Educate Yourself

Week in Review
For the week 7/17/2006 - 7/21/2006
Brian Trumbore
President/Editor, StocksandNews.com

I caught Secretary of State Condoleezza Rice's press conference announcing she was going to hold talks with a contact group in Rome, in attempting to come up with a solution to the current crisis in Israel and Lebanon, and I thought I was watching a high school valedictorian give their speech.

You know, the one where the 18-year-old is up at the podium, in most cases seemingly poised beyond their years while talking of the modern world and the future, and yet you're thinking, "Kid, you just don't know what it's really all about."

Rice sounded like she lived in a fantasy world in discussing Lebanon's "young, democratic government, free now of Syrian forces, that is trying to assert its power."

It made me sick and I haven't been this depressed about the geopolitical scene since the days following 9/11. My anger this time, though, is directed at the Bush administration, as I'll attempt to explain later.

But first, as the tragedy unfolded in Lebanon, thanks to Hizbullah, I hasten to add, world leaders weighed in, including Russian President Vladimir Putin and French President Jacques Chirac, who both labeled the use of force by Israel "justified," though it also needed to be "balanced" and it didn't appear to be.

For its part Egypt had evidently been attempting to broker a prisoner swap on the hostages, including the Israeli soldier taken by Hamas, but then Hamas stiffened its resistance and Egypt quit the effort.

Support in the Arab street for both Hizbullah and Hamas was strong, and leaders in Saudi Arabia, Jordan and Egypt, in particular, were scared to death this could result in trouble for their own regimes.

And leave it up to Iran's Ayatollah Khamenei to call Israel "an evil, cancerous tumor" in the midst of the Islamic world.

"Seven days into Israel's war on Lebanon, there is no hint of effective international diplomacy on the horizon. The Lebanese are being forced to accept that they are alone in the world, without a friend who can defend them against an undeserved onslaught. The Syrians, who many have argued share a healthy portion of blame for the current crisis in Lebanon, are too busy saving their own skins, threatening fierce reprisals if their nation comes under attack. The Iranians, also fingered in this latest wave of hostilities, are cozily sitting back and enjoying the luxury of sacrificing Lebanon and Hizbullah in their quest to sweeten a deal with the West over their nuclear program.

"Saudi Arabia is abandoning its role as a regional peacemaker, placing all of the blame squarely upon Hizbullah and Iran, and expressing no hint of outrage over the collective punishment and destruction in Lebanon?.

"Egypt, the home of an ineffective Arab League, which cannot even muster the diplomatic will to hold a summit, is busy scolding Hizbullah for its misdeeds. As Lebanon burns?we see no sense of urgency on the part of Egyptian leaders to convene emergency talks?.

"Even in Israel, there is no sign of diplomatic efforts on the part of leading politicians. The rookie Israeli government - which has achieved record destruction at a scale and pace rarely seen, even in this part of the world - has stepped aside and let Israeli generals take the lead. They fail to see the irony in the fact that their commanders have been pounding the very army that they expect to impose order over Lebanese territory.

"And the Europeans and the Americans are blindly following as the Israelis lead us all down a treacherous path?.

"This time, (the Lebanese') beloved homeland has been chosen as a battleground in which the Israelis will brutalize the Lebanese in order to teach the Iranians a lesson on behalf of the West. The war-weary Lebanese have no choice but to pay the ultimate price and once again bear the brunt of the consequences of world diplomats' failure to resolve a crisis peacefully."

"Of the many dimensions of Israel's current fighting with Palestinians and Lebanese, the most significant in my view is the continuing, long-term evolution of Arab public attitudes to Israel. The three critical aspects of this are: a steady loss of fear by ordinary Arabs in the face of Israel's military superiority; a determined and continuous quest for more effective means of technical and military resistance against Israeli occupation and subjugation of Palestinians and other Arabs; and a strong political backlash against the prevailing governing elites in the Arab world who have quietly acquiesced in the face of Israeli- American dictates.

"The Lebanon and Palestine situations today reveal a key political and psychological dynamic that defines several hundred million Arabs, and a few billion other like-minded people around the world. It is that peace and quiet in the Middle East require three things: Arabs and Israelis must be treated equally; both domestically and internationally the rule of law must define the actions of governments and all members of society; and the core conflict between Palestine and Israel must be resolved in a fair, legal and sustainable manner?.

"Protecting Israel has long been the primary focus of Western diplomacy, which is why it has not succeeded. For decades now Israel has established buffer zones, occupation zones, red lines, blue lines, green lines, interdiction zones, killing fields, surrogate army zones, and every other conceivable kind of zone between it and Arabs who fight its occupation and colonial policies - all without success. Here is why: protecting Israelis while leaving Arabs to a fate of humiliation, occupation, degradation and subservient acquiescence to Israeli-American dictates only guarantees that those Arabs will regroup, plan a resistance strategy, and come back one day to fight for their land, their humanity, their dignity and the prospect that their children can have a normal life one day?.

"Piecemeal solutions and stopgap measures will not work any more. Ending these kinds of military eruptions requires a more determined effort to resolve the core conflict between Israel and Palestine. This would then make it easier to address equally pressing issues within Arab countries, such as Hizbullah's status as an armed resistance group or militia inside Lebanon, which itself is a consequence of Israeli attacks against Lebanon and the unresolved Palestine issue."

"Given the American stakes in this crisis, the Bush administration's passivity is inexplicable. Hizbullah and Israel have been tossing lighted matches back and forth in a region soaked with gasoline, and the world is waiting for robust American diplomacy. Instead we see a tongue-tied superpower, led by a president who grumbles into an open mike in St. Petersburg that Kofi Annan should get on the phone to Syria and make it all go away, or maybe Condoleezza Rice should get on a plane to the Middle East?.

"Rather than bringing positive change, military action in the Middle East tends to bring unanticipated consequences. In this case, one wild card is the Shiite population of Iraq - America's crucial ally there. If the Israeli campaign against Hizbullah stretches to weeks and even months, how long will it be before the United States faces a Shiite insurgency in Iraq, which would almost certainly spell a decisive American defeat there? And, ominously, CIA and FBI officials are said to be hearing increased 'chatter' about new terrorist attacks in America.

"When international crises arise, analysts often cite the tragic chain of events that produced World War II - Neville Chamberlain's policy of appeasement that emboldened the Nazis and led to the slaughter of tens of millions. The 1938 Munich lesson of the necessity for action is indelible. But it's also worth considering the lesson of 1914, in which the world slipped toward a war that could have been avoided had statesmen escaped the lock-step chain of action and response.

"Are we living through a Sarajevo moment, like the concatenation of events that marched Europe toward World War I? Impossible to know. But given the risks for the United States and its allies, this ought to be a week when Americans are aggressive, active diplomats, rather than bystanders. If America means to be a world leader, it cannot appear to be a prisoner of events."

"Until a few weeks ago, Palestinian President Mahmoud Abbas was confronting the Hamas-led government with a very important decision. 'If you do not recognize the newly elected government of Israel as a legitimate negotiating partner,' he told them, 'I will order a referendum among the Palestinians on the single issue of that recognition.' He had at his disposal an important letter, signed by several respected Palestinian political prisoners, that called for a two-state solution on this basis, and he was also cutting with the grain of important resolutions by the European Union and other concerned international interlocutors. He also knew what many people forgot - Hamas did not win a majority of the votes in the Palestinian elections, and only hold a tenuous supermajority of the parliamentary seats. Hamas made it very clear that they did not relish this proposal, the ultimatum- point of which was just coming due.

"Does it not seem obvious that the intention of the various provocations launched from Gaza, from the missiles to the first abduction of an Israeli soldier, were designed precisely to make this referendum impossible? And does it not seem at least very likely that the Hizbullah operations on Israel's northern border have been implicitly coordinated to assist Hamas in this respect?"

"Israel is attempting to do what the world has been unable to accomplish: Enforce UN Resolution 1559, which calls for the disarming of all Lebanese militias and Beirut's control of its own borders. It's a shame to see Lebanon's first semi-independent government in decades caught up in this new round of violence. But Hizbullah's continued military might, backed by Iranian arms and Syrian intelligence, is the main threat to Lebanese independence. In disarming Hizbullah, Israel would be doing Lebanese patriots a favor."

"Behind the pictures of landing craft and exhausted evacuees, collapsed apartment blocks and charred vehicles, bodies and the bereaved, lies a truth that should not be forgotten. None of this would be happening if terrorists had not crossed an international border to kidnap soldiers of a sovereign state, and underlined such an intolerably provocative act by firing volleys of missiles at civilians. Israel has a right to defend itself; if the words risk becoming a clich? it is because they are true, and they remain the starting point and context for all that has unfolded over the past nine days?.

"There is logic too in yesterday's apparent preparation for a possible ground offensive. Destroying half of Hizbullah's arsenal of rockets, as Israel claims to have done, is not much use unless the other half is similarly dealt with. [ed. No one believes Israel's claims on the missile front.] ?.

"There are wider concerns that Israel would be wise to consider. Historic ally Lebanon has hardly been a triumphant hunting ground for its forces. The Lebanese Government is weak and the dangers to Israel from it slipping into civil war would be great. Hizbullah might have painted itself into a corner by attacking when it did, earning it condemnation from parts of the Arab world; but it would not be in Israel's interests to regard the moral high ground from which it set out nine days ago as a free hand to act without regard to the world around it. Therein lies a different trap."

"Conservatives complain that the United States is hunkered down in Iraq without enough troops or a strategy to crush the insurgency. They see autocrats in Egypt and Russia cracking down on dissenters with scant comment from Washington, North Korea firing missiles without consequence, and Iran playing for time to develop nuclear weapons while the Bush administration engages in fruitless diplomacy with European allies. They believe that a perception that the administration is weak and without options is emboldening Syria and Iran and the Hizbullah radicals they help sponsor in Lebanon."

"Let me put this in a larger context. The United States said there would be terrible consequences for North Korea if they fired their missiles. They fired their missiles. We then threatened that the Chinese would come visit them. The Chinese went and visited them, nothing happened. We then said we'll go to the UN?.The Chinese said they'd veto (a resolution) if it was tough. They passed a weak resolution, and within 45 minutes the North Koreans had repudiated the resolution. So there's no consequence.

"Meanwhile, the Iranians are watching. These two countries are watching. The Iranians watched, the North Koreans basically stand us down. The North Koreans watched the Iranians basically get face-to-face talks. And these two dictatorships are playing us like a ping-pong game."

On the issue of Lebanon, I wrote the following?different from last week's quotes.

"And then there's Hizbullah, not exactly a pleasant next door neighbor to Israel though with increasing political clout in Lebanon's new government. According to Baalbek-based leader Hussein Hajj Hassan, a member of parliament, 'Hizbullah will not hand in its weapons as long as Israel possesses 400 nuclear missiles.' Hassan points to Lebanon's army not being able to defend the nation against outside threats, and on this point he is correct. The military desperately needs new equipment and armaments and the United States has been helping some in this regard. But it's also clear UN Security Council Resolution 1559, which called for the disarming of Hizbullah, will not be carried out."

"Syria is sending arms to the Palestinians here and Iran continues to flood Hizbullah with support. The Lebanese government, with Hizbullah as a member of parliament, is too weak to disarm a group that continues to renounce Israel's right to exist.

"The West, and separately, Israel, can not afford to be patient for long and it's all going to come to a head over the coming six months."

[Missed it by three, though later nailed it within a week as you saw last time.]

"Just two years ago, Druze leader Walid Jumblatt harshly criticized U.S. policies in the region, but this week he was in Washington asking for support in removing Syrian influence from his country.

" 'It took me a long political trip to come to the U.S. and ask for help against the (Syrian) dictator,' he said, adding that if the U.S. fails in Lebanon, the Bush administration's hopes for democracy in the Middle East are doomed 'and we'll go back to dictatorships.'

[Throughout this space I have quoted Walid Jumblatt extensively, and with good reason I have called him the most fascinating politician in the world today. He may also end up being bang on. But should things calm down in Lebanon, the U.S. cannot blindly count on Jumblatt's cooperation and constant diplomacy will be required. That is if he isn't assassinated first.]

Continuing?I also highlighted an issue that is not getting enough play these days.

[This particular week, Israeli and Hizbullah forces battled it out in the disputed Shebaa Farms border region between the two. Four Hizbullah guerillas were killed in the heaviest fighting since 2000.]

"Israel later dropped leaflets on Beirut and other major Lebanese population centers, slamming Hizbullah. But think about how this was accomplished. Israeli jets and helicopters invaded Lebanese territory to carry this off with obviously zero resistance from Lebanon's military; not the kind of thing that would engender confidence if I was the average citizen of Beirut."

"After (Rafik) Hariri's death [Feb. '05], international condemnation led to Syria being forced to withdraw its army from Lebanon (though the agents and terrorists obviously stayed behind), with France and the U.S. leading the charge. But today nothing, as (Syria's Bashar) Assad appears to have weathered the initial storm.

"Watch Lebanon and look for headlines on the status of the government. In a land where Hizbullah is a fixture, this nation can be as important a story as Iraq itself.

"Lastly, we go back to Israel which has its own issues with Lebanon because of the Hizbullah presence. Here, though, Israel can stop violating Lebanon's airspace. It's one thing to clash with Hizbullah over the disputed Shebaa Farms territory, but it's quite another to drop leaflets over Beirut using fighter jets and attack helicopters."

Looking back, Israel's prior actions were nothing more than a clear violation of Lebanon's sovereignty and the international community said nothing. Supporters of Israel would counter the periodic firing of Katusha rockets over the years was a violation of its sovereignty as well.

But to me it all comes down to Shebaa Farms. What a wasted opportunity. Prime Minister Fouad Siniora, in his trip to Washington that I wrote of 4/22/06, set out to seek U.S. assistance in enabling Lebanon to recover its occupied territories. And it's here where I have to dial back my frustration.

In the immediate aftermath of the assassination of Hariri, I wrote the following on 2/19/05.

"Regardless of who did it, the killing of Hariri was one dumb move. French President Jacques Chirac was a close friend of his and Chirac attended the funeral, a risky gesture given the explosive climate. While Washington continues to have major problems with the French leader, including on the issue of Hizbullah, there is a chance that the U.S. and France could reach some real accommodation in helping get Syria out of Lebanon."

"Far be it for me to defend France for its anti-American actions over the years, but being a neocon doesn't preclude one from also being a pragmatist. You've since seen what's happened. Presidents Bush and Chirac met in Europe and, while disagreeing on almost everything else, issued a stern warning to the government in Damascus to get their troops out of Lebanon. Since that day, Secretary of State Condoleezza Rice and her French counterpart blasted Syria and then the likes of Germany, Russia, Egypt and, shockingly, Saudi Arabia piled on to condemn the government of Bashar Assad. Throw in some classic 'people power' in Beirut itself and before you knew it, the government in Lebanon had collapsed and Syria's puppet, President Lahoud, was scrambling to keep up with the pace of change."

[Where I was wrong then was that I thought Assad may fall, "though it's difficult to see who would fill the breach."]

And so this is where history will be harsh. In the first few months following Rafik Hariri's death, the UN, U.S. and France led the way in expelling Syria's military. President Bush then had a terrific opportunity to work with Chirac to force Lebanon to confront the issue of Hizbullah.

And the key? Shebaa Farms, a tiny piece of land attached to the Golan Heights that Israel kept when it left Lebanon in 2000.

And why has this been important? Because it was Hizbullah's raison d'etre, for declaring itself a resistance force. Hizbullah consistently said it was defending the honor of the Lebanese people by confronting Israel over Shebaa Farms.

Fouad Ajami, an Arab affairs expert, got it all wrong (as he often does) in an op-ed Friday in the Wall Street Journal.

"No great emotions stirred in Lebanon about the Shebaa Farms. It was easy to see through the pretense of Hizbullah. The state within a state was an end in itself."

But Ajami misses the point, and the only other 'expert' I've observed over the past two weeks who gets it is former U.S. Green Beret Bob Bevelacqua, who was cut off by Bill O'Reilly literally as he was mentioning "Sheba??" Major Bevelacqua, I knew where you were going with this one.

Don't you see? The U.S., France and the UN should have pressured Israel to give up Shebaa Farms, thus taking away Hizbullah's reason to remain armed there. There would have been nothing else to defend. Hizbullah would have come up with a reason to say no, but they would have then been exposed as frauds before the world community once and for all.

At the same time, the U.S. and France could have worked together to not only strengthen the Lebanese government, but to rearm its military. Once Israel had left Shebaa, the majority government in Lebanon would have had no other choice but to expel Hizbullah if it remained. If Hizbullah then held fast, well, Israel would have also had a right, under international agreement, to move back in.

It wouldn't have been easy, but it was right there in front of our leaders all the time.

The other day President Bush said "we worked hard to free Lebanon from Syrian influence." Perhaps, for a month or two, but then the White House, as the sole superpower in the world, abandoned the heroes of the Cedar Revolution. You never heard another word from the president except when he wanted to throw out some inane platitudes on fighting for democracy. I could show you tens of times I would then add, 'we haven't done enough in Lebanon.'

So President Bush said this week, "Sometimes it requires tragic situations to help bring clarity in the international community."

No, Mr. President. Sometimes it takes creative leadership, as well as a curiosity about the world that is tragically lacking in your case.

It's all so sad. On Friday, Condoleezza Rice spoke as if Lebanon merely had a few bridges down and a sewage plant or two that was inoperable. Instead Lebanon is being destroyed and the United States never tried to prevent it.

We all agree Hizbullah and Hamas, and by extension Iran and Syria, are bent on Israel's destruction. But there's far more to this story and the history is being written by the hour.

Aside from all the evil Iran is involved in with regards to Hizbullah, it promised that it would give its answer on the package of incentives for its nuclear program on Aug. 22. But it also warned:

"If the path of confrontation is chosen instead of the path of dialogue, and if there is any action to limit the absolute rights of the Iranian people, the Islamic Republic will have no choice but to revise its policy."

Otherwise, an official government statement read, "Iran has welcomed the offer and is examining it with a positive attitude."

And over in Iraq, we learned this week that an average of 100 civilians are being killed daily in sectarian violence. Baghdad's morgue, for example, has already taken in over 1,000 bodies this month alone. In fact, since the Iraqi government's security crackdown, attacks in Baghdad have soared 40 percent, according to the U.S. military.

It's gotten so bad that Grand Ayatollah Ali al-Sistani, seemingly the only voice of reason in Iraq's clerical community, said the bloodletting must stop. Sistani, a Shiite, was addressing the likes of Moqtada al-Sadr and his Mahdi Army.

Separately, I have written in the past of the brain drain in Iraq and the issue of doctors being killed, but James Hider and Ali al- Hamdani reported the following for The Times (of London).

"Baghdad's medical facilities are simply overwhelmed by the daily carnage. They were stripped down by a decade of UN sanctions, looted after the U.S. invasion and then slowly rebuilt to cope with a peacetime city that never materialized. There are only 30 intensive care beds in the capital.

"The Ministry of Health has been taken over by supporters of Moqtada al-Sadr?.who have little medical experience.

"Adel Abdel-Mohsin, the Deputy Health Minister, told The Times that 190 medical staff had been murdered and 400 doctors kidnapped and that 1,000 (other) doctors had fled the country?.

" 'Doctors are all afraid of showing up in the wards because of the recent threats to us,' a doctor from Baghdad's main hospital complex told The Times yesterday.

" 'I have started telling families after surgery that their relatives will die soon because there is no proper follow-up,' he said?.

"Doctors in Baghdad's hospitals no longer even wear white coats or carry stethoscopes for fear that gunmen might storm their hospital. Instead they try to mingle with relatives whenever armed men enter the building. 'We are afraid of going near a patient because if he dies we'll be kidnapped or killed,' said the doctor."

The threats and violence have gotten so bad, the other day there were 15 medical staff present in the Baghdad complex where once there were 500.

On a separate issue, it doesn't help for Prime Minister Nouri al- Maliki, a Shia, to blast Israel in the current crisis. "I condemn Israel's aggressions and call on the Arab League?to take quick action." That's our man in Baghdad.

Lastly, you have the ongoing issue of the Kurds which is vastly underreported but threatens to spill over at any moment.

Turkey's Islamist government has warned U.S. and Iraqi forces that they must confront the Kurdish rebels. 15 Turkish soldiers and policemen were killed in the past week in clashes with the Kurds and Turkey is warning if their activities are not stopped, Turkey is going in. Forget the politicians, Turkey's military could easily say enough is enough, and frankly I wouldn't blame them.

[Any conflict with Turkey would also have an adverse impact on the new Baku-Tbilisi-Ceyham pipeline connecting Azerbaijan, Georgia and Turkey that was to supply up to 1 million barrels per day of oil, much of which would then transit to the U.S. Since it ends on Turkish soil, they don't necessarily have to cooperate as others would gladly take the crude.]

No doubt, the Street is peopled with idiots. How else do you explain the reaction to Federal Reserve Chairman Ben Bernanke's semi-annual testimony to Congress on the state of the U.S. economy? Following the first round of questioning by the Senate on Wednesday, the markets roared their approval, with both stocks and bonds staging significant rallies. But most of the gains were then given back on Thursday and Friday, and then some in the case of Nasdaq.

So what did the chairman say? Nothing, really. Growth is moderating, as anyone who lives in the real world can see, and in the Fed's mind inflation pressures "remain contained" but are also an ongoing concern. Again, nothing new here.

But the market seemed to focus in on Bernanke's statement that the Fed may accept higher core inflation (ex-food and energy), short-term, with the expectation that a slower economy would lead to falling inflation later.

Well, if you're one who has been waiting for the Fed to stop hiking interest rates, you would interpret this last bit to mean the board may "pause" when it next meets on Aug. 8.

At the same time, though, the Fed's own forecasts for economic growth are still quite bullish?3.25-3.50 percent for 2006 and 3.00-3.25 percent in 2007, together with core inflation of just 2.25-2.50 percent. Ergo, if demand remains that strong, such as for energy which would be the case in a 3.00- 3.50 environment, then inflation pressures would continue to weigh on markets and the Fed would have to keep hiking rates, or start up anew which psychologically would be a disaster. At least that's my way of looking at what Bernanke said.

As for my own opinion on the state of things, you know I believe the Fed already overshot in hiking the funds rate to 5.25 percent, since the last few moves in particular won't be felt on key items such as adjustable rate mortgage readjustments until early 2007.

So at times like these, let's go back to our three-legged stool; the consumer, housing, and capital (business) spending. Let's also not make this harder than it is.

The consumer is slowing. Chain store and restaurant sales are telling you this in the two easiest, none big-ticket sectors to explore. The high cost of gasoline plays a large role here. Larger items, such as auto sales, are also hurting as Americans begin to readjust their vision of the ideal set of wheels given the fact $3.00 gas, or thereabouts, may stick around a while. Auto makers are suffering because they earn more on SUVs than they do on Gremlins and Pacers. [They still make these, don't they?]

Of course the consumer is also influenced by the wealth effect. Americans have jobs but wage increases are not keeping up with inflation; at least by any measure matched up against real world expenses such as for healthcare and college tuition. Additionally, Americans' biggest investment is their home and this creates a problem.

Chairman Bernanke told the House Financial Services Committee on Thursday that "The downturn in the housing market so far appears to be orderly."

Yeah, I'll buy that. Housing never crashes overnight, like stocks can. It takes time for it to all sink in when it comes to your home, but Americans are slowly beginning to understand that real estate's glory days are over. And over the next six to 12 months this hard reality will impact consumer spending in an increasingly big way. Anyone who doesn't believe that is getting their heroin directly from Afghanistan.

Homebuilders are increasingly offering large discounts, while at the same time the number of cancellations appears to be soaring.

[Regarding this last bit, I keep looking at those advertisements in the Wall Street Journal for the luxury condo complexes in areas such as Miami and Las Vegas. You just know many of these places, still only half-completed, are hurting.]

Inventories across the country are rising so quickly, as my friend Jimbo said this week, " 'For Sale' signs now appear to be as rooted on the front lawns as the oak trees to which they are juxtaposed." [At least that's the case where the two of us live.]

Which brings up another issue?affordability. Boy, this one is a killer. The Los Angeles Times had a piece that concluded only 11% of southern California households can afford a median- priced home using conventional financing. That spells trouble in River City, folks. And it's not like any of us are getting a break with our property taxes. Mine hit $10,000 this week?.for a condo in New Jersey!

Now if you tell me the economy will keep chugging along, as the Fed says it will, and that inflation will remain low, as the Fed says it will, then people will continue to "get by" for the most part. And one positive is the fact mortgage rates should not spike up because long-term rates appear to have peaked for now at still historically low levels.

[But it's those with adjustables that are getting whacked and in many parts of the country that's the vast majority of new homeowners.]

So that's our second leg of the stool. The third is capital spending and I hate to keep beating a dead horse, but aside from the fact a weakening housing and consumer sector don't spell good news on the cap-ex front, here you also have to deal with geopolitical events and you all know what the prospects are on this front, at least for the foreseeable future.

In the midst of this week's earnings reports, you already have some high-profile players like Intel, Dell and SAP expressing a bit of discomfort. Business software giant SAP, for example, said "The consumer spending environment is stable," not exactly "booming," or even "strong," while Dell and Intel warned of slowing commercial markets worldwide and, in the case of these two, price wars.

Well if the consumer, housing and capital spending are the three bulwarks of an economy, especially this one, what follows right below?

Earnings are trending down, as will become more visible in the second half (still growing, but at a much slower pace).

Interest rates, as measured by the 10-year, are stuck in a trading range, 5.00-5.20 percent, but I expect the 10-year to break below 5 percent decisively in the second half, which will actually help lessen the pain in the real estate market, short-term.

As for oil, it's anyone's guess. Tell me what Mahmoud Ahmadinejad and Grand Ayatollah Khamenei are going to do in Iran and I'll tell you where oil is going. Secondly, tell me what the weather gods have planned during this hurricane season and I'll firm up the oil picture even further. Otherwise, until the global economy tumbles into recession, which is coming, we aren't going to catch any significant break in oil prices, say below $60.

Lastly, China's growth rate for the second quarter came in even higher than I noted last week?11.3%...and their foreign exchange reserves are now $941 billion. Something's got to give, soon, and whatever it is it's not likely to be good for the rest of us.

--Stocks finished mixed on the week, with the Dow Jones and S&P 500 managing gains, solely because of Wednesday's big stampede, while Nasdaq fell for a third straight week (now six out of seven) based on the fact most of the dire earnings news was on high-profile issues like Intel, Dell and Yahoo!

But there were a lot of good earnings stories out of the likes of Apple Computer, Google, Honeywell, Caterpillar, Motorola, J.P. Morgan Chase, Bank of America, even stodgy Bank of New York. McDonald's also rocked and rolled last quarter due to the World Cup and rising breakfast sales; breakfast being the most important meal of the day, after all. [That's why I have a chocolate covered donut and a large coffee from Dunkin' Donuts, myself.]

Others on the down side, aside from the ones mentioned above, included Citigroup and Ford, while in the "so-so" category you had the likes of eBay.

Rates rallied some, but as alluded to above are still basically in a trading range, though now at the lower end of it. Bernanke's testimony helped, as did the fact we didn't have a blow-up on the inflation data.

For June, the producer price index came in at 0.5 percent, but only 0.2 percent core, while the consumer price index was 0.2, 0.3 percent core.

Year-over-year, the figures on the PPI are 4.9 and 1.9 percent, respectively, with the latter the core, ex-food and energy, increase. For the CPI the corresponding numbers are 4.3 and 2.6 percent. It's that 2.6 figure that has the Fed worried.

Housing starts for June were down 5.3 percent, adding to the good tone in the bond market since bond vigilantes love bad news, while there was a piece of better economic data in the form of a stronger-than-expected industrial production number.

[Correction: Last week I said the public/national debt was $8.3 trillion. I took that out of my short-term memory bank, which is faltering. It's really over $8.4 trillion.]

--Russian state-owned oil giant Rosneft came to market in London on Wednesday, the 6th-largest IPO in history, and was essentially unchanged. What's left of Yukos attempted to block the offering on the basis that Rosneft had stolen the former's assets, which it had, but the offering proceeded nonetheless. 49% of the shares were purchased by BP, Malaysia's Petronas and China's CNPC, with a fourth mystery buyer. Rosneft's future, however, is dependent on finding more reserves.

--On a different oil-related topic, I didn't have a chance to comment on this last week but the Journal ran this story that Saudi Arabia, through its use of new technology, actually has more oil than the "peak oil" adherents believe it does. Since I'm increasingly in the peak oil camp myself, I got a kick out of a commentary from my friends at Pritchard Capital.

"Yes, the Saudis have ramped up their drilling in a big way, and they are doing more complicated drilling, not because they want to but because they have to! They went from less than 20 operating rigs to over 100, going to 120 by year end. And yet Saudi production is still generally flat."

Recall a few weeks ago I told you of Norway's plight and how they are seeking more and more drills just to maintain production at existing levels, and also how many of these same rigs, both deepwater and shallow water, are heading to areas like the North Sea as well as the Persian Gulf, let alone the land rigs that are being reshuffled all over the world.

Bottom line, it's the rig operators who are profiting, of course, and there is a big backlog for new equipment. But they aren't necessarily finding any substantial new reserves.

--Bloomberg News had another related tidbit on Friday concerning Royal Dutch Shell and its quest for oil on Russia's Sakhalin Island and the seas north of Japan. Shell's Sakhalin II project has doubled to $20 billion as the company is desperate to replace reserves 'lost' amidst its overstatements of two years ago. Shell is facing all kinds of stumbling blocks here, including from environmentalists. It's the other side of the story that Big Oil doesn't do a good enough job at getting out when instead all we hear about are their excessive profits.

--And in keeping with the above, while no doubt Big Oil's profits have been humongous in this era of $50, then $60, then $70 oil, as Terry Keenan points out in the New York Post, last year ExxonMobil, Chevron and ConocoPhillips paid more than $44 billion in taxes, a 48 percent increase from 2004?.in case you're wondering how the U.S. budget deficit could be coming down so quickly. In fact, as Keenan notes, probably all of the $55 billion in "unexpected corporate tax receipts (cited by the administration) has come from the oil industry." That won't always be the case, and it also doesn't necessarily buttress the tax cutting adherents' argument, myself included.

--Former Brocade Communications Systems Inc. CEO Gregory Reyes (no relation to Mets All-Star shortstop Jose Reyes), is the first big fish to be fried in the options manipulation / backdating scandal. At Reyes's direction, Brocade manipulated its earnings and played around with compensation expense as new hires were given backdated options grants as part of Brocade's attempt to retain talent in the then competitive Silicon Valley environment. That's flat-out securities fraud.

The SEC claims at least 80 other companies are now under investigation and many in the Valley are probably feeling a bit queasy these days.

And, according to a joint study by academics at the University of Iowa and Indiana University, more than 2,000 companies, or about 29% of publicly traded entities, may have backdated or manipulated options grants for top executives from 1996 to 2005; not that this means it's all criminal behavior as the important part is disclosure and the accounting for the compensation expense.

--Staying in Silicon Valley, venture capitalists have roared back when it comes to funding Internet companies. In the first three months of this year the Los Angeles Times reports "venture investors funded 761 deals worth about $5.6 billion," up 12% from the same period last year with much of this going to online media and entertainment.

But while this isn't necessarily a good thing, as some talk of a second dot.com crash, understand that this figure is one-fifth the staggering $28.1 billion spent in the first quarter of 2000, according to PricewaterhouseCoopers.

--There hasn't been a more patient, long-term investor than Saudi Prince Alwaleed bin Talal when it comes to his huge stake in Citigroup. But as Citigroup disappointed the Street with its earnings this week, Prince Alwaleed said, "I'm patient, but enough is enough," in urging the banking giant to take "draconian measures to control costs."

--Shares in Microsoft recovered a bit despite a so-so report for the quarter on word it was dipping into its cash reserves to buy back $40 billion more of its stock. Since Wall Street started bitching that Mr. Softie wasn't doing anything with its cash, Microsoft will have shelled out $100 billion in both dividends and share repurchases. The company is, however, fairly optimistic concerning its current fiscal year.

--It's always nice to see an airline do well, even if it is at our expense much of the time. Can't live without them, after all, and I do like Continental. The carrier reported second-quarter net income of $198 million thanks to a 23 percent increase in passenger revenue, which offset rising fuel costs. Just keep that middle seat empty in my row, guys.

--Since the end of 2004, 44 of the top 55 executives at Fannie Mae have left amidst the accounting scandal at the mortgage giant.

--Amnesty International has blasted Yahoo, Microsoft and Google in a new report on human rights abuses in China's online market.

"All three companies have in different ways facilitated or participated in the practice of government censorship in China."

While the three claim they are only abiding by Beijing's laws and policies, Amnesty counters that "none of the companies has been willing or able to specify precisely which laws and legal processes it has been obliged to follow." [Financial Times]

--Further proof that the real estate bubble is global. From Bloomberg News and the South China Morning Post:

"Thai real estate groups are concerned the Bangkok housing market may slump, as the biggest new supply in nine years coincides with higher interest rates and a slump in consumer confidence."

--Legg Mason paid its CEO, Raymond "Chip" Mason, $35 million in compensation, including a $14 million cash bonus, for the year ended March 31. A shareholder advisory firm, Proxy Governance Inc. (what a lousy name), says this is 126% more than CEOs at peer companies and that his pay has risen 400% over the last two years. Legg's compensation committee said the pay is warranted because he closed a deal with Citigroup and it was necessary to keep him on board. Ah, where else is the guy going? He founded the company, for crying out loud, plus he's close to retiring.

--Inflation watch: "A 'perfect storm' of record summer temperatures, low global grain stocks and the expected growth in biofuels has seen wheat prices rise to 10-year highs and may lead to big increases in the cost of bread and pasta." [Financial Times] Of course, ex-food and energy, inflation is benign, so the government tells us, so what the heck do you care?

But this also means corn and barley prices will rise, which in turn means higher prices for beer! Aghhhhhhhh!

Actually, as Joe Bastardi of Accuweather recently told my friends at Pritchard Capital, all the talk of increasing usage of ethanol and other biofuels is incredibly dependent on the weather, to a far greater extent than we are taking into consideration.

--If your financial advisor ever uses the hackneyed expression "The biggest risk is in being out of the market," fire them; especially now that you're being paid a decent stipend to sit in cash and you also know the world is fraught with danger.

--The CEO of BetonSports was arrested in Dallas as he changed flights from the U.K. to his company's headquarters in Costa Rica. Of course online gambling is illegal in the U.S., even though without us Americans plopping down $billions each year, many of these offshore operations would be folding their tents. However, Congress doesn't appear ready to make it totally clear, through legislation, just what is truly illegal behavior. So fear not, gamblers.

--Real Estate Bubble, part LXCVIII?. "Tennis star Andre Agassi is trying to sell for $22 million a San Francisco-area home he bought five years ago - for $23 million." [Wall Street Journal]

And what does it feature? Two pools, three spas, a hydrotherapy waterfall and a tennis court.

But wait?.there's more! The 10,500-square foot main residence includes a theater, a four-bedroom children's wing (hope it's supervised) and views of San Francisco and the Golden Gate Bridge.

But wait?.there's more! It also comes with a detached four- bedroom staff quarters (undoubtedly unsupervised) and a separate guest house.

Don't tell anyone, but I'm waiting for it to go down to $18.5 and then I'm pouncing.

--And lastly, we note the passing of the chairman of Hooters, Robert Brooks, who died suddenly at the age of 69. I offer without comment his credo, as told to Fortune magazine in 2003.

Russia: President Vladimir Putin was on display this week as he hosted the G8 summit in St. Petersburg, so what did we learn and what was accomplished?

Well, if you didn't know it before, he's mighty confident these days, puffed up as he is on oil revenues. At their first press conference, Putin and President Bush were asked about the process of establishing democracy in Iraq and Putin said, "We certainly would not want to have the same type of democracy that they have (there)," adding, "It is true that we assume that nobody knows better than us how we can strengthen our own nation. But we know for sure that we cannot strengthen our nation without developing democratic institutions. And this is the path that we'll certainly take, but certainly we will do this by ourselves." [New York Times]

"President Bush raised the subject of Russian politics deferentially. 'There will be a Russian-style democracy,' he conceded, borrowing from the Kremlin's talking points; 'I don't expect Russia to look like the United States.' British Prime Minister Tony Blair took the same approach, saying he would raise the question of democracy 'without wrecking the hotel room.' But this gentlemanly style did not appeal to Mr. Putin?.

"If this is how Mr. Putin behaves when the eyes of the world are upon him, the coming months look bleak. Russia's leader has already squashed the independent media. He has emasculated the powers of Russia's parliament and the independence of its judiciary. He has abolished regional democracy, replacing elected governors with Kremlin appointees. Anyone who challenges Mr. Putin's authority faces semi-legal harassment: tax inspections, lawsuits, regulatory restrictions on efforts to open offices or hold meetings."

"(With) bloodshed in the Middle East showing little sign of abating, there are limits on what the leaders ensconced in St. Petersburg's ornate splendor can achieve in the short term, and especially when the host is in such an irascible mood. President Putin was overcome twice in a single day by the diplomatic equivalent of a Zidane moment. His decision to head-butt President Bush over Iraq and knee Tony Blair in the groin over Lord Levy [ed. enmeshed in a corruption scandal that taints Blair] speaks volumes about his defensiveness over the shortcomings of Russian democracy and corruption. That Mr. Putin should deliver such obviously premeditated insults to two men who have invested huge amounts of time and capital trying to sell him to skeptics may have tickled his domestic audience but it irked his guests."

"Vladimir Putin thinks that he is riding high. He approached the G8 summit facing international opprobrium for Russia's creeping autocracy. He has returned to Moscow stronger than ever; the star of three packed press conferences (two of them held, in the manner of a cult jazz musician, after midnight) and the creator of a new 'architecture for the future of international relations.' Far from being lectured on democracy by Messrs Bush and Blair, he had the temerity to lecture them. To cap it all, they chatted candidly into a live microphone that they had assumed was switched off.

"Their actual conversation, for all the inevitable attempts to mock it, was a sensible analysis of an intractable problem and a discussion of possibly diplomatic solutions. That problem may have eclipsed the summit's formal agenda, but the Russian media were still partly justified in calling the event a triumph for the host nation. Barring a total collapse of its relations with the West, Russia's membership in the G8 now seems assured."

But what of the issue of "energy security" that was to dominate discussion before other events overwhelmed it? Nothing happened. Russia refuses to ratify the Energy Charter Treaty, which governs energy investment and transit issues in Europe, Russia and other nations. In other words, Russia will continue to use the likes of state-owned Rosneft and Gazprom to jerk everyone around as it sees fit. Particularly in the case of Gazprom, it has become the sole legal exporter of Russian natural gas, which supplies the lion's share of Europe's needs.

And then there is this battle over Gazprom's giant Shtokman natural gas field. Putin, recognizing Russian companies can't develop it alone, will soon be selecting one or two outside players, such as France's Total and U.S. majors Chevron or ConocoPhillips, to help in the project.

But this week Putin heaped praise on Norway's Norsk Hydro and Statoil. You don't have to be a rocket scientist to read between the lines on this one.

"You have probably heard that we are holding talks with several countries on the development of different fields," Putin said. "But companies from Norway are among the first on this list. This is a very comfortable partner for us for many reasons. First of all, they don't go around with their noses in the air; they work objectively, very professionally." [Moscow Times]

In all seriousness, this statement was as telling as anything else we heard all week when it comes to the direction Putin is taking his nation in. On the other hand, Putin could be holding up Chevron and ConocoPhillips because of the failure of the U.S. and Russia to reach agreement on World Trade Organization accession. Supposedly, talks on this issue broke off over Washington's demand for more copyright protection as well as a bigger market for U.S. farm products.

Back to Shtokman, though, much of the gas from this project is to be shipped to the United States in the form of liquefied natural gas, or LNG, and on this front at least Statoil has been marketing LNG to the United States for several years.

But there was one other significant item this week, and it came after the G8 summit wrapped up. Putin met with the leaders of China and India, speaking of a new "architecture" in international relations.

"After the collapse of the bipolar world, our world has not become safer," Putin said. "On the contrary, it has become less predictable."

"Since the entire system of international relations had been worked out in previous decades to serve a bipolar world, we do not have the tools to address the challenges of today. And, therefore, here we are developing the architecture for future international relations."

Speaking of China and India, specifically, Putin went on, "Our approaches to key international problems are very close or, as the diplomats say, they practically coincide."

"The underpinnings of Russia's relations with the wider world are unchanged by two days of pageantry on the Gulf of Finland: its economy is, for now, thriving but critically vulnerable to gas and oil price fluctuations; and it remains endemically corrupt, with no rule of law and therefore no guarantees for foreign investors such as those now considering a stake in Rosneft, the state oil giant.

"What did change at St. Petersburg was the West's perception of Mr. Putin as an individual. His guests paid him the courtesy of muting their criticism of his anti-democratic tendencies. He repaid them with wisecracks about Lord Levy and Iraq. A little more grace, and less hubris, would have served him and his country better."

There was one positive development out of St. Petersburg, and not to be underestimated; that being a new global initiative between the U.S. and Russia to combat nuclear terrorism and hopefully secure weapons-grade material. Within months, the two should be joined by China, Japan, the other major European powers, Kazakhstan and Australia.

But on a somewhat related note, aside from us finding out this week that Iran had representatives observing the recent North Korean missile tests (though not one educated person on the planet should be surprised by this), we learned that Russia's early warning system failed to see two of Pyongyang's bottle rockets hit near Russian territory.

I've written quite a bit on this topic over the years. Russia desperately needs to upgrade its satellite capacity. There are tremendous holes in its coverage and that's how you can easily have an accidental nuclear war. Recall during Boris Yeltsin's presidency that the Russians mistook a flock of geese for a surprise attack but it was Yeltsin, and a courageous Russian general, that called off a counterstrike for a non-existent threat at the last possible minute.

North Korea: The U.S. totally abandoned Japan and its hard line on North Korea in favor of China and their jerking us all around. So the Security Council came up with a vastly watered down resolution that "strongly urges" North Korea to cease its nuclear weapons program. Japan had sought to include more sanctions and provide for enforcement by armed intervention.

With Washington convincing Tokyo to give Beijing more time with its own diplomatic effort, of course the Chinese mission failed. Or rather China wanted it to fail in order to make life even more difficult for President Bush.

Meanwhile, South Korea appears to be firm in suspending food aid shipments to the North and in retaliation Pyongyang said it will end cross-border family reunions. President Roh still argues, however, that the world shouldn't "overreact" to the missile tests.

China: And lest you forget the threat from here, a report by Wendell Minnick of Defense News.

"China plans to deploy by year's end the first of 60 Dong Feng 31-series intercontinental ballistic missiles (ICBMs), which will be the first Chinese nuclear-tipped weapons that can target all of Europe or the entire continental United States.

"This new capability raises a question among China-watchers: Will Beijing change its stated policy to use nuclear weapons only in retaliation for an atomic strike?"

By 2010, China will also have deployed five to seven new nuclear-powered submarines, each with 16 nukes capable of hitting any target in the U.S., thus creating a far more deadly threat.

Taiwan: The military held its biggest live-fire drills in 20 years on Thursday, showcasing its defenses against a Chinese attack.

India: Prime Minister Manmohan Singh is taking a harder line following the deadly Mumbai train bombings. The first real arrests were made on Friday, though what terror groups are actually responsible is still sketchy.

But there was a different, rather troubling development in India this week; that being the blocking of some Web sites that host the country's most popular blogs; yes, censorship. Some of the Internet providers, though, have failed to cooperate. The government has yet to offer a good explanation, though it is sensitive to criticism on anything terror-related.

Ukraine: It seems certain former president Viktor Yanukovich, a friend of Moscow's, will return as prime minister in a new governing coalition following four months of political stalemate after the March election. Yanukovich, though, is still expected to steer Ukraine to membership in the European Union and NATO. But Putin now has a man who would likely do his bidding. As for President Viktor Yushchenko, he is a greatly weakened figure at this point.

Mexico: Lopez Obrador refuses to give up and last Sunday called for a campaign of "peaceful civil resistance" in addressing a rally of 1.1 million supporters. [Another is slated for July 30.] Lopez Obrador now claims fraud at 60,000 of 130,000 polling places in his contest against President-elect Felipe Calderon.

Of course this whole story is getting lost in the U.S. with everything else that's going on, but by the first week in August it could be capturing more attention unless Lopez Obrador gives it up. By the way, some of the participants in the rally held banners that read "Death to Calderon." Lovely.

Dow Jones +1.2% [10868]
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Russell 2000 -1.4%
Nasdaq -0.8% [2020]

Note: For more on Lebanon, you may want to check out my July 20 edition of "Hott Spotts." Then again, you may be so sick of the topic you'll opt for some fresh air instead.

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