, an environment the Los Angeles Times described as "collective inertia." In New Jersey's white-hot market, the evidence now reveals that sales peaked in the third quarter of 2005. Nationwide, April housing starts were down 7%.

As for prices, nationally, the median home price for the first quarter was $217,900?still up 10.3% year over year. But the trend is down. It was 13.6% in the fourth quarter. In most parts of the country the year over year comparisons will be flat, if not down, by the fourth quarter.

You are going to begin to see an unending litany of tales of woe out of the national media and that is only going to help fuel the slide. As for the 'experts' who say housing will have a "soft landing," it's indeed different this time because of the aggressive lending practices of the banks and the prevalence of these no money down-type pieces of paper. You can go back to the Tulip Bubble for examples of this kind of game.

No doubt, however, a vast majority of Americans have little need to worry and the gains on their most valuable investment, even after a probable correction, will in most cases still be quite nifty. But there is the other side and they will have an impact on the pace of consumer spending and the overall economy.

That is unless hyper-inflation hits us and homeowners suddenly find that the value of their place once again exceeds their mortgage, thus allowing a bank to give them a third home equity loan?????..just kidding.

But speaking of inflation, as Fed governors debate the lag effect of their earlier moves on interest rates as it relates to housing, the hard data is presenting another conundrum. Deep down they have to know another rate hike will be more than the market can handle but the Fed's #1 job is to fight inflation, not worry about your personal financial situation?at least that's the way it's supposed to be.

But a hiking they may go as this week's report on April consumer prices was up 0.6%, 0.3% if you strip out everything we use; which means year over year prices have risen 3.5%, or 2.3% core, both of which are basically at the upper end of the Fed's comfort level.

The next Fed meeting, though, isn't until June 28-29 and in between we're going to have a slew more reports on inflation, including another reading on producer and consumer prices, so to those parsing every word from the Fed this week save your breath; just as we're going to do in the headquarters of StocksandNews.

I mean for crying out loud, I didn't hear one guy on BubbleVision mention that we have all this other stuff to digest and if the preponderance of the evidence is that the economy is becoming to take on gas due to a rapidly retrenching consumer, the pressure to pause is going to be palpable regardless of the inflation figures. Personally, though, I think they'll hike one more time because the data on growth will be respectable; thus finally sending us over the cliff.

First, real estate is not just a local issue, it's global and you're going to start hearing more and more about it. For that matter consider the following out of Bridgewater Associates and Tom Petruno of the Los Angeles Times.

Out of 60 nations tracked by Bridgewater, not one is in recession; the first time this has been the case since 1969. It's been fun, hasn't it? Especially since in the midst of a war, as is the case with the U.S., its citizens haven't even been asked to sacrifice.

Well, unless you can convince me the rest of the world is going to pick up any slack from a soon to be faltering American economy (though there is still a possibility this could be the case), then it's payback time.

For its part China has yet to show any sign of slowing but it's obviously dependent to a large extent on the health of the American consumer. Urban fixed asset investment (like for building roads and plants) has risen 29.6% the past four months, while industrial production has 'slipped' to a 16.6% rate. Thanks to rising incomes retail sales are up 13.6% year over year, though I wonder how much debt consumers here are taking on.

At the same time government officials in China are doing all they can to cool the housing market because increasing segments of the population are being priced out which in turn will eventually create unrest. Add it all together and it means one thing?China will be raising interest rates, as will the European Central Bank and the Bank of Japan. The BOJ held off this week but it's just a matter of time before it begins to move off the floor.

--The major averages all fell about 2% and it's the worst two- week stretch since January 2003. The Dow Jones, just eight trading days earlier threatening its all-time high of 11722, now sits at 11144, while the S&P 500 has corrected 4.4% off its multi-year high. Nasdaq, at 2193, is not only off 7.5% from its peak of less than two weeks ago but is also now in negative territory for the year.

Technically, the market looks like garbage thanks in no small part to losing streaks of 8 and 9 straight sessions by the Nasdaq and Russell 2000, respectively, and while earnings have indeed been strong, if the economy begins to slow as many a Wall Street economist was suddenly predicting by week's end, then future earnings gains vs. current expectations must be called into question.

The long end of the curve rallied on the hope (a) the Fed is serious about fighting inflation, (b) the slowing economy will lessen inflation pressures, or (c) all of the above. Take your pick.

No one knows what the Fed is going to do in June, least of all the Fed itself, but as I said last week that's as it should be until they sift through the remaining data.

It's just that the market hates uncertainty and it's not about to do its own homework, which helps compound the problem. Of course today bond traders have zero confidence in Chairman Bernanke as well.

But back to Alan Greenspan, as part of his speech on housing the other night he also took direct aim at the whole credit derivatives market, saying he was "frankly shocked" at how these instruments are traded; as in don't look for formal confirmation slips like you receive on your 100 share purchase of XYZ.

"This is 19th-century technology that I find appalling. I don't want to use the term unconscionable, but I guess I would." [Wall Street Journal]

--One of the other huge stories on the week was the collapse in commodities prices. In fact it was the single worst week for the benchmark CRB index in over 25 years, down 6.4%. Few are really surprised, though, after the spectacular gains of not just this year but the past few. Copper, for example, had its biggest one month gain ever in April, up 30%, and that kind of action draws all the little guys in?at exactly the top. But is this week's drubbing merely a pause that refreshes? You tell me the pace of global economic activity, particularly here and in China (India is overrated in this particular story), and I'll tell you where commodities are headed.

--Stephan Wrobel, chief executive of Swiss-based Diapason Commodities Management SA, addressed a Dow Jones / European forum in Frankfurt the other day.

"Currently the world derives some 60% of its energy from fossil fuels but these supplies are limited - the global 'production peak' of oil could be reached by around 2010."

So Mr. Wrobel is just the latest to talk of 'peak oil.' But this week Congress once again rejected an attempt to end a quarter- century ban on oil and natural gas drilling off our nation's shores, just as it has continued to vote down plans to develop a postage-stamp portion of the Arctic National Wildlife Refuge, both of which only help accelerate the peak oil story.

But one point is getting lost in the debate, as it almost always does. Energy prices are still determined by supply and demand, so, for example, while there is this hue and cry across the land about $3 a gallon gasoline, it behooves Americans to look at their heating bills and praise the god of their choice for the fact natural gas has fallen from a Dec. 13 high of $15.37 to below $6. Why? There is a ton of supply, that's why. And as my friends at Pritchard Capital always remind me, pretty soon the drillers are going to start "laying down their rigs" because if we drop much further, many of the exploration projects don't make economic sense from a risk/reward standpoint?and then eventually the supply comes down and the price goes back up, because that's how markets work.

The point being that even if Congress had approved drilling in our coastal waters, for both oil and gas, that doesn't mean every Tom, Dick and Harry Oil Co. (symbol TDHO) is going to immediately send their skiffs out and start prospecting. If the current price doesn't warrant it, most will opt out rather than take a flyer on the future.

But these are also 5-10 year projects in many instances, just as ANWR would be, and we must have the approvals in place to allow those who want to take the risk to do so. As for the environmental impact, along with the concerns over tourism, they are incredibly overblown. But far be it for Congress to exercise any kind of vision.

--China: The first home-grown computer chip, announced back in 2003 as a technical breakthrough here, has been found to be a fake; a huge embarrassment for China resembling the South Korean cloning scam where the scientist there faked his research. What's not known is how the makers of the fake chip duped the companies that purchased it, the Shanghai government and prestigious Jiaoting University.

--"U.S. companies earned nearly $11 billion in Japan last year, more than double what they could muster in China ($3.3 billion) and India ($1.2 billion) combined, according to statistics from the U.S. Bureau of Economic Analysis." [Paul Wiseman / USA Today]

As market strategist Joseph Quinlan avers, we often ignore Japan with all the China / India talk, while Jesper Koll, chief economist at Merrill Lynch Japan, adds that the key to winning over Japan's demanding consumers is to recognize that they are "discerning customers?but once you've got him or her, you're king. You have to be the best. But if you are, you have infinite pricing power."

--Honda announced it will be building its fourth plant in the U.S., at a site to be determined, as Detroit's Big Three flail away and complain about the Japanese "falsely rallying around a flag (they) don't salute," as a Chrysler spokesman told the Financial Times.

--The Financial Accounting Standards Board's mandate that corporations include their pension liabilities on their balance sheets by year end will erase some $537 billion in shareholder equity, according to Bloomberg News.

--Milberg Weiss, the giant-class action firm, was indicted along with two partners on charges it received more than $200 million in attorneys' fees as a result of conspiracy, money laundering, obstruction, racketeering and filing false tax returns. This firm has been a joke for decades and finally they've been nailed.

[Ohio's attorney general immediately fired Milberg Weiss from a class-action in that state.]

--In the "What the heck were they waiting for?" category, Dell Computer is going to start using chips from Advanced Micro Devices, the last major PC maker to do so. Shares in AMD rose sharply, while rival Intel's slipped a bit. AMD's chips have a growing reputation as being superior to Intel's.

--Merck won approval for its drug Gardasil; a vaccine against the sexually transmitted virus that can lead to cervical cancer. The FDA went further in approving it for girls as young as nine years of age.

--The latest revolt over executive compensation will reach a climax this week as shareholders of Home Depot express their disapproval of a system that has awarded CEO Bob Nardelli with $200 million in cash and prizes over just the last five years while the share price has fallen.

--Bausch & Lomb finally pulled ReNu MoistureLoc contact lens solution from shelves around the world due to overwhelming evidence it contributed to a serious fungal infection that can result in blindness. But B&L waited five weeks after the initial warning from regulators to carry through with the recall, let alone the fact the first cases surfaced in Singapore and Hong Kong all the way back in February.

--The federal probe into the backdating of stock options continues to widen as up to 20 corporations are now under investigation, including UnitedHealth Group. On the surface all these cases appear to be simple fraud, but backdating in and of itself is not necessarily illegal. It's whether or not there was appropriate disclosure. This issue is going to continue to mushroom.

--Inflation Update: I buy a ton of paper and printer cartridges and go to Staples at least once a month. So less than two months ago (WIR, 4/1/06) I noted that the price of a stack of paper had gone from $2.89 to $3.19. Well I walk in this week and see? $3.99. $3.99! I checked and rechecked?called a clerk over? "Is that right?" "Yup." What is this, Zimbabwe?!

--Dirtball Kirk Wright, the former Atlanta hedge-fund manager who preyed on professional athletes, was arrested in a Miami hotel. Wright is accused of stealing up to $110 million in client funds, though his capture (with $28,000 in cash on hand), gives investigators some hope that a decent portion of the assets may yet be recovered.

--Boy, when I was in the mutual fund industry Putnam Investments was a giant the rest of us were jealous of. But today, thanks to the fallout from its role in the fund trading scandal as well as poor performance, Putnam has seen its assets plummet from a peak of $240 billion in 1999 to $99.5 billion as of March.

--Despite some decent rainfall, Lucent's headquarters lawn continues to look like crap?.an appearance that may in no small part have something to do with the fact I saw 50 geese on it the other day. But what I've been remiss in not reporting, as we maintain our irregular lawn watch, is the fact that on Mondays I pass another of Lucent's complexes, this one in Whippany, N.J., and its lawn is in the exact same shape?with huge splotches. These happen to be the two worst corporate lawns in America, I imagine.

"(New Orleans) owes investors $878.6 million, including nearly $500 million in general-obligation bonds that it normally would pay off with property tax receipts. But this year's tax bills have not gone out yet, five months late. And a recent assessment cut city property rolls by 24% while the likely tax collection rate is pegged as low as 50%."

That's just one example of the giant debt issue overhanging the city. The water board, responsible for pumping hurricanes out and such, is $408 million in debt, including $137 million due investors in July. It's having trouble paying its own bills and providing basic services.

My portfolio: I haven't deviated from the 80% cash / 20% equities recommendation that is now outperforming the S&P 500 year to date, but my own portfolio remains skewed by my large position in the carbon fiber stock. And it was slapped around big time this week, so I bought more near the lows on Friday. This is a long term play, but I do have an exit price in mind.

Iran: Early in the week, President Mahmoud Ahmadinejad told the European Union what it could do with its latest offer to break the deadlock in the nuclear program talks.

"They say we want to give Iranians incentives but they think they are dealing with a four-year-old, telling him they will give him candies or walnuts and take gold from him in return."

The EU is proposing the same economic incentives it's offered before, political and financial guarantees for the construction of a light water reactor, but Iran must suspend its uranium enrichment program in return and cease work on a heavy reactor. The mullahs will never give up their enrichment project, nor the quest for the bomb.

Speaking of which, wouldn't you know that after your editor has been saying Iran is undoubtedly much further along in the weapons process than the experts at the CIA say they are, now it would appear the intelligence community is preparing to step up the date by which Iran could develop a nuke. In a story in the Financial Times, Francois Heisbourg, an adviser at a Paris think tank, said:

"Perhaps the single most important factor in this whole dispute is the CIA estimate of when Iran could get nuclear weapons and whether in the light of present events they move the probable date to before the end of President Bush's term in office. With a five to 10 year estimate he has more leeway. If the date was moved he would have to explain why he wasn't doing anything."

Another weapons expert, Mark Fitzpatrick, says "Iran has made progress, so it's necessary to recalibrate it."

In the same vein, and on the topic of dealing directly with Tehran, Flynt Leverett, a former Bush administration official, says that prolonging the diplomatic stalemate only results in the obvious; that being Iran just moves a few steps closer to shocking the world.

"If we had pursued this three years ago and been able to work out a deal, the Iranians wouldn't have 164 centrifuges today. Now if we do a deal with them we're probably going to have to accept centrifuges and some kind of small-scale enrichment activity. If we wait three years from now, who knows what the bottom line will be?"

Of course I pointed out myself in the fall of 2002 (WIR, 11/16/02) that the time was right to support what was then a more vibrant democratic movement in Iran and the Bush administration, focused solely on Iraq, failed to grasp the opportunity.

Retired Lt-Col. Ralph Peters had the following thoughts in an op- ed for the New York Post.

"The Iranian regime is a murderous, anti-Semitic, nuke-hungry, Islamofascist junta headed by apocalyptic nuts who support international terrorists and view their god as a bloodthirsty control freak.

"We need to know this enemy better. Everything we hear is second-hand. Whether in a business negotiation or a bid to prevent a nuclear catastrophe, there's no substitute for sitting down face to face with the other guy and talking.

"By prolonging our snit and refusing to play with the other children, we hand the playground to the Iranians. We need to appear as the adult playground monitor, not the schoolyard bully.

"By refusing to hold direct talks, we only make it harder on ourselves and easier for China and Russia to stiff-arm our efforts to call Tehran's bluff. Critics can depict us, rather than the Iranians, as stubborn, close-minded and volatile.

"We're missing a great opportunity (as we did with Castro, Hugo Chavez and others) to use open contact as a means to reach past vicious leaders to their people. If we appear rational and earnest, we encourage the Iranian opposition. But a public stance of pre- determined belligerence plays into the regime's hands?.

"For all the Ahmadinejad junta's raving about the world ending in the next couple of years and the Twelfth Imam catching a direct flight in, these guys are psychologically needy. They desperately want to be acknowledged by us - and we can work that angle. A great interrogator will tell you that bullying is counter-productive, but playing to the egos of powerful men is nearly infallible?.

"When you sit down and listen to the enemy, you learn an enormous amount - even when you make no formal progress. You come away from such contacts with a heightened sense of the other guy's reality - and an enhanced ability to target him effectively, should war become necessary."

"Groups of (small boats) might swarm around U.S. warships, then withdraw into the cover of islands, haze and shipping, analysts and observers say. Suicide bombers might aim to duplicate the 2000 attack that crippled the destroyer USS Cole. Others might position mines and missiles to threaten the oil tankers that carry one-fifth of the world's daily petroleum traffic through the Strait of Hormuz.

" 'Iranians are preparing for guerrilla warfare at sea,' said Ali- Asghar Kazemi, a retired Iranian Navy admiral who is a political science professor at Tehran University. 'Like operations on land, when two unequal opponents face each other, the best way for the weak side is to resort to a war of attrition and guerrilla operations.'?.

"Iran has a few dozen C-802 anti-ship missiles, which it purchased from China in the early 1990s. The subsonic, radar- guided C-802 skims the sea's surface to strike targets up to 140 kilometers away?.

"Iranian forces also might target Arab states' coastal installations, such as oil refineries, ports and desalination plants with the C-802 and other missiles, said Sami Al-Faraj, president of the Kuwait Center for Strategic Studies....

"In the 2002 Joint Forces Command war game Millennium Challenge, anti-U.S. forces used swarms of small boats and aircraft to rip into a U.S. invasion fleet, sending much of it to the bottom of a shallow sea."

[Note: I'm waiting 24 hours on a story that Iran's parliament has passed a piece of legislation mandating that minorities wear badges to identify themselves. The major press has yet to confirm it as I go to post.]

Iraq: Prime Minister-designate al-Maliki is to have announced a cabinet by Sunday but as of this writing there are still questions on the critical interior and defense ministry posts, as well as a new rift between Shia factions.

Afghanistan: The 'forgotten war' erupted anew as Taliban- inspired violence killed over 100, including 13 Afghan policemen in one attack involving hundreds of Taliban fighters. As NBC's Jim Maceda put it in a report from the field, there are millions in Afghanistan who just don't like the thought of democracy and religious tolerance.

[There's a story this morning that Canadian and Afghan forces captured a key Taliban leader on Friday. This would be a huge morale boost not just for the Afghan military, but also NATO.]

Israel: With 165,000 Palestinian government employees unpaid since March, there shouldn't be any mystery as to why the fledgling state is in an uproar. This week Hamas formed its own 3,000-man police force (primarily from its military wing) to directly challenge President Mahmoud Abbas's security forces. Abbas said Hamas must immediately disband their militia. On Saturday morning, Hamas appears to be responsible for a failed assassination attempt on Abbas's chief of intelligence.

So will it be civil war or just "civil jostling" as a BBC reporter put it? The latter term refers to the perception that whoever has the bigger security force has the power; but in either case it also means Israel then has no incentive to restart talks and will just continue with its unilateral withdrawal and strengthening of the border, as it sees fit, while the power struggle between Fatah and Hamas continues.

Russia: In just two months (July 15-17), leaders of the G-8 nations will meet in St. Petersburg in what is shaping up to be a diplomatic disaster and a political minefield for both Russia and the West. Setting agendas beforehand is important in these gatherings and it's already known the U.S. wants to bring up Belarus and the territorial integrity of Moldova and Georgia, while the others want to hammer away at energy security.

Separately, Vice President Cheney is reportedly furious with Russia for its arms sales to Iran and resistance to UN sanctions, while it was Cheney who fueled the pre-summit fires by saying the Kremlin was using energy for "intimidation and blackmail."

As for Russia, they are playing hardball with the U.S. and its refusal to approve Russia's World Trade Organization bid; the U.S. having blocked it for decades. But now the Kremlin is making waves about linking participation of U.S. companies in Gazprom's giant natural gas field, Shtokman. I can't say I blame Russia on this one, though for its part Gazprom said it is independent and will not just do the government's bidding. [You can laugh now.]

Separately, President Vladimir Putin said he'd pick a successor for 2008 and would not seek to change the constitution to allow for a 3rd term. I still say he's in office in 2009, citing a crisis of some sort.

Turkey: A prominent judge was killed and four others wounded as a gunman broke into Turkey's highest court in Ankara in a troubling episode that speaks to the divide in the country between secularists and Islamists.

One of those wounded, Judge Mustafa Birden, had ruled last week that schoolteachers, who are banned from wearing the Islamic headscarf at work, could not cover their heads even when out of school. The gunman shouted "Allah is great" as he commenced firing.

The headscarf law has been condemned by Prime Minister Erdogan, whose ruling party has Islamist roots, though he was quick to condemn the attack.

"I hope those who still can't see where Turkey is being dragged, who refuse to see it, will take this as a warning?.Turkey is being dragged into a very dangerous situation. Everybody should come to their senses." [BBC News]

The day after the shooting about 40,000 marched in Ankara to show their support for secularism and the principles first established by the founder of modern Turkey, Ataturk. It was he who first banned the fez, for example, and Turkey's courts have upheld secular principles ever since. Now it's under attack like no other time since then.

Netherlands: Just last November I spent some time here and wrote of my observations in this space, 11/19/05. Back then I noted that "beneath the surface there is fear and often violence" with regards to the Islamic community and added, "The placid Dutch landscape hides (a) seething cauldron that is now being peeled back."

I also wrote then of Ayaan Hirsi Ali, the Somali-born Muslim woman who became a member of parliament and then received death threats for speaking out against the abuse she said Muslim women suffered even when living in Europe.

So this week Ms. Hirsi Ali's citizenship was revoked by "Iron Rita," Rita Verdonk, the immigration minister, thus leading to an uproar and backlash against Verdonk for her intolerance as Hirsi Ali said she will move to Washington. Just last month she was evicted from her apartment by a Dutch court after her neighbors filed a lawsuit complaining that death threats against Hirsi Ali violated their own "human rights."

"Washington can't turn its back on a democratic Taiwan as undemocratic China rapidly rearms. But there is reason to hope that the tension in the Strait of Taiwan is ebbing. The two Chinas are increasingly bound by economic ties, and that means the chances of armed conflict are diminishing. As the prospects of economic growth beckon across the ocean strait, Taiwanese support for a speedy declaration of independence is slipping?.

"(But) China also is aggressively cultivating friends in the U.S. Congress. Beijing hosts groups of U.S. lawmakers, who often find that longstanding trade issues with companies in their districts are miraculously resolved during their visits. That wins China key allies in its efforts to curb U.S. arms sales and military cooperation with other nations in Asia. Beijing, for example, opposes U.S. weapons sales to India and the normalization of Japan's role as a regional power.

"This is part of China's effort to supplant the United States as the undisputed power in Asia.

"China is entitled to build a military structure commensurate with its economic clout, fulfilling what many of its leaders consider a destiny long thwarted by external powers. Yet the buildup and its forces on offensive systems are worrisome.

"So is the lack of debate within the United States about China policy. Beijing increasingly appears to be steering U.S. policy, and pro-China sentiment is growing in Washington - or at least, is outpacing vigorously anti-China feeling.

"The United States may abandon its leadership role in Asia, but it shouldn't do so without debating the question."

Where I disagree with the above is in the realm of China / Taiwan economic ties. For years I have written I do not trust Taiwan's business leaders to always act in the best interests of their fellow countrymen. [Taiwan's a country to me, no matter what others say.] Yes, it's pretty easy to buy these guys out.

North Korea: The New York Times reported the White House is ready for a new approach to dealing with Pyongyang; a second track outside the failing six-party nuclear weapons talks that focuses on replacing the 1953 armistice, and the resulting perpetual state of war, with a permanent peace treaty that would include China and South Korea.

Meanwhile, former South Korean president Kim Dae-jung, with the approval of President Roh, will visit Kim Jong-il in late June; the second such visit between these two, the first being in 2000.

Finally, Japan is reporting that North Korea may be preparing a long-range missile test. According to some, it is a ballistic missile capable of reaching the mainland of the United States. And you wonder why I sleep with one eye open.

Libya: The Bush administration announced it is restoring full diplomatic relations with Tripoli while removing Libya from the State Department's list of state sponsors of terrorism.

Of course it's largely about oil, not that I disagree with the move assuming Libya has indeed taken the requested actions to get out of the terror game. But what really ticks me off is just days before the announcement Taiwan's President Chen Shui-bian was criticized by the U.S. for refueling in Libya on his way home from his trip to Costa Rica and Paraguay. More than a bit hypocritical, to say the least.

Egypt: Ayman Nour, the lawyer who challenged President Hosni Mubarak last year, will spend the next five years in prison after an appeals court upheld his trumped up fraud conviction. Nonetheless, the U.S. is adamant that it continue to fork over $2 billion in annual aid. As one Arab scholar put it in the Washington Post, "The charade is over. Egypt is going back to an earlier period of repression."

Venezuela: Why the United States chose now to make an announcement that it was suspending arms sales to Venezuela I'll never know. This is one instance where we should let sleeping dogs lie. Of course we shouldn't be selling Hugo Chavez's regime arms, but the move gave Chavez another excuse, this time from London, to rail against the Bush administration and garner more support in his spreading leftist constituency across Latin America, which as Mary Anastasia O'Grady points out in Friday's Wall Street Journal could soon include Nicaragua; where that ol' Sandinista, Daniel Ortega, is poised to make a comeback in his country's November presidential election.

And I need to remind you of something I wrote all the way back on 12/4/04 in this space.

"The job of Commerce Secretary is normally an inconsequential one but in the case of the recently nominated Carlos Gutierrez, Kellogg Co.'s CEO, an exception can be made. I was surprised how no one in the press seemed to recognize that if President Bush were to let the Cuban-born Gutierrez loose in Latin America, he could do a world of good in helping reestablish tarnished relations across the region. Gutierrez has the potential to be a real heavyweight in this administration if the White House will let him."

Today the White House wonders why the situation down south is going from bad to worse.

For crying out loud, President Bush and Secretary Rice, this was a no brainer! You'd think that Rice, in particular, with all her traveling, would understand that when any U.S. official travels abroad it's front page news in the local papers, even if it's 'just' the commerce secretary. I see this all the time. Gutierrez's face, splashed across the papers and television screens, could have been a big help. I give up. Where's my third party.

[Actually, in reading the last few items, why is Secretary Rice getting such a free pass?including by me most of the time?]

Brazil: What an awful week here, especially in Sao Paulo, the largest city in the hemisphere. Gangsters associated with the First Command of the Capital (PCC) launched a wave of coordinated attacks on police, killing at least 40 over a seven-day period, before police regained control thanks to a shoot first, ask questions later policy. Overall, at last count at least 170 were killed in the violence.

This all started when authorities sought to separate the PCC already in jails in an attempt to reduce their influence in the overcrowded facilities, so 600 were transferred to a new maximum security facility. PCC members on the outside then took over.

Aside from the brazen grenade and machine gun attacks, over 60 public buses were torched and 100s of hostages taken in prison revolts across the country.

You read quotes from the gang members and how little they value life and it's chilling. It's also another major reason to secure our own border. Way too many MS-13 members, for instance, have already infiltrated America and what happened in Sao Paulo can easily happen here.

Italy: New Prime Minister Romano Prodi, in his inaugural address, said "We consider the war in Iraq and the occupation of the country a grave error. It has not resolved, but complicated, the situation of security."

The speech was interrupted by cries of "Shame! Shame!" from the opposition. [Ian Fisher / New York Times]

Uganda: I have to admit I forgot about the Lord's Resistance Army, a rebel group here. The Government is attempting to negotiate a deal with them but the International Criminal Court is saying 'no way' as it has already indicted five members of the LRA for war crimes.

And who are these animals? The LRA "is a cannibalistic cult that has slaughtered whole villages and left its victims without hands, feet or faces. It abducted children, forcing the boys to become killers and the girls to become 'wives' of fighters. It often made them kill and even eat their relatives to alienate them from society." [Richard Dowden / London Times]

Children make up about 80 percent of the army. You know, sometimes it's tough to be optimistic about the future of our planet.

Australia: At least Prime Minister John Howard had a good week while in America. Howard was treated royally and rewarded for his loyalty by the Bush White House.

Commented Kurt Campbell, an analyst with the Centre for Strategic and International Studies, "I don't think there's any country globally that punches as far above its weight as Australia does."

Mr. Campbell obviously hasn't heard of my dream global alliance [U.S., UK, Japan, Australia and India]. Australia is far more important in the coming decades than he's giving them credit for. John Howard's treatment was well-deserved.

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