Educate Yourself

Week in Review
For the week 9/4/2006 - 9/8/2006
Brian Trumbore
President/Editor, StocksandNews.com

In my "Week in Review" column of 8/27/06 I wrote it was "sad that President Bush has to try to convince us of his intellectual curiosity by releasing the fact he is a voracious reader, including two books on Lincoln, his political hero, yet he obviously hasn't picked up on Lincoln's lesson in waging war."

"The first and greatest lesson of the last five years parallels what Lincoln came to understand. The dangers are greater, the enemy is more determined, and victory will be substantially harder than we had expected in the early days after the initial attack. Despite how painful it would prove to be, Lincoln chose the road to victory. President Bush finds himself in precisely the same dilemma Lincoln faced 144 years ago. With American survival at stake, he also must choose. His strategies are not wrong, but they are failing. And they are failing for three reasons.

"(1) They do not define the scale of the emerging World War III, between the West and the forces of militant Islam, and so they do not outline how difficult the challenge is and how big the effort will have to be. (2) They do not define victory in this larger war as our goal, and so the energy, resources and intensity needed to win cannot be mobilized. (3) They do not establish clear metrics of achievement and then replace leaders, bureaucrats and bureaucracies as needed to achieve those goals?.

"Because the threat of losing millions of Americans is real, Congress should hold blunt, no-holds-barred oversight hearings on what is and is not working. Laws should be changed to shift from bureaucratic to entrepreneurial implementation throughout the national security and homeland security elements of government.

"Beyond our shores, we must commit to defeating the enemies of freedom in Iraq, starting with doubling the size of the Iraqi military and police forces. We should put Iran, Syria and Saudi Arabia on notice that any help going to the enemies of the Iraqi people will be considered hostile acts by the U.S. In Southern Lebanon, the U.S. should insist on disarming Hizbullah, emphasizing it as the first direct defeat of Syria and Iran - thus restoring American prestige in the region while undermining the influence of the Syrian and Iranian dictatorships.

"Further, we should make clear our goal of replacing the repressive dictatorships in North Korea, Iran and Syria, whose aim is to do great harm to the American people and our allies. Our first steps should be the kind of sustained aggressive strategy of replacement which Ronald Reagan directed brilliantly in Poland, and ultimately led to the collapse of the Soviet empire.

"The result of this effort would be borders that are controlled, ports that are secure and an enemy that understands the cost of going up against the full might of the U.S. No enemy can stand against a determined American people. But first we must commit to victory. These steps are the first on a long and difficult road to victory, but are necessary to win the future."

"No leader since Napoleon has roiled the Middle East as has George W. Bush. By invading Iraq, President Bush set history in motion. By doing so without a strategy for governing it afterwards, he did not plan for the worst, and so the worst has happened. Iraq has become the pivot for strengthening the radical forces that the invasion should have weakened. Yet to assume history follows a straight path is fatalism, not analysis.

"A strengthened Shiite world was not an unintended consequence of the Iraq war?.People forget that moving history forward after 9/11 required shaking up the suffocating complacency of the Sunni Arab police states from where the terrorists originated.

"Back then, Iran seemed to offer an opportunity for regional change. It was among the Muslim world's most sophisticated populations, a significant portion of which was pro-American, embarrassed by their own regime. In late 2001, when the seemingly reformist president, Mohammed Khatami, was in power, a gradual political shift in Tehran without military action seemed possible, particularly if somewhat stable, somewhat pro- American governments emerged on Iran's borders in Iraq and Afghanistan.

"But ideas, particularly bold ones, are hostage to the quality of their execution. There was indeed a political shift in Iran - for the worse. Mahmoud Ahmadinejad became president of the Islamic Republic in June 2005, in the wake of the Cedar Revolution in Lebanon, the withdrawal of Syrian troops from that country, and historic elections that saw millions of Iraqis hold up the purple finger against tyranny. In the dynamic environment that Mr. Bush had unleashed, even a flawed occupation led to encouraging developments - however superficial - to which Iran's radicals reacted. Iran's advantages were these: Though Iraqis had voted, they had no governing authority worth the name; likewise, the Syrian troop withdrawal from Lebanon could not erase the fact of Lebanon's demographically ascendant and militarized Shiite community.

"Statements by the Arab League and the governments of Egypt, Jordan and Saudi Arabia initially blaming the violence in Lebanon on Hizbullah, rather than on Israel, stood as evidence that a heightened fear of Shiism had indeed shaken these states out of their complacency. Arab support proved short-lived, though, because of Israel's dragged-out and bungled operation. But while Iran is strengthened, it is not dominant: The radical Islamic universalism that it once sought to represent has been narrowed to a sectarianism with no appeal beyond its own Shiite community. Iran plays the spoiler in Iraq. But Iranian politics will become gnarled by its interaction with a more pluralistic, ethnically Arab, Shiite southern Iraq. We are tearing our hair out over Iraq. The Iranians will be too, if there is a full-scale civil war?.

"To say that George Bush has been among the greatest agents of freedom in the region is a nebulous historical statement. It avoids the harder question: Did he go about it prudently? Given that good planning is the better part of valor in any decision- making process, the provisional answer is 'no.'

"Next year could see the beginning of a massive draw-down in Iraq, from 140,000 to 40,000-or-so troops: a number by which the military manpower strain becomes alleviated. An increase in troops above 140,000, coupled with the willingness to destroy Shiite militias, could dramatically improve the situation. But outside the universe of some policy journals there is no appetite for that. The political calculus is disturbingly inexorable: No more troops in Iraq now or ever, and the bulk out before the 2008 presidential season. Without immediate demonstrable progress in Baghdad, the Republican Party will overtake the White House on this issue?.

"The carnage caused by Mr. Bush's shattering of the post- Ottoman state system is minor compared to that in the former Soviet Union and its shadow zones after the Berlin Wall fell. Can he keep it that way? Can he undermine Iranian hegemony even as he reduces whatever control he has in Iraq?

"The president may need to pull closer to the Saudi royals, Egypt's Hosni Mubarak and Jordan's King Abdullah. Weakened by our response to 9/11, terrified by Israeli incompetence in defending their interests in Lebanon, these regimes still demonstrate more enlightenment than their populations. They fear Iran more than do the Europeans. Whatever our ultimate decisions in regards to a nuclearizing Iran, we require all the help we can get. That is what comes of bold ideas, poorly executed."

"We are stalled in Iraq not because of something some fringe antiwar critics said, or did, but because of how the Bush team, the center of U.S. policy, approached Iraq from the start. While it told the public - correctly, in my view - that building one example of a tolerant, pluralistic, democratizing society in the heart of the Arab-Muslim world was really important in the broader war of ideas against violent radical Islam, the administration acted as though this would be easy and sacrifice- free.

"Bush-Cheney-Rumsfeld told us we are in the fight of our lives against a new Islamic fascism, and let's have an unprecedented wartime tax cut and shrink our armed forces. They told us we are in the fight of our lives against a new Islamic fascism, but let's send just enough troops to topple Saddam - and never control Iraq's borders, its ammo dumps or its looters. They told us we are in the fight of our lives against a new Islamic fascism, but rather than bring Democrats and Republicans together in a national unity war coalition, let's use the war as a wedge issue to embarrass Democrats, frighten voters and win elections. They told us we are in the fight of our lives against a new Islamic fascism - which is financed by our own oil purchases - but let's not do one serious thing about ending our oil addiction."

The above pretty much covers the political spectrum, yet all are in agreement on the central thought about the war in Iraq?.the cause may have been just, despite the now discounted theories on any ties between Saddam and al-Qaeda, but the execution of the game plan has been abysmal. And this week Grand Ayatollah al- Sistani told Iraqi Prime Minister Maliki that he must bring the situation under control, soon.

It certainly has been a bizarre week, with former Iranian President Mohammad Khatami giving a series of speeches in America on tolerance, while reiterating his government's position that Iran's nuclear program was peaceful in scope.

"The world's free nations will not allow Iran to develop a nuclear weapon?.Iran's leaders have also declared their absolute hostility to America. Last October, Iran's president declared in a speech that some people ask - in his words - 'whether a world without the United States and Zionism can be achieved. I say that this goal is achievable.' Less than three months ago, Iran's president declared to America and other Western powers: 'Open your eyes and see the fate of Pharaoh. If you do not abandon the path of falsehood, your doomed destiny will be annihilation.'

"Less than two months ago, (President Ahmadinejad) warned: 'The anger of Muslims may reach an explosion point soon. If such a day comes, America and the West should know that the waves of the blast will not remain within the boundaries of our region.' He also delivered this message to the American people: 'If you would like to have good relations with the Iranian nation in the future, bow down before the greatness of the Iranian nation and surrender. If you don't accept to do this, the Iranian nation will force you to surrender and bow down.'"

"Bush wants the world to understand that he sees the nation of Iran as different only in degree from bin Laden and the terrorists in Iraq, not different in kind. We are to take Ahmadinejad's rhetoric seriously. We are not to dismiss his threats as flowery rabble-rousing but as honest statements of intent.

"And if you do that, then the conclusion is inescapable that the world must do everything it can to prevent Iran from joining the nuclear club. 'Armed with nuclear weapons,' Bush said, Islamic extremists 'would blackmail the free world, and spread their ideologies of hate, and raise a mortal threat to the American people. If we allow them to do this, if we retreat from Iraq, if we don't uphold our duty to support those who are desirous to live in liberty, 50 years from now history will look back on our time with unforgiving clarity, and demand to know why we did not act. I'm not going to allow this to happen - and no future American president can allow it either.' ?.

"Like most people, I've presumed for the past few years that our commitment in Iraq and the extreme difficulty of targeting the proper sites had basically foreclosed a serious military option in Iran. Certainly the hesitant and cautious behavior of Secretary of State Condoleezza Rice in the past few months suggested as much.

"Now it seems to me that, barring a miraculous change of heart on the part of the Iranian regime, a military strike is all but inevitable. Bush himself will view his own presidency as a failure if he doesn't act.

President Ahmadinejad told UN Secretary General Kofi Annan Iran would not stop enriching uranium and that Tehran would host a conference to examine "exaggerations" about the Holocaust.

The blockade of Lebanon's air and seaport facilities was finally lifted by Israel as UN peacekeepers filled the breach to the satisfaction of Israeli Prime Minister Ehud Olmert. Earlier, Lebanese Parliament Speaker Nabbi Berri, a Hizbullah sympathizer, urged Arab planes to break the blockade.

And in the first public opinion survey in Lebanon since the war, 57 percent "supported" the decision made by Hizbullah in kidnapping the Israeli soldiers, while 34 percent were "against." Additionally, 79 percent believe Hizbullah's Hassan Nasrallah's performance was "good/great," with Berri receiving a 71 percent favorability rating. So to those still claiming Hizbullah suffered a loss, the mood in the street argues otherwise. [Daily Star]

[On the report that Israel was about to exchange 800 Palestinian prisoners for Gilad Shalit, kidnapped by Hamas from Gaza on June 25.]

"Days after Shalit's kidnapping, the prime minister (Ehud Olmert) said something that made me proud I voted for his Kadima Party: 'Israel will not give in to extortion by the Palestinian Authority and the Hamas government, which are led by murderous terrorist organizations. We will not conduct any negotiations on the release of prisoners. The Palestinian Authority bears full responsibility for the welfare of Gilad Shalit, and for returning him safe and sound to Israel.'

"With that as a basis, Israel launched Operation Summer Rain, a series of military incursions into Gaza - the first since disengagement?.

"True, the (Israeli Defense Force) has failed to track down Shalit - but we've made them pay dearly for the kidnapping and killings. The Hamas government is hurting; so is the Palestinian polity which elected it.

"Then, on July 12, Hizbullah attacked across the Lebanese border, killing eight IDF soldiers and capturing Ehud Goldwasser and Eldad Regev.

"Once again Olmert made me proud when, in a seminal speech before the Knesset on July 17, he declared: 'Citizens of Israel, there are moments in the life of a nation when it is compelled to look directly into the face of reality, and say: No more! And I say to everyone: No more! Israel will not be held hostage - not by terror gangs, or by a terrorist authority, or by any sovereign state.'

"What ensued was a month of difficult war in which 117 IDF soldiers were killed. Because we took a justifiably tough stance, Hizbullah launched 4,000 rockets against northern Israel. Forty- two civilians were killed and over 4,000 wounded. It will take the North years to recover from the damage to homes, farms and forests?.

"If Olmert's pledge that Israel would not be held hostage doesn't preclude ransoming our soldiers for terrorists - what exactly did it mean?

"One could argue that an Israeli military retaliation (against Hamas and Hizbullah) was called for even if we planned to trade prisoners for kidnapped soldiers all along. In that case, however, our actions should have been more carefully calibrated. Instead we acted as if a new-found principle was at stake: that Kadima, unlike Likud and Labor, wouldn't cave in to terrorists. And on the basis of that principle a million Israelis stoically accepted a hellish summer.

"One might also argue that both Hizbullah and Hamas have learned that although Israel does eventually cave in when faced with a ransom demand, Jerusalem will exact a heavy price before throwing in the towel. But couldn't such a deterrent message have been sent - especially on the northern front - with greater dexterity?

"I have no problem with trading 'fresh' Palestinian prisoners - taken since Gilad Shalit's capture, like members of the Hamas- led Palestine National Council; or Lebanese and Hizbullah POW's (and corpses) taken during the war itself. But anything beyond that would be a clear reversal of Olmert's principled, indeed revolutionary, stand.

"This is not one of those grey areas. Either we went to war because a principle was at stake, or it wasn't. Either we trade hostages for prisoners, or we don't.

"History shows that every time we free killers, at least some of them go back to their line of work. And giving terrorists their liberty lifts the enemy's spirits. Arab society can more easily tolerate 'martyrs' than the lengthy incarceration of husbands, sons, brothers and daughters.

But there's another side to the Israeli - Palestinian struggle. This week the Olmert government announced it was building 700 additional housing units on the West Bank.

"Since taking office, Israeli Prime Minister Ehud Olmert has said many times that he wants to start a dialogue with the Palestinians with the aim of reaching a peace agreement. But even as Olmert renews his expressed commitment to opening negotiations with the Palestinians, the Jewish state continues to erect barriers to peace.

"In the latest example of this trend, Olmert's government announced on Monday that it will delay any further withdrawals from occupied territory and will instead fortify its illegal occupation of Palestinian land by building 700 new housing units in the West Bank. The 'centrist' Israeli government's decision to invite tenders for the construction of these new homes suggests that Israel's expansionist appetite is far from satisfied and a genuine Israeli desire to make peace is virtually non-existent.

"As the Daily Star went to press (Tuesday), world leaders - who have recently been applying considerable pressure on the Palestinians and the Lebanese to abide by international law - had not uttered a word of condemnation over Israel's latest illegal expansion of its settlements. Nor have very many condemned Israel's other discriminatory and oppressive policies, such as the Jewish state's separation barrier, its war crimes or its discriminatory laws. The message that is being sent repeatedly to the region is clear: Arabs must respect international norms or face dire consequences, while the Israelis are free to annex Palestinian land, violate human rights, ignore UN resolutions and ride roughshod over international law.

"The West's application of double standards and blind support for Israel's imperialist policies only fuel the kind of extremist sentiments that drive young men to resort to violence, as one gunman did at a tourist venue in Amman on Monday. Incidents such as these will only become more commonplace in the region and around the world until the festering Arab-Israeli conflict is resolved."

While the week was light on economic data, the Federal Reserve's study of regional activity revealed that five of 12 districts were reporting a deceleration in growth as consumer spending slowed and real estate weakened. Separately, a reading on labor costs, up 4.9% on an annualized basis, spooked the stock and bond markets, temporarily, on the feeling that perhaps the Fed will have to resume raising interest rates, but by week's end sentiment turned and bonds rallied back some as the slowdown trumped inflation expectations.

The market, as well as Republican congressional candidates, also took comfort from the continuing slide in energy prices as gasoline is heading towards $2.40 or so at the pump over the coming weeks; barring a hurricane in the Gulf of Mexico or an increase in tensions over Iran. At $66, oil is now trading at its lowest level since March and Iran's oil minister said OPEC would not cut production at its next meeting.

And much was written this week of the massive potential find in the Gulf by a consortium headed up by Chevron; as much as 15 billion barrels in new reserves, pumping at a rate when fully developed of perhaps as much as 750,000 barrels a day.

But the first significant production won't come online before 2010 and it's kind of like some cancer "cures" you often read about?.it's hard to separate fact from the hype in the initial stages.

Nonetheless, it is a huge technological achievement that the oil companies were able to drill down some five miles to tap this field, and it also points out that the United States must continue to drill for further sources of crude, including in the Arctic National Wildlife Refuge.

Finally, the other market-moving issue of the week was once again real estate as homebuilders Lennar, Hovananian Enterprises, Beazer Homes and KB Home all lowered their profit outlooks; citing declining orders, higher cancellation rates, and weaker-than-expected demand.

The Office of Federal Housing Enterprise Oversight (Ofheo) reported that single-family home prices rose just 1.17%, nationwide, in the second quarter over the first, the biggest slowdown in price increases since 1975. The number is actually worse than this because Ofheo's index excludes condo and luxury home sales. As Ofheo Director James Lockhart pointed out, "The housing market is cooling in a very significant way."

I also just want to add a little discussion from the 9/11 issue of Business Week, as reported by Mara Der Hovanesian, concerning some popular adjustable rate mortgages and the games the banks and mortgage originators are playing with the books.

"(The) signs of excess are crystal clear. Up to 80% of all option ARM borrowers make only the minimum payment each month, according to Fitch Ratings. The rest of the money gets added to the balance of the mortgage, a situation known as negative amortization. And once balances grow to a certain amount, the loans automatically reset at far higher payments. Most of these borrowers aren't paying down their loans; they're underpaying them up.

"Yet the banking system has insulated itself reasonably well from the thousands of personal catastrophes to come?.Some $182 billion of the option ARMs written in 2004 and 2005 and an additional $83 billion this year have been sold, repackaged, rated by debt-rating agencies, and marketed to investors as mortgage-backed securities?Banks also sell an unknown amount of them directly to hedge funds and other big investors with appetites for risk.

"The rest of the option ARMs remain on lenders' books, where for now they're generating huge phantom profits for some lenders. That's because, according to generally accepted accounting principles, or GAAP, banks can count as revenue the highest amount of an option ARM payment - the so-called fully amortized amount - even when borrowers make only the minimum payment. In other words, banks can claim future revenue now, inflating earnings per share?.

" 'This is basically an IOU that may never get paid,' says Robert Lacoursiere, an analyst at Banc of America Securities. James Grant of Grant's Interest Rate Observer recently wrote that negative-amortization accounting is 'frankly a fraudulent gambit. But what it lacks in morality, it compensates for in ingenuity.'"

The Financial Accounting Standards Board told Business Week that it is "concerned that the disclosures associated with these types of loans (are) not providing enough transparency relative to their associated risks."

--Stocks continue to trade in an 'up one week, down the next' pattern with this past one down; 0.6% in the case of the Dow Jones, 1.3% for Nasdaq.

After yields spiked higher early in the week, bonds rallied back to recover most of their losses. Fed Governor Janet Yellen's comment that the Board will continue to exhibit a "bias toward further tightening" was largely ignored.

"Risk to the global outlook is clearly tilted to the downside? there is a one-in-six chance of growth falling below 3.25% in 2007."

Seeing as growth is projected to come in at 5.1% this year, and that G7 economies will register just 2.5% for '07, that's a significant deceleration.

--Bill Ford hired his own replacement as CEO, Alan Mulally of Boeing's commercial aircraft division. Seems like a super pick to me, Mulally having spearheaded Boeing's success with its new Dreamliner aircraft. Plus I don't see a tremendous difference between autos and planes, at least nowhere near as much as others are saying in criticizing the selection. For his part, Bill Ford, Henry Ford's great-grandson, will remain as chairman.

But while I might agree with the move, that doesn't mean Ford's many problems are over, especially if I'm right on my recession forecast.

--General Motors announced a sweeping improvement in its warranty program on 2007 model cars and trucks. The warranty has been extended to five years or 100,000 miles vs. the existing 3-year / 36,000 mile coverage on engines, transmissions and powertrains. [Hyundai offers a 10-year / 100,000-mile warranty.]

--The Kremlin won agreement on a new pipeline that will carry Russian oil from Bulgaria to Greece (the Black Sea to the Aegean) and thus avoid the congested Bosporus at Istanbul, which costs oil companies $hundreds of millions extra.

--Intel is reducing its work force by 10,500 jobs by the middle of 2007, some of which had been previously announced, with the goal of reducing costs by $3 billion annually starting in 2008.

--In Congressional hearings, the SEC announced its investigation into possible violations involving executive stock options now covers over 100 companies.

"The unquestionable appetite for exorbitant compensation on the part of executives and the sheep-like willingness of boards to feed it yet again raise the issue of whether modification" of taxpayer privacy standards is warranted. [Wall Street Journal]

Everson said about 25 executive pay cases have been referred for criminal investigation, though it's not known how many involve backdating.

--Related to the above, Broadcom is restating earnings for 1998 and 1999 to the tune of $1.5 billion (or "substantially more" as the company itself said) as a result of finding further accounting issues due to its options backdating policy. Just two months ago Broadcom said the restatement would be 'only' $750 million.

--Tom Freston, who built MTV, was fired as CEO of parent company Viacom by chairman Sumner Redstone. The 104-year- old Redstone was upset that Viacom lost out to Rupert Murdoch's News Corporation in the latter's acquisition of the popular social networking site MySpace. Recently Redstone also canceled the long-time production deal Tom Cruise had with Viacom's Paramount film studio, whose own head, Brad Grey, is now twitching nervously.

[Freston, by the way, is receiving some $60 million in parting gifts as his buyout.]

--Ben Stein, on the surge in private-equity and leveraged buyouts, the accompanying conflicts of interests, including insider trading, and how shareholders are being short-changed.

"No court has yet put all of this together and banned management buyouts. But it took a long time for courts to bar segregation or for Congress to bar residential housing discrimination. Management buyouts are great for management. But by every standard I can see, they are yet another sad sign of how our corporate trustees have lost their moral compass.

"The time for them to stop is long overdue. If the stockholders have hired you and pay your wage to manage their assets, your job is to do that for them - not to buy them out at fire-sale prices and turn around and make billions that rightfully belong to them. The management buyout is a sad and infuriating avatar of a decadent age." [New York Times]

--The State of California is investigating boardroom leaks surrounding the ouster of former CEO Carly Fiorina, amidst reports some board members obtained others' private phone records in an effort to identify the source of the leaks. Then it came to light the records of nine reporters were also examined under false pretenses. Board Chairman Patricia Dunn could be forced to resign this weekend.

--I'm a Dunkin' Donuts guy so I found it interesting that the chain is planning on adding 10,000 new stores around the country by 2020. Today it has 4,400 stores compared to Starbucks' 8,600. [The plans were previously announced but I wasn't aware of them until reading a piece in the Washington Post.] Today there is one coffee or doughnut shop for every 10,000 people in the United States

--U.S. authorities arrested another CEO of a UK-based online betting site, this one from Sportingbet. Earlier, the former CEO of BetonSports was nabbed. Internet gambling in most forms is illegal here, though it nonetheless comprises the bulk of revenue for the offshore companies.

--According to a survey by Entertainment Media Research, interest in downloading music is beginning to wane. For example just 11% of consumers were paying for music downloads on their mobile phone, or half the level from a year ago. A huge 44% said they were not interested in downloads. This is potentially bad news for Apple which is looking to introduce a mobile phone patterned after the iPod. [Financial Times]

--On a somewhat related topic, shock-jock Howard Stern's daily audience is still just about one million at Sirius Satellite Radio compared to the 12 million he was drawing over the commercial airwaves before he made the move. Rivals Opie & Anthony, who took over Stern's FM slot and still have their own satellite show on XM, told Crain's New York Business that the difference between being heard on satellite and on terrestrial radio "is night and day," satellite being a very slow build. But Stern can take credit for putting Sirius on the map.

Mexico: The Electoral Court ruled 7-0 that Felipe Calderon was the winner of the July presidential election and he is set to be sworn in on December 1.

"To hell with the institutions!" he said in response to the tribunal's decision, as Lopez Obrador's next target date is Sept. 16, Independence Day, where he is threatening to hold a national convention and form an alternative government.

Both Calderon and current President Vicente Fox are losing patience, but it's up to Fox to act with force if necessary and he shows no inclination of doing so. This issue is far from over.

Russia: President Vladimir Putin made a significant visit to South Africa, the first Russian head of state to do so, and Putin announced he was eager to invest more in Africa, particularly in the diamond, mining and metals sectors. The Russian president acknowledged his country had a lot of catching up to do compared to other European nations.

Back in the times of apartheid, the Soviet Union was a leading supporter of the African National Congress and Nelson Mandela, while current South African President Thabo Mbeki received military training in Russia in 1970 as did many others in the current government.

But as a further sign of deteriorating relations with the United States, Russia canceled its annual joint military exercise with U.S. forces.

China: Just as in the case of Russia, China is doing all it can to influence events in Africa and capture mineral rights. In an audacious move, Beijing warned Zambia that it would cut diplomatic relations if voters elected an opposition candidate in its upcoming presidential election.

Such overt interference in the vote is outrageous, but it reflects China's growing role as lead investor in Africa when it comes to securing supplies of raw materials. In the case of Zambia, China is the biggest buyer of Zambian copper.

The reason why China is against the man running against the incumbent president is because he has been quoted as calling Taiwan a "sovereign state" and has also spoken out against Chinese labor practices in Zambia. The politician in question, Michael Sata, has guts; that's for sure.

Separately, in an interview published in The Times (of London), Chinese Premier Wen Jiabao said those looking for democracy in China will have to wait quite a while.

"Multi-candidacy elections are practiced in China and the number of candidates standing will increase," said Wen, but he was referring solely to local elections at the village level.

"We are confident that when the people are capable of running a village through direct election, they will later be able to run a township, then a country and a province."

But to hold democratic elections at higher levels will require proof, first. On the economy Wen was optimistic, but he also ruled out any "surprise" adjustments when it came to China's currency.

On Iran, Premier Wen said "Our goal is to bring about eventual peaceful resolution (of the nuclear issue). But imposing sanctions will not necessarily get us there, and may even prove counterproductive."

Lastly, on the pollution front government officials have begun naming and attempting to shame the biggest industrial culprits. It's a start.

Taiwan: President Chen Shui-bian remains under intense pressure as a result of the corruption scandal that has implicated members of his cabinet and family. On Saturday the opposition is expected to turn out 300,000 or so demanding his resignation.

The movement's leader, Shih Ming-teh, said "Taiwan will be doomed if we let (Chen) and his corrupted and ruthless interest group run the country until his term ends in May 2008. It is not true democracy if Taiwanese people can elect their president but are not able to oust him for failing to serve the country and the people well with honesty and dedication."

Japan: The frontrunner to be the next prime minister, Shinzo Abe, said "Japan will follow a foreign policy that makes firm demands based on national interests. The security treaty with the U.S. forms the center of Japan's foreign and security policy. We must work to strengthen that stance."

Meanwhile, remember the housing scandal from last spring where an architect was responsible for designing buildings that fell far short of code in terms of earthquake protection? He just pleaded guilty, after falsifying data on nearly 100 apartment buildings and hotels that enabled contractors to cut costs. Tenants were forced to find other shelter. The architect's wife reportedly committed suicide last March.

And on a far happier note, many in Japan are ecstatic a male heir to the throne was finally born, the first to the royal family in 41 years. There had been concerns of a succession crisis, since only males by tradition were allowed to ascend to the top. Shinzo Abe was known to oppose any efforts to enact a law allowing females to succeed the emperor.

North Korea: Pyongyang is showing no signs of wanting to return to the six-party talks on its nuclear weapons program and the more I think of it, the more it makes sense that Kim Jong-il could opt to conduct an underground test in October, right before our mid-term elections.

Turkey: Attitudes are changing here, and it's unsettling for the West. Transatlantic Trends, an annual survey of European and American public opinion, reveals a big shift in Turkey.

On a 100-point "thermometer" scale, Turkey's "warmth" toward the United States declined to 20 degrees from 28 from 2004 to 2006. At the same time, Turkey's warmth towards Iran increased to 43 degrees from 34 over the same period.

Warm feelings for Britain and France were just 25, while Germany, with many Turks residing there, registered a 44.

And then there's the issue of EU membership, where positive feelings have plummeted from 73 percent to 54 percent. Positive feelings among Turks toward NATO membership have also fallen to 44 percent. [Judy Dempsey / International Herald Tribune]

[The same Transatlantic Trends poll found that 58 percent of Americans disapprove of President Bush's foreign policy. In Europe it's 77 percent. After talking to some folks in Ireland while I was there the other week, it felt closer to 99 percent.]

This week Turkey's parliament voted 340-192 to send up to 1,000 troops for the Lebanon peacekeeping force, far short of the hoped for 5,000, while parliament insisted Turkey's forces not be used to disarm Hizbullah.

Britain: What the heck is Prime Minister Tony Blair doing? Eight of his junior level aides resigned in protest over his schedule for leaving office; which he now concedes will be next spring or summer.

Blair has been in office since May 1997 and was hoping to beat Margaret Thatcher's record as the longest-serving prime minister in more than a century, but he'd fall short if he leaves in '07.

More importantly, his Labour Party is up in arms over his refusal to step down in favor of Gordon Brown as Blair has faced one scandal after another and plummeting approval ratings over his handling of Iraq and a flip-flop in policy over the war in Lebanon.

The Labour Party holds its annual conference later this month and there will be fireworks. For his part, Brown is demanding a "dual premiership" until Blair leaves.

Dow Jones -0.6% [11392]
S&P 500 -0.9% [1298]
S&P MidCap -1.9%
Russell 2000 -1.8%
Nasdaq -1.3% [2165]

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