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Week in Review 
For the week 10/9/2006 - 10/13/2006
Brian Trumbore

North Korea's Nuclear Test Announcement

"The field of scientific research in the DPRK (Democratic People's Republic of Korea) successfully conducted an underground nuclear test under secure conditions on October 9, 2006, at a stirring time when all the people of the country are making a great leap forward in the building of a great, prosperous, powerful socialist nation.

"It has been confirmed that there was no such danger as radioactive emission in the course of the nuclear test as it was carried out under scientific consideration and careful calculation.

"The nuclear test was conducted with indigenous wisdom and technology 100 percent. It marks a historic event as it greatly encouraged and pleased the KPA (Korean People's Army) and people that have wished to have powerful self-reliant defense capability.

"It will contribute to defending the peace and stability on the Korean Peninsula and in the area around it."

Following is first reaction, representing all sides of the political spectrum.

Editorial / Wall Street Journal

"With great danger comes great clarity. By ordering his country's first-ever nuclear weapons test, Kim Jong-il lay bare this generation's greatest challenge: How far will the world go to impose order on rogue states intent on acquiring weapons of mass destruction?

"History offers cold comfort. Only nine nations in the post- Soviet era possess nuclear weapons, but many more, including Tehran's mullahs, are seeking them. The U.S. and other responsible democracies have persuaded a few nations - Ukraine, South Africa, Libya - to disarm or abandon their weapons programs. In our globalized world, however, WMD proliferation is a potent threat, as proven by Pakistan's former nuclear-secrets merchant, A.Q. Khan.

"Pyongyang, like Iran today, never hid its ambitions. For over a decade, the North has built up the world's fourth-largest military, threatened its neighbors and engaged in drug dealing, counterfeiting and WMD proliferation - with little rebuke. At one point, the Hermit Kingdom threatened to turn Seoul into a 'sea of fire.' In 2002, Pyongyang announced it had nuclear weapons..

"South Korea shoulders much of the blame. By sticking to its 'sunshine policy,' Seoul undermined every diplomatic effort to exert non-violent pressure on the North. Two-way trade between North and South Korea passed $1 billion last year.a huge chunk of the North's total income. By tolerating Pyongyang's proliferation ambitions, President Roh Moo Hyun and his foreign minister, Ban Ki Moon [ed. the new UN Secretary General], have allowed the current crisis to explode on its doorstep..

"Yesterday's test marks a new reality that will change security calculations in Asia and the world. We're about to find out how responsible an actor China wants to be on the world stage, or if it prefers having one of its clients creating trouble for the U.S. and Japan. At the very least Kim Jong-il has to know, and will have to be told, that any use of nuclear weapons by his regime or by anyone who can be traced to North Korea will result in his government's annihilation. U.S. Assistant Secretary of State Christopher Hill said the other day that North Korea 'can have a future or it can have these weapons.'

"There will be renewed calls for bilateral talks between Washington and Pyongyang. This would be a mistake. Putting new money on the table and pulling sanctions off would be seen by Pyongyang and all others as a reward for defying the world and building a bomb. The next 'development' will be another nuclear nation, starting with Iran.

"Kim has opened a Pandora's box. Closing it won't be easy. The effort needs to be made to avoid the alternative: a new world disorder."

Editorial / Times of London

"Kim Jong-il has gone for broke. North Korea's claim to have conducted its first nuclear test has yet to be fully verified. It is still unclear whether the country is years, or perhaps only months, away from developing a missile-delivered nuclear warhead. But by declaring itself to be set on being a nuclear- armed power, North Korea has gone past the point of brinkmanship, leaving no shred of doubt about its intentions - and no room for ambiguity in the international response.

"As the new Japanese Prime Minister Shinzo Abe grimly observed yesterday, Asia's most untrustworthy regime has launched the region into 'a new, dangerous nuclear age.' North Korea could not have been more sternly warned that if it went ahead with the test, it would find itself in a break-hold from which it could not escape. The regime has escaped total isolation until now, mainly because of the petulance of China, North Korea's economic lifeline and ultimate protector, to admit to, or use, its considerable economic and political leverage. But even China's patience has been wearing thin. It pointedly declared at the UN last week that 'no one is going to protect.bad behavior.' To underline that message, Beijing told Pyongyang that it might drop the 'automatic intervention' clause in the friendship treaty that commits China to come to the regime's defense..

"The generals must be given fresh reasons for discontent. There will be members of the elite whose stomach is turned by Korean suffering and the crass Kim personality cult. China knows who these leaders are. Beijing would balk at 'regime change,' but perhaps not as edging out the Dear Leader in favor of pragmatists ready to risk accommodation and cautious reform. Mr. Kim's departure is the neatest way out of crisis. He may have hastened the forced exit he is desperate to prevent."

Editorial / New York Times

"Let us all agree: North Korea's government is too erratic, too brutal, and too willing to sell what it has built to have a nuclear bomb. There is also no military solution, not least because intelligence experts haven't a clue where Pyongyang has hidden its weapons labs or its stock of plutonium.

"So after years of temporizing and denial, the world's leaders need to figure out how to force this terrible genie back into the bottle. It is a truism that no country that has tested a nuclear weapon has ever been pressured or cajoled into giving it up. But neither has any nuclear postulant been as vulnerable to outside pressure and bribery as this regime.

"The Bush administration seems to want to impose limited sanctions on North Korea - and inspections of all cargo going into and out of the country - until it agrees to abandon its entire weapons program. We fear that won't be enough to quickly change Pyongyang's mind - while key players like China won't sign on to never-ending punishments..

"In practice, the North Koreans are likely to back down only if China chokes off their oil supply and other essential trade. Until now Beijing has refused to use its enormous leverage, fearing that too much pressure could topple the North Korean government and unleash a mass of refugees over its border. When told they were enabling their neighbor's nuclear ambitions, Chinese diplomats blithely insisted that the North was likely bluffing about having a weapon. Now, Washington, Tokyo, Moscow and others have to make clear that China will be judged by its willingness to confront this problem..

"The administration has indulged in its own denial and temporizing. Last year, Secretary of State Condoleezza Rice dismissed the North's declaration that it had nuclear weapons as a bid for attention. 'I do think the North Koreans have been, frankly, a little bit disappointed that people are not jumping up and down and running around with their hair on fire,' she told The Wall Street Journal.

"Since then, United States policy has whipsawed between negotiations and posturing, incentives and sanctions. It has been months since negotiators even sat down at the table. Administration hawks suggested last week that perhaps the best thing would be for the North to test, so the world would know exactly what it was dealing with. The hawks appear to have gotten their way. So why don't we feel safer?"

Editorial / Washington Post

"North Korea's objective in the aftermath of its reported nuclear test will undoubtedly be to force its neighbors and the world to accept it as an established nuclear power. India and Pakistan succeeded in riding out sanctions and winning acceptance as 'strategic partners' of the United States after their bomb tests. Kim Jong-il will try to repeat that history. Whether he succeeds will depend, above all, on the outcome of what we hope will be some serious rethinking by the governments of South Korea and China.

"North Korea's neighbors, and not the United States, bear the burden of the North's decision to proceed with what it said was a nuclear explosion - the small yield raised questions yesterday about whether the test could have been a flop or a fake. Beijing and Seoul have propped up Mr. Kim's despotic regime with heavy subsidies of fuel and food, reasoning that keeping it alive was better than a collapse that could flood their countries with refugees. The underlying logic was that the North's nuclear program was little more than a bargaining chip with the United States and did not pose a genuine military threat.

"Both countries have to recalculate now. Is an outlaw dictatorship with nuclear weapons on the border really tolerable? Is the possibility that Japan or Taiwan will respond by building nuclear weapons less of a threat than a tide of refugees? What poses a greater risk of war: the possible collapse of the Kim regime, or an attempt by that regime to use its new weapon either to extort concessions from the South or to achieve its stated goal of conquering the whole Korean Peninsula? Most important: If subsidies and bribes have failed to moderate North Korean behavior over the past few years, is it reasonable to bet that they will do so in the future?"

Editorial / Washington Times

"Promise, agreement, ultimatum, transgression, failure, threatened catastrophe. Repeat. This, the all-too-familiar pattern of North Korean diplomacy, has now permitted one of the world's most dangerous regimes to declare that it has gone nuclear. Whether the test deep in the mountainous northeast of the hermit kingdom was successful is disputed. It may have been, it may not have been. What is not disputed is this: Either now or at some point in the foreseeable future, Pyongyang will be able to threaten the United States and its allies, credibly, with the world's most destructive weapons.

"Pyongyang's declaration to the world has many consequences. The first is the emboldening of all seekers of nuclear weapons who have been subjected to the same empty international - community rhetoric as North Korea, which hereby flouts it all, without much consequence. The international community's word - threats, warnings, lines drawn in the sand - is now made to appear in the eyes of Iranian mullahs, Syrian autocrats, terrorists and others as a few dozen sternly worded letters utterly devoid of consequence. The North Korean regime's negotiating postures could only have taken clear account of this; they were designed to stall and buy time until a weapon could be completed. Other malefactors are undoubtedly taking note: 'Six- party talks' and their equivalent are a ticket to the nuclear club.

"Words must have consequences if they are to have meaning; ours clearly did not. 'I will not wait on events, while dangers gather. I will not stand by, as perils draw closer and closer,' President Bush said in his famous 'Axis of Evil' address in 2002. 'The United States of America will not permit the world's most dangerous regimes to threaten us with the world's most destructive weapons.' Imagine the conclusions our enemies draw when North Korea openly flouts such promises..

"Speculation mounted yesterday as to whether this apparent nuclear test is the product of an internal policy struggle between dictator Kim Jong-il and senior military leaders. Certainly it made little strategic sense: North Korea's hand is now stripped of its last worthwhile card short of direct military escalation.

"About the only positive that could conceivably emerge here would be the opportunity, the strongest yet, for the affected nations - the United States, Japan, South Korea, China, Russia, Taiwan and surrounding countries - to speak as one. Sanctions must go forward at the United Nations. China must stop playing both sides. The evidence for tough action is indisputably here, if only the world community would wake to it.

Jon B. Wolfsthal, Op-Ed / Los Angeles Times

"The United States must ensure that North Korea's leaders understand the full force of our commitment to defend our Asian allies. President Bush's statement that the United States will hold North Korea accountable for its actions is a good first step. However, it took the United States years of face-to-face talks with the Soviet Union and China to work out a stable relationship based on mutual deterrence. Washington will have to find ways to ensure that Pyongyang does not overreach or miscalculate with its nuclear capability.

"However distasteful the Bush administration finds direct talks with North Korea, the president should nonetheless dispatch a personal envoy to Pyongyang with a clear message: Any attempt to use its nuclear arsenal offensively will bring immediate, disastrous and possibly nuclear consequences. Further, Kim needs to understand that any future North Korean missile tests that are not announced or that are aimed at or over U.S., South Korean or Japanese territory might warrant a U.S. nuclear response. That's because it would be impossible for any American leader to be sure that such 'tests' were not the first signs of a nuclear attack.

"This envoy would not be empowered to negotiate. The six- party talks were moribund before and should be declared dead. The envoy's job would be merely to deliver an unambiguous, sober message about Pyongyang's new responsibilities. The Bush administration will undoubtedly try to step up the economic and political pressure on Pyongyang to disarm. But the naval blockade that it is contemplating is unlikely to succeed either in forcing North Korea to reverse course or in preventing it from exporting its nuclear weapons should it choose to do so."

David Frum, Op-Ed / New York Times

"The North Korean nuclear test - if that indeed is what it was - signals the catastrophic collapse of a dozen years of American policy. Over that period, two of the world's most dangerous regimes, Pakistan and North Korea, have developed nuclear weapons and the missiles to launch them. Iran, arguably the most dangerous of them all, will surely follow, unless some dramatic action is soon taken.

"It is, alas, an iron law of modern diplomacy that the failure of any diplomatic process only proves the need for more of the process that has just failed. Thus those who have long supported negotiating with North Korea are now calling for the Bush administration to begin direct talks with the Kim Jong-il regime. Sorry, but all this would accomplish would be to reward an actual proliferator in order to preserve the illusion that the world still has a meaningful nonproliferation regime.

"Some even suggest, in worried tones, that the North Korean test might provoke Japan to go nuclear, as if the worst possible consequence of nuclear weapons in the hands of one of America's direst enemies would be the acquisition of nuclear weapons by one of America's best friends.

"A new approach is needed. America has three key strategic goals in the wake of the North Korean nuclear test. The first is to enhance the security of those American allies most directly threatened by North Korean nuclear weapons: Japan and South Korea.

"The second is to exact a price from North Korea for its nuclear program severe enough to frighten Iran and any other rogue regimes considering following the North Korean path.

"The last is to punish China. North Korea could not have completed its bomb if China, which provides the country an immense amount of food and energy aid, had strongly opposed it. Apparently, Beijing sees some potential gain in the uncertainty that North Korea's status brings. If China can engage in such conduct cost-free, what will deter Russia from aiding the Iranian nuclear program, or Pakistan someday aiding a Saudi or Egyptian one?"

At President Bush's press conference the other day, I was waiting for a reporter to ask the following.

"Mr. President, why is it that after six years of your administration, China (and Russia) continues to play the United States for chumps?"

As I go to post, it does not appear likely that the UN Security Council will approve tough sanctions on North Korea. Both China and South Korea have different reasons for not cooperating with the desires of both the United States and Japan on items such as inspection of all cargo going in and out of the North. While China and South Korea do both agree on mild sanctions, China calls military action "unimaginable," even though the U.S. is not advocating an attack, and Seoul doesn't want to abandon its policy of engagement. As for Russia, it's just backing China as the two jerk the U.S. around, similar to the case of Iran, like two tag team titleholders.

When it comes to Pyongyang, however, there are many unanswered questions, including:

"Has Kim just given up on negotiations?" "Who are the generals behind him?" "Has Kim told China the truth about his nuclear program and its capabilities?"

As for President Bush there has been a lot of talk, such as that above, about the administration's obvious failure in preventing Kim from taking the step he did. But my opinion is the failure is not as much about the lack of direct talks, though I would go along with that, but rather the president's inability to make any headway with Beijing. It's long time we played hardball, but our leverage is severely limited these days.

There is one winner thus far in the North Korean crisis, Japan's new Prime Minister Shinzo Abe. Kim Jong-il's intransigence has played into Abe's goals of a stronger military and more patriotism at home.


Hours after posting last Saturday's column, I learned of the assassination of Russia's leading journalist and Putin critic, Anna Politkovskaya. Politkovskaya had been most involved over the past few years in exposing torture and abuse by Russian authorities in Chechnya and she was about to produce further evidence, including videos; snippets of which were then released following her death by the paper she worked for.

Former President Mikhail Gorbachev called the killing "a savage crime (and) a blow to the entire democratic, independent press. It is a grave crime against the country, all of us."

All eyes immediately turned to President Vladimir Putin, as well as his handpicked prime minister in Chechnya, Ramon Kadyrov. Putin was initially silent, then he termed the murder "tragic" and vowed to pursue the killers.

But Putin later inferred that he was the one most damaged by Politkovskaya's death and that those wishing a Ukraine-style "Orange Revolution" had ordered her killing in order to advance their cause. Politkovskaya's supporters were outraged.

Anne Applebaum, Op-Ed / Washington Post

"Of course if this murder follows the usual pattern in Russia, no suspect will ever be found and no assassin will ever come to trial. But in the longer term, the criminal investigation isn't what matters most. After all, whoever pulled the trigger - or paid someone to pay someone to pull the trigger - has already won a major victory. As Russian (and Eastern European) history well demonstrates, it isn't always necessary to kill millions of people to frighten all the others: A few choice assassinations, in the right time and place, usually suffice. Since the arrest of oil magnate Mikhail Khodorkovsky in 2003, no other Russian oligarchs have attempted even to sound politically independent. After the assassination of Politkovskaya on Saturday, it's hard to imagine many Russian journalists following in her footsteps to Grozny, either.

"There are jitters already: A few hours after news of Politkovskaya's death became public, a worried friend sent me a link to an eerie Russian Web site that displays photographs of 'enemies of the people' - all Russian journalists and human rights activists, some quite well known. Above the pictures is each person's birth date and a blank space where, it is implied, the dates of their deaths will soon be marked. That sort of thing will make many, and probably most, Russians think twice before criticizing the Kremlin about anything."

Garry Kasparov, Op-Ed / Wall Street Journal

"This brutal episode cannot be taken outside the context of recent events in Russia. The forces in control here are facing an impending crisis and fault lines are beginning to appear in the Kremlin's vertical power structure. The authoritarian structure that Mr. Putin has built in Russia has been very profitable for his circle of friends and supporters. Income is siphoned off from every region of the country. Business and politics have been combined into a streamlined process for bleeding the nation dry. Now, however, Mr. Putin and his associates are approaching a dilemma. The president's term of office ends in 2008 and this efficient machine is threatening to explode. Should Mr. Putin stay or should he go?

"The chaos that will surely occur if Mr. Putin leaves office is relatively easy to understand. Any mafia-like structure is based on the authority of the top man. If he leaves, or appears weak, there is a bloody scramble for his position. Whoever wins that battle must then eliminate the others to consolidate his grip, so the fighting is fierce. Perhaps only 10 percent of the combatants will pay in blood or incarceration and ruin, but nobody knows who will be in that 10 percent.

"To avoid that dangerous uncertainty, some of Mr. Putin's closest lieutenants are dedicated to making sure the top man stays right where he is. The problem with this plan is that Mr. Putin is constitutionally prevented from staying in office beyond the end of his term in 2008. The main obstacle is not the Constitution, which can be easily adjusted to the Kremlin's requirements; the obstacle is that, after he has made so many statements about his intent to step down in 2008, Mr. Putin would lose almost all his legitimacy in the West if he exercised this option. Of course, his regime has never shown concern for the voices of America and Europe, and feeble indeed those voices have been. But the money his associates have become so adept at squeezing from Russian assets resides almost entirely in Western banks. If the Russian government loses its veneer of legitimacy, these accounts could begin to receive an unpleasant amount of scrutiny.

"So what can the ruling elite do to avoid both the chaos of succession and the loss of easy relations with Europe and the U.S.? The answer is becoming clearer every day if you read the headlines and look at the big picture. The Kremlin is exaggerating and fabricating one crisis after another, all combining to create an image of imminent peril. Those who believe they have burned every bridge and cannot afford to see Mr. Putin step down are trying to build a case that he is the only alternative to anarchy."

I've said all along that Putin will still be in power come 2009.

Last week I was writing of the standoff between Russia and Georgia and the Kremlin's ongoing threats. Since then over 130 Georgians in Moscow were deported and authorities demanded schools provide them with lists of students with Georgian- sounding last names so the papers of their parents could be checked out. Putin has been drumming up anti-Georgia hysteria and the West has said little.

As Georgian President Mikhail Saakashvili noted in a Journal op-ed:

"The essential question confronting the international community is this: is Moscow reacting to a specific, unique threat it perceives from Georgia? Or is Georgia a target of opportunity, a chimerical foil created by some politicians for domestic purposes? Put another way, does the malignancy reside in Georgia, or Russia? A misdiagnosis could have dire consequences for Western security. Because if the international community downplays the current rift - or worse, if it pressures Georgia to back down on all counts, shunting aside its hard- earned principles and values - then the problem will simply metastasize to another place.

"Russia's vital place in the international order is secure. It is a veto-wielding member of the UN Security Council. Its natural resources fuel the European and global economy. It owns a fierce nuclear force. No one, let alone Georgia, should ever call for isolating Russia in the manner of a North Korea or Zimbabwe. At the same time, however, we must not turn a blind eye to what is happening to human rights and the norms of international behavior."

But I'm reading a Washington Post story on negotiations taking place at the UN concerning North Korea, when I spot this disturbing line.

"(Security Council) diplomats said Russia softened its opposition (to sanctions) after (Sec. of State) Rice agreed in a phone conversation with Foreign Minister Sergei Lavrov to drop U.S. opposition to a Russian-backed resolution criticizing its neighbor Georgia, which recently detained seven Russian soldiers who were accused of spying."

There you go; the White House selling out its friend, Georgia.

Lastly, Putin and his KGB buddies continue to build up their own OPEC on the oil and gas front. In what was described as a "shocking" move, natural gas monopoly Gazprom rejected all five foreign bidders who sought to participate in the development of the giant Shtokman gas field and would use foreign companies as contractors only, not partners.

In addition, the gas is to be sent mostly to Europe, rather than being shipped as liquefied natural gas to the United States as originally planned.

Gazprom CEO Alexei Miller said the export switch was "an additional reliability guarantee for the long-term supply of Russian gas to Europe and proof that the European market is the most important for the company," adding, "The foreign companies were unable to provide the assets that would correspond, by the size and quality, to the reserves of the Shtokman field." [Moscow Times] What a crock.

The five bidders were the United States' Chevron and ConocoPhillips, Norway's Statoil and Norsk Hydro, and France's Total.

So it's not just a blow to the U.S. and its energy needs, but of course this helps put the screws to Europe as Russia, barrel by barrel, pipeline by pipeline, gains the ability to totally control the Continent's energy supply and play around with the valves when the Kremlin's interests are being threatened. Remember the G-8 summit in St. Petersburg and the agenda item of energy security? This is just another huge step backwards.


What more can happen? Try an Iraqi police brigade having their food poisoned (there were fatalities), a vice president had a third sibling gunned down, Britain's head of the Army, General Sir Richard Dannatt, directly contradicted his prime minister in urging his country's troops be withdrawn, the staff of a fledgling television station was massacred, scores more were mutilated, and ethnic cleansing is taking place on a massive scale.

Retired Army officer Ralph Peters has been as rabid a supporter of the war as you'll find, and for the most part my own opinion has dovetailed his. Here are some of his latest thoughts, however, from his column in the New York Post.

"With 26 American troops dead in Iraq in the first nine days of October, the combination of bad news and pre-election politics has those on one bench arguing for bailing out immediately and those on the other bench frantic to pile on.

"Neither position is realistic. We're not going to pull out of Iraq overnight - no matter what happens in November. The 'bring the troops home now' voices always blended arch political cynicism with willful naivete - it's always been about Bush, not Iraq.

"But remaining in Baghdad requires a new sense of reality. 'Stay the course' is meaningless when you don't have a course - and the truth is that the administration still has no strategy, just a jumble of programs, slogans and jittery improvisations.

"Our Army and Marine Corps urgently need increases in personnel strength. They've been stripped to the strategic and tactical bone. We need more boots. But not on the ground in Iraq.

"Sending more troops wouldn't help and can't be done. It's too late. We've reached the point where Iraqis must fight for their own future. If they won't, nothing we can do will bring success.

"As this column stressed months ago, the test for whether we should remain in Iraq is straightforward: Will Iraqis fight in decisive numbers for their own elected, constitutional government? The insurgents, militiamen and foreign terrorists are willing to die for their causes. If 'our' Iraqis won't match that strength of will, Iraq will fail.

"If Iraq's leaders stop squabbling and lead, and if Iraq's soldiers and police fight resolutely for their constitutional state, we should be willing to stay 'as long as it takes.' But if they continue to wallow in ethnic and religious partisanship while doing as little as possible for their own country, we need to leave and let them face the consequences.

"Give them one more year. And that's it..

"A Victorian-era cliché ran that the saddest words in the English language are 'if only.' Well, if only Secretary Rumsfeld had permitted detailed planning for an occupation, sent enough troops when it would've made a difference, allowed our commanders to enforce the rule of law when they reached Baghdad.and so on, for a hundred other pigheaded mistakes.

"Well, you face the future with the Iraq you've got, not the Iraq you'd like to have. We owe the Iraqis one last chance, and it's up to them to take it.

"But no more U.S. troops. Make the Iraqis fight for their own country. If they won't, we need to accept that a noble endeavor failed.

"People get the government they earn. Those of us who believed that the situation in the Middle East required desperate measures may have to accept that the cynics were right when they insisted that Arabs can't govern themselves democratically. What if it doesn't take a village? What if it takes a Saddam?

"If Iraq does fail, the cold truth is that the United States will do fine. We'll honor our dead, salve the wounds to our vanity and march on stronger than ever (with the world's most powerful and most experienced military). But the Middle East will have revealed itself as hopeless."

This is Ralph Peters' Cronkite moment, you might say. I agree with much of the above, sadly, even as Peters has been far too easy on President Bush for his own culpability since the beginning. But today, as Newsweek's Fareed Zakaria wrote, Mr. Zakaria having been another supporter of the war, the goal is to "limit failure."


Wall Street

Here's the deal. If there had been just one Category 3 hurricane in the Gulf of Mexico and/or if the Western world had put Iran's back up against the wall when it snubbed its nose at the UN Security Council, we wouldn't be talking about Dow's just that simple.

The markets, and the global economy, caught a huge break the past few months in falling oil and gas prices and it's obvious consumers have been taking advantage of the extra cash.

And despite the significant slowdown in real estate, the spillover effect has not as yet impacted employment on a broad scale. Some of us think that day is still coming, but it isn't here yet.

So what's not to like? Stocks aren't excessively valued if you believe earnings growth will continue, the Federal Reserve may hold the line, if not lower interest rates, and most folks have simply chosen to ignore the implications of a nuclear-armed North Korea and soon to be Iran. We've already seen for three plus years now how the war in Iraq has had zero impact on share prices, even if it will at the polls in a few weeks' time.

We also now know from past experience that when it comes to the terror front, only something huge and catastrophic is likely to shock world markets, and that's a good thing. The evil ones have to come up with something better than bombing a few trains or resorts (as insensitive as that might sound) before breaking the backs of those of us who choose to go on with our lives. You couldn't have made this statement just two years ago, but the world is growing up in some respects and for their part the terrorists know it; which makes their quest for weapons of mass destruction and dirty bombs all the more urgent.

But I'll always be extra cautious, as long-time readers have learned, not in how I lead my life and where I go, but in the threats that could at a moment's notice derail the Clueless Express we sometimes all climb aboard.

For now, though, enjoy the fact North Korea appears to have a ways to go on the nuclear weapons front and that Iran as an issue is more often than not buried on page A16, even though it is more of a threat today than it was just a few months ago when it dominated the headlines. These respites are to be cherished, especially if you're nimble enough to get out at the top.

Me? I'm not that good. I'll pick my spots for aggressive, single company bets, while continuing to keep most of my assets in cash. I'll largely miss the occasional bull run, that I'll admit, but I'll probably sleep a little better..except I already told you I can't help but keep one eye open. You understand.

As for the economic news of the week, third quarter earnings trickled in (the deluge begins next week), and with few exceptions such as Alcoa's they were largely positive. The likes of Costco and McDonald's provided the impetus, which isn't all bad, but at the same time you had General Electric, barometer for world economic health, issue a so-so report. In other words, we're not going to hell in a handbasket but the economy is slowing down nonetheless.

The Federal Reserve issued its minutes from the September meeting and they showed that members are still concerned about inflation, but reiterate that the slowing economy should help in this regard. More than a few Fed officials have actually issued fairly hawkish comments on price pressures, so the Street can't really count on any cuts in the funds rate the rest of the year.

As for our favorite topic of real estate, the Fed's survey of regional economic activity (the Beige Book) is painting a gloomier picture with each update; this time finally acknowledging "widespread cooling."

Housing sales continue to plummet; off 28 percent in Southern California (35 percent in San Diego County alone) and similar evidence is emerging in once white-hot markets.

But as Josh P. and I were musing, two other things are happening. First, you may see inventory levels actually decline in some regions, as is the case in parts of Southern California, simply because folks are taking their homes off the market after having to cut the price so precipitously and still having no response. Those looking for a quick rebound, however, will be sadly mistaken.

Second, it's just taking a while for the housing slump to play into consumer sentiment. As I've been writing, oil trumps housing, at least for now.

Finally, on a different topic, former Federal Reserve Chairman Paul Volcker wrote an op-ed in last Saturday's Wall Street Journal warning of the dark implications behind the September assassination of Russian central banker Andrei Koslov. The murder, Volcker says, "defines the battle lines for all of us. It's a battle that all those supporting economic development and the rule of law cannot afford to lose. And, appropriately, it is international institutions that are placed front and center in that battle."

Volcker then comments on one of my favorite topics, corruption.

"I think it is now generally recognized and accepted that corruption is an obstacle - and in some countries the major obstacle - to effective economic development...

"Failure to deal with corruption undercuts development. It will limit, and likely will more than offset, any value added in new lending.

"Of course, that's easy to say. Much more difficult is what can be effectively done in combating corruption. The key to dealing with corruption is leadership - leadership at the multilateral institutions, but also in lending countries, in borrowing countries, in private companies and in nongovernmental organizations. A consistent message really needs to come from the top..

"A reasonable starting point might be to take a leaf from Nancy Reagan, with her old anti-drug slogan: 'Just Say No.' After all, corruption is a kind of addictive drug..

"My impression is that the corruption problem may be getting worse. Whether or not that is the case, it plainly needs priority attention."

On a related topic, ethics, this week Berkshire Hathaway Chairman Warren Buffett ordered his top managers to redouble their efforts to crack down on unethical behavior.

While saying that some "bad behavior" is inevitable, Buffett wrote in a memo "we can have a huge effect in minimizing such activities by jumping on anything immediately when there is the slightest odor of impropriety.Berkshire's reputation is in your hands."

Then he added, in reference to the stock options backdating scandal, "The five most dangerous words in business may be 'everybody else is doing it.'" Buffett's thoughts should bolster the case of federal regulators investigating the options mess.

And so this week executives from at least five companies resigned over their roles in backdating options, including CEOs at two tech outfits, McAfee and CNET. Even long-time defenders such as the Journal's Holman Jenkins Jr. are beginning to cave.

It's always been about fraud, pure and simple. If you fail to disclose material news that means investors are making decisions on fraudulent information. There is no defending that. Throw in the fact that in many cases companies weren't paying proper taxes and you can see why so many of these characters deserve to be in prison.or they flee to Namibia, as we've found, in an attempt to avoid it.

As for Jenkins, he had these thoughts on Apple's Steve Jobs.

"Apple's mea culpa on backdating last week was eloquently incomplete, and all the more intriguing because the gaps seemed almost Socratically mapped to invite the media to fill in the holes by asking obvious questions. The big joke here is that the logic of the witch hunt will stop the media from asking the obvious questions, not least because CEO Steve Jobs is a hero to much of the press and there's little appetite for bringing him down.

"Don't misunderstand. We believe it would be a gross injustice if he were defenestrated over backdating, just as we have serious doubts about the prosecutions launched against other backdating CEOs. And Apple's likely purpose in issuing its statement, naturally, was not lexical comprehensiveness but saving Mr. Jobs' job.

"Here's what Apple said: 'In a few instances, Apple CEO Steve Jobs was aware that favorable grant dates had been selected, but he did not receive or otherwise benefit from these grants and was unaware of the accounting implications.'"

Jenkins goes on to defend backdating again, as he has ever since it became an issue, but then he adds:

""Mr. Jobs is not an accountant, but Apple's claim that he didn't understand the accounting implications of backdating should test our credulity for an obvious reason: Then why not just issue 'in the money' options? Why adopt the baroque artifice of selecting a past date when the share price was lower?....

"Is Apple simply saying he didn't understand that backdating was an improper way of making sure these options received the accounting treatment prescribed for 'at the money' options? If so, his defense is the likely defense of several CEOs already in the dock. Luckily for him, we have signals from prosecutors that they intend to focus on 'egregious' cases - read 'small companies without celebrity CEOs.'"

Barron's Thomas G. Donlan weighed in on the topic.

"Perhaps an even better example of shareholders' concern - or lack of it - can be found at Apple Computer, where the stock has risen nearly 40 percent since falling 6 percent on news that it was investigating backdating of options. Apple investors should be leery of anything that could implicate CEO Steve Jobs, but it appears that corporate results count for more than options shenanigans.

"The idea of stock options is to align managers' interests with those of the shareholders. The more the managers want to see the stock go up, the harder they will work to make it so, the more the stock will go up and the happier the shareholders will be.

"Experience has shown several weaknesses in this proposition:

"Stock prices don't go up only because executives work hard. They can go up because the CEO and his close associates fiddle with the books. They can go up because there's a temporary bullish mania in the broader market, or a bullish enthusiasm for a particular industry. Worst of all, stocks can go down. If the theory is that executives work harder in order to make millions of dollars in the stock market, how hard will they work if their stock options are underwater? The answer includes backdating, repricing and other mechanical adjustments, disclosed or not.

"Some executives will keep working hard, but only to float their own boats."

Of course the above discussion is also but one reason why President Bush has trouble getting credit for the economy these days. 'How's that?' I'm sure you're musing.

It's about the issue of excessive executive pay and the stupendous gap between those at the top of our largest corporations and the average worker.

The Wall Street Journal had a piece this week on soaring compensation and decades of failed restraints. Here are just two factoids.

"In his 1936 State of the Union address, President Franklin D. Roosevelt railed against 'entrenched greed' at American corporations. At the time, the average compensation for the top executive of a big company was about $95,000, according to MIT's Ms. Frydman, equivalent to $1.4 million in today's dollars."

Today the average CEO's pay is 369 times as much as the average earned by a worker last year, compared with 131 times in 1993 and 36 times in 1976. Throw in the fact that the average worker's paycheck has barely kept pace with inflation (even as healthcare and other costs skyrocket) and you have a problem; one that as a society we're going to have to work on, through moral suasion as well as the tax code. Don't worry, my fellow capitalists; regarding this last bit it's about closing some stock option loopholes that have helped lead to the abuse.

Street Bytes

--The three-week winning streak has resulted in one record for the Dow Jones after another; Friday's closing figure of 11960 being the new benchmark. Nasdaq had another outstanding stretch, up 2.5 percent to 2357, while the year to date returns across the board are certainly nothing to sneeze at, as noted below.

--U.S. Treasury Yields

6-mo. 5.13% 2-yr. 4.86% 10-yr. 4.80% 30-yr. 4.93%

Tough week for bonds as traders chose to focus on statements from the inflation hawks at the Fed, as well as strong retail sales for September, up 0.8 percent when you strip out autos and gasoline sales. Ergo, further evidence the Fed isn't likely to ease anytime soon.

--The U.S. reported a record trade deficit for August, $69.9 billion. As they used to say on 'Hee Haw,' "Saa-luuute!" Then again, it really isn't much to be proud of, I guess, and on the other side of the world, China's trade surplus for the first nine months of the year is already larger than all of last year. Exports in September were up 31 percent ($91.5 billion) and imports rose 22 percent ($76 billion), so about $15.5 billion to the black. The surplus with the U.S. for the month of August, incidentally, was $22 billion. [Notice how China is also a month ahead of us.]

--The Bush administration did have legitimate cause to crow this week as the budget deficit for fiscal 2006 (ending 9/30) was just $248 billion, or only 1.9 percent of GDP, to use a common measurement. The biggest reason is corporate tax receipts rose 27 percent, but as I noted recently those complaining about Big Oil and its profits should understand the vast majority of the pick-up in corporate taxes is a result of those paid by the oil companies.

--The National Weather Service is calling for a mild winter (tell that to the residents of Buffalo!), with those using natural gas to heat their homes possibly seeing bills 13 percent lower than last year.

--On the oil front, OPEC is still attempting to reach consensus on a production cut, while it's laughable that President Bush is claiming credit for the slide in prices at the pump.

--In another blow to Big Oil, Indonesia announced it was terminating an agreement with Exxon Mobil to develop a natural gas field and instead sought a new one with better terms for Jakarta. Exxon says the old deal should stand, while all foreign investors in Indonesia's considerable natural resources will think twice before plunging in unless contracts are honored.

--Everyone is talking about Google's acquisition of YouTube for $1.65 billion. Who the heck knows if this is a good price? Steve Ballmer, CEO of Microsoft, said "If you believe it's the future of television, it's clearly worth $1.6 billion. If you believe something else, you could write down maybe it's not worth much at all." Certainly Google now faces significant copyright issues, but one thing is for sure; 20-something co-founders Chad Hurley and Steve Chen are now worth an estimated $250 million apiece.

--Wheat prices are at 10-year highs as fears build over the global drought and stockpiles that are at 25-year lows. The wheat harvest in Australia, for example, is expected to be down almost 60 percent this year and if the drought continues in producer nations in 2007, there could be rationing. Corn futures have also been rising on both reduced crop estimates and the growing share going towards ethanol, which is expected to account for about 35 percent of next year's supply in the U.S.

--In a big move, Bank of America is offering free online trading for accounts with as little as $25,000 in deposit. Shares in competitors such as Ameritrade and Charles Schwab were hit hard on the news as it's the dollar threshold that really shakes things up. Schwab, for example, is at $9.95 per trade, but you need household assets of $1 million to qualify. BofA in turn is looking to leverage its 5,700 branches and suck up more business in mortgages, CDs and other lines. To me it's a brilliant move, but as I told my rep at Schwab the day the news hit (I have my account there these days), it's also still about service.

--My portfolio: Even though they were Jan. '08 puts, I jettisoned my financial services / mortgage originator play, taking a small loss. Analysts have been consistently downgrading the company due to its housing exposure, but the stock wasn't responding the way I wanted it to. I also sold another underperformer (a small position) and I'm close to the 80 percent cash, 20 percent stocks that I have been predicting would beat the market all year. [I'm still only about five percent behind the S&P, in actuality.]

--Talk about hype. Virtually every newspaper I read on Friday had a story on Coca-Cola's new Enviga tea-based drink that claims to burn calories; 60 to 100 if you drink 3 cans a day. Geezuz, just take a walk now and then.

--Delta Air Lines announced it was expanding its international service, including direct flights to Bucharest, Romania.... ......I was there first!

Foreign Affairs

Iraq, part II: Just a further note on British General Dannatt, who backtracked furiously on Friday after the following comments from an interview were published.

Sir Richard said the continuing presence in Iraq of 7,200 British troops was "exacerbating the security problems" and they should come home soon.

"We are in a Muslim country and Muslims' views of foreigners in their country are quite clear. As a foreigner you can be welcomed by being invited in a country but we weren't invited, certainly by those in Iraq at the time. The military campaign we fought in 2003 effectively kicked the door in..

"I don't say that the difficulties we are experiencing around the world are caused by our presence in Iraq but undoubtedly our presence in Iraq exacerbates them."

The general made it clear the planning for the post-war phase was "poor, probably based more on optimism than sound planning," adding, "The original intention was that we put in place a liberal democracy that was an exemplar for the region, was pro-West and might have a beneficial effect on the balance within the Middle East. That was the hope, whether that was a sensible or naïve hope, history will judge." [Daily Mail / The Times of London]

Of course the general's comments directly contradict the argument made by both his boss, Tony Blair, and President Bush.

Lastly, Sir Richard weighed in on the state of affairs back home, saying the failure to support Christian values in Britain "was allowing a predatory Islamic vision to take hold," as reported by The Times.

Sir Richard:

"When I see the Islamist threat in this country I hope it doesn't make undue progress because there is a moral and spiritual vacuum in this country."

Separately, from an editorial in The Times concerning Jack Straw's efforts to have Muslim women remove their veils.

"Mr. Straw worries about the veil being a 'visible statement of separation and difference.' This understates the matter. There are numerous modes of attire - religious and secular from priests to punks - that indicate separation or difference. What is unique about the veil is that it precludes a basic form of human contact in a way which the Sikh turban or the Buddhist robe or the Christian Cross do not do. There is a subtle but crucial distinction between separation and isolation. It would plainly be inappropriate to legislate in this area. It would be even more mistaken to pretend that the veil is simply another item of clothing when lifting it might let in light."

Turkey: You can forget about this country entering the European Union, despite anything you hear to the contrary. Relations between France and Turkey have been irreparably harmed by a French parliament decision to approve a bill that makes it a crime to deny that the 1915-17 massacres of Armenians at the hands of Ottoman Turks constituted genocide. Turkey's parliamentary speaker called the decision "shameful." Opposition in France to Turkey's EU application is stiff, while Turkey, which itself has seen falling support for the EU among its own people, has threatened economic reprisals.

China: The Central Committee established at a meeting this week that it needs to address the growing gap between rich and poor which is resulting in rising internal strife. It's easy to forget the Beijing Olympics are now just two years away. Unrest in the major cities and pollution in the staging area are the major concerns as the Commies gear up for their big opportunity to showcase the China Miracle. Meanwhile, in Taiwan, protests against President Chen Shui-bian continue amid the corruption scandal here, though an effort by parliament to oust him failed.

Australia: Prime Minister John Howard has been a rock of support for the Bush administration and he's vowed to keep his country's 1,300 troops in Iraq, even though the people are against it by a 59-36 margin. The comments from the British general may complicate matters further, however.

Afghanistan: Two German journalists, working on a documentary, were killed and there were a score of suicide attacks this week.

Lebanon: In an interview with the Wall Street Journal, Prime Minister Fouad Siniora said resolution of the Shebaa Farms issue remains the first requirement for any permanent peace deal. Just as I wrote before the war, Siniora wants to deny Hizbullah a reason for pursuing its campaign of armed resistance.

Bolivia: So I'm reading the Santiago Times and I see a note that Bolivia is in the process of building 24 military bases, paid for by Venezuela and Hugo Chavez, on its borders with Peru, Brazil, Paraguay, Argentina and Chile as a way of promoting Bolivian- style revolution. Isn't that super? It certainly has Chile's attention. Now what other conclusion can you draw by this news if you believe the theory I've been throwing out the past few months? Iran could eventually have advisors at the bases.


Pray for the men and women of our armed forces.

God bless America.


Gold closed at $593
Oil, $58.57

Returns for the week 10/9-10/13

Dow Jones +0.9% [11960]
S&P 500 +1.2% [1365]
S&P MidCap +2.7%
Russell 2000 +3.1%
Nasdaq +2.5% [2357]

Returns for the period 1/1/06-10/13/06

Dow Jones +11.6%
S&P 500 +9.4%
S&P MidCap +6.3%
Russell 2000 +13.3%
Nasdaq +6.9%

Bulls 52.2
Bears 30.4 [Source: Chartcraft / Investors Intelligence.55-60 in the bull camp is normally the sign of at least an intermediate top, though the readings can persist for some time.]

The next three weeks I'll be coming to you from Tucson, Scottsbluff, Nebraska, and the Black Hills of South Dakota as I drive a few thousand miles around America. I'll be the guy wearing a Wake Forest hat.

:) _]

Brian Trumbore

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