Week in Review 
For the week 9/18/2006 - 9/22/2006
Brian Trumbore
President/Editor, StocksandNews.com

Happy Independence Day! Here in Sofia it was, Friday. Independence from the Ottoman Turks in 1908, if I understood my waiter this morning. As I write this passage, it's 2:00 pm, my hotel overlooks the main square, and there's really nothing happening on this day off for the people. I just took a walk up to Alexander Nevski Cathedral, the main landmark here, and there were about five folks wandering around inside.

In the meantime, I've been overseas since Tuesday but have kept up on much of what's going on, including my Mets finally clinching the division crown, and at the end of the day, some of us care more about that then a few little rants at the UN.

OK, maybe they were big rants, by some of the world's great dirtballs?men like Iran's Mahmoud Ahmadinejad and Venezuela's Hugo Chavez. Sudan's President Bashir wasn't much better.

I got a kick out of some of the headlines I saw in the New York Post and Daily News. Those of us who live in the shadows of the Big Apple often deal with the downside of having the United Nations there. The United States foots up to 25 percent of the bill for this incredibly dysfunctional world body, while Japan is next at 19 percent.

I bring up this last point because I was reminded this week that as Japan futilely attempts to become the 6th permanent member of the Security Council, it's kind of amazing that China, which pays 2 percent of the bill, and Russia, one percent, are in.

Yes, I know why they are. It's about post-World War II and having nukes and the like (and China replacing Taiwan?but that's a different story), but you really don't need to hear the annual rants at the General Assembly to understand how bad the UN can be. All you really need to know is that the nation fitting one-fifth of the bill really has no equal seat at the table.

I imagine, though, well over half of the American readers of this site wish the UN would just go away, but I'm not one of them. There has to be some organization where the nations of the world get together and hash out disagreements, aid the poor and unify behind rebuilding efforts in the event of national catastrophes.

But that doesn't mean you need this huge bureaucracy, on this we can all agree.

I also have noted for years now that there is one man who should replace Kofi Annan?former Czech president Vaclav Havel, health willing. He gets it.

Anyway, last Sunday, appearing with Wolf Blitzer on CNN, Israel's Foreign Minister Tzipi Livni said Iran was only "months" from mastering uranium enrichment. This is important because once they've hit this stage the broader issue of weaponizing it becomes moot. The second part is easy, especially in the case of Iran which already has sophisticated missile technology, including of the long-range variety.

There are many other experts, however, who've stated recently that Iran is progressing far more slowly than anticipated. Which requires me to repeat myself yet again. Neither the United States nor the International Atomic Energy Agency knew for 18 years that Iran was working on a nuclear program, so who the heck knows what the real story is? At some point, though, Israel can not afford to just sit back if they are able to obtain hard evidence that Iran has crossed the threshold.

So those thinking this seemingly peaceful interlude, post-Aug. 31 and Iran ignoring the EU-3 / UN Security Council demand that Iran cease with its uranium enrichment, will continue aren't dealing with reality. And those thinking Iran can be trusted with any agreement to halt production at this point probably believe Barry Bonds has been clean all these years because he never admitted to using steroids.

Back to the General Assembly, it ended up being all about Chavez and Ahmadinejad, "revolutionary brothers." In the case of Hugo it's easy to blow him off, except for the fact he is allowing Iran, in essence, to build a base of operations in our hemisphere, and that's not good. So you roll the dice. If you think Ahmadinejad and Chavez are going to be in power even just another five years, the Pentagon better be thinking of contingency plans. If not, then in the case of Chavez you just ignore him, except he's set to be president for life.

Elsewhere, General John Abizaid, commander of all U.S. forces in the Middle East, said troop levels in Iraq would remain the same "through next spring." And Prime Minister al-Maliki made news in removing the presiding judge in the Saddam Hussein trial for saying Saddam was "not a dictator." But the civil war rages on and both al Qaeda and Iran, for different reasons, love it.

In Israel, anything I write on the Palestinian issue could be old by the time you read this because the story is being rewritten every hour, or so it seems. One moment President Bush is praising "heroic" Palestinian President Mahmoud Abbas, while Abbas is assuring everyone the new unity government between Fatah and Hamas will recognize Israel and renounce violence as a precondition for true peace talks, and then the next Hamas is saying 'no way will we recognize Israel.'

Both Abbas and Hamas desperately need the flow of foreign aid to resume but most donors won't give another dime, except for extreme humanitarian purposes, as long as ruling party Hamas speaks in violent tones.

At the same time, if Abbas gets to sit down with Israeli leaders in the near future, and Israel keeps building new settlements, Abbas will be forced to walk away from the negotiations.

Then there's Lebanon. On Friday, Sheikh Nasrallah appeared for the first time in public since July and addressed a throng in Beirut, calling for the downfall of the Lebanese government. Israel had vowed to kill him if he popped his head out and they had their chance, though this wasn't the stage for such an operation.

Finally, and back to the issue of Islamic fundamentalism in general, President Bush told his UN audience and Muslim leaders specifically:

"Extremists in your midst spread propaganda claiming that the West is engaged in a war against Islam. This propaganda is false, and its purpose is to confuse you and justify acts of terror."

Which is kind of what Pope Benedict XVI was saying when he got in hot water the other day. You, leaders of Islam, need to confront the perversion of your religion. It's not about what medieval theologians and emperors were saying, it's about the here and now. But the historian/theologian in Benedict sought to point out that for centuries some have warned about taking certain passages in the Qu'ran and distorting them for evil purposes. [Others would say it's no distortion?these are facts.]

My gut reaction last week, that the Pope knew full well what he was doing, appears to be right. And I just glanced at a piece in The Wall Street Journal by Daniel Henninger that I think is bang on. Benedict is spoiling for a fight, and for good reason. Christians around the world, particularly in the Middle East, are being rolled up and threatened in what boils down to "religious cleansing."

And many of us now wish the Pontiff would stop apologizing. Yes, there is little doubt that the Pope's words were perhaps insensitive, and almost all of us had the same initial reaction?uh oh! Pope Benedict was also na?ve to the power of the Internet, one suspects, but as a British writer noted all the Pope was saying was "violence in the name of faith is never acceptable." That's the modern world, not the language of the Middle Ages where none were truly without sin.

So after 'waiting 24 hours,' we did see some encouraging words. The top cleric in Turkey accepted Benedict's apology and the fundamentalist Muslim Brotherhood of Egypt did as well.

Separately, the former Archbishop of Canterbury, Lord Carey, defended the Pope, too, reiterating that Muslims must address their religion's association with violence. Nor should the Pope let extremists limit our right to free speech, as the Washington Post's Anne Applebaum put it. For crying out loud, the Pope is allowed to quote from a medieval text!

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Wall Street

I printed out two stories before I left home on Monday afternoon for my flight to Prague. The first was a Bloomberg piece on how the Street's five largest brokerage firms - Goldman Sachs, Lehman Brothers, Bears Stearns, Morgan Stanley and Merrill Lynch - are expected to earn $28 billion in 2007, up another 7 percent from 2006's anticipated record performance. This despite the fact fees from acquisitions fell 14 percent in the third quarter, trading of government securities declined 6 percent, and commodities took it on the chin.

As reported by Adrian Cox and Christine Harper:

"The results show how Wall Street's five largest companies?are weathering declining markets by hedging, speculating and investing on their own behalf while continuing to help clients buy and sell stocks, bonds, currencies and commodities."

Merrill Lynch's Guy Moszkowski, an expert on brokerage stocks, is quoted as saying "It comes down to the diversification both by line of business and geographically, and the better risk- management tools that the firms use."

Oh, what was the other article I brought along, a story that then continued to mushroom?

The debacle at Amaranth Advisors and their hedge fund.

Why / how can a 'well-diversified' fund, with the, err, latest in risk-management tools, lose $6 billion off a peak base of $9.5 billion in a matter of about ten days? Gee, Mr. Moszkowski, I'm stumped!

Excuse my sarcasm, but what have I been saying for years now in this space? These guys aren't as smart as they think they are.

No doubt, however, there are some firms that are better than others when it comes to risk-controls, though for obvious reasons these also tend to be on the stodgy side in terms of their share price.

And I realize that Wall Street's Big Five aren't hedge funds, in the purest sense of the word, though in all cases (1) more and more of their own capital is going into the vehicles, many self- created, and (2) those with a large retail presence, such as Morgan Stanley and Merrill Lynch, have been pitching hedge funds to Mr. and Mrs. Middle America (often in the form of 'funds of funds,' which are supposed to spread out the risk but in the case of Amaranth, a few examples have emerged where perhaps certain such vehicles had too much exposure to these dealers; as Josh P. just informed me was the case with already troubled San Diego and its pension fund?like to the tune of $125 million!).

Well it just so happens that the same Bloomberg article on the brokerage industry quoted Peter Solomon, 68, and a former Lehman vice chairman now running his own advisory firm.

The investment banks have been increasing earnings in part by taking greater risks, he said, a strategy that could backfire. "They are highly leveraged institutions. They think that they have every type of hedge in the world, but you know that isn't true. Don't ever believe that they can't have huge reverses."

Arrogance?.thy name is Wall Street.

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Meanwhile, down in Washington, the Federal Reserve gathered for its latest Open Market Committee and, as expected, held the line on interest rates again, averring as before that "some inflation risks remain," though any additional firming depends on the outlook and data. Chairman Ben Bernanke and crew (with one dissenting vote) continue to believe that the economy will moderate enough, in time, to take care of any inflation pressures still in the system and today it's helped in this regard by the tumbling housing market.

So is the economy moderating as nicely as the Fed would like? We need more information before drawing any real conclusions, but no doubt it's slowing as a reading of manufacturing activity in the Philadelphia region pointed out on Thursday. In fact the Street was shocked by a negative number for this particular index, while earlier in the week housing starts were off a whopping 6 percent, the 5th such decline in the past six months.

What's good? Energy. The national average for a tank of gas is already below $2.50 and heading lower still. As I was walking around Sofia today, thinking of what to write, I came up with this thought, as weak as it may be.

Today's situation with the consumer boils down to this.

With the decline in gasoline prices, let's say the average driver fills their tank once a week and the car has 15 gallons. At a 60 cent savings off prices from early in the summer, that's $9.00, or about $450 a year. Hey, $9 is $9 and $450 is real money, especially if your commute is long, or you're a trucker, and the savings are even higher.

But measure that against the value of your home. I've told you before of the 22-unit townhouse development that I've lived in now for 12 years. I paid $240,000 for my place then, yet a basically identical unit went for $690,000 last fall. I wrote of this then and said it was definitely the top. The next sale, about two months ago, was at $640,000 and I bet anyone selling today wouldn't get $600,000. By next spring it will probably be closer to $550,000.

So how does this affect consumer spending? That remains to be seen. Bringing things down closer to the national averages, if you owned a home that cost $200,000 initially, and then saw it go to $400,000, but now it's valued at $350,000, do you spend less? That's a $50,000 paper loss, you might be thinking, as opposed to a $150,000 gain, but assume you still have your job and everything else is equal.

Compare the $50,000 paper loss then with the hard currency gain of $9 a week, or $450 a year. There is no comparison, by my way of thinking, but that's not necessarily how people react.

[Of course I'm ignoring the recent cases where those who bought are already down.]

I just suspect it will take a bit more time for the wealth effect to kick in on the downside for the simple reason that bubble mania of any kind normally takes a while to wear off. The bursting can be quick, a la Nasdaq 5048 in the spring of 2000, but many investors didn't totally throw in the towel until two years later, which of course represented a terrific buying opportunity for others.

Well enough on this topic. For now enjoy the savings; splurge on some premium beer, if you're really feeling good. But if you were in the camp that believed your home's value was going to rise at 5, 7 or 9 percent forever, it's time to start readjusting your targets, and before you know it you may also be adjusting some of your spending habits; much to the chagrin of Corporate America and Wall Street, the latter with still frothy earnings expectations for the former well into the future.

Street Bytes

--The pattern of one week up, one down, continued as the major averages all declined this week on fears the economy is softening too rapidly. But the down weeks have been tame during this stretch, as for example the Dow Jones declined only 0.5% to 11508, after once again getting within 100 points of its Jan. 2000 high of 11722.

--U.S. Treasury Yields

6-mo. 5.01% 2-yr. 4.67% 10-yr. 4.59% 30-yr. 4.74%

Bonds staged a spectacular rally, across the board, partially due to a tame reading on producer prices for August, up just 0.1%, with the core, ex-food and energy, actually sliding 0.4%. Of course the Fed's holding the line helped as well, as did the housing numbers. But it was the Philly manufacturing index that put bonds into overdrive.

--On the earnings front, Yahoo warned its latest quarter would be negatively affected by a slowdown in advertising, particularly in the auto and financial sectors. But Oracle handily beat for its Aug. 31 quarter and said it is regaining momentum in its battle against fellow business software giant SAP, which SAP itself disputes. Shares in Oracle are at a 4-year high.

[Separately, Forbes announced its list of the 400 richest Americans and for the first time everyone on the list is a billionaire. Bill Gates ($53 billion) and Warren Buffett ($46 billion) remain #s 1 and 2, but casino mogul Sheldon Adelson has soared up to #3 at $20.5 billion. However, for the article Oracle's Larry Ellison is at $19.5 billion, though no doubt he has passed Adelson as his shares in Oracle have soared since the cutoff date for the piece.]

One other earnings item. Federal Express offered a classic case of the conundrum we now face. Just how much is the economy slowing? Fed Ex said it was seeing a "little slowing" but remained optimistic on the fourth quarter and 2007. Of course that could all change.

--And you can't ignore a fact like German investor confidence hitting a new 7-year low amid fears of a global slowdown.

--If you're an emerging market investor, while your market showed little nervousness over events in Thailand and Hungary (more on this later), it doesn't mean that will always be the case.

--Back to Amaranth and its bad bet, for the record it was the prime responsibility of 32-year-old Brian Hunter, who reportedly made $75 million in compensation for his great energy plays in 2005, though when natural gas went against him, and he had levered up way too much, he cost Amaranth's investors $6 billion. But I guess since he already "passed Go" he gets to keep his earlier winnings.

--In the ever-burgeoning saga of Hewlett-Packard and its attempt to spy on the media in searching for the source of leaks on confidential boardroom matters, it's come to light that even CEO Mark Hurd, Wall Street's darling for his performance following the ouster of Carly Fiorina, "approved of a sting operation on (a reporter for CNET) in an attempt to plug leaks to the media." Finally, shares in HP reacted negatively. Then late Friday, we learned Patricia Dunn, chairman of the board, left before her previously announced January exit date and Mark Hurd was taking over. But for his part Hurd refused to answer questions during a press briefing. Oh, but he will be this week as he testifies before Congress.

--BP admitted its giant Thunder Horse rig in the Gulf of Mexico, severely damaged by Hurricane Katrina and responsible for 250,000 barrels of oil per day, may not be ready to come back on stream until 2008 rather than 2007.

--And then there's the ongoing controversy over Russia's Sakhalin II project in Siberia that was to connect by pipeline to the Far East and supply Japan and the U.S., predominantly, with oil and gas. Shell has a 55 percent stake in it and suddenly the Russian government announced it was putting the whole deal on hold for environmental reasons.

No questioning there are legitimate issues in this regard, but there is also little doubt the Kremlin and government-owned natural gas giant Gazprom is strong-arming Shell and other foreign participants (like Exxon on Sakhalin I) to allow Gazprom to take ultimate control.

Japan is furious as these tactics could obviously discourage future foreign investment (badly needed by Russia's energy industry, incidentally) and thus further destabilize energy supplies.

--Back to Yahoo, it supposedly has offered social-networking site Facebook and its 22-year-old founder Mark Zuckerberg $900 million. Take it, kid. You'd be nuts not to.

--Wal-Mart picked up a ton of publicity in announcing it was slashing prices on 300 generic prescription drugs, a potential challenge to pharmacy chains and drug makers. Wal- Mart is launching the plan in the Tampa Bay, Fla., area.

But while it's touting savings of 20-90 percent off existing prices, some of the more popular drugs, such as generic versions of cholesterol-lowering Zocor are not on the list.

--Emirates Airlines is the latest to have issues with Airbus' A- 380, double-decker flying hot dog that seats 550. After the manufacturer, EADS, announced deliveries would be delayed, Emirates said its purchase of 45 of this incredibly stupid aircraft is now "up in the air."

--DaimlerChrysler said it was cutting production 16 percent the second half of the year. CEO Dieter Zetsche's stint as "Dr. Z" in the $100 million ad campaign is in jeopardy.

--I didn't know this?over the past five years, healthcare, broadly defined, has been responsible for more job creation, 1.7 million, than the housing industry, 940,000. [Business Week]

--Barron's had a piece on Heineken and the buzz surrounding its new Heineken Premium Light beer. From personal experience it was all the buzz at a recent gathering of friends in terms of beer selection. One investor has labeled it Heineken's "Starbucks-like moment." In the end, though, it's all about taste. Will your editor make it his own beer of choice in the 'light' category? Stay tuned.

--And in the latest options disclosure, Cablevision revealed it backdated some for a former vice chairman, after the fellow died in 1999, in order to make it appear they were granted when he was alive. Why that would be enough for one to hop right out of their coffin, don't you think?

Foreign Affairs

Thailand: Billionaire Prime Minister Thaksin abused the powers of his office for personal financial gain, of this there is little doubt, but he was democratically elected and loved in Thailand's rural areas.

But the country's political situation has been in crisis for the better part of a year now and so the military, with the king's blessing, staged a bloodless coup while Thaksin was in New York for the UN General Assembly.

The leader of the coup, General Sonthi, promised an election in a year as well as an investigation into all corruption at the government level.

On the surface it really doesn't sound that bad, only one problem; the generals are reinterpreting democracy, a common occurrence in Asia.

Hungary: And it's a somewhat similar situation here, though in this instance Prime Minister Gyurcsay was caught on tape admitting he had lied continuously about the state of Hungary's economy prior to April's elections. Protesters took to the streets in large numbers and there was some violence.

The problem in this instance is that Gyurcsay is supposed to be an economic reformer and Hungary needs it in the worst way as its debt is 10% of GDP, a staggering sum. [By contrast, the U.S.'s budget deficit is about 2.5% of GDP, 4% or thereabouts if you use the kind of accounting rules corporations abide by.]

Hungary joined the EU in 2004, along with Slovakia and Poland, and it's been downhill ever since. Recall that everyone wants to join the club, particularly an agrarian economy such as Poland's, because they seek the kind of success Ireland had with subsidies and handouts.

But the EU's old guard just isn't about to let that happen, and now the EU decides on Tuesday whether or not to admit Bulgaria and Romania. Hungary's recent experience will certainly give the EU pause.

It's a coincidence I happen to be in Bulgaria now, and on Monday, Romania, so I'll be curious to get some local reaction to the vote.

To give you an idea of the economies in both, the average monthly wage in Romania is $400 vs. $890 in the Czech Republic. [I don't know Bulgaria's, exactly, but it's close to Romania's figure.]

Anyway, there is only one Celtic Tiger. Ireland was in the right place at the right time. Europe had guilt pangs when it was doling out the EU subsidies, such as in Ireland's struggle with the potato famine and all, while at the same time Ireland used the money wisely and also famously lowered corporate tax rates, to the 10 to 12 percent level at the time, which encouraged a flood of foreign investment.

But the share of the EU pie for all the new members is obviously much smaller, let alone the established countries aren't about to throw good money after bad.

[It's actually a fascinating topic, college students out there. Use it for a thesis.]

Mexico: Andres Manual Lopez Obrador is continuing his effort to spoil Felipe Calderon's victory in the recent presidential election, launching a shadow government as he had promised. And Mexico's drug war continues to take a heavy toll. At least 1,500 died last year and 15 alone in Tijuana in one four-day period last week. Many of the victims are tortured before being beheaded. So you may want to think twice about venturing south of the border, all you bachelor party and San Diego area convention goers.

[I have to admit I had the chance to go here on more than one occasion and passed it up?.thank goodness.]

Sudan: President Bashir reiterated he will not renew the mandate for UN peacekeepers for the Darfur region upon its expiration. The do-nothing African Union's army will be allowed to stay. Just as in the case of Zimbabwe's Robert Mugabe, the West and Africa had ample opportunity to take on Sudan's leadership and failed to act. And because of this inaction, as I believe I long proved, including prior to 9/11 in the case of Mugabe, the bin Ladens of the world interpreted it to mean it was clear sailing for their terror operations.

Taiwan: I apologize that I missed last time a 300,000 strong demonstration against President Chen Shui-bian that took place before I went to post. It was the second consecutive week such a protest had taken place, but at the same time the follow-up seems to be lacking as Chen, similar to the situation involving Thaksin in Thailand, battles those accusing both him and his family of massive corruption and abuse of power.

China: The Commies arrested another online dissident.

North Korea: Robert Kaplan has a terrific piece in the current issue of The Atlantic Monthly titled "When North Korea Falls." Here's one scenario I haven't discussed in this space before.

"(Some levels) of the American military worry less about an indiscriminate artillery attack on the South than about a very discriminate one. My sources feared that in the aftermath of the KFR's (Kim Family Regime's) missile launches in July, the Bush administration might actually have been foolish enough to react militarily - which might have been exactly what Kim Jong Il was hoping for, since it would have allowed him to achieve a primary strategic goal: splitting the alliance between South Korea and the United States. How would that happen? After the United States responded in a targeted fashion to the missile launches or some other future outrage, the North would initiate an intensive five- or ten-minute-long artillery barrage on Seoul, killing some Americans and South Koreans near Yongsan Garrison, the American military's Green Zone in the heart of the city. Then the North would simply stop. And after the shell fire halted, the proverbial question among American officers in a quandary would arise: 'What now, Lieutenant?'

"Politically speaking we would be trumped. The South Korean left - which has been made powerful by an intrusively large American troop presence and by decades of manipulation by the North - would blame the United States for the carnage in Seoul, pointing out that it had been provoked by the Americans' targeted strike against North Korea. The United Nations and the global media would subtly blame Washington for the crisis - and call not so subtly for peace talks. With that, the KFR would get a new lease on life, with more aid forthcoming from the international community to keep it afloat."

Kaplan says for this reason many military and civilian experts continue to argue for increased economic warfare instead. Cease all humanitarian aid, but the fact is today China and South Korea continue to send food into the North.

But for their part, this week Australia and Japan announced a series of financial sanctions on Pyongyang. They are largely symbolic, with little real teeth, but it's yet another sign of my hoped for supra-alliance?Japan, Australia, India, Britain and the United States. I call point man in Sydney for the U.S. side!

Zimbabwe: Back to our two-time "Dirtball of the Year," The Times (of London) reported that Mugabe's regime recently tortured 15 members of the opposition Movement for Democratic Change.

"As a case of police brutality on a group, it is the worst I've ever seen," a doctor who helped to attend to them said.

Sweden: The Moderate Party emerged victorious in parliamentary elections, thus ending 12 years of center-left rule. Sweden's new leader will be Fredrik Reinfeldt, who is really a conservative but the Moderates packaged themselves as centrists for the vote. Reinfeldt has promised reforms in the welfare state. Good luck.

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Pray for the men and women of our armed forces.

God bless America.

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Gold closed at $594
Oil, $60.55?$72.55 just four weeks ago.

Returns for the week 9/18-9/22

Dow Jones -0.5% [11508]
S&P 500 -0.4% [1314]
S&P MidCap -1.2%
Russell 2000 -1.5%
Nasdaq -0.8% [2218]

Returns for the period 1/1/06-9/22/06

Dow Jones +7.4%
S&P 500 +5.3%
S&P MidCap +0.6%
Russell 2000 +6.8%
Nasdaq +0.6%

Bulls 47.4
Bears 33.7 [Source: Chartcraft / Investors Intelligence]

Have a great week. I appreciate your support.

Next week from Bucharest?computer willing.

Brian Trumbore

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