Educate Yourself

Week in Review
For the week 9/25/2006 - 9/29/2006
Brian Trumbore
President/Editor, StocksandNews.com

So why have I spent the last ten days in Bulgaria and Romania? Beats the heck out of me, now that I'm here. Of course in all honesty I came here to learn a few things, and that I have.

Like just what is the European Union thinking in admitting these two into the EU, as they did on Tuesday, effective Jan. 2007? Granted, the EU placed strong conditions on Bulgaria and Romania, particularly in terms of cleaning up corruption (fat chance of that!), organized crime (ditto!) and instituting proper procedures for the allocation of farm aid (good luck). Bulgaria as well must improve its air safety standards, which I didn't learn until I exited the country. But the move makes little sense to me.

To generalize very broadly, the European Union was established to create a common market making it easier to transact commerce across borders. The first members - Belgium, France, Germany, Italy, Luxemburg, and the Netherlands - were chosen in 1952 and with the addition of Bulgaria and Romania the club now numbers 27. As the EU has expanded, some poorer members, such as Ireland (admitted in 1973), were granted substantial subsidies by the other countries in the thought that it would only lead to the further success of the others. The better the poorer members performed, the better for all.

For decades, critics of the EU said it was too altruistic, let alone bureaucratic, and that in other areas such as foreign policy there was no way in a place such as Europe you could have a one size fits all agenda, and, alas, many of its inhabitants still hate each other.

And now the more established EU nations are scared of a huge influx of immigrants from the likes of Bulgaria and Romania, and so many who once had an open door policy, such as Britain, Ireland and Sweden, are adopting far more stringent measures to keep the new club members out.

One of the consistent themes I heard while in Bulgaria and Romania was that while a lot of the citizens aren't as fired up as they once were about joining the EU and being told how to conduct their own business, the biggest advantage is the freedom to travel anywhere in the union without obtaining a visa. And that is a huge plus. It makes it easier for citizens of B&R to get into, say, Britain, and then seek work at far higher wages than they are being paid back home, for instance.

But I said the EU is nuts because in so many ways Bulgaria and Romania are very backward. For starters they are easily the two poorest members, with both having a GDP per capita about 31 percent of the EU average.

In their defense, though, officials at both say, hey, our economies are growing at a consistent 5 to 6 percent pace; far better than the bulk of you.

Critics these days, however, are countering, well look at the problems 2004 members Poland, Hungary and Slovakia are having (and to a lesser extent Czech Republic). The politics of these nations are increasingly fragile, to say the least.

And the debate goes back and forth. One thing I found interesting in both B&R is that the locals stressed the EU wants them for its "pure food." The vegetables do taste fresh, I must say. And I got a kick out of being told on more than one occasion that my soup "has no additives!"

On the other hand, Bulgaria and Romania are still havens for organized crime with massive levels of corruption, though I was told that the new center in the region for mob activity, including of the Russian variety, is Prague, which was a bit surprising to me.

But you know what I found startling in both countries? The locals admitting they had no national pride, which is largely a result of the same Mob-inspired crime and corruption, when you think about it; though Russia has both in spades and yet its citizens remain proud of their heritage, as messed up as some of us outsiders see it.

I'll give you a great example, which readers of my "Bar Chat" column have a little more background on.

On Wednesday I hired out a driver in Bucharest to take me into Transylvania. What a day. Parts of it I was scared to death by Gabriel's driving. [Transylvania itself was both beautiful and fascinating.]

So Gabriel and I get back to Bucharest, ten long hours later, and I had had it with his lawless driving. We were up on the trolley tracks (which are separated from the main roads some), totally illegal, and scattering unsuspecting people about.

I yelled at him, he shot back, and then we got into this heated discussion about his country and politics in general. It essentially went like this.

"What laws? We have no laws. Who are the laws for? The government? The people? In Romania it's each man out for himself. If I wait in traffic, in a neat line with the others, what does that prove?"

"Our society is already broken. Unless you are at the top of government, with all your privileges and kickbacks, you don't stand a chance. I work all day to put bread on the table for my wife and daughter and yet I don't ever get any higher in life."

It turned out to be a heart-wrenching discussion as we went on and on like this for a good fifteen minutes. It was also fascinating his perception of America.

"Here in Romania, if we see someone in the subway who is disabled and is having trouble getting around, no one offers to help. It's every man for himself. But in America you have, what do you call it, 9-1-1. You help each other."

He was giving us more credit than we deserve sometimes, by my own observations, but we are certainly far more generous and compassionate than every other nation on earth, by the statistics. And so while his 911 analogy was slightly off, it does open your eyes.

My driver in Bulgaria, Tony (the fellow I hooked up with after posting last week's column), had somewhat similar comments, especially on the issue of lack of pride and identity. Tony was a great kid, in his 20s and clearly highly ambitious. He wasn't going to be left behind if he could help it.

"People who work hard are to be celebrated," he told me. I mean he grows and sells carrots, is a chef, and is buying property (and doing very well by everything I heard in Sofia?a booming market). And on the side he picks up lucrative driving jobs, like in my case.

As Tony and I were driving through Bulgaria's Rila Mountains on the way to the Rila Monastery, the reception on the radio kept fading in and out as we picked up one channel and lost another.

At one point Tony said, "That's Iraq." "The station's from Iraq?" "Yes, Iraq." He then listened a while and told me the commentator was talking about how the level of U.S. casualties there had now exceeded 9/11. Since I had just seen this story I knew he wasn't kidding me as to where the station was originating from.

Then, without any prodding on my part, Tony, bright as anyone I met in his country, said "George Bush crashed those planes."

I just said I was amazed how many believed that and changed the topic. Maybe I should have engaged him, like I did with Gabriel, but our trip was just starting that day. Next week I am, however, going to try and express my thoughts on just why it is so many around the world despise President Bush.

For now, as I wrap up my thoughts on Bulgaria and Romania and the European Union's questionable move to elevate these two to club status long before they are ready - what with the contract killings still taking place in the former and the black market in babies in the latter - which you'd think would dictate more of a level of prudence on the part of the EU, I leave you with another story that tells you something about the character of the people.

I was talking to Gabriel in Bucharest about my going to see the monstrosity built by dictator Nicolae Ceausescu in the late 1980s, The Palace of the Peoples. Ceausescu, one of the evil racists of his time who was eventually done in by a restive Hungarian population which sparked a revolution, displaced 40,000 to build the world's second largest office building next to the Pentagon. It is an amazing sight to see up close, but an incredible folly.

"Well Ceausescu displaced tens of thousands and built this colossus at a time when you all were starving, from what I've read."

"Oh, it wasn't that bad. And he brought in a lot of workers from outside and they were given a housing block."

Wonderful. Looks like there's still no shortage of things to learn in this amazing world of ours.

Iraq: The New York Times' David Brooks, in citing a World Values Survey, wrote "Iraq is the most xenophobic, sexist and reactionary society on earth." Sadly, he's got it right.

And in a poll conducted by the University of Maryland, 60 percent of Iraqis approve of attacks on U.S.-led forces, though at least 57 percent disapprove of Iranian President Ahmadinejad, which is slightly encouraging.

On the unbelievably bad reconstruction effort, filled with graft and corruption to the tune of $billions, the Washington Post reported that a $75 million model police academy is already in shambles. Floors buckling, walls falling apart?it's brand new! It's so bad urine is seeping through the floors from the bathrooms.

But in a piece of good potential news, Kurdish rebel leader Ocalan, who is in a Turkish prison, told his followers to seek peace with Turkey. It's unknown by yours truly how much Ocalan is still respected and listened to, and I see that a gas pipeline between Iran and Turkey was just blown up, supposedly by Kurds.

Iran: Yup, Iran is still "stalling," to use President Bush's term. Of course none of you should be in the least bit surprised, seeing as I told you of Iran's four-corners offense long ago. And now it's officially been a month since Iran was told by the UN to cease with its uranium enrichment program.

In a poll conducted by the BBC and Globescan, 21 percent of Americans are for striking Iran if it continues to defy the UN, while only 8 percent of Brits feel that way, 6 percent of French, and 4 percent of Germans. Forget the raw numbers, it's the ratios that are telling, though also not in the least bit surprising.

Israel / Lebanon: Speaking of things you already know about, I had to laugh when I saw some articles this week talk about Shebaa Farms now being a key to any permanent peace agreement between Israel and Lebanon. I told you long before the war started it was critical to resolve this, and a missed opportunity on the part of the Bush administration to call Hizbullah's bluff; Shebaa Farms being Hizullah's raison d'etre for their "armed resistance" against Israel. But the White House's incredibly unimaginative and inept foreign policy resulted in yet another disaster.

I also seem to be the only one who is incredulous that President Bush has the temerity to stand in front of us and say with a straight face "We believe strongly in the concept of a Democratic Lebanon," having failed to lift a finger in supporting the fledgling government when it needed help most.

Bush has sent a high-level delegation to Beirut that includes Intel's Craig Barrett and Cisco's John Chambers and I do at least like what Barrett said; it's a time for "concrete actions, not empty promises," which is all Lebanon received from the United States in the days and months following the assassination of Rafik Hariri.

Total losses, by the way, in Lebanon are now expected to hit $10 billion, when you add in the loss of tourism dollars and exports.

And when it comes to South Lebanon, three people a day are being killed and wounded by unexploded bomblets from the cluster-bombs Israel dropped in the area. Incredibly, according to the Washington Post, there are some one million that are unexploded?Israel having dropped 90 percent of them in the last 72 hours of the conflict. Of course this severely impacts the efforts of any attempting to farm the area for their livelihood. Yet, incredibly, there will be those, looking at the broader picture, who still don't understand how Arab enmity in the region towards Israel exists as it does.

And this leads to feelings being expressed by relative moderates such as Rami Khouri, who I've quoted frequently in the past. Khouri is a professor at American University in Beirut and writes for the Daily Star of Lebanon. I don't agree with all of this, but it's representative of opinion on "the Arab street."

"In the five years since 9/11, a most worrying and widespread political trend in Western societies has been the broad identification of Islam with terrorism. The translation of that general perception into specific foreign policies by leading Western powers has led to dangerous new confrontations in the predominantly Islamic Arab-Asian region. It has driven military interventions and 'regime change' policies spearheaded by the United States, sometimes with Europeans and Israelis on board. These tensions have also dovetailed with the persistent Arab- Israeli conflict, aggravating the overall situation.

"In response, a new coalition of forces has emerged in the Middle East, prompted by a growing collective will to defy and sometimes militarily resist Western-Israeli policies. Such resistance includes the use of force in Afghanistan, Iraq, Palestine and Lebanon, and pushing back politically against Western-Israeli hegemony. Iran, Syria, Hizbullah, Hamas, Muslim Brotherhood groups and remnants of leftist and nationalist movements have all found themselves motivated by common fears of American-Israeli-driven policies.

"The recent fighting in Lebanon highlighted these new battle lines, whose origins can be traced back in part to aggressive post- 9/11 American strategies to 'drain the swamp' in the Arab- Islamic Middle East.

"The problem as seen by many in the Middle East is three-fold. First, since the end of the Cold War, the U.S. and the West in general have seemed to need a new defining global paradigm to regulate relations among states or groups of states. Many in the West seem to have opted for a 'clash of civilizations,' quickly reduced to a West-Islam face-off. Incompatibilities and threats, rather than shared values and ethnic-religious legacies, quickly defined the public discussion of Islam and the West in many parts of Europe and North America?.

"Second, the American and British governments misdiagnosed and then overreacted to 9/11 and other terror attacks, in London and Madrid particularly. They opted for an aggressive military and diplomatic strategy that seeks to defeat terror groups, but also to change regimes and modify government systems, along with some basic social values, in Arab-Asian societies. The West is no longer just suggesting gradual policy reforms to Arab- Asian countries - It is sending in the U.S. Marines to do the job by force, often dictating the values and systems the target countries should adopt.

"Third, George W. Bush and Tony Blair in particular have incessantly spoken of their fear that radical Islamic values and the acts of terror groups threaten the Western way of life, and must be beaten with a robust display of Western power and determination waged in a great civilizational 'battle for hearts and minds.' The most recent catchall phrase to describe the bad guys in the Middle East-Asian region is 'Islamo-fascists' - a stunningly simplistic convergence of a noble ancient religion from the Middle East with an evil modern political ideology that was born in Europe. When two leading figures like Bush and Blair repeatedly speak of Islamic values, radical terror groups and ideologues and threats to Western lifestyles as one seamless set of ideas, the damage over years is devastating?.

"The confrontational cycle since 9/11 between many in the West and the Middle East has been fueled by specific policies and incidents that can be widely interpreted as reflecting a new form of political racism in the West against Arabs and Muslims. The main charge is that the American-led West applies a double standard when it comes to Arab-Islamic countries or groups. Four particular recent issues reflect this feeling: the Danish cartoons controversy last winter; reactions to Iran's nuclear technology development; the response to Hamas' victory in the Palestinian elections; and the relaxed Anglo-American attitude for calling for a ceasefire in the Israel-Hizbullah war, after initially giving Israel weeks to pursue its widespread devastation throughout Lebanon.

"Each of these issues reflects distinct dynamics and concerns. But in the eyes of much of the Arab-Islamic world they also share a common thread: They manifest in practical policy terms a prevalent Western sense that the rights of Arabs and Muslims are broadly contingent on their first unconditionally accepting American-Israeli demands."

Again, the above is a mainstream opinion in the Arab world. We need "historic" leaders to bridge this growing gap between us before it's too late.

Afghanistan / Pakistan: I give President Bush credit for attempting to bring these two together, but at the same time one can't help but witness the hypocrisy in some of it. And while his book may sell (I'll probably buy it), President Pervez Musharraf did not otherwise have a good week. It is obvious the tribal agreement he reached in Waziristan has only led to a stronger Taliban, now shielded in the region, while a leak from British intelligence suggested that Musharraf's ISI (their CIA) needs to be disbanded because of its support for al Qaeda. Of course everyone has known there are elements in the ISI who have had something to do with the attempts on Musharraf's life, but the timing of the report, as Musharraf was heading to Britain, couldn't have been worse.

President Karzai of Afghanistan isn't without blame, either, for his nation's many problems, but he is doing just about all he can given his still pitiful resources. He hasn't been dealt a great hand to begin with and without a strong ongoing commitment from NATO and the U.S. on the security side, it's going to be virtually impossible to improve on it.

[On a related topic, U.S. forces will now be under NATO command in Afghanistan.]

Each week, this paragraph or two is the last I plug in after waiting to see how the market closes and gathering some final statistics. Well, suddenly I have Internet connection issues so I need to make this mercifully brief.

The pattern continues?one week up, one week down?but the up ones are strong, while losses to the downside have been minimal.

And so this time the Dow Jones, starting the week at 11508, rocketed to a new all-time high of 11741, besting the Jan. 14, 2000, mark of 11722. Only one problem. The 11722 figure still stands because the Dow failed to 'close' above it any single day this week, finishing Friday at 11679, basically on concerns the Federal Reserve may not be easing interest rates anytime soon after all.

Earlier in the week we had mixed news on the housing market, with existing home sales down for the month of August, but new home sales up. Few really believed the latter number and, more importantly, the median price on both existing and new homes is actually down, 1.3 to 1.7 percent, from year ago levels. So this being new for most homeowners, we'll see how it begins to weigh on psychology and consumer spending.

The latest data on personal consumption, incidentally, was up just a mere 0.1 percent, while personal income rose 0.3 percent.

But two leading measures of consumer confidence rose, thanks to falling gasoline prices; certainly not an unexpected development.

Lastly, as the final revision for 2nd quarter GDP came in, 2.6 percent and less than expected (it was 5.6 percent in the 1st quarter), White House Council of Economic Advisers Chairman Edward Lazear told the Senate Budget Committee that the "housing slowdown will be a significant drag on third quarter growth."

The bond rally petered out on the above noted concerns the Federal Reserve may not be easing anytime soon, following rather hawkish comments from Fed Gov. Poole.

--Crude oil rose to $62.91, despite continuing builds in inventories, on word OPEC may begin reining in production. Friday it announced Venezuela and Nigeria would voluntarily cut back some?but only 170,000 barrels, combined. Natural gas, meanwhile, staged a big rally after bottoming around the $4.40 level, closing the week at $5.62.

--Treasury Secretary Henry Paulson appears to have convinced the Chinese government to continue to let its currency appreciate further, which helped block protectionist measures by senators Lindsey Graham and Charles Schumer.

--General Motors is balking big time at an alliance with Renault and Nissan, with the latter two seeking a 20 percent stake without paying a premium, at last report. But it's investor Kirk Kerkorian who is pushing GM into some kind of arrangement in threatening to raise his already considerable 9.9% stake.

--In a totally absurd ruling, a federal judge has granted class- action status to tens of millions of smokers of "light cigarettes."

--JP Morgan Chase is now #2 behind Goldman Sachs on the list of largest hedge fund managers, which might be a slight surprise to some. But $12 billion of its $28 billion in hedge fund assets was recently acquired. JPM has 38 in-house funds.

--I haven't seen an Amaranth update in a few days, so I'm assuming there still hasn't been a conference call where investors could ask chief Nick Maounis just how it was Amaranth was able to lose $6 billion of $9.5 billion in assets in the blink of an eye. Maounis instead has only offered this statement:

"Sometimes even the highly impossible happens and that's what happened in September."

Pitiful. Amaranth is being served with all manner of suits alleging it misrepresented its risk management policies, though I think by now we can leave out the word "alleged."

[Update to last week's comment. Josh P. informed me San Diego's pension fund exposure to Amaranth was $175 million, not $125 million as originally reported, but the actual loss may be closer to $90 million. I think I left the impression last time the 'loss' was $125 million. And I did just see Amaranth announce it is suspending redemption requests as it looks to liquidate the entire portfolio. The loss would now appear to be greater than $6 billion.]

--Health-care premiums of employers and workers are climbing double the rate of wages and inflation in 2005, up 7.7 percent. But the pace had been as high as 14 percent as recently as 2003.

Just as importantly, these days only 60 percent of smaller companies now provide some sort of health benefit, down from 68 percent a few years back.

--Former Enron CFO Andrew Fastow was sentenced to six years, without parole. Fastow could have received ten, but he's been cooperating with federal authorities; specifically as it pertains to some of the ongoing class-action suits.

Fastow is pointing out to plaintiffs where key documents may exist that help in their cases against the likes of Barclays, Royal Bank of Scotland, Merrill Lynch and Credit Suisse, all of whom opted out of the initial multi-$billion settlement in claiming innocence in the whole Enron fiasco. Earlier, a judge absolved Barclays of any guilt, but if Fastow produces the goods, the case will likely be resurrected.

--Ken P. observed that it probably wasn't a good thing for WorldCom's Bernard Ebbers to show up at federal prison in a Mercedes the day he began serving his 25-year sentence. Undoubtedly, the inmates took note.

--Kobi Alexander, former CEO of Comverse Technologies and fugitive from justice as a result of charges he manipulated his company's stock options, was seized in Namibia. Namibia?! Geezuz, I realize he probably thought no one would find him there, but what fun would that place be? And so we nominate Kobi Alexander for "Corporate Idiot/Dirtball of the Year," the first so chosen in both categories. Kobi, you'll receive your hardware at year end. Enjoy.

--Ken S. reminded me that despite all the publicity on Hugo Chavez and Venezuela's ownership of Citgo, it behooved me to mention it once in a while. Yes, I've been remiss in not doing so. And then two days after receiving this note from him, 7- Eleven announced it was dropping Citgo from 2,100 locations, though the company said it had nothing to do with denying Chavez more revenue, but rather Citgo's contract with 7-Eleven was expiring. Well we know where the truth lies on this one, don't we?

--Nice move by the Mexican government to allow executives at TV Azteca to sponsor a raid on NBC-owned rival Telemundo. Moves like this are why some of us have such a low opinion of this country.

--With the carnage in the auto sector and a slowing housing market (and thus a slowdown in purchases of appliances), many are talking about a glut in steel. Finally, falling prices.

--One company I like to see do well is McDonald's, especially after some of the problems they had years ago. They've simply executed and haven't been afraid to change strategy and experiment. In fact, President Bush could learn a thing or two from them. This week McDonald's announced it was hiking its dividend to $1 from $0.67.

--My friend Jimbo is an avid L.L. Bean shopper, as am I from time to time, and he's noted the shopping experience is so enjoyable, both in terms of price and service, that he's thinking of waiting on the curb for the package to arrive.

--I see where Yahoo! is closing its offices the last week of the year to save on lighting and heating. The company is also mandating that employees use vacation time if they want to be paid for the forced time off. Here at StocksandNews, we grant employees only Christmas Day?and they better be in all the earlier on the 26th.

The Vatican: Pope Benedict XVI met with some Muslim leaders and most of the press accounts I read I believe got it all wrong. They talked of his willingness to apologize for perhaps being a bit insensitive and not wanting to humiliate the Islamic faith, but at the same time the bigger story was the Pope's refusal to back down in stressing his opposition to religious intolerance, and he specifically decried discrimination against Christians in Saudi Arabia. Muslims are granted full rights in Christian countries and Christians aren't in many of theirs. That must change, yet the Pope appears to be the only one with the guts, and authority, to bring it up.

Japan: Shinzo Abe, 52, became the youngest prime minister post- World War II and he immediately appointed a conservative cabinet. Abe will set to formally revising the pacifist constitution to allow for more offensive military capability, while at the same time he is calling for a summit with China.

But China is saying 'not so fast' as both it and South Korea continue to rail about visits to the Yasukuni war shrine. Abe hasn't disavowed going to the shrine himself. Thus far the Japanese people are giving him a 71 percent approval rating.

China: Meanwhile, President Hu dismissed a leading political rival, the party boss in Shanghai, over corruption charges. But Hu was also sending a signal to the increasingly powerful regional chiefs ahead of a Communist Party confab and next year's bigger congress.

Russia / Georgia: Major spat here as Georgia has accused five Russians of spying, with Georgian police surrounding a Russian base there that is said to be protecting the fifth. [The other four were arrested.] Russia in turn has withdrawn some of its officials, including its ambassador, and their families because of "security concerns." Georgian President Saakashvili termed this reaction "hysteria" and then his government produced both audio and video evidence of the coordinated Russian activities, as well as evidence implicating one in a car bomb attack last year that killed three. But Russia would never do such a thing, would it? I mean they wouldn't want to possibly foment revolution in the breakaway Georgian republics of South Ossetia and Abkhazia for the purpose of toppling the very pro-West government of Saakashvili, would they?

South Korea: Seoul is bribing members of the UN Security Council in its attempt to have foreign minister Ban Ki Moon succeed Kofi Annan; this according to The Times (of London).

Hungary: Prime Minister Gyurcsany said he is committed to reforms and will not step down despite the protests over the audiotape revealing him to have lied about the state of the nation's economy prior to key April elections.

Poland: And a major corruption scandal here as yet another politician has been caught on tape; this time a ruling party member who tried to bribe another party's politician.

Kazakhstan: I don't know any details as I go to post but it's pretty funny that President Nazarbayev has been treated to a state dinner, a rare occurrence for the Bush White House. While there is no doubt Nazarbayev is actually among the more moderate leaders in his region, and he is truly popular among his people, he has ruled Kazakhstan with an iron fist. A democracy? I don't think so, which makes criticism of the administration's kid glove treatment of Nazarbayev totally legit. [In case you didn't know, Kazakhstan has a lot of oil.]

North Korea: The top commander for U.S. forces in the Pacific said Pyongyang doesn't have a legitimate long-range missile capability, citing its test failures from last summer and eight years earlier. That's a big leap of faith, to me.

Indonesia: The death toll from bird flu hit 52. It's still out there and world health officials and governments can't let down their guard.

United Kingdom: Prime Minister Tony Blair made his last appearance at a Labour Party Conference as its leader. Labour is down to 31 percent in the polls, compared to 38 percent for the Conservatives.

Switzerland: The conservative Swiss People's Party, the leading vote getter in a recent vote here, vows to tighten asylum and immigration laws?a trend throughout Europe as you've seen.

Zimbabwe: The government is seeking to postpone elections from 2008 to 2010 to give Robert Mugabe two more years in power. Why he's done such a good job!

Dow Jones +1.5% [11679]
S&P 500 +1.6% [1335]
S&P MidCap +1.6%
Russell 2000 +1.0%
Nasdaq +1.8% [2258]

Bulls 47.4
Bears 33.7 [Source: Chartcraft / Investors Intelligence?both readings unchanged on the week]

Have a great week. I'm heading back to Prague on Sunday but will be coming from home next time. It will be good to get back, as it always is.

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