Educate Yourself

Week in Review
For the week 6/12/2006 - 6/16/2006
Brian Trumbore
President/Editor, StocksandNews.com

Commentator Bill O'Reilly said on the "Today" show that President George W. Bush's "whole legacy is staked on Iraq." That's the common perception across America, but as I've pointed out it's wrong. Yes, Iraq is critically important, but Bush's true legacy, as historians will define it, is as much about Iran (and North Korea).

I was watching (Ret.) Gen. Barry McCaffrey on "Meet the Press" and he spoke the most important words of the entire week. Understand, if you're not too familiar with him McCaffrey is now an NBC News analyst and very plugged in to the military and intelligence establishments. So when Tim Russert asked the general about Iran, McCaffrey nonchalantly said the mullahs would have "20-30" nuclear bombs in five years. [Later he said five to ten years.] When a rather startled Russert asked him to elaborate, McCaffrey said the key now is forming new strategic alliances in the region to keep Iran from doing something stupid with this power.

Well, as long-time readers know I've written quite a bit on this topic and while I have consistently said Iran will plow ahead with its nuclear program and obtain the bomb, there is no way Iran will be allowed to ramp up to a level where it has 20 nukes. For starters, Israel would never let this happen. Nor, eventually, would the United States, or Saudi Arabia, or Turkey, or a host of others in the region and outside it.

So how do we prevent this? The current negotiations with the EU-3, the United States, Russia and China are supposed to be able to pressure Iran to halt its uranium enrichment program, while the International Atomic Energy Agency's Mohamed ElBaradei said "(The IAEA) has not made much progress in resolving verification issues."

Ayatollah Khamanei reiterated Iran will continue to enrich uranium and then China maintained it would be opposed to sanctions, while Russia continues to hint it would be as well.

In other words, nothing has changed from the position of all parties months ago. For its part Iran continues to masterfully manipulate Russia and China vs. the other four and its pronouncements that it would be in favor of unconditional talks line up nicely with my bit last week about a mahogany table with fruit juices. All designed for stretching negotiations out as long as possible while appearing compliant.

So this is the probable Bush legacy as of this moment, a nuclear- armed Iran. Of course it wasn't supposed to come to this. As I myself believed, a rapid change of power in Iraq was to have had a transformative effect on the Iranian citizenry, but this wasn't to be.

As for Iraq itself, President Bush deserves credit for his trip to Baghdad and his face-to-face with Prime Minister al-Maliki. If nothing else it bucked up the troops.

The president told Maliki and his cabinet, "The future of the country is in your hands," though it's obvious Iraq doesn't stand a chance unless the U.S. military is taking the lead for at least another year.

And that's where American public opinion comes in because even after killing Zarqawi, a majority of the American people either aren't confident the U.S. will "succeed" in Iraq or "win the war." [NBC News / Wall Street Journal; USA Today / Gallup polls] President Bush is paying the price for his failure to lead in 2003 and 2004 and despite the recent successes most Americans are too far gone. It was also typical that in this week of good news, tragically the 2,500 death figure was reached to blunt some of the positive developments.

"President Bush's surprise trip to Baghdad yesterday was long overdue and, at five hours duration, too short. But it was still worth making, if only to show both Americans and Iraqis that the U.S. remains committed to seeing this war through to victory.

"Iraqis can be forgiven if they had begun to doubt American resolve, amid all of the media devoted to falling U.S. public support for the war and to such come-home-America advocates as Senator John Kerry and Congressman Jack Murtha. 'I've come to not only look you in the eye,' Mr. Bush told new Prime Minister Nouri al-Maliki, 'I've also come to tell you that when America gives its word, it keeps its word.'

"This message reminds American GIs that they're fighting in a noble cause with support on the home front. It tells the terrorists that they aren't close to the political victory they seek of driving the Coalition out of Iraq. It tells the Iraqi people that they can afford to take a risk and join the police or assist the new government with more confidence that the terrorists won't be able to exact revenge. And it gives the Maliki government more political and military options as it considers how to restore order to Baghdad, among other dangerous places?.

"The insurgents have been operating dangerously close to the Green Zone, the area in Baghdad in which Americans and most Iraqi government officials live. And the perception of chaos in the capital city has a demoralizing effect on both Iraqis and Americans.

"The last week has been the best for Free Iraq in a long time, with the killing of Abu Musab al-Zarqawi, the completion of the new government, and now Mr. Bush's visit. Let's hope the President returns soon, perhaps along with British Prime Minister Tony Blair, and stays even longer the next time."

"President Bush delivered an important demonstration of American support for Iraq's new democratic government in his visit to Baghdad yesterday. Prime Minister Nouri al-Maliki represents the best and maybe last hope that a national government can stem sectarian bloodshed, defeat Islamic terrorist organizations and die-hard defenders of Saddam Hussein, and make economic recovery possible?.

"U.S. support, of course, cannot be unqualified, and it certainly cannot ensure success: Mr. Bush rightly told Mr. Maliki that 'the future of your country is in your hands.'?.

"But what Mr. Bush can do is give the government some precious time by continuing to provide American troops and aid to a regime that is nowhere near able to defend itself or rebuild the country on its own?.

"If Democratic leaders such as Sen. John F. Kerry (Mass.) had their way, almost all U.S. troops would be out of Iraq by the end of 2006 - a blow that Mr. Maliki's government almost certainly could not survive. Mr. Bush's willingness - at least for now - to resist such politically expedient demands may not rescue Iraq's fledgling political system; it may be that nothing can at this point. But he is - correctly and courageously - using what remains of his personal political capital to give Iraqi democracy a chance."

"The dust having settled - 500-pound bombs can raise, and even manufacture, a lot of dust - it is time to give the devil his due. To understand the diabolical genius of Abu Musab al-Zarqawi, that pornographer of violence, begin with this:

"He was a primitive who understood the wired world and used an emblem of modernity, the Internet, to luxuriate in gore. But although he may have had an almost erotic enjoyment of the gore, it was also in the service of an audacious plan. And he executed it with such brutal efficiency that he became, arguably, the most effective terrorist in history?.

"It is sometimes charged that journalism, which considers the phrase 'good news' an oxymoron ('We don't report the planes that land safely'), is missing the good news from Iraq. But so pervasive is the violence, and hence so dangerous has Iraq become for journalists, that the Wall Street Journal, hardly a hostile observer of the U.S. undertaking in Iraq, thinks the bad news might be underreported.

"Even the good news often has a dark cast to it. At last - 25 weeks after the voting - the Iraqi parliament has produced a full government. But its first task is to conquer itself: It must end the sectarian violence being committed by people wearing government uniforms, in the military and police.

"It is frequently said that protracted terrorism has an atomizing effect on a polity, reducing civil society to so much human dust. In Iraq it may be having the opposite effect: Rather than disaggregating Iraqis, the force of the explosions - especially the one on Feb. 22 that demolished the dome of the Askariya shrine in Samarra - seems to have blown them together, ruinously, into furious Sunni and Shiite blocs."

Some final thoughts. President Bush told Prime Minister Maliki to "use oil as a unifying force." The right thought, but in the long run I just don't see the Kurds and Shia willingly sharing the loot.

Maliki is prepared to offer limited amnesty to the insurgents, ostensibly to those who 'only' targeted coalition forces, i.e., the U.S. This won't sit well with the average American, but politically it may be the only option.

The current security sweep should have been augmented by more U.S. forces. Why hold back at this crucial moment?

Finally, while I like Gen. McCaffrey for his insight, I'm sick of his description of all generals as "brilliant." They aren't. McCaffrey is teaching up at West Point these days; you'd think he'd know better.

Just another volatile week for world markets. Early on we had declines of 9% in one day in Russia and back-to-back losses of 10% and 9% in Colombia. [To put that in perspective, this would be like consecutive 1,000 point losses on the Dow; which would engender a headline or two on the nightly news, I imagine.] But then on Thursday, Colombia was up a stupendous 16%! And as the markets rallied, India posted 5% and 6% gains.

As for the U.S., at its worst levels on Wednesday morning the Nasdaq and Russell 2000 were off 14% and 13%, respectively, from their multi-year highs of early May, while both the Dow Jones and S&P 500 were off 8%. 10% being the benchmark for a "correction," we were back in that territory.

But then "Shazam!" After a dead cat bounce on Wednesday, Federal Reserve Chairman Ben Bernanke somehow soothed markets by saying little. For the life of me I don't understand Thursday's rocket launch, when the major indices in the U.S. rose 2% to 3% each.

You see, Bernanke said in a speech that as long as energy prices don't go much higher, overall inflation risks appear to be "manageable," though at the same time he offered that the Fed needed to remain vigilant to inflation expectations.

In other words, he said nothing new. The Fed is still hiking end of the month, a 17th consecutive time, and if the core consumer price index for July is up another 0.3%, the Fed could hike again come August.

The point being, they've already gone too far and with the June 29 increase they will have officially overshot. And, coincidentally, when the economy rolls over, inflation will dry up faster than you can say "Tiger Woods missed the cut at the U.S. Open."

The economy is already slowing, as the Fed's own report of regional activity (the Beige Book) noted this week. Retail sales are on the weak side and a report on industrial production was kind of punk.

Rising short-term rates are killing consumers with a lot of credit card debt, adjustable rate mortgages and home equity loans, and that will be increasingly reflected in the data. The housing sector is rolling over and the third leg for the economy, capital spending, is as I've said in the past the most squirrelly. Corporate chieftains are the first ones to panic, given any kind of bad news, especially on the geopolitical front, and I see cap-ex falling short of expectations in the second half.

And just a word on energy. Bernanke is right when he says as long as prices don't spike higher, the costs to the economy of $70 oil are manageable. That level isn't great, but it's not the killer a slumping housing market can be coupled with rising short-term interest rates.

But the risks of a price spike are still there for two main reasons these days; Iran and the hurricane season. It's why prices have remained as high as they have given near record levels of inventories. Otherwise, yes, oil should be $50, or lower, and gasoline back below $2 a gallon.

So I get one of those solicitations in the mail for a market newsletter, as I'm sure you all have, and there is one of those little books inside, touting the end of the world?or so these all seem to do. [No, I've never written one myself?.just this column.] Anyway, the author rips off Matthew Simmons and the 'peak oil' adherents. These folks believe production from the largest oil fields around the world have hit their max and the situation is increasingly worrisome because we aren't finding new mammoth fields to replace them.

I believe this, too. But the author of this little book I was perusing, while eating a box of peanut butter cookie crisp cereal, says that we'll wake up one day and oil will have shot up overnight to $100 a barrel because the Saudis made an announcement that they have squeezed the last out of their fields and from here on they'll be producing less.

For starters, trust me, this can't happen overnight, or in a week, or a month. There is no almighty oil god who will intone from up high, or below, that production has peaked. Many experts, though, already suspect this to be the case and on Friday the Saudis did indeed announce that production for the month of May was down. For example, when the International Energy Agency or some other outfit projects 115 million barrels per day of demand will be needed by 2020 and we're currently at 85 million, well the peak oil folks would say we can never get to 115 in the first place.

But let me address this fellow's claim of oil going to $100 overnight. It actually can?only it will occur when Iran tests its first nuclear weapon. You can take that to the bank.

Finally, a word about China. As much as some of us like to bash the place, the flood of Chinese imports has certainly helped keep inflation at bay.

But for a while now the economy there has been too hot. That's not me, it's Premier Wen Jiabao who this week, through the State Council, warned that credit growth and overinvestment in fixed assets were flashing major warning signs. As the Wall Street Journal reported, "top Chinese bankers were called into China's central bank?and directed 'to pay close attention to the risks' of over-rapid lending, the central bank said in a statement."

Fixed asset investment (infrastructure) is up 30% for the first five months of 2006. Much of this growth is warranted, of course, but there's a certain point where you don't need a fourth six-lane beltway. And someone, some bank, is financing all of these projects.

Gary Schmitt & Jared Feiger, both at the American Enterprise Institute, wrote a piece in the June 19 edition of The Weekly Standard titled "Don't Bank on China." To wit:

"Early last month, the accounting firm of Ernst and Young released a report concluding that the 'nonperforming' loans of China's banks totaled $911 billion (40 percent of China's GDP) - a figure that far exceeds the Chinese government's own estimate of $164 billion. Beijing's response to the report was not subtle: 'The report not only seriously distorts the actual assets quality of the Chinese banking sector,' but 'its conclusions are absurd and incomprehensible.'"

Well, as Schmitt and Feiger write, Ernst and Young then withdrew it, not because it was necessarily flawed but more likely because it is auditor for the state-owned Industrial and Commercial Bank of China, the country's largest bank, and it probably thought, 'You know, this is a pretty good account. Maybe we should try and keep it.'

"(Nonperforming loans) are expected to rise as a result of a flood of new lending by Chinese banks?.In the first four months of this year, Chinese banks lent 60 percent of the amount of credit they issued for the whole of 2005. This is bound to give rise to future bad loans."

"Plenty of analysts have seen these problems and have predicted China's economic downfall for some years now - and it hasn't happened. At least, not yet. The laws of economics may be complex, but they do, in the end, punish those who ignore their most rudimentary precepts.

"However, that's the point. Western financial experts keep looking at China as though it simply wants to be another Western-style, economic force. And while undoubtedly some in China do, others don't. The Communist party sees the banks as too important, in allocating resources and ensuring political support, to turn them over to independent actors. As Minxin Pei notes in his fine new book 'China's Trapped Transition,' 'Few authoritarian regimes can rely on coercion to maintain power. Most autocracies mix coercion with patronage to secure support from key constituencies, such as the bureaucracy, the military, and business groups.'

"China is not different, and its banks remain a critical element in the regime's strategy for self-preservation."

--For the week, stocks were mixed, with the Dow Jones up 1.1% to 11014, while the S&P 500 and Nasdaq were off fractionally. Goldman Sachs and Bear Stearns reported monster earnings, and Oracle's were better than expected, but it was the global meltdown early in the week that called the tune before most everything rallied back later. But when it comes to future earnings, like the second half of '06, I just think they'll fall short, thus limiting any upside prospects.

Interest rates soared anew after the 10-year had broken below its trading range the previous week. Core producer and consumer prices (ex-food and energy) were both up 0.3% in May, not real good, and the 3-month trend on the core CPI is now running at a 3.8% annualized rate. As Fed Governor William Poole said on Friday, this is too high. [In turn Poole killed the equity rally with his comments.]

--Bill Gates announced he was stepping down from his day-to- day duties at Microsoft in two years, though he will remain chairman. Chief Technical Officer Ray Ozzie will assume Gates's role of chief software architect while rumors swirl about the fate of CEO Steve Ballmer. It's not as if Microsoft's stock has been a great place for your investor dollars the past five years.

I admire Bill Gates. It's certainly hard not to, though when my "great software" crashes I tend to invoke his name. But I was disappointed the major press (with one exception) failed to quote the key to his speech the other day in announcing his eventual departure.

Gates said "with great wealth comes great responsibility to give back to society."

As Steve Ballmer added, Bill Gates will now become the "greatest philanthropist of all time." Here's hoping he does.

--President Bush continues to receive little credit for the U.S. economy. In the USA Today / Gallup survey, 39% approved of his handling of it, 57% disapproved. [The other 4% didn't understand the question.]

--Commodities took it on the chin early, with gold experiencing its single biggest decline in 15 years, down $44 on Tuesday, while at one point silver was off 37% from its May high and copper 25%.

--It was a rough week for European planemaker Airbus due to production issues, including installation of the electrical systems, that have forced big delays in the delivery schedule of its new superjumbo A-380, the world's largest passenger aircraft. Already some airlines are canceling orders as they seek other alternatives (Boeing) in a rush to meet surging demand, particularly for overseas travel. [Of course these folks don't realize my coming global recession will send them all back in the dumper?but I digress.]

Another key issue with the A-380, though, is the 'wake.' As Roger Yu in USA Today describes it:

"Airbus is lobbying for changes in international regulations that will reduce the number of miles between the A-380 and trailing planes. Because the four-engine A-380 leaves such a turbulent wake, trailing planes have to be at least 17 miles behind when cruising, or 11 miles if the jumbo jet is landing or taking off. The requirement for the current largest jet, the Boeing 747, is six miles for both."

--There has been a lot of talk about how the big foreign equity exchanges, such as London's and Hong Kong's, have been taking away initial public offering business from the New York Stock Exchange and Nasdaq, but I noticed a little item in the Daily Star (Lebanon) the other day that has to be just as worrisome for New York's financial elite.

Emirates Airlines sold $400 million in five- and 10-year bonds on the Singapore bond market; the largest single debt issue by a Middle Eastern company in the primary market. [Citigroup was, however, part of the selling group.]

--Picture Fed Chairman Ben Bernanke having an investment in a hedge fund where the lead manager, a national figure in his own right, is accused of insider trading. This is the situation in Japan these days as the head of the Bank of Japan, Toshihiko Fukui, held an investment in the Murakami Fund. Last week I wrote of how founder Yoshiaki Murakami was arrested on insider trading charges.

The government is defending Fukui, saying his own investments shouldn't have an impact on how he conducts monetary policy, while Fukui himself vows he won't resign. Of course this all comes at a most sensitive time as the Bank of Japan has been taking away its easy money policy and is on the verge of raising interest rates.

--The Government Accountability Office (GAO), Congress's non-partisan investigative agency, says if Venezuela's Hugo Chavez stopped selling oil to the United States as a result of a political dispute, such an embargo would lead to an immediate 15% surge in world oil prices; due to the fact the U.S. is unprepared for such an occurrence. Senator Richard Lugar (R- Ind.) called for the study in urging Washington cooperate more on energy issues globally. Venezuela supplies over 10% of U.S. oil imports.

"Canada's province of Alberta and the country of Mexico are both renowned oil economies and in both places, the government owns the oil reserves. But that's where the similarities between the two end.

"Alberta has an annual per-capita gross domestic product just shy of $55,000; Mexico's is roughly $6,000. To put it another way, Albertans are swimming in their black gold while Mexicans are swimming the Rio Grande for the right to wash dishes for Tom Tancredo's constituents, while the congressman hurls insults at them on cable TV.

"Why, in the midst of this energy boom, is Mexico so poor, while Alberta lives large? My guess is that it has to do with the fact that the Canadian province welcomes private-sector investment (otherwise known as money) in its energy sector while Mexico has a government-owned oil monopoly (Pemex) and forbids private-sector risk capital.

"Money in an economy has a way of making people wealthier. Alberta estimates the long-term capital investment value of its inventory of privately funded energy projects at almost $80 billion. Mexico has made such investment illegal, creating a lack of funds. We call this poverty."

--Yes, the upcoming G-8 summit in St. Petersburg is going to be largely about energy security (as well as Iran and North Korea, one would hope) and this week the Kremlin announced Russia will be tightening its ownership requirements for all "strategic" (read 'large') oil and gas fields. Foreign companies will not be allowed to own more than 49%, thus enhancing the monopolies for Gazprom and Rosneft. This means, though, that Russia is impeding much-needed investment, a la Mexico.

--China uses more coal than the European Union, United States and Japan combined.

--VeraSun Energy, the no. 2 ethanol producer behind Archer Daniels Midland, came public at $23 and closed its first day at $30. [It finished the week at $25.] But buyer beware when it comes to this sector in general as there is a rush for a lot of ethanol outfits to go public while competition booms. For example, you can begin churning out the stuff just 14 months after breaking ground on a plant.

--Hedge funds now hold about $1.3 trillion in assets, worldwide, and make up 40% to 50% of the average daily volume by value in global markets. Proponents argue that the industry has changed greatly, though, and that hedge funds are both sources of liquidity as well as diversification. I would argue that they still operate for the most part with a herd mentality which we've seen best exhibited by extensive exposures to the energy and emerging markets sectors over the past two years.

--There were a few articles this week related to the amount of power taken up by search engines and Internet services in general. For example, "One large data center can consume enough juice to power a small city of 30,000 to 40,000 people." [Wall Street Journal]

But then there's Google's new development on the Columbia River. This secret complex, which will eventually comprise three buildings (two football fields) with twin cooling plants, is known locally as Project 02, and to give you an idea of the company's growth, consider these facts.

"In March 2001, when (Google) was serving about 70 million Web pages daily, it had 8,000 computers?.By 2003 the number had grown to 100,000.

"Today?the best guess is that Google now has more than 450,000 servers spread over at least 25 locations around the world." [John Markoff and Saul Hansell / New York Times]

Microsoft's Internet computing effort is expected to grow to 800,000 servers by 2011.

--IBM CEO Sam Palmisano wrote a piece for the Financial Times on globalization and today's multinational corporation. Specifically, he's concerned the public will turn the former into an all-out assault on big business.

"Let me describe this new creature. In a multinational model, companies built local production capacity within key markets, while performing other tasks on a global basis. They did this in response to the rise of protectionism and nationalism that began with the first world war and carried on late into the twentieth century. As an example, American multinationals such as General Motors, Ford and IBM built plants and established local workforce policies in Europe and Asia, but kept research and development and product design principally in the 'home country.'

"The globally integrated enterprise, in contrast, fashions its strategy, management and operations to integrate production - and deliver value to clients - worldwide. That has been made possible by shared technologies and shared business standards, built on top of a global information technology and communications infrastructure. Because new technology and business models are allowing companies to treat their functions and operations as component pieces, companies can pull those pieces apart and put them back together in new combinations, based on judgments about which operations the company wants to excel at and which are best suited to its partners."

--Meanwhile, Ford Motor, in what would be another severe blow to the United Auto Workers Union, is expanding three plants in Mexico (and possibly building another). Membership in the UAW has fallen from 1.5 million in 1979 to 598,000 today.

--A just-released June 2005 SEC deposition revealed that former NYSE chairman Dick Grasso invoked the Fifth Amendment against self-incrimination 168 times when questioned about items such as possible share price manipulation in the case of AIG. Former AIG chairman Hank Greenberg pressured Grasso into getting AIG's specialist to boost the stock's value, or so the story goes. The NYSE is a self-regulating entity and Grasso was in charge of enforcing the specialists' rules. Both the SEC and the New York Attorney General's office continue to probe the role of the specialists and alleged trading abuses, including front- running. Ten have already settled with the SEC and another two leading figures went on trial this week in this still-developing scandal.

[As an aside, the New York Post's John Crudele reports that Grasso's big friend, Ken Langone, who chaired the NYSE compensation committee, told the SEC in his own deposition, "There's an old saying that if you have a seat on the New York Stock Exchange, it's a license to steal. I shouldn't say that in front of a prosecutor, but anyway." As Crudele said, "What a dope!"]

--And then there's the ongoing investigation into Fannie Mae. While both Congress and the White House are adamant about reducing both Fannie and sibling Freddie Mac's monopoly in the mortgage sector, owing to the gigantic risk should there be some kind of systemic failure, current CEO Daniel Mudd and Chairman Stephen Ashley were grilled by the Senate Banking Committee about Fannie's accounting shenanigans.

"I really do find it astounding that neither of you knew what was going on," said Sen. Chuck Hagel (R-Neb.) "I'm astounded that you would stay with this institution."

For his part Mudd insisted that even though he was chief operating officer from 2000 to 2004, "Never at any point would I sanction any departure from the (accounting) rules in order to hit (incentive) targets." [USA Today]

Former CEO Franklin Raines remains the prime target and we hope indictments are forthcoming.

--Boy, what a couple John and Pamela Torkelson are. Actually, they're divorced and therein lies part of the problem for John.

You see, Pamela Torkelson pleaded guilty last year to assisting in the theft of $1.9 million from Acorn Technology Fund, a former venture-capital partnership. Ex-hubby John is tied up in the investigation into improper payments to witnesses by class- action lawsuit king Milberg Weiss Bershad & Schulman. Milberg Weiss allegedly paid Torkelson $10s of millions to be an expert in various suits. And now Pamela is singing? "Laaa!" She also hasn't been sentenced yet in her own case thanks to her cooperation.

--For watchers of "Kudlow and Company," don't you think it is more than a bit hypocritical that Larry Kudlow, who was barking all last fall that the Federal Reserve was going too far in hiking interest rates, has now been saying another "quarter- or half- point is a good thing"?

--Last week I commented on the passing of L-3 Communications founder and CEO Frank Lanza. After posting the column I read a piece in the Saturday edition of the Wall Street Journal that there are serious questions as to why shareholders weren't apprised just how sick Lanza was, considering he was the company to a great extent in being both the public face and driver of its success. Lanza, it turns out, was suffering from esophageal cancer and the issue is what do shareholders have the right to know?

But in exchanging notes with Scott P. on this topic, we also talked about the overall cancer situation in the New York / New Jersey area. The incidence of esophageal cancer appears to be exploding, as a Journal piece noted a while back, and Lanza, who was from the area, is the latest victim. I know of two such cases literally within 50 yards of my home.

So it's the water, it's easy to muse. Separately, Scott reminds me that 9/11 unleashed a toxic cloud down in Manhattan that we'll be learning the consequences of for years to come.

But coincidentally, two managers of water plants in Toms River, New Jersey, were just arrested on Thursday for falsifying records on the purity of the water there going back years. The community of Toms River had long suspected the sky-high cancer rate in their own area had something to do with it. As much as possible, I'm drinking bottled from here on. [I should have been years ago.]

Israel: Talk about 'waiting 24 hours,' it was embarrassing how Israel responded to the tragedy on the Gaza beach where a Palestinian family of seven was killed by a shell of some kind. First, Israel regretted the mistake, saying it had to be one of its own. Then, upon analysis of the shrapnel, Israel said it couldn't have been. Then, Israel said it had to be an old land mine laid by Hamas. Then, Israel said it could have been old ordnance from the Israeli military. And so that's where we stand for now, with the United Nations preparing its own investigation.

At the same time, Hamas had called an end to the ceasefire and resumed firing rockets into Israel. But by week's end Hamas hinted it may be willing to reinstitute it.

While all this was going on, though, there were more pressing issues for the average Palestinian, like how to feed themselves and so workers stormed parliament, seeking paychecks. It's a desperate situation.

Lastly, as Palestinian President Mahmoud Abbas pushes for his July referendum on a two-state solution (thereby recognizing Israel), British Prime Minister Tony Blair backed Israel's unilateral redeployment plan, thus infuriating the Arab world.

North Korea: Within just the past few weeks, both Japan and the United States have become convinced Pyongyang is preparing for a long-range ballistic missile test. As I go to post, it appears imminent.

--China: Iran supplies China with 13% of its crude oil imports, thus the splendid reception being given Iran's President Ahmadinejad at the Shanghai Cooperation Organization meeting.

Separately, China and Taiwan reached a deal on charter flights between the two on four major public holidays. Taiwan's President Chen Shiu-bian continues to struggle amid all the scandals swirling around his administration and the air deal is seen by most as a sign of weakness. In this instance I disagree. There is no reason for Taiwan and China's citizens not to be able to travel to each other's place without having to first go through Hong Kong.

On another matter, though, Amnesty International came down hard on China for exporting arms to Sudan, Burma and Nepal; arms that in Amnesty's report are used to further violations of human rights. A spokesman for the organization explained:

"China describes its approach to arms export licensing as 'cautious and responsible,' yet the reality couldn't be further from the truth. China is the only major arms exporting power that has not yet signed up to any multilateral agreements with criteria to prevent arms exports likely to be used for serious human rights violations."

And one last bit on the mainland. The vice-mayor of Beijing, who was in charge of construction activities for the 2008 Olympics, was fired after a foreign businessman accused him of extortion.

But further investigation revealed Liu Zhihua had built himself a sex den filled with lovelies. The act that got him fired, though, had to do with a land transaction. Well, now everyone is wondering about how much corruption there is as the Games draw near, to which I'd say, hey, corruption is what makes the world go 'round.

Russia: According to the annual report of Freedom House, on a scale of 1 to 7, 1 being the most democratic and 7 the least, Russia is a 5.75.

"The major theme for 2005 was the state's continuing crackdown on all aspects of political life in Russia," the report said. [The Moscow Times]

India: The International Atomic Energy Agency's Mohamed ElBaradei on the debate over the exchange of nuclear technology between India and the United States.

"India clearly enjoys close cooperation with the United States and many other countries in a number of areas of technology and security. It is treated as a valued partner, a trusted contributor to international peace and security. It is difficult to understand the logic that would continue to carve out civil nuclear energy as the single area for non-cooperation.

"Under the agreement, India commits to following the guidelines of the Nuclear Suppliers Group, an organization of states that regulates access to nuclear material and technology. India would bring its civilian nuclear facilities under international safeguards. India has voiced its support for the conclusion of a Fissile Material Cut-Off Treaty. The strong support of both India and the United States - as well as all other nuclear weapons states - is sorely needed to make this treaty a reality.

"The U.S.-India agreement is a creative break with the past that, handled properly, will be a first step forward for both India and the international community. India will get safe and modern technology to help lift more than 500 million people from poverty, and it will be part of the international effort to combat nuclear terrorism and rid our world of nuclear weapons.

"As we face the future, other strategies must be found to enlist Pakistan and Israel as partners in nuclear arms control and nonproliferation. Whatever form those solutions take, they will need to address not only nuclear weapons but also the much broader range of security concerns facing each country. No one ever said controlling nuclear weapons was going to be easy. It will take courage and tenacity in large doses, a great deal more outside-of-the-box thinking, and a sense of realism. And it will be worth the effort." [Washington Post]

Of course I agree with the above. But it's incredibly frustrating to know that ElBaradei, who has been a roadblock in cracking down on Iran's weapons efforts, can also be so supportive of the groundbreaking agreement between India and the U.S. when it draws fierce opposition in Congress.

Indonesia: Abu Bakar Bashir, the Muslim cleric tied to the 2002 Bali bombing, was released after just two years in prison, whereupon he said "the world must unite behind an Islamic god." Needless to say, the Australian government is rather upset.

Lebanon: The world's most colorful politician, Druze leader Walid Jumblatt, said "Hizbullah's role is over" in his country and he also had something to say of the Lebanese government's cracking of an Israeli spy ring that supposedly was involved in the killing of both Hizbullah and Palestinian militants over the years, including two deaths two weeks ago. As Jumblatt put it, the government can figure out who killed the Palestinian figures in short order, but it can't figure out who killed former prime minister Rafik Hariri in almost 1 ? years. [Because of Syria's continuing influence here.]

Syria: Tehran and Damascus signed a new defense pact to address "common threats" presented by Israel and the United States. Neither side gave specifics.

Sri Lanka: A while back I noted how the Tamil rebels are really the world experts when it comes to terror tactics and how important it was to reach a true peace agreement in Sri Lanka as a possible way of preventing some of their ideas from getting into the hands of others. So this week we had another example of their methods. It appears they attached two claymore mines filled with ball bearings to tree branches and when a bus brushed them they exploded. At last count a staggering 64 had died, including at least 15 children.

[Friday's Baghdad mosque suicide attack was another worrisome development in the terror war as the bomber supposedly had the explosives in his sandals, thereby eluding what had been very tight security. Outside of Richard Reid's attempt, this is the first episode of this kind that I can recall.]

Thailand: The nation celebrated the 60th anniversary of the reign of revered King Bhumibol Adulyadej, then a few days later insurgents in the south set off 40 bombs, simultaneously, killing two. The government admitted it was aware of such a plan but still couldn't prevent it. Since 2004, some 1,300 have died in the region where Muslim's make up just 4% of the population.

Global Attitudes: The Pew Research Center released its annual survey and the image of America has slipped again in some quarters.

For example, in Spain only 23% have a positive opinion of the U.S., down from 41% in 2005, while Britain's have remained in the mid-50s, still down from 2002's 75%.

India's favorable opinion of us is now 56%, down from 71%; Russia is 43%, down from 52%; and Indonesia 30%, down from 38% in just the past year.

Particularly disturbing is the continued slide in Turkey, where only 12% of the people here have a favorable view of America.

In some countries, however, it's more about President Bush. When asked of their opinions of ordinary Americans, for instance, 82% of Japanese like us, and Britain's approval is back to 69%. But only in India and Nigeria did majorities express confidence in Bush. In Spain, just 1 in 14 like him. [Only 20% of Spaniards back the war on terror, too.]

But if you're looking for some good news, there is unanimity on handling Iran. More than 90% of Americans, Germans, Japanese and French oppose Iran acquiring nuclear weapons. [International Herald Tribune]

Dow Jones +1.1% [11014]
S&P 500 -0.1% [1251]
S&P MidCap -0.7%
Russell 2000 -1.2%
Nasdaq -0.2% [2129]

*Reminder?these figures come out Wednesday and are a compilation of newsletter writers' sentiment over the previous week; important to remember for you junkies out there. The current bull reading of 38.7 is the lowest since a major Oct. 2002 low of 28.4, so contrarians take note. And, as if on cue, equities staged their spectacular two-day rally, Wed. / Thurs.

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