Educate Yourself

Week in Review
For the week 7/10/2006 - 7/14/2006
Brian Trumbore
President/Editor, StocksandNews.com

"One can never forget that Iran has been arming the terrorists, particularly Hizbullah in Lebanon, and both Hamas and Hizbullah have access to increasingly sophisticated weaponry. It's why Israel has to continue to bomb suspected weapons factories and missile sites. Watch the Lebanese border in particular over the coming weeks."

If you didn't understand before why I've focused so much attention on Lebanon in the past 1 ? years, you know now.

Following the assassination of former Lebanese Prime Minister Rafik Hariri in Feb. 2005, I felt compelled to travel to Beirut. I planned to arrive a few days after Syria had pulled its last troops out of the country, but I also wanted to leave before the four- week election cycle began as I suspected there could be some violence during this time. [There was.]

"The last of 14,000 (Syrian) troops departed on Tuesday and now the UN is filing a report on both the assassination and any residual Syrian presence, i.e., its intelligence agents who terrorized large segments of the population. Undoubtedly, many remain, either in the Hizbullah-controlled south, along the Israeli border, or in safe houses in Beirut.

"But the democracy forces have already won some rounds and a new interim government has been formed with Prime Minister Mikati vowing to hold parliamentary elections by end of May. Here's where it gets very complicated. There are four main political powers in Lebanon, which is roughly 70% Muslim and 30% Christian; the Sunnis, Shias, Druze (Muslims) and the Maronite Christians. Each has its own tribes, neighborhoods and towns?.

"What does the new government do with Hizbullah? Not to disarm it undermines the government's credibility as you'd have the Lebanese army and then Hizbullah. Who has the real authority then? But if the government attempts to disarm Hizbullah it risks almost certain confrontation and a renewal of the civil war [1976-1990].

"Ironically, Syria's presence in Lebanon over the years probably helped some, in a perverted way, by damping down local tensions that could now re-emerge. At this point it can still go either way, but what transpires here will have a huge impact on attempts to spread democracy across the entire region."

"The people in Beirut, I would guess a slight majority, have a generally favorable opinion of the United States because we helped kick out Syria and gave the Lebanese back their country. Rafik Hariri himself is viewed as a true martyr for the cause with many, especially those in the lower classes, seeing him as a god. But one of the insights I gained from my ride outside Beirut was that I didn't see Hariri's picture in one shop window outside the city proper?.His image graced seemingly every store in Beirut and hung from more than a few office towers, but not one picture of him outside of town.

"That is but one example of the tribalism and factions in Lebanon that have existed for centuries. The Sunnis have their leader?the Shia have a number of disparate candidates, the Maronite Christians have their own, the Druze have Walid Jumblatt and then there is Hizbullah.

"Hizbullah does not represent all of the nation's Shiites but I saw firsthand just how popular it is among the lower classes. Yes, Hizbullah does build schools and hospitals and while it's difficult for an American (let alone an Israeli constantly under threat from Hizbullah and its growing missile arsenal) to understand this, it's a fact.

"But when it comes to the young people I encountered in Beirut, I heard the following comment more than once. 'We are free now, we have an opinion' and on May 29 they will be able to express it?.The election will be fascinating and, I imagine, chaotic. The democracy advocates speak of the 'Intifada of Independence' and 'The Truth' but this is an incredibly complicated place and in the end I'm afraid the status quo will prevail, which is not in the nation's best interests?.

"I don't see Hizbullah being disarmed as they were to have been back in 1989. And while the Lebanese army seems capable?the threat of renewed civil war is still very real?.

"(With) the situation deteriorating badly in Iraq these days, the U.S. and its allies desperately need a political victory in Lebanon. I'm hoping for the best, but my faith in a positive outcome is shaky."

[As it turned out, the election produced an incompetent government and Hizbullah was given two cabinet seats.]

"The following account?.is important in that Druze leader Walid Jumblatt launched a blistering attack on Hizbullah, questioning its determination to keep its arms forever.

" 'To those who hold the rifle today we say, "thank you, the South is free." (But) to whom is your allegiance now, Lebanon or other countries?'

" 'We don't want to be in the middle of an axis that starts in the Mediterranean and ends in Tehran,' referring to Shia-Hizbullah's relations with Syria and Iran.'"

[There were bombings and political assassinations in Beirut during this time?.Jumblatt continued.]

" 'There are 'security islands' that harbor a load of wired cars? and as we all know, the state cannot investigate or interrogate people in some of the areas inside these security islands.'"

"Hizbullah MP Hassan Fadlallah decried Jumblatt's statements. It is necessary to refrain 'from insulting institutions that enjoy respect and admiration within a vast majority of the Lebanese. No matter how stiff and tense the political situation gets, we will maintain our national identity. No matter what happens, the weapon of the resistance has one direction, and that is the Israeli enemy.'"

[Lebanese Prime Minister Fouad Siniora had just traveled to Washington to meet with President Bush.]

"Afterwards, Siniora said he was 'really convinced' that 'Bush and the United States will stand beside Lebanon to have Lebanon remain a free, democratic, united and sovereign state.'"

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

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

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

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

And so we come to today. Violence has spiraled out of control, though not necessarily as I expected. Israel is waging war on two fronts, Hamas and Hizbullah are receiving aid from both Syria and Iran, and at any minute it could escalate further.

But some of us are screaming, just where has the Bush administration been? Lebanon is such a fragile country, but a majority of the new parliament was anti-Syrian and they were crying for aid and a diplomatic effort. The U.S. had its chance to play the role of honest broker on the issue of Shebaa Farms, critical to Hizbullah's credibility among its supporters, and pressure Israel to give it up in exchange for a bolder UN peacekeeping force. This would have then given Hizbullah zero reason for remaining armed and the world community could have finally held it, and Iran's, feet to the fire. But Bush was clueless. Secretary of State Condoleezza Rice was clueless.

So on Wednesday, taking its orders from Tehran, Hizbullah struck and all hell broke loose. Israeli Prime Minister Ehud Olmert said "The events this morning are not terror attacks but actions of a sovereign state that attacked Israel for no reason. The Lebanese government, of which Hizbullah is a member, is trying to undermine regional stability. Lebanon is responsible and it will bear responsibility."

Oh, how Sharon is missed by some of us. Many in Israel, though, would say Sharon brought all of this on, beginning with the risky disengagement from Gaza, but you can be sure Sharon would have addressed the ensuing problems there far quicker than Olmert has, plus Israel had to deal with a lengthy election and transition period following Sharon's incapacitation. I wonder if Iran and Hizbullah would have risked testing Sharon, especially with his history in Lebanon?

Think about it, Israel is fighting two wars and both Olmert and Defense Minister Amir Peretz have zero command experience. Not a big deal in Canada, perhaps, but critical in Israel. So I ask, just who is calling the shots in Israel?

And so for this week, I have just tried to remind everyone where we've been, and how this unfolding conflict is also not one of America's great moments. But what to do now?

Russia is offering no help, nor the European Union as of today. Incredibly, about the only player that did speak up against Hizbullah, save the U.S., was Saudi Arabia. Many who don't understand Lebanon were wondering why the Kingdom blamed "elements" of the Lebanese government on Thursday, i.e., Sheikh Nasrallah's Hizbullah. You need to know your history to understand this one. [Regular readers of this space do.]

Saudi Arabia was Rafik Hariri's major supporter. Hariri, with generous Saudi donations, was making great strides in his effort to rebuild Beirut when he was cut down. The Saudis are seeing their investment go up in smoke.

Iran is 90% Shia. Iraq is 60% Shia. Lebanon is 34% Shia (the most of the four major groups there).

"(Even) if Hizbullah is punished politically at home for its wild irresponsibility, the underlying problem - its benefactors in Iran and Syria remains. That's where American and allied diplomacy and influence should be focused. Tehran should be called to account in the UN Security Council not only for its program to enrich uranium but also for its support of Hizbullah. Damascus, which hosts Hizbullah and Hamas, should also come under renewed international pressure, including sanctions. In all the diplomacy, the false lure of 'evenhandedness' must not be allowed to obscure the fact that Hizbullah and its backers have instigated the current fighting and should be held responsible for the consequences."

Michael Young, editor of Lebanon's Daily Star, in an op-ed for the New York Times:

"While the United Nations has been ineffective in its efforts toward Middle East peace, it may be the right body to intervene here, if only because it has the cudgel of Security Council Resolution 1559, which was approved in 2004 and, among other things, calls for Hizbullah's disarmament.

"The five permanent Security Council members, perhaps at this weekend's Group of 8 meeting, should consider a larger initiative based on the resolution that would include: a proposal for the gradual collection of Hizbullah's weapons; written guarantees by Israel that it will respect Lebanese sovereignty and pull its forces out of the contested Lebanese land in the Shebaa Farms; and the release of prisoners on both sides. Such a deal could find support among Lebanon's anti-Syrian politicians, would substantially narrow Hizbullah's ability to justify retaining its arms, and also send a signal to Syria and particularly Iran that the region is not theirs for the taking."

It all sounds pretty easy when put this way, doesn't it? But as I wrote last week there are no Churchills these days. I didn't even recognize the guy the White House finally sent to the region on Thursday.

"Lebanese civilians, who have absolutely no control over the events that are unfolding, and who once again find themselves in the eye of the storm, are now bracing for the very worst. Their darkest fear is that as they helplessly repeat the act of watching history unfold on their land, this time the promise of Lebanon's resurrection will itself become history."

Meanwhile, Iran and Syria sit back, mission already partially accomplished. Chaos takes the focus off Iran's nuclear program, at least temporarily, while Syria's President Bashar Assad doesn't have to worry about a faltering UN investigation into the Hariri assassination. As of now, Israel is not expected to venture further beyond Lebanon.

Finally, I watched Israel bomb Beirut's airport with dismay. I arrived in Beirut just ten weeks after Hariri's assassination. My hotel room overlooked the bomb crater. I ate some of my meals just a few hundred feet from it. I visited Hariri's shrine and observed the crying women at his coffin. Tourism had quickly dried up following the car bomb and those who served me couldn't have been more appreciative. They were back to work!

But Lebanon's economy, which had begun to rebound, will now suffer through years of distress even if the violence were to end tomorrow. I understand that Israel wanted to stop Iranian flights from rearming Hizbullah, but Israel killed Lebanon in cutting off this vital artery.

The airport meant something else for me, however. One day I took a long walk along the coast to a place called Pigeon Rocks. The weather was gorgeous and I found the restaurant I was looking for, high on a cliff and with a spectacular view of the Mediterranean.

You could also almost touch the airplanes as they glided in for a landing just three miles from my location further down the coast. As I soaked it all in, of course I also couldn't forget where I was. 'Boy, it would be easy to take out a plane with a shoulder-fired missile,' which is one reason why the State Department didn't allow U.S. flag carriers to use Beirut International. That's Lebanon.

Remember this one? Too bad we can't forget it, because what is developing has as much to do with China, Japan and South Korea and their mud-slinging as resolving the true crisis at hand.

China has accused Japan of overreacting, South Korea has blasted Japan, and Japan has accused South Korea of appeasement.

China refused to accept Japan's attempt to pass a UN resolution calling for stiff sanctions on Pyongyang. South Korea's President Roh, who has been strangely silent in commenting on the North, called Japan's resolution a "shrill" response. A presidential spokesman added, "There is no reason to fuss over this from the break of dawn like Japan, but every reason to do the opposite."

When a Japanese cabinet minister spoke of pre-emptive strikes on North Korea's missile bases, the same South Korean presidential spokesman said:

"(South Korea) will strongly react to the Japanese political leaders' arrogance and outrageous rhetoric that further intensifies the crisis on the Korean Peninsula with dangerous and provocative rhetoric such as 'pre-emptive strike.'"

Of course there are some in Japan (as well as your editor) who feel it's long time for Japan to carry its share of the load in the region, militarily.

"The Japanese people are very angry and very worried and, right now, they will accept any government plan for the military. In the short term, there will be more Patriots and Aegis destroyers in the Sea of Japan, but I think that will change soon as Shinzo Abe becomes prime minister."

Ah yes, the replacement for Koizumi in September. Mr. Abe is going to be fun to watch?at least fun for some of us. He's a hardliner and will seek to steer his nation to become a nuclear power. That's going to be a helluva debate, and destabilizing at first.

At the least, as another Japanese professor of international relations said, "Japan should have cruise missiles that we can use to attack the launch sites before North Korea can fire them." [Sources: South China Morning Post, Financial Times]

But as for the little guy with the bad hair, isn't it interesting how the White House has suddenly changed its rhetoric. Now, President Bush is acting like North Korea may not even have a nuclear weapons capability. "How do you know they do?" he asked a White House reporter the other day who was herself inquiring about the number of nukes Kim had. Just about every expert on weapons proliferation believes North Korea has enough enriched uranium for anywhere from 5 to 13 bombs at this point. It could be 30, for all we know?.because we don't know squat! Bush must feel these kinds of statements take the heat off him and perhaps he's thinking, 'I can't leave Iran, Iraq and North Korea for the next administration?let alone that new issue that sprang up the other day?but maybe I can leave two of 'em.'

"The red lines, pink lines, and mauve lines of U.S. foreign policy seem increasingly to be written in erasable ink. What was 'unacceptable' to President Bush a week ago (a North Korean missile launch) has been accepted. In retrospect, according to a draft Security Council resolution, the missile launch turns out merely to have been 'regrettable.' Our assistant secretary of state for East Asian and Pacific Affairs, Christopher Hill, visited China at the end of last week, where he was rebuffed by Beijing on sanctions for Pyongyang. He settled for an agreement that we should all return to the six-party talks.

"China, it bears emphasizing, has refused to use its leverage to change Pyongyang's behavior (North Korea continues to function only because China provides most of its energy). Yet President Bush praised China last Friday as 'a good partner to have at the table with us.' Japan, with a ringside seat for the missile launches, looks on in horror, seemingly alone in actually being provoked by the North Korean 'provocation.'

"Meanwhile, in the Middle East, at the center of our global war against jihadist terrorists, Iran, perhaps the prime state sponsor of terror, is sitting pretty. The pursuit of nuclear weapons by the clerical regime in Iran has also been deemed 'unacceptable' by the president. Yet, as the Iranian regime has resumed uranium enrichment, threatened to obliterate other nations, and scorned offers to negotiate, it has been rewarded with gestures by us that certainly seem to be concessions. Now, watching North Korea, the mullahs must be feeling even less intimidated. And despite Syrian and Iranian complicity in killing U.S. soldiers in Iraq? neither has paid a price?.

"A few weeks ago, Michael Rubin lamented in this magazine that Bush's second term foreign policy had taken a Clintonian turn. But to be Clintonian in a post-9/11 world is to invite even more danger than Clinton's policies did in the 1990s. The real choice isn't Kim Jong Il's. It's President Bush's."

Iran / Iraq: Iran said a while back it was going to wait until Aug. 22 to respond to the West's nuclear proposal and by gosh it will. I hardly think the G-8 will come up with anything new in St. Petersburg.

As for Iraq, you just can't make this stuff up. The esteemed General George Casey, President Bush's "man in Baghdad," said on Wednesday that, gee, we just may need to interject more troops into the capital. If you've been doubting the veracity of my comments on America's military leadership the past few years, you should be getting the picture by now.

Of course we need more troops in Baghdad. What was that policy of ours? "Clear and hold?" We never tried it in the very capital of the country! It doesn't matter if 90% of the land mass is peaceful if you still can't secure Baghdad.

And Ret. Gen. Barry McCaffrey, who has called all of these same generals "brilliant," now concedes we have a full-blown civil war on our hands.

This week was but another example of why you can never ignore the hot spots, and why I'd like to think this column can add some value from time to time. At the end of the quarter I was listening to the comments of a market veteran, Michael Metz, who when asked by CNBC about geopolitics and whether or not there were any outside concerns, said there's nothing you can do about them.

Well I've always liked Mr. Metz because he's been a bit of an iconoclast over the years, but that was about the stupidest thing I'd ever heard and others of his ilk continuously say the same thing, even today.

"Stocks for the long run?you can't do anything about external events?you have to go on living your life, after all!"

Bull. I disproved that theory long ago. Of course Iran, Iraq, Israel, North Korea, Russia, China and countless others do matter. [I wonder what Mr. Metz would say to CNBC today, incidentally. "Mr. Chairman, I'd like to revise and extend my remarks," I hope.]

So what do you do if you feel a bit queasy? You go to cash, that's what. Or if you're a real stock jock, you go 'short.' I'm not comfortable doing the latter so I hide out in the greenback. And with money market and CD rates at around 4.50 percent or higher, you're finally getting paid to worry; which in turn is kind of comforting.

This particular week the major market-related concern, tied directly to the Middle East conflict, was the price of oil which hit $78 before closing the week at $77. So it's time to get out the piggy bank before you take that road trip. The price of gasoline will be $3.50 in some spots before long; $4.00 if oil trades much above $80.

And is this enough to finally begin to dampen consumers' spirits? By some measurements, such as Wal-Mart's numbers and retail sales in general, it already has. Plus you have a rapidly softening housing market (full discussion below) and the distressing geopolitical picture, the latter leading directly to reduced capital spending because CEOs are paid to worry (at least the good ones ?the crooked ones just get paid regardless).

None of the above is good for earnings and that was a major concern of its own this week. Software king SAP's warning of lighter than expected sales may have been the most significant announcement on this front, while the likes of EMC, Alcoa and Dell didn't exactly light it up with their own talk of weaker than expected future revenues, or, in the case of Dell, price cuts. GE's tepid forecast for the current quarter didn't do much to increase investor confidence either.

But for now, much of this is irrelevant. Events in the Middle East will drive market averages, both up and down though I have a hard time envisioning too many scenarios leading us up in the short run.

Some other items of note. The Bank of Japan raised interest rates for the first time in over six years, from zero to 0.25 percent. What's significant is the BoJ is telling you Japan's recovery is solid and deflation is a thing of the past. Bank lending is also at its highest level in five years.

But now the question becomes, how far do they go? And at what point are assets, in a sizable amount, repatriated back home from, say, the United States? Some of this has already occurred, but if there is a rush to the door look out below. Or maybe the issue is did the Bank of Japan act too soon in not allowing another few quarters of growth before making this important, if largely symbolic, move? Because Japan's economy is still subject to the whims of consumers in the U.S. and China.

Regarding China, Japan still has little to worry about here in terms of the flow of goods between the two slowing down overnight. China's second quarter GDP is going to come in at 10.9%, on top of 10.3% growth in the first. This is staggering. The government, after all, desires 8%, which is generally accepted as the figure necessary to keep the people happy. [Below that, you could have net job losses.]

China's auto sales are expected to rise 74% this year, for those of you hoping to see gasoline demand fall. And fixed investment, like for infrastructure projects, was up another 35% in the first five months. Goodness gracious.

But bank lending actually plummeted 22% in the month of June and the rest of the world, particularly Europe and the U.S., simply can't ignore China's exploding trade surplus. It will be impossible to control the flows of capital during a financial crisis.

For some good news, though, the Bush administration would like you to focus on the budget deficit, which the White House announced would come in at $296 billion for the fiscal year (ending 9/30), which is an improvement on 2004 ($412 billion) and 2005 ($318 billion).

I've been a supporter of the tax cuts (except that on dividends, which of all the tax incentives in the world truly only benefits the rich) since day one, but the White House can't crow too much about the revenues generated in these best of times. They are, after all, still just back to 2000's level and a full $300 billion below the projected take in the very first budget this administration came up with (before the cuts). [Washington Post]

So while they deserve credit for the improving picture on one hand, the fact is the national debt has still increased to a frightening $8.3 trillion and the administration has done virtually nothing to slow the rate of discretionary spending, let alone entitlements; except in this last instance to add a new one in the form of the drug benefit. And then there is always the fact this president has yet to issue one veto. But don't get me started on that one.

--It was a horrible week for stocks and the Dow Jones, off 3.2%, is now basically even on the year. The S&P 500 lost 2.3% and is down 1% for '06, while Nasdaq's 4.4% loss brought its year-to- date decline to 7.6%.

Nothing mysterious here. Bonds rallied in a classic flight to quality move, helped as well by the growing feeling the economy may be slowing quick enough to allow the Federal Reserve to pause when it meets next month. But this coming week it's about the producer and consumer price indices.

--Rosneft, Russia's state oil company, raised $10.4 billion in the world's sixth-largest initial public offering, giving the company an overall value of some $80 billion. Vladimir Putin gets $8.5 billion from the offering to hand out to his buddies. [More on Russia and energy security below.]

--Brazilian President Luiz Inacio Lula Da Silva, in an op-ed for the Wall Street Journal:

"The sharp rise in international oil prices, political instability in producing regions and the environmental impact of fossil fuels have combined to evoke a growing interest in alternative energy sources. In this context, the Brazilian experience with ethanol fuel has been a noteworthy success story over the last 30 years. And the success is now expanding to biodiesel and H-Bio. I expect that our experience will be of interest during the G-8 summit in St. Petersburg."

Lula is one of those side visitors to the summit, including China's Hu Jintao. I would suggest he watch his back because the last thing Russia wants is a rush to alternative sources of energy.

One of the nation's largest homebuilders, D.R. Horton, issued an earnings warning for the just completed quarter as sales came in at 14,316 homes, down from 14,980 a year ago. It's the same old story we're hearing from around the country; rising inventories as demand slackens off along with higher cancellation rates.

"San Diego County's once blistering housing market moved into negative territory for the first time in 10 years as overall prices declined 1 percent last month from June 2005."

Home sales have now fallen 24 consecutive months and as Josh has been advising us, 4th quarter year-over-year comparisons are going to paint an even uglier picture. Heck, the median price on new homes and condos are already down 8 percent in this region from June '05's levels. [The one percent figure above includes existing homes.]

And the Washington Post reports that "The flattening of the housing economy might be good news for some taxpayers but poses challenges for local governments. A six-year windfall in property tax revenue, generated by soaring assessments, has enabled many localities to both increase spending and cut tax rates - although the reductions have seldom been enough to offset tax bill increases."

This is the domino effect. The housing sector, broadly defined, was responsible for a lion's share of the jobs growth in this country. Now you'll begin to see the flipside, not just in the construction and mortgage sectors, but also in city and state employment. Plus, as Josh was reminding me, the ATM window is closing in terms of home equity loans so all manner of consumer spending is bound to be impacted.

Incidentally, home sales in Fairfax County, Va., are off 20 percent for the first five months of 2006.

And we're dealing with a global bubble, as I've noted on more than one occasion. Here's a little item from Bloomberg News about South Korea's situation.

"Buyers?have caused mortgage debt to almost double in four years and home prices to increase 40 percent, prompting President Roh to raise taxes to curb speculation?.

"The nation's highest interest rates in three years are dragging on an economy already restrained by near-record oil prices and a rising currency?.South Korean homeowners are saddled with a record $212 billion in mortgage debt?.

"More than 80 percent of mortgages track moves in the yield of three-month certificates of deposit, which rose to 4.62 percent, the highest since April, 2003."

"The cost of a cancer drug prescription rose nearly 16% last year, compared with 3% for other prescriptions."

The former editor of The New England Journal of Medicine told reporter Liz Szabo, "It's really exploiting the desperation of people with a life-threatening illness."

--Sycamore Networks is one of more than 50 companies that are involved in the still burgeoning backdating of options scandal. An internal memo has emerged that shows a wide range of employees were involved, but that some also questioned the legality.

The Wall Street Journal reported that Stephen Landry, a former human-resources director, contends he was terminated because he told executives of employees attempting to hide the backdating from auditors.

Meanwhile, Bloomberg News has some details concerning UnitedHealth Group Inc. Chairman William McGuire.

"On Oct. 13, 1999, (McGuire signed) a new, five-year employment contract?.It happened to contain options to buy 8 million shares, his largest grant ever.

"The date of the contract also coincided with the day shares of the No. 2 U.S. health insurer closed at their lowest level of the year. That became the strike price."

However, "The story of McGuire's contract began with a Sept. 16, 1999, press release that highlighted the promotion of Stephen J. Hemsley to president?.A single phrase said that McGuire, who's also CEO, had 'entered into' a new contract. Details weren't disclosed.

"Six months later, the contract was made public in a 10-K filing with the SEC. The report said the date the contract went into effect?.was set in October, almost a month after the announcement and after the stock had dropped by more than a third.

"It also said that McGuire had the power to set the dates of his option grants, although it wasn't specific about whether he, or the board, had chosen Oct. 13, 1999."

UnitedHealth admitted in May of this year that it had a "significant deficiency" in its procedures for granting options, and that an eventual restatement could cut earnings $286 million. In the above particular example, changing the date allowed McGuire, a billionaire, to earn an additional $39 million on just this one grant.

Separately, Bloomberg reports that investigations of options manipulation have cost 19 corporate officers their jobs thus far, including four CEOs.

Yet backdating still has its defenders, namely Holman Jenkins, Jr. of the Wall Street Journal's editorial board. In his column this week, Jenkins offers:

"You (have) to ask yourself a simple question: Companies have not been averse to showering large compensation on their executives. Why assume executives would resort to subterfuge to add a few dollars to the pile when other explanations of backdating are available?"

Each case is different, no doubt, and I for one have to rely on the reporting for accurate descriptions, but here's the bottom line. In many instances it is coming to light that shareholders were deceived in what was reported in required filings. As in the case of Sycamore above, many employees knew at the time they were acting illegally but they did it anyway. In these cases it's fraud, pure and simple. Plus if a company didn't properly account for the options as a compensation expense, they understated their taxes. What doesn't Jenkins understand?

For that matter, why does the Journal's editorial board feel compelled to defend every corporate practice until the weight of the evidence finally convinces them otherwise?

Of course the reason why all of this is important is because it just adds to the perception that this nation is increasingly one in which it is the very rich versus everyone else, with the former accumulating wealth at a rate never before reached in human history when weighed against the average worker.

Consider this data from a Washington Post study of the D.C.- area's highest-paid executives.

"The median total compensation for the 100 highest-paid executives at local public companies rose 21.2 percent in 2005, to $6.4 million from $5.2 million the year before. While the median salary for that group increased 4 percent, bonuses climbed nearly 14 percent, the value of the typical stock option grant went up by more than 25 percent, and other forms of long- term compensation leapt by a third."

For private-sector workers nationwide, total compensation rose by an average of 2.9 percent last year. [David S. Hilzenrath and Derek Willis]

But if you're still not convinced there is something wrong with a system that allows executives to run roughshod over the rest of us, consider the following argument by economist Robert J. Samuelson, columnist for the Washington Post.

"The controversy over CEO pay is not just an accounting matter. Love them or hate them, corporate chief executive officers preside over a vast segment of America's wealth. How they manage or mismanage it enriches or impoverishes their shareholders and the entire nation. CEOs are often unfairly stereotyped as heartless because they shut plants and cut jobs - unpopular actions that are often necessary. Still, the public pounding of CEOs for their lavish pay packages is amply justified.

"The minority of CEOs who deserve massive payouts (because they contributed uniquely to a company's success) or whose pay is properly restrained are tainted by their peers. The Business Roundtable, a group of 160 CEOs, argues that a few huge pay packages create a distorted picture. Not really. Consider a Business Roundtable study, using data that Mercer Human Resource Consulting collected on 350 major companies. The idea was to examine median CEOs - those in the middle - as typical. Here's what the study found:

"From 1995 to 2005 median CEO compensation at these companies rose 151 percent, from $2.7 million to $6.8 million (the figure included base salary, bonuses, stock options and other 'incentives' - but not pensions).

"In the same period, the median sales of these companies increased 51 percent, to $7.6 billion, and the median profits 126 percent, to $591 million.

"By contrast, the median pay increase for full-time, year-round workers ages 25 to 64 in these years was only 32 percent, to $38,223 (that's all workers, not just those at the study's firms).

"Remember, these are run-of-the-mill CEOs, not just the superstars or the supergreedy. Even they seem to regard being a multimillionaire as an entitlement befitting their position. From 1995 to 2005 their pay rose five times faster than the typical worker's. In 1995, median CEO pay was 94 times median worker pay; by 2005 it was 179 times as much?.

"(Today's CEOs) have contrived a moral code that exempts them from self-control - a moral code that justifies grabbing as much as they can. They unduly enrich themselves at shareholders' expense and set a bad leadership example. Because almost everyone else sees their code as self-serving and selfish, CEOs have undermined their moral standing and their ability to be taken seriously on other issues. They are slowly becoming a threat to the very system they claim to represent."

--And this just in?Broadcom is taking a non-cash charge of $750 million and restating five years of financials for?stock options chicanery. Holman Jenkins sees no problem.

--And what do the ultra-rich do with their money? Well, some of it ends up in private-equity funds. Blackstone Group just raised a record $15.6 billion for global takeovers. An increasing problem, though, is finding investments that will pay off. Private-equity fund efforts are expected to raise about $300 billion this year alone. May I suggest buying cement and asphalt companies in the Middle East, based on this week's news.

--When I was in Seoul, I wrote of a new business venture between Korea and the Netherlands, LG Philips LCD, that involved building a plant that would eventually employ 42,000, both directly and indirectly, while churning out 90,000 flat panel monitors a month. [WIR 4/29/06]

That was then. This is now. There is an incredible glut on the world market for LCDs and prices are collapsing. LG Philips reported a substantial loss for the second quarter and will now slash production. Dreams are being put on hold.

--GM, Nissan and Renault have agreed to review a possible alliance over the next 90 days.

--The European Union, in its long-running anti-trust case against Microsoft, has fined Mr. Softie, proprietor of 'bad software,' $357 million. Which reminds me; make sure you've updated your Windows software. Microsoft announced another five security risks for which they've made a spiffy patch for all of us. I want a Mets logo on mine.

--Halliburton's KBR unit will have received over $15 billion for its work in Iraq when its contract expires end of the year. But now KBR has to resubmit a bid and it only makes sense, with all the negative publicity the Pentagon has had to endure, that it won't win. From a profit standpoint, KBR really doesn't earn that much for Halliburton and 20 percent of KBR is being spun off in an IPO this year with plans to divest the full holding later?probably to some private-equity guys, eh?

--Merck won another Vioxx trial, as a New Jersey jury rejected claims by a woman who survived a heart attack after taking Vioxx for more than two years. While the jury said Merck hadn't appropriately warned her, it did find that the company warned her doctor and that Vioxx was not a "substantial contributing factor."

--Mario Gabelli settled with the Justice Department in his civil- fraud suit involving cellphone license auctions. While Gabelli and his affiliates denied any wrongdoing (normal in these matters or sadly a majority of these cases wouldn't get settled), Mario still had to shell out $130 million. In other words, he can deny he did anything wrong, but we all know otherwise.

--Intel is laying off 1,000 managers. That's 1,000 "good, high- paying jobs," as our president would say.

--My friend Jimbo had a good point following another earnings warning from my neighbor Lucent, whose sales force is sitting back, waiting to see who gets to keep their job in the merger with France's Alcatel instead of going out selling telecom equipment; not that the customers would necessarily respond. They want to know what's going on, too. But in keeping with my irregular Lucent lawn watch, Jimbo suggests I check Alcatel's lawn at HQ. Since my travel schedule is jammed up this fall, I hope one of my readers in Paris will keep me informed.

--My portfolio: 80% cash doesn't look too bad some weeks, does it? As for the carbon fiber holding it was a lousy one. But I was surprised to see a commercial for Goodyear during the All- Star Game. In it the tire maker touts its use of c.f.

And so some day, boys and girls, the whole world will consist of carbon fiber; borders secured by it, carbon fiber bubble shields to protect us from rogue missiles, and then peace will break out!

--Put this in the category of some things never change. As reported by Barron's Eric Savitz.

"The Vonage story just gets uglier and uglier. And there's every reason to think it will get uglier still."

"Now, analysts from the firms that underwrote the offering are weighing in with some intriguing research reports.

"Piper Jaffray's Troy Jensen rated the shares as Market Perform, with a price target of 9. UBS' John Hodulik awarded a neutral rating and a target of 10?.

"Huh? It was only a few weeks ago that bankers at these firms sold shares to the public at more than twice the current price."

As Savitz notes, these "squirrelly" analysts knew all the adverse issues they now write of before the company went public. Class- action suits are flying.

--The Irish miracle continues. There are now 30,000 millionaires in the country following a decade of spectacular growth. In just that time, the personal net worth of the average Irish citizen has more than tripled. It's largely about soaring property values.

--Interesting tidbit in Crain's New York Business. Following the release of "The Da Vinci Code," book sales dried up.

The movie was released May 19 and for the week ending May 21, mass market paperback sales were 115,000. For the week ending July 2, they were down to 23,000. This isn't the way it was supposed to work. Ergo, the film must have sucked.

[I'll catch it in 2028. Just watched "Lust for Life" 50 years after it was made. How the heck did Kirk Douglas not get an Oscar for his portrayal of Van Gogh, by the way! I mean he won the Golden Globe award?..geezuz, this is upsetting.]

--Yul Brynner won Best Actor for "The King and I" in 1956. I just had to save some of your time.

"(When) President Vladimir Putin hosts the first summit of Group of Eight leaders in Russia this week, the most notable thing won't be that his country has failed to become the consolidated democracy that the G-7 countries expected when they invited Russia to join a decade ago. What will be remarkable - but has been little remarked on - is that Putin has become a leader and an emblem of an active movement to combat the spread of democracy."

As Sen. Richard Lugar (R-Ind.) said, "What seems to be the case is that governments that are authoritarian have decided to fight back."

I thought I'd take you back to my column of June 23, 2001, following President Bush's statement that he had looked into Vladimir Putin's soul. This is what I wrote.

"Regarding the president's effusive statements following his first meeting with Russian President Putin?opinion was decidedly mixed. Actually, while yours truly strongly feels it's important to have some kind of personal chemistry between our two leaders, I also don't disagree with Republican Senator Jesse Helms's statement that 'prematurely personalizing this relationship only underscores the incentives (Putin) has to reorient Russia's domestic and foreign policy goals.' Helms added that Putin is stamping the 'jackboot of repression' on Russia's press. Democratic Senator Joe Biden said, 'I don't trust Mr. Putin.'"

That was then. What about today? On Thursday, Russian defense minister Sergei Ivanov "warned the west to stay out of its internal affairs saying it would use its 'military might' as a deterrent and a guarantor of its sovereignty."

Writing in Izvestia, Ivanov added, as reported by the Financial Times, that "some democratic states which criticized Russia for its authoritarianism 'were unhappy about an independent, strong and confident Russia.'"

Of course Russia is newly confident because of oil. And it should be added that Ivanov is a bad guy, by all accounts, and remember he could yet succeed Putin should the latter opt to step down in 2008.

Stuart Eizenstat, a former Carter and Clinton official, commented in an op-ed for the Journal on the issue of energy security.

"As the G-8 prepares to meet this weekend in St. Petersburg, it is now clear that the Yukos Affair, which began three years ago this month with the arrest of Platon Lebedev in Moscow, has had a much more far-reaching effect than could have been imagined. Mr. Lebedev, one of Russia's wealthiest financiers, was Mikhail Khodorkovsky's business partner. Together, they controlled a vast banking and natural resources empire including Yukos, then Russia's most efficient, transparent and profitable privately owned oil company?.

"Many of their most important business and philanthropic ventures were designed to cement Russia's integration into the global economy. Once they were jailed, a good number of these initiatives could never be realized, to the detriment not only of Russia but also its G-8 partners in the West."

Recall that at the time of their arrest, Lebedev and Khodorkovsky were negotiating the sale of 25% of Yukos to a U.S. oil company. "While they did not need the money, they decided that their vision for a Western-looking Russia depended upon this partnership. The sale would have thwarted the Kremlin's plan to retake control of the Russian oil industry as well as strengthened economic ties between Russia, Western Europe and the U.S?.

"The implications of the Yukos Affair must be viewed from this perspective. The price of oil has given the Russian government enormous new wealth, while the Kremlin's unfettered control of the country's massive energy reserves has given Mr. Putin the leverage to silence his opponents at home and threaten Russia's neighbors. Unless they are willing to challenge Mr. Putin's policies in St. Petersburg, the G-7 leaders risk giving Russia's president the impression that nothing stands in the way of a further consolidation of his power."

"Mr. Putin should also be put on notice that the Rosneft IPO, which involves reselling assets illegally confiscated from Yukos?. limits Russia's prospects of being viewed as a member in good standing of the world's group of leading nations. Many of these messages were contained in Vice President Cheney's speech two months ago in Vilnius, where he warned Russia against using its energy resources to 'blackmail' its neighbors and the Kremlin's power to clamp down on enemies at home. These same messages should be delivered again in St. Petersburg. Otherwise, the Yukos affair and all it represents will continue to cast a long and dark shadow over Russia's relations with the West."

"For Russia, energy security is about the state's retaking control of the 'commanding heights' of the energy industry and extending that control downstream, over the critical export pipelines that provide a substantial part of government revenues. For Europe, today's concerns center not on oil [Rosneft], but on natural gas [Gazprom] and on the debate about dependence on gas from Russia. For Japan, the question is quite different - how to compensate, in running the world's second largest economy, for the absence of virtually any domestic resources. For China and India, it is assuring that energy does not hold back the economic growth they need for development and to avoid social turbulence."

One big positive for President Putin this week was the death of Chechen terror leader Shamil Basayev, who was responsible for thousands of deaths, including 330 at Beslan. Basayev was killed (in an accident, it would appear) while preparing an attack to divert attention from the summit.

India: It appears the terrorists who killed over 200 in a highly- coordinated series of attacks on Mumbai's commuter trains are linked to the Kashmir conflict, though further links to al-Qaeda are still unclear as I go to post.

But most worrisome is the Indian government's accusation that "elements" in Pakistan had a hand in it, similar to Saudi Arabia's use of the term in the case of Lebanon. Pakistan vehemently denies this. It's yet another instance where we need to 'wait 24 hours.' India's government, however, doesn't feel as if it can afford to as the public demands answers, now.

Afghanistan: Talk about a forgotten war, especially in light of this week's other events. Britain is sending 900 more troops after losing six the past few weeks. NATO has to step up further.

China: President Hu Jintao is slated to snub Japanese Prime Minister Koizumi at the G-8 because of the ongoing disputes involving textbooks and Koizumi's visits to the war shrine. Koizumi, though, leaves office in September and one last issue is whether or not he visits the shrine on its anniversary, Aug. 15.

On the Web front, China has sentenced a journalist to two years in prison for inciting subversion on overseas websites, which means I'd probably receive 'life' if I lived there. The case of Li Yuanlong is one of two involving Yahoo, which helped Chinese authorities track the fellows down. The other gentleman is appealing a 10-year sentence, according to a Hong Kong-based human rights organization.

Mexico: Andres Manuel Lopez Obrador continues to contest the presidential election that saw him lose by 244,000 votes on July 2. Lopez Obrador filed a challenge with the Federal Election Tribunal seeking a complete recount of all 41 million ballots, which some say is illegal for starters. The election commission has up to two months to issue a ruling. Last week, votes in 6,500 of 130,000 polling stations were recounted and despite Lopez Obrador's claims of fraud, there appeared to be none.

But no matter, Lopez Obrador has called for another massive demonstration on Sunday and has threatened worse if the tribunal doesn't rule in his favor. This is another bad man, sports fans.

Meanwhile, the winner, Felipe Calderon, has said he would respect the tribunal's decision.

But I have to note a statement by Bush spokesman Tony Snow. It's only natural that Calderon would say he opposes the building of more walls on the U.S.-Mexico border. So Snow nonetheless felt compelled to say "last time I checked, Calderon did not have any official authority over the activities of the United States government."

Yoh, Tony. Try a little diplomacy, will ya? Just keep your mouth shut. Calderon, who is clearly someone the U.S. can work with, then felt compelled to reply, "President Bush's spokesman is someone who does not have the authority to tell me what I should be saying." [Manuel Roig-Franzia / Washington Post]

Latin America: Michael Barone of U.S. News & World Report reminds us that despite the talk of a shift to the left, at least in the case of Colombia, Mexico, Chile and Brazil, a line in the sand appears to have been drawn when it comes to Venezuelan President Hugo Chavez's quest for continent wide revolution.

Ukraine: Yulia Tymoshenko, the former prime minister who was to return to office in a new coalition until that version fell apart, has called the Yanukovich bloc, which is threatening to take over parliament, a bunch of "communist oligarchs" that would drive Ukraine "several centuries backwards." This place is a mess and Russia will do all it can to take advantage of the situation as the Kremlin seeks to ensure its ally, Yanukovich, ultimately prevails. Remember, the country itself is basically split 50/50 between support for the West and Russia.

Poland: President Lech Kaczynski swore in his identical twin brother, Jaroslaw, to be the prime minister. Really. So much for having a double fill in while you're playing on the Riviera, eh?

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