Week in Review 
For the week 8/21/2006 - 8/25/2006
Brian Trumbore
President/Editor, StocksandNews.com

Ireland, Housing and the Global Economy

As I was out of touch with the world Wednesday through Saturday, except for an Irish newspaper, and spent most of Sunday flying home, my comments will be brief and I'll catch up on the world-at-large next time.

I spent four days golfing and renewing friendships in the western Ireland seaside town of Lahinch, where they have a spectacular links course and I'm also privileged to be an overseas member. Depressingly, I never played worse and our threesome was in the back of the pack thanks to me not carrying more of my share of the load, but enough of this Shia-style self-flagellation. I'm a lucky, lucky guy and I didn't have to watch any videos of JonBenet Ramsey for the better part of a week.

One thing I do know about Ireland is that since my first trip in 1989 the Emerald Isle has not only changed, in some respects it's changed for the worse. Some of the charm is gone and it has to do with the raging success of the Irish economy and its people.

And what's so bad about that? Crime is soaring. In fact the Sunday edition of the Irish Times had a front page story as I was leaving that Ireland's crime rate in categories such as theft, burglary, assault, and sexual attacks is now the highest in the European Union. [Crime overall is dropping in the EU, but rising here and in Belgium. In the latter's case they have a growing issue with fascism that I've written of before.]

There's a brand of hooliganism among Ireland's youth that didn't exist before and for the first time in fifteen or so trips I noticed something was amiss. My local friends also had no problem telling me things have changed.

Every society, whether it's in Asia, Latin America, Europe or the U.S. and Canada has seen rising standards of living, but success often breeds excess and it's manifested in different ways. In the U.S. it's been mostly about material goods, but we've also had to deal with the flipside of rising inequality, which will be even more apparent and troublesome as our economy slows and we're hit with the downside of the housing bubble.

And talk about a property bubble, Ireland has one of its own in spades. For the month of July the average home rose 15% in value, year-over-year, and is still expected to rise 12% for all of 2006. At the same time official inflation (like in our consumer price index) is rising at a 5% clip (2 ? times the EU target of 2%), but the cost of items such as housing, healthcare and energy is running at a 10% rate. [On the energy front, incidentally, the region has major concerns over still declining production from North Sea oilfields.]

Like everywhere else that has seen a bubble in real estate, from Spain to Moscow, to New York and Los Angeles, across to China and South Korea and down to Australia, speculators have been fueling the excess. In Ireland this comes in the form of non-nationals; as in 1 in 5 homes purchased there are bought by Americans, Asians and other Europeans and this all helps lead to the biggest issue worldwide these days when one talks about a home?.affordability.

No matter what developed or developing nation you're referring to, people are taking on debt at astronomical levels, but whereas in the past it was mostly of the consumer variety, i.e., credit cards, today it's layer upon layer on just about everyone's largest asset, their home.

So while each nation is in various stages of the cycle, with Ireland in the process of gradually topping out (it may not look like it yet by the numbers but it's started) and the United States having peaked last fall, there is no way any rational mind can say we don't have a serious issue of global proportions, with, as is always the case, the ones who can least afford it being hit the worst.

Just to finish up on Ireland, though, and on the good news side, back in 1987 the unemployment rate was 18%. Today it's 4.1%. Tourism was up 13% for the first half of the year and GDP will likely grow in the neighborhood of 5%.

What's particularly interesting, however, especially for those who remember the days when Irish youth fled to other countries for opportunities they couldn't find at home, a trend long since reversed, today it's the Poles who are emigrating to Ireland. In fact a staggering 150,000 since 2004 with an even greater number landing in Britain, thanks in large measure to Poland's sky high 16% jobless rate with a pitiful wage structure to boot.

Iran, Iraq, Lebanon

I've said for well over a year now that Iran has played the West for chumps and this week the New York Post's Ralph Peters wrote "Iran's been playing poker while the West plays Old Maids."

The week started with Iran's extensive war games "planned in response to the evil intentions of the enemy," according to an Iranian general. They fired off some impressive looking missiles (with more today) and the message was clear. Don't mess with the mullahs.

Then on Monday, Iran turned away UN inspectors attempting to search a suspected nuclear facility in a clear violation of the Nuclear Nonproliferation Treaty. Ayatollah Khamenei said his nation "will continue its path" of nuclear liberation.

Next, the long-awaited August 22, which Iran had telegraphed as the date it would tell the world what its plans were. Some, such as Islamic scholar Bernard Lewis, saw some sinister message in the selection of a date with historical meaning in the Islamic world, but as it turned out all Iran wanted to do was present a 23- page document that basically said it was willing to accept a new round of talks under a "new formula."

Ah yes, just like former North Carolina basketball coaching great Dean Smith and his four-corners offense in the days when there was no shot clock. It's a continuation of Iran's brilliant delay game as it knows the world's powers are split on what to do next. The United States and Britain would like to see sanctions levied, as would even France, for Iran's failure to comply with a UN Security Council Resolution demanding Iran stop enriching uranium by Aug. 31, but France wants to still pursue a diplomatic track further and as for Russia and China, well, you shouldn't be surprised they're backtracking in a big way.

All of which means this Thursday's deadline will come and go with little real consequence as deep in the bowels of tens of sites across Iran, the mullahs edge ever closer to having the bomb?an Islamic bomb.

Regarding Iraq, last Sunday on "Meet the Press" Republican Senator John McCain reiterated we need more troops in Baghdad, but not just borrowed from somewhere else in the country, and once again called for Secretary of Defense Rumsfeld's resignation (in so many words), saying he has "no confidence" in the man.

The violence in Baghdad proper, though, has lessened slightly with the infusion of more troops over the past few weeks, but going from suicide attacks killing an average of 70 a day to 30 isn't exactly cause for a victory parade and Sunday was another bloody one with at least 60 dead.

Iraqi Prime Minister Maliki got key tribal chiefs to pledge their support for his efforts, but let's face it, it all comes down to corruption and divvying up the oil revenues. Unless it's done in an equitable fashion, with the Sunnis receiving a fair share, it's going to be hard for the United States and its few allies left in the theatre to exit with dignity.

It doesn't help when Iraqis feel as they do. According to surveys of public opinion from 2004 and 2006, there is an "increased feeling of powerlessness, insecurity, pessimism and a striking level of distrust of U.S. intentions among all three of Iraq's major ethnic and religious groups," as stated in U.S. News & World Report. And when asked for "the three main reasons for the U.S. invasion," less than 2% picked "to bring democracy to Iraq" as their first choice. "To control Iraqi oil" was selected by 76%, followed by "to build military bases" (41%) and "to help Israel" (32%). But the sponsors of the project, the National Science Foundation, did at least find a rise in support for secular politics.

Lastly, we have Lebanon. On Sunday, Hizbullah's Hassan Nasrallah admitted that if he had to do it over again he wouldn't have kidnapped the two Israeli soldiers because of the consequences. Israeli officials are saying this is proof Israel, not Hizbullah, won.

More importantly is the reaction in the streets of Lebanon as it begins the painful process of rebuilding. A week ago Lebanese Speaker Nabi Berri and Prime Minister Fouad Siniora spent less than an hour in bombed out south Beirut, Hizbullah's stronghold, in their first visit there a week after the fighting had stopped.

A local resident told the Daily Star, "Hizbullah's officials were here from the very first day and their party started working on the ground lifting the rubble and assessing the damage before the government even thought of thinking of us. Why do we love Hizbullah and why are we volunteering to help? I tell you it is because they took care of us and they still do, and it's about time we take care of them."

Otherwise, the week saw movement in building a UN peacekeeping force for south Lebanon as France agreed to up its troop levels to 2,000, as well as lead the force until February, while Italy said it would contribute 3,000 and command it afterwards. [Spain is talking 1,200 and Turkey could end up supplying 5,000 of the 15,000-strong army that will work with 15,000 Lebanese soldiers.]

But while some such as Italian Prime Minister Romano Prodi talk of a new "era of responsibility," there is really just one issue; disarming Hizbullah. Here there are no takers. The UN force won't, even though it's in their mandate to do so, and obviously Lebanon's army, replete with Hizbullah sympathizers, won't pick up arms against their new brothers. So just as in the case of Iran, the world community, including the U.S., talks a good game and nothing more.

As for Israel, Prime Minister Olmert's popularity has plummeted in the aftermath of the disappointing way Israelis now see the war as having been fought, with 63% wanting him to resign. Former Prime Minister Benjamin Netanyahu's support is rising fast. Of course it doesn't help Olmert that his president, Moshe Katsav, is under investigation for sexual harassment and Israel's Justice Minister Haim Ramon resigned over allegations he forcibly kissed a teenage woman soldier during a party at government offices. Earlier, before the war, the army chief of staff, Lieut. Gen. Dan Halutz, was selling his stock holdings so as not to lose on his investments when the shooting started.

Wall Street

The market meandered downward, pressured by the latest dismal readings on housing as both sales of new and existing homes fell yet again in July while inventories soared. By one measurement the median home price is now up only 1% over the previous year as the comparisons continue to weaken. Merrill Lynch chief economist David Rosenberg believes the chances of a hard landing in real estate are now 40-80% and as housing is the "quintessential indicator," just as in the bursting of the tech bubble it spells big-time trouble.

I was reading a story in U.S. News & World Report about housing's importance in the overall economy and while I've broached this topic ad nauseum for years now it's still worth repeating that 1 in 10 jobs, nationwide, are housing-related. In some coastal regions of Florida the sector accounts for 1 in 5. Separately, Josh P. wrote that for the month of July in San Diego County, 1,300 construction jobs were shed. That's just the beginning.

So for those expressing little concern, think again. By the end of this year an awful lot of folks will be facing negative equity on their homes and when it comes to consumer behavior the reverse wealth effect isn't a good thing, let alone if you have a home equity loan or two on top of it. Santa could be traveling light this year.

Street Bytes

--U.S. Treasury Yields

6-mo. 5.16% 2-yr. 4.86% 10-yr. 4.79% 30-yr. 4.93%

Bonds continued to rally on the feeling the Federal Reserve is finished raising interest rates due to the overwhelming evidence the economy is slowing, as best exemplified by the housing data, while the latest figures on durable goods (big ticket items) were weaker than expected.

--German investor confidence plunged to a five-year low this month, a rather worrisome development for the health of Europe's largest economy.

--Ah, politics and defense contractors. BAE, the British defense group, has contributed over $670,000 to U.S. candidates this election cycle, 68% of which has gone to Republicans. $20,000 apiece has been forwarded in plain brown paper to Congressmen Jerry Lewis (R-Ca.), John Murtha (D-Pa.), and Duncan Hunter (R-Ca.), the three biggest figures on the House side in appropriating funds for defense contracts. [Financial Times]

[Foreign companies can do this through U.S. subsidiaries.]

--Former tech investment banker Frank Quattrone avoided a third trial on obstruction of justice in the IPO scandal and will be able to continue as if nothing happened in his beloved financial services industry. Quattrone will be setting up an investment boutique specializing in huge paydays.

--Ford extended buyouts to all workers, not just those previously identified in specific plants.

--In Ireland, Coca-Cola remains the leading grocery brand despite lower prices for many generic offerings. And believe it or not, Budweiser is the top beer and alcohol brand, with Bud ahead of Smirnoff, Heineken, Bulmers, Guinness, and Jameson.

--Prudential Securities agreed to pay a fine of $600 million for its failure to supervise a number of brokers in its Boston branch as a result of the mutual funds market timing scandal going back to 2001. [Prudential's brokerage arm is now under the name of Wachovia Securities these days.]

--Chile's tourism is up 16.5% for the first six months of the year.

--And while I was away my carbon fiber stock play showed some life, which makes coming back a little easier.

Foreign Affairs

[Just this one other item of note]

Mexico: With the nation's Federal Electoral Tribunal slated to name a president-elect by September 6, and with that choice expected to be Felipe Calderon, opposition leader Andres Manual Lopez Obrador continues to call for a full recount of the July 2 vote.

"If the fraud is ratified, I could not recognize the institutions, (and) obviously I would not recognize Felipe Calderon because I would consider him to be a spurious, illegal and illegitimate president. We would fight to make democracy count."

Geezuz, Lopez Obrador is a real pain.

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Pray for the men and women of our armed forces.

God bless America.

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Gold closed at $631
Oil, $72.51

Returns for the week 8/21-8/25

Dow Jones -0.9% [11284]
S&P 500 -0.6% [1295]
S&P MidCap -2.0%
Russell 2000 -1.8%
Nasdaq -1.1% [2140]

Returns for the period 1/1/06-8/25/06

Dow Jones +5.3%
S&P 500 +3.8%
S&P MidCap -0.3%
Russell 2000 +3.9%
Nasdaq -3.0%

Bulls 40.0
Bears 34.7 [Source: Chartcraft / Investors Intelligence]

Have a great week. I appreciate your support.

Brian Trumbore

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