Educate Yourself

Week in Review
For the week 8/28/2006 - 9/1/2006
Brian Trumbore
President/Editor, StocksandNews.com

This week the Rasmussen polling people tracked me down and I was asked the standard questions you've seen before. I gave President Bush a poor grade in terms of overall job performance and his handling of Iraq, but, as a Republican, I still said the president and the Republican Party were better able to handle the war on terror than the Democrats. So I'm a classic example of the divergence that occurs with many voters when it comes to Iraq and the broader conflict.

And so it was this week also saw the administration pound away on the same themes it has for years now; that exiting Iraq would be "disastrous," as Bush put it, and that "We either fight them there or we fight them here."

But increasingly the public isn't buying the linkage of Iraq and the global war on terror as defined by 9/11.

Secretary of Defense Donald Rumsfeld had this to say in a speech to the American Legion National Conference.

"With the growing lethality and availability of weapons, can we truly afford to believe that somehow vicious extremists can be appeased?

"Can we really continue to think that free countries can negotiate a separate peace with terrorists?

"Can we truly afford the luxury of pretending that the threats today are simply 'law enforcement' problems, rather than fundamentally different threats, requiring fundamentally different approaches?

"And can we truly afford to return to the destructive view that America - not the enemy - is the real source of the world's trouble?"

"We also should be aware that the struggle is too important - the consequences too severe - to allow a 'blame America first' mentality to overwhelm the truth that our nation, though imperfect, is a force for good in the world.

"Consider that a database search of the nation's leading newspapers turns up 10 times as many mentions of one of the soldiers punished for misconduct at Abu Ghraib than of Sgt. 1st Class Paul Ray Smith, the first recipient of the Medal of Honor in the global war on terror."

Here's what's frustrating to yours truly, as I'm sure has been well apparent for over three years now in reading this column.

Republicans/neocons such as me feel abandoned and the administration, in blasting critics of the war, acts like the opposing fire is only coming from Democrats. Like the vast majority of you (at least in the American audience), I agree totally with the principles of why we are fighting as spelled out by the White House, though where some of us disagree is that I still support the mission in Iraq (barely).

But what's unconscionable is that our president, as I noted countless times while it was happening, was AWOL, particularly during the critical summers of 2003 and 2004 when changing course could have crushed the incipient insurgency in its tracks. And we have a defense secretary who has flat out lied to the American people and should have been tossed out years ago.

I wrote back in this space on 5/10/03 that while I was overseas then I saw Rumsfeld proclaim the war in Afghanistan was over. "Bull," I thought. "He's lying." I then added that "Donald Rumsfeld has lost me."

I also need to make mention again of my opening for that same column from over three years ago, a quote from Max Boot and The Weekly Standard.

"Our armed forces have won a triumph, but an inept political strategy can easily leave the fruits of victory to rot on the vine."

That's exactly what's happened and it's why our president has such little credibility, be it over Iraq or Lebanon.

There was important hard news here this past week. A battle between the Iraqi Army and the forces of Moqtada al-Sadr's Mahdi militia claimed 80 lives, many of whom were Iraqi soldiers. Prime Minister Maliki has given his fellow Shiite Sadr far too much room but Maliki feels he can't have a semblance of peace without Sadr's support. Sadr of course knows he has Maliki over a barrel. As Senator John McCain said, Sadr should have been taken out long ago. Just as troubling, many of the newcomers to the Iraqi Army (which we've been told is far more effective and reliable than the corrupt and insurgent-ridden police force) now refuse to fight against their brothers on both sides, be they Sunni or Shia.

And that coordinated attack on Thursday on the apartment complex that killed over 50 was particularly distressing. The remote-controlled bombs were placed on the roofs for the purpose of collapsing the buildings.

Also, we learned on Friday that the Pentagon has issued a depressing report to Congress on the future of Iraq and the upsurge in violence.

But, believe it or not, there was some good news that went unreported except in the Financial Times, as far as I could ascertain. The Iraqi government has begun hashing out an agreement on the sharing of oil revenues, an item I mentioned again just last week. There is a long ways to go, particularly when it comes to items such as the Kurds and revenues from "future fields," but a solution to this critical issue would be a sign of progress.

There really isn't a lot to say about this one that hasn't already been said. The UN Security Council's Aug. 31 deadline for Iran to stop its uranium enrichment has come and gone, the International Atomic Energy Agency has confirmed that Tehran is indeed still enriching uranium (though on what kind of scale or where is unknown), Iran said it would continue to do so because "production of nuclear fuel is one of Iran's strategic objectives," and President Bush said there would be "consequences" for Iran's intransigence, yet clearly none appear to be forthcoming in the short run.

"The Iranian nation will not accept for one moment any bullying, invasion and violation of its rights."

So where does this leave us? In a stalemate, just as Iran prefers it to be. The five permanent members of the Security Council (U.S., Britain, France, Russia and China) plus Germany will now discuss the levying of minimal sanctions such as travel restrictions on Iran's leadership and perhaps some financial roadblocks, such as access to capital markets, but Russia has already said it's too early for sanctions, China will go along with the Kremlin, and France is likely to call for further negotiations; leaving the U.S., Britain and perhaps Germany with little option but to attempt to go it alone and levy their own sanctions, which would have zero impact.

What we did see this week was talk that Iran is stumbling in its enrichment efforts, even though last week they opened up a heavy water plant which could be a key source of fuel for nuclear weapons in its own right. It is said that Iran may not be advancing as rapidly as it had hoped in creating the vital centrifuge cascades.

But there is absolutely no way anyone can know, whether it's the IAEA or the U.S. Remember, the IAEA missed Iranian nuclear activity for 18 years (as did the U.S.) and it was the U.S. that was shocked when Pakistan tested its atomic bomb. So when you hear all these pronouncements, as were made yet again this week, that Iran is at least five years away from having a weaponized device, question them.

"Russian and Chinese leaders have personally assured (Bush) they would back sanctions if Iran refused (as it has) to stop uranium enrichment. The president must hold them to their word, warning that their relations with America will be jeopardized if they balk."

But then Barnes adds, "It's also time to make clear to Iran that the military option is indeed an option. In short, Bush should not wait for Iran's unlikely compliance, allowing the United States to look ineffectual, if not indeed a patsy."

I would agree with this line of reasoning were it not for the fact that our own military is not only a shell of its former self at this moment because of the deployment in Iraq, but we have no clue what to target.

At the same time there is the thought that we could at least set back Iran's program another five years or so (that is if they don't write any checks to North Korea or Pakistan and acquire the nukes that way), but of course this would lead to blowback, and in forms we perhaps can't begin to imagine.

The time is drawing near when the United States Congress is going to have to very publicly debate this on the House and Senate floors. This is the paramount issue of our times and for our leaders, from both sides of the political aisle, to now shirk their responsibilities would be its own crime against humanity.

As I noted last week, Hizbullah leader Hassan Nasrallah admitted that if he had known Israel would go to war over the kidnapping of just two soldiers he wouldn't have done it, which led Israeli officials to crow that yes, indeed, Israel, not Hizbullah, had won. I then pointed out, though, that it was still about reaction in the Arab street, particularly in Lebanon itself.

"So much for the 'strategic and historic victory' Nasrallah had claimed less than two weeks earlier. What real victor declares that, had he known, he would not have started the war that ended in triumph?

"Nasrallah's admission, vastly underplayed in the West, makes clear what the Lebanese already knew. Hizbullah may have won the propaganda war, but on the ground it lost. Badly.

"True, under the inept and indecisive leadership of Ehud Olmert, Israel did miss the opportunity to militarily destroy Hizbullah and make it a non-factor in Israel's security, Lebanon's politics and Iran's foreign policy. Nonetheless, Hizbullah was seriously hurt. It lost hundreds of its best fighters. A deeply entrenched infrastructure on Israel's border is in ruins. The great hero has had to go so deep into hiding that Nasrallah has been called 'the underground mullah.'

"Most important, Hizbullah's political gains within Lebanon during the war have proved illusory. As the dust settles, the Lebanese are furious at Hizbullah for provoking a war that brought them nothing but devastation - and then crowing about victory amid the ruins."

"In the Middle East, however, promising moments pass quickly. This one needs to be seized. We must pretend that Security Council Resolution 1701 was meant to be implemented and exert unrelieved pressure on behalf of those Lebanese - a large majority - who want to do the implementing."

I agree with much of what Krauthammer says, but I disagree with his take that Lebanese are furious at Hizbullah. They are far more upset at Israel, at least for now, and as long as Iran can keep the money flowing to Hizbullah, and Hizbullah can be seen publicly aiding the reconstruction effort, they will still maintain enough hearts and minds to fight another day. I can not envision, for example, Hizbullah losing seats it already held in parliament whenever that body holds new elections.

What we did see this week was a donor conference in Stockholm for reconstruction aid and it will be interesting to see what portion of the nearly $1 billion pledged is actually forthcoming. In Iraq, for example, only $4 billion of an originally pledged $13.5 billion has been forked over but that is likely a result of anti-U.S. sentiment.

Speaking of Washington, the White House better hand over the $170 to $230 million it has pledged to Lebanon?like on Monday. Our popularity couldn't be lower and as I documented the past 1 ? years the Bush administration ignored Lebanon when the government of Fouad Siniora was crying for help before the war started.

"The current 'talking points' of U.S. officials include an assertion that Washington's 'support' for Beirut is dependent on the latter's taking bold steps to disarm Hizbullah. This is accompanied by a tacit threat that if Sayyed Hassan Nasrallah's organization continues to exist in its current form, Israel will resume its offensive against Lebanon - this time with even more of a green light from an increasingly impatient America. During the 34-day onslaught that ended on August 14, the U.S. government appears to have experienced internal divisions over the extent to which it should encourage and re-supply the Jewish state, but the end-result was a policy of unconditional backing for a campaign that primarily destroyed civilian lives and civilian property. Any suggestion that the current administration is a 'friend' to Lebanon is therefore viewed with understandable skepticism.

"From the perspective of many Lebanese, being America's friend carries precious few benefits. Prime Minister Fouad Siniora has done his utmost to respect U.S. wishes on a variety of fronts, only to be sent away empty-handed whenever he has asked for anything in return. American policy vis-?-vis the devastating war with Israel was no more than a highly purified version of this formula, with Washington repeatedly claiming that it was concerned about the stability of Siniora's government but simultaneously helping the Jewish state to mete out more and deadlier punishment.

"Especially in this part of the world and particularly for a tiny country like Lebanon, the absence of effective support means no support at all. The presence, meanwhile, of active and enthusiastic support - diplomatic, economic, military - for a powerful invader is difficult to see as anything other than unabashed betrayal.

"Lebanon and the wider Middle East need a powerful force to help local fires from spreading across the region. The United States has the might and the influence to supply such a stabilizing influence, but it has thus far lacked two other necessary qualities: even-handedness and consistency. This is indeed a tragedy of the highest order, for what other nation on the planet has so storied a history upon which to base its credentials as an honest broker and a supporter of democratic freedoms? Washington's selective enforcement of both U.S. and international law - always to the benefit of Israel - robs it of the credibility it needs to be trusted by Arabs and Muslims, let alone to call itself their 'friend.' The current situation in Lebanon is just the latest episode of a long-running horror show of American inconsistency, and the Lebanese need look no further than Palestine for another recent one: the collective punishment and economic strangling of a people who dared to elect a government that defied Washington's diktats."

The above is what the likes of Charles Krauthammer just don't get. Sadly, the Daily Star is right in almost every respect.

"Lebanon will be the last Arab country to sign a peace agreement with Israel after 300 million Arab citizens sign it. There will be no agreement with Israel before there is a global peace deal that is just and lasting."

"Where there is great trauma, wild ambition brings up the rear. At the end of the 34-day war between Lebanon and Israel, there were those calling for a grand transformation of the political system. The thinking was that since a major overhaul of the country was in motion, then why not toss out the corrupt political class with the debris of Bint Jbeil and Qana? This reasoning was shallow, particularly with regards to a new Cabinet. Negotiating a fresh division of power would be so divisive, so certain of leading to prolonged deadlock, that Lebanon would be unable to adequately manage the aftermath of Israel's onslaught?.

"How can Siniora defend his government? For one thing, he needs to put reconstruction of Shiite areas on a fast track. Hizbullah is trying to exploit public disgruntlement with the slow pace of rehabilitation by turning it against the state. No one can compete in terms of speed with cash handouts from Hizbullah suitcases, but more can be done by the government to explain its reconstruction strategy and tell people in demolished areas what to expect. Hizbullah knows that the support it enjoys depends on its efficiency in addressing Shiite distress; the state should be making the same calculation, if only because it cannot afford to face a large community of angry Shiites, backed by an armed organization that will exploit this to advance its own parochial objectives."

As for Israel, Prime Minister Ehud Olmert rejected a far-reaching inquiry into his government's handling of the conflict, choosing an internal investigation instead. But then his defense chief, Amir Peretz, called for an independent one, so the internal chaos here continues. Regardless, Israel needs to lift the blockade of Lebanese waters, immediately, as it's killing Lebanon's fishing industry and only further aiding Hizbullah.

It's still largely about housing. This week the National Association of Realtors' pending home sales index plunged 7% in July, the biggest such monthly decline in five years.

Following are two opinions, the first from Karl E. Case and Robert J. Shiller, with Shiller having also famously called the crash in tech stocks.

"Looking back at past housing booms, the first sign of the end is when a goodly share of buyers stop making offers and eventually stop looking, seeming to just disappear. In the spring of 1987, during another U.S. housing-market boom that was starting to lose speed, Nora Moran, president of the Greater Boston real estate board, said 'someone blew a whistle that only dogs and buyers heard.'

"This incredible boom has been fueled in part by favorable demographics, low interest rates, a very liquid mortgage market with low down payments and borrower-friendly underwriting (option arms, interest-only, stated-income, etc.), a baby boomer generation with a special taste for housing, a substantial volume of foreign demand, and the poor overall performance of the stock market.

"But beyond all these factors there is the simple psychology of expectations that is part of any speculative boom. These expectations can turn suddenly when alert home buyers get the sense that something might be amiss. Among respondents to our questionnaire survey of home buyers in April and May of this year, the median expected 12-month price increase in Los Angeles was only 5%, compared to 10% in early 2005. In Boston, the median expectation was down to 2% from 5% last year?.

"As always, the future is uncertain. Many of the underpinnings of the boom are still strong, and the soft-landing scenario so widely promoted by economists and industry leaders is a possibility if the U.S. can avoid a generalized inflation, if long rates don't rise a lot, and if the rest of the economy stays strong. But that possibility is not enough to give great comfort to all those who worry today about the housing market.

"Unfortunately, there is significant risk of a very bad period, with slow sales, slim commissions, falling prices, rising defaults and foreclosures, serious trouble in financial markets, and a possible recession sooner than most of us expected. Deterioration in that intangible housing market psychology is the most uncertain factor in the outlook today. Listen hard and watch out." [Wall Street Journal]

"The thing with bubbles, to paraphrase Joni Mitchell, is that you don't really know you've got one till it's gone.

"When the air is expanding inside a speculative balloon, stretching the film of credibility that contains it to an ever-more improbable thinness, you can always find someone to explain why this time it's different - why technological/demographic/ astrological factors justify valuations today that have always proved historically unsupportable.

"Until the bubble actually starts to deflate or burst, there's just enough doubt about whether prices really will revert to their historical mean to keep us all guessing?.

"But it looks now as though we can say with some confidence that the long American housing bubble is over?.

"If the housing market really is in retreat, the two important questions are: how far will it fall, and how much damage will it do to the U.S. and, by extension, the world economy? It is not an exaggeration to say that the buoyant U.S. economy has been kept afloat in the past five years by its housing sector. The first and most obvious effect has been the direct contribution a booming real estate market has had on employment and income.

"If you dissect the official employment data over the past five years, and lump all the housing-related stuff together - construction, estate agents, mortgage broking, home improvement, housing insurance - you get some staggering numbers.

"By some estimates all this housing activity has accounted for more than 40% of all the jobs created in the U.S. since 2001. Now, all these new jobs are not going to disappear in a housing slump. But even if residential real estate activity falls by half in the next year or two it will represent a sizeable blow to the labor market that could, if there is nothing else to take up the slack, push unemployment significantly higher, and income somewhat lower?.

"In previous periods of weakness in property markets there have been huge institutional collapses. The savings and loan debacle of the early 1990s is the most recent example. Today, again thanks to increased financial efficiency, the risk of such a massacre seems smaller. The securitization of the nation's mortgage market has spread the geographical and sectoral risks to the broader economy.

"But there will still be many financial institutions with significantly impaired balance sheets as the value of their mortgage-backed securities declines sharply over the next year. All in all, even on the most optimistic assumptions, post-bubble conditions in the housing market would be highly uncomfortable for America and could seriously sap demand in the world.

"Of course, that is what the pessimists said about the collapse of the tech bubble in 2000. But back then, like a guardian angel, along came the housing boom just in time.

"Is there anything that might do the same for the U.S. in the next few years? There's not much room for fiscal support. Unfortunately, and though interest rates have edged lower in the past few weeks, inflation pressures may limit the potential for support here. A further decline in oil prices would be useful, but can hardly be counted on. Which may leave the U.S. in the unaccustomed position of hoping that the rest of the world can come to its rescue with a period of really strong demand growth. Who would bet the house on that?"

And I came back home from the office on Friday to pick up my Business Week and see the following on the cover.

[Time prevents me from commenting on this specific piece today. I'll pick up on it next time. And thanks for the alert, J.P.]

Of course sometimes Business Week covers have been known to be contrarian indicators, but not this one. Earlier this week I purchased long-term 'puts' (Jan. '08) on a leading mortgage originator. I'm already making money on the position.

As for the rest of the economy and Wall Street in general, there was a ton of economic data this week and traders added it all up and decided it was nirvana?as in a 'soft landing.'

The jobs report for August was in line with expectations, an addition of 128,000 non-farm positions accompanied by a tame average hourly wage gain of just 0.1% (good for stocks and bonds?bad for humans), various manufacturing indicators continue to decline but not more than expected, construction spending was down big, and consumer confidence by various measures was also down.

Then you had mixed sales reports from the nation's retailers, though in keeping with a slowing economy as exhibited by the revision of second quarter GDP, 2.9% vs. the 5.6% clip in the first quarter.

But you also had figures on personal income, up 0.5%, and personal consumption, up 0.8% in July. So everyone immediately took out their "Don't ever underestimate the ability of the American consumer to spend" plaque. I don't buy it, but even if you do by most measurements we have a negative savings rate so either we're massively in debt or Iran is stuffing our pockets with cash. Since the latter isn't likely, I'll go with the former and just say the day of reckoning continues to draw near when it comes to the consumer. As I said last time, Santa will be traveling light this year. [Plus he has to discard all his liquids.]

Of course when you tally up the above you're supposed to come up with a take on corporate earnings and the second quarter GDP report contained an interesting nugget on the subject. The government releases a broad-based estimate, covering both public and private operations, and it states profits in Q2 rose just 2.1% vs. a 14.8% increase in Q1.

But looking ahead, if one just takes the S&P 500, its profits in Q3 are expected to increase 15% with another 14% rise in the fourth. That just isn't going to happen and I expect earnings warnings season, which will begin in another two weeks or so, to be quite active.

Lastly, the Federal Reserve released its minutes for August and it proved to be a major catalyst for the positive action in stocks and bonds as the majority of participants said there was no urgency to raise interest rates further, but it was still a "close call" to pause last time. Inflation does, however, remain a concern but the expected economic slowdown could in itself take care of any real price pressures. One member of the FOMC did offer that he was concerned pricing power would yet become entrenched. Moi? I'm beginning to dust off my old deflation story.

--Stocks rallied back to their highest levels since May, with the Dow Jones adding 1.6% to 11464 (just 260 points shy of its all- time high), while Nasdaq gained 2.5% to 2193. As for the S&P 500, aside from its own gain of 1.2%, it rose 2.4% for the summer period overall (5/26-9/1).

The rally continues, helped along by all the soft landing talk and the growing belief the Federal Reserve is finished. But at a certain point a bond rally has to cause some stock jockeys to say, hmmm, is this signaling recession, especially because the yield curve is now heavily inverted between the 6-mo. and the 10- year?

--Another positive catalyst on the week was falling gasoline prices (which if it continued could be a huge boon for Republicans come November), and to a lesser extent oil (back below $70) and natural gas ($6.00), amid talk of lessening demand on the top of already ample inventories.

But the Farmer's Almanac is predicting a cold, cold winter. I hate cold??..brrrrrrrrrr??so I'm going to head out west and slaughter a couple of buffalo for the purpose of making some nifty blankets and coats.

--Auto sales for the month of August were mixed, with General Motors surprising, up 4%, while Toyota gained another 17% over last year's pace. But DaimlerChrysler's were off 4% and Ford's tanked 12%.

--According to new Census Bureau data, for the first time since 1999, household income rose faster than inflation in 2005. But the median hourly wage for American workers, after inflation, has dropped 2% since 2003; the first time this has occurred over a three-year period since World War II.

Even in the good news on last year, though, income rose only because more in each household worked (like rescue dogs? ?????just kidding), although at lower-paying jobs.

Ergo, this remains a potent political issue for November and 2008. As political analyst Charlie Cook told the New York Times, "There are two economies out there. One has been just white hot, going great guns. Those are the people who have benefited from globalization, technology, greater productivity and higher corporate earnings. And then there's the working stiffs, who just don't feel like they're getting ahead despite the fact that they're working very hard. And there are a lot more people in that group than the other group."

--New Jersey has the highest median household income in America, with that of whites and Asians up big, but blacks' and Hispanics' far less so in a further expansion of the gap between the haves and have nots. What's happening in my home state, though, is the white middle class is fleeing at a rapid clip, ostensibly because of our outrageous property taxes.

--For all the talk (my talk, admittedly) about potential third party candidates for 2008 (Michael Bloomberg's name has been bandied about?aside from the McCain / Lieberman scenario), perhaps the most realistic candidacy would be that of California Republican Governor Arnold Schwarzenegger. Only one problem. There's that little matter of the constitution.

But why does the governor appear in Street Bytes? Because this week he broke with the national Republican Party in spearheading legislation that makes California the first state in the nation to fight global warming by slapping emissions caps on industry.

Big Business is up in arms, of course, claiming costs such as for electricity will soar and that employers could take their plants elsewhere, but for now it's the same garbage we've heard from industrial polluters for 100 years. And by my reading of the law, limits on greenhouse gas emissions (such as on carbon dioxide) would begin to take effect in 2012 so there's not only time to plan ahead, the legislation itself is purposefully vague so that problems in implementation can be worked out.

In the meantime, as the Washington Post editorialized, "California has begun an experiment of tremendous importance to the rest of the nation. It has asserted that talk and study are no longer sufficient - that bold action is possible and necessary."

Of course it's also about getting Asia to adopt similar restrictions, seeing as much of California's pollution has ridden the winds from there. And on this front China has definitely begun to recognize the mammoth problems its own economy and people face unless it addresses the issue. This is also where staging the 2008 Olympics in Beijing actually helps speed up the process.

--And speaking of polluters, don't you know two of the largest in the world are Russian Aluminum's Glencore and SUAL, the world's third- and sixth-largest producers of aluminum, respectively, that are now merging to form the world's largest, ahead of Alcoa and Canada's Alcan.

RusAl is headed up by Roman Abramovich, Russia's richest man with an estimated net worth of $18 billion. [No limits on sturgeon for him, eh?] And you can be sure the Kremlin, as it seeks to control all of Russia's natural resources, isn't about to slap any emissions limits on the combined behemoth.

--The strike at the world's largest cooper mine, Escondida in Chile, is over. BHP, the majority owner, will not only give every worker a 5% wage increase, but also a special one-time bonus of $17,000. Not too shabby. Chilean wine for everyone! Escondida accounts for 9% of global production.

--Industrial production for the last reporting period unexpectedly dropped in Japan when it was supposed to rise and thereby offer further confirmation the recovery is for real. So now future data will be examined even more closely. Japan is being counted on to help carry the water should the U.S. become incapacitated.

--I missed the Fannie Mae decision last time so I just need to insert for the archives that the Justice Department declined to prosecute Fannie for its massive accounting fraud. What a joke. Our only hope now is that the SEC could still slap around individuals like former CEO Franklin Raines. It's unfathomable to think Fannie's dirtballs will escape scot-free. Then again, it's called "politics."

--I've mentioned this topic before but because the Journal had a story on it it's an excuse to bring it up again. Homeowners could be significantly underinsured unless they make sure their policy reads "guaranteed replacement cost," not "extended replacement cost," the latter simply adding a set amount, like 20% to the original value. As one who has overseen the books on my townhouse complex for years now, this is a topic near and dear to my heart.

--Intel is expected to announce a further restructuring on Tuesday, including anywhere from 10,000 to 20,000 layoffs.

--Real Estate, Part XLCV: KB Home, the nation's fifth-largest home builder, sold off a 49% stake in a massive master-planned community in the Antelope Valley of Southern California where sales have dropped 41% from year ago levels.

--Mark K. of Pritchard Capital Partners was in Illinois this past week and noticed a story in the Chicago Tribune detailing soaring construction costs: steel structure +80%, copper wire +289%, diesel +244%, asphalt +44%, rebar +50%, and concrete +30%.

--As Aaron Elstein wrote in Investment News, it's important to remember that as the trial over former New York Stock Exchange Chairman Richard Grasso's pay begins in October, there is another ongoing series of court actions taking place today that reflects on Grasso's general tenure and none of it paints a pretty picture.

Elstein is talking about the government's case against a large number of NYSE specialists who are accused of the worst in self-dealing, placing their orders before clients'.

David Robbins, a New York securities lawyer and former compliance director at the American Stock Exchange, says "The pay trial speaks to Grasso's greed. But the specialist trials in some ways are more important, because they speak to the kind of exchange Grasso ran."

"Some experts who follow the NYSE say that Mr. Grasso was indifferent to what happened on the floor because the then- closely-held institution was owned by the specialists and other floor traders, who paid his salary. The traders were loyal to him because they thought the charismatic chairman was effectively promoting the exchange and keeping competitors such as Nasdaq at bay."

--Speaking of hubris and arrogance, the New York Times' Gretchen Morgenson reported on a study conducted for the Times by Measuredmarkets Inc., an analytical research firm in Toronto, that looked into mergers with a value of $1 billion or more for the 12-month period ending in July.

"41% of the companies receiving buyout bids exhibited abnormal and suspicious trading in the days and weeks before those deals became public."

Morgenson writes: "Moreover, many investors are troubled by what they now see as rampant insider trading, saying it fosters the perception that insiders can profit in the markets at the expense of outsiders."

Not that any of this is new, and a New York Post piece from Friday told of how insiders profited from the just-announced merger between two mining giants?Goldcorp and Glamis Gold. Just about ten days before the announcement on this one, volume on Glamis call options soared, after which Goldcorp announced its intent to buy Glamis and Glamis shares rose $7.26 to $46.12.

It's an ongoing theme here at StocksandNews that there has never been a level playing field; that Wall Street is nothing more than a casino?and it's only getting worse. Heck, program trading is consistently over 50% of daily volume, for starters, and while it's not all of the 1987 variety that helped lead to the Crash, the Street is still just a bunch of lemmings and the rest of us schmucks get swept up and thrown over the cliff with the others.

--CNBC promotes its show "Fast Money" with the tag line "The best on the Street are sharing their trade secrets."

--Drugmaker Schering-Plough pleaded guilty to conspiracy to mislead the government and agreed to pay a fine of $435 million, ending a six-year Justice Department investigation looking into Schering's pricing and marketing practices. What was disappointing to me was that CEO Fred Hassan, who inherited the problems and is viewed as a sort of turnaround artist, also settled with the SEC for his "selective disclosure" of information to investment analysts. From time to time I've dabbled in these shares, but not today.

--ComScore Media Metrix is the main tracker of Internet traffic and recently the company changed the way it computed users on a global basis. The impact was to drastically lower some statistics. For example, Mexico's estimated active monthly users was cut in half from 18 million to 9 million and India's tally dropped 70%! This same gauge impacted individual sites, too, as both the New York Times and New York Post reported in the case of Forbes.com, which heretofore touted itself as the #1 business site but evidently only has 7.3 million unique visitors compared to an earlier figure of 15 million.

--I got a kick out of this hack for the private-equity industry who was on CNBC the other day, talking about how the firms are "extraordinarily disciplined and seek a specific rate of return."

Depends on how you define that. What's come to light is that so many of these deals are geared solely for the partners at the private-equity shops, and the target's senior management, and then they just slice it up and take all these special dividends.

The excuse to go private in many cases has been Sarbanes- Oxley and excessive regulation of public companies, but then the private-equity folks just turn around and send Co. X back out to the public sphere, at which time the bankers take another layer of fees and dividends.

--Huge win for Lockheed Martin Corp. as it was selected over a team from Northrop Grumman and Boeing to build the new generation of manned spacecraft that will eventually see us back on the moon?at least that's the plan?and later Mars as soon as we train the snowboarders. The contract is valued at more than $8 billion.

"NBC 'Dateline' anchor Stone Phillips had to drop the price of his co-op just off Central Park West over $1 million to $4.45 million before he was able to unload it earlier this month. He first listed it last fall for $5.5 million.

"Britney Spears had to wait even longer before someone snapped up her NoLita apartment, which she listed for $5.5 million in 2004. The 4-level pad eventually went to contract a few weeks ago for about $4.45 million."

I don't know?$4.45 million seems to work. Maybe I'll put my place on the market for that.

--Mike Clowes, the editor of Investment News, told of a personal tale involving his McAfee security software that I'm sure all of you can relate to.

Clowes' problems started when he installed an upgrade, but then he couldn't access the Internet. The real nightmare, though, was in dealing with McAfee.

After a frustrating look for help on McAfee's corporate site, he called tech support where he was given four options. Clowes chose one offering an 800 number and a $2.95 per minute charge.

"I dialed the number and was informed that after two minutes of wait time, the $2.95 per minute charge would begin, even if a technician had not picked up. The automated voice on the phone suggested that if a technician had not picked up in two minutes, I should hang up and dial again.

"That's correct - McAfee was going to charge me $2.95 per minute for waiting. Even my doctor doesn't charge me for waiting to see him, at least not overtly?.

"I timed the two minutes, and hung up and dialed again. Again, no tech after two minutes. So I hung up and dialed again. This time, I realized that hanging up each time was probably putting me further and further down the response chain, so I decided to hang on until my call was answered."

Finally a technician picked up and Clowes explained he couldn't uninstall the program.

"Each time I had tried, I got a message saying that a particular file was missing?.

"More than an hour later, he finally succeeded in removing it by e-mailing me a patch of some kind.

"Voila! The problem was solved, and I could again access the Internet, though I had to reinstall McAfee Security Center.

"A week later, I got the bill from McAfee: $180. That's correct. McAfee charged me $180 to fix a problem caused by their software."

Well Mike, they are because I had the exact same issue with Norton you did on a brand new Dell PC. But rather than go through the incredible hassle, I called Dell and purchased a new one. That's right?.I took a loss on about my 13th or 14th Dell since I started StocksandNews. I'm an idiot for continuing to buy from them and one of these days I'll wise up.

But Clowes' tale also points out that the software industry is basically running a scam. None of their crap is reliable?none of it. And we're the suckers for not raising hell about it.

--Goodness gracious. Electronic Arts reported that in its first week sales of Madden NFL 2007 grossed $100 million.

--It's time to build more prisons because Ryanair, Europe's low- cost carrier, announced it will be equipping its fleet with an onboard mobile phone service. Aghhhhhhhhh!

"If you want a quiet flight, use another airline," said Michael O'Leary, CEO. I think I shall, mused the editor.

Mexico: On Friday night, President Vicente Fox was forced to abandon his final annual address by left-wing deputies, alleging vote fraud. Fox then was to have delivered it on national television instead.

Mexico is a tinderbox and it could blow at any minute thanks to Andres Manuel Lopez Obrador and his refusal to concede last July's presidential election to Felipe Calderon. Mexico is already ungovernable in many respects, with cities ruled by drug lords and militants. And when the electoral court confirms Calderon as the winner on Sept. 6, there are many who believe all hell will break loose as Lopez Obrador has called for revolution and the establishment of an alternative government, even as the court issued a preliminary ruling last Monday that there was no evidence of fraud in the vote.

The repercussions for the United States are massive and this is clearly a sleeper issue leading up to our own mid-term election.

And one other item not yet discussed in the media. You know how there are an estimated 10.5 to 11 million illegal immigrants in America? Mark my words?about one million will be returning home to Mexico, and south, as the construction and homebuilding industries collapse, unless Mexico's in a state of revolution, that is.

Turkey: This week's terror attacks in the coastal resorts of Antalya and Marmaris that claimed at least three lives are significant. Kurdish separatists were once again the culprits and it points back to Iraq and the problems Turkey has been having with the Kurdish rebels on the border. This dispute is only going to get worse and the U.S. needs to step in soon and control the Kurds.

Afghanistan: There are some incredible acts of heroism taking place here. For example, this week I read of a 25-man British platoon that was under fire for eight weeks before finally being extracted. 6 Brits were killed in Afghanistan in the month of August, and another on Friday.

Meanwhile, NATO is balking at sending more much-needed troops, especially in the critical southern province of Helmand where the worst fighting has been taking place.

Taiwan: No topic frustrates me more than this one and the way the Bush administration talks of spreading democracy but then tiptoes around the fact China now has 800 missiles aimed at Taiwan.

So Mortimer Zuckerman, editor-in-chief at U.S. News & World Report, wrote a piece this week titled "Don't Fear the Dragon." Just as he wrote a glowing portrayal of Fidel Castro following Fidel's surgery, Zuckerman concludes his piece on China with the following.

"Taiwan is the last key - and the last remaining symbol of humiliation, such that no Chinese leader can be seen as the one who lost it. The Chinese look to Washington to discourage Taiwan's formal secession and to refrain from selling sophisticated weapons that embolden it to resist political reconciliation and economic integration. Seven American presidents of both parties have recognized China's claim that Taiwan is a part of China.

"Fortunately, China is not trying to spread an ideology, unlike what the Soviet Union did and the Islamo-fascists do today. This should enable us to work together to strengthen regional security, fight terrorism and international crime, and stabilize Afghanistan - and most critically, to stop Iran from acquiring nuclear missiles. Our goal, as Robert Zoellick, then deputy secretary of state put it, is for China to become a 'responsible stakeholder' in the world. And in our dealings with this remarkable country, we, above all, must avoid a tone of imperial condescension."

Where does one start? Who the heck is the aggressor here? You'd think it was Taiwan, from this passage. And in Zuckerman's entire piece, no mention of the missiles.

And it's not as if China has been cooperative on the North Korea and Iran fronts, right? Oh, they can still make amends, quickly, but for now "this remarkable country" has thoroughly enjoyed jerking us around while Taiwan wonders what each morning will bring.

But to be fair, the U.S. does have legitimate beefs with Taipei from time to time. No one said the world was simple, after all.

For instance Taiwan has requested 66 F/16s, but the U.S. National Security Council and State Department are urging the Bush administration to reject Taiwan's request. Why?

"There's too much to risk in the relationship with China, and little willingness to take the hit with the Chinese when the record of getting major systems through in the end, given the local political climate, is not good," a U.S. defense source told Defense News.

"In other words, an approval would draw punishment from Beijing - i.e., canceling contracts with U.S. companies and going French or German, etc. - and then it pisses people off in D.C. when Taiwan gets the political brownie points - i.e., showing Beijing how much the U.S. loves it - but then doesn't follow through with the actual procurement," said the U.S. source.

Yes, Taiwan's President Chen Shui-bian isn't exactly in favor back home and it's been difficult getting any increased defense spending through parliament.

Japan: All the recent opinion pieces on Prime Minister Junichiro Koizumi's apparent successor seem to be titled "Honest Abe" in discussing Shinzo Abe. [Pronounced Ah-bay]

By all accounts this is a good man who promises to pick up on Koizumi's legacy of a more vigorous foreign policy while pursuing changes in Japan's post-World War II constitution that would allow for a more 'offensive' military force; the key provision you'll hear a ton about over the coming months being "Article 9" which states Japan "forever" renounces war and "the threat or use of force" in settling disputes.

Article 9 has already been circumvented to a large extent as Japan has offered various forms of support in both Afghanistan and Iraq, including the first deployment of Japanese troops to a war zone since 1945 (Iraq).

"Mr. Abe has indicated that he'll deepen relations with other like-minded regional democracies such as Australia and India. This makes sense, not least as a way of creating a strong counterweight to China."

So my long sought after dream alliance of the U.S., Britain, India, Japan and Australia is not dead after all!

Of course all of the above makes Japan's neighbors more than a bit queasy, particularly South Korea and China. And the long- running oil and gas dispute between Tokyo and Beijing continues to simmer as China has begun production in waters in the East China Sea claimed by Japan.

Separately, five executives of a Japanese manufacturer were arrested on suspicion they were preparing to export equipment to Iran that could be used in the making of nuclear weapons.

North Korea: Secretary of Defense Rumsfeld, in comments made in Alaska, said South Korea need not fear a conventional attack from North Korea. On this I largely agree with the secretary, helped by my own observations from my trip to the DMZ last May. With all the obstacles in place (minefields, tank traps, gates for tunnels and highways) I just don't see how the North could launch a successful invasion.

But you still have the issue of the artillery, let alone a suicidal nuclear threat. It does need to be noted, though, that Rumsfeld is also in the process of cutting troops in South Korea from over 30,000 to 20,000. I agree with this policy as well.

Canada: Prime Minister Stephen Harper announced plans to add 1,400 border guards and Mounties. And beginning next year border security officers will be armed?finally. Already, the change in government here is benefiting the United States. President Bush shouldn't hesitate to reciprocate in some fashion.

Venezuela: President Hugo Chavez received a hero's welcome in Syria this week. Lovely. And now golfers in Caracas will have to make do with computer games because the government is appropriating three exclusive golf courses to build homes for the city's poor.

Caracas' Mayor Juan Barreto called his plan a justified attack on the "putrid middle class," saying "It's shameful to see people playing golf when right there in front of them is a shantytown."

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