Week in Review 
For the week 10/30/2006 - 11/3/2006
Brian Trumbore
President/Editor, StocksandNews.com

The Election and Foreign Policy

The White House hopes voters think about the economy far more than the situation in Iraq as they go to the polls on Tuesday. Certainly Friday's report that the unemployment rate had hit a 5- year low of 4.4% gave the Bush administration and Republican congressional candidates something to crow about these last 48- 72 hours. But after traveling over 2,000 miles and through parts of six states the past two weeks, I'm not so sure voters are actually doing so well as the numbers offer and thus they may select candidates depending on their feeling about the war in Iraq, or, in the case of the electorate in South Dakota or Missouri, social issues such as abortion and stem cell research.

But this column has always been about foreign affairs and hot spots, as much as stocks and finance, because the former from time to time can have a debilitating impact on the latter. It's often all about confidence, or lack thereof, and since few cover the foreign beat like I do, week in and week out, let me offer that the Democrats have missed a huge opportunity on this front.

Let me remind you that after the 2004 presidential race, we had basically six hot spots?the axis of evil (Iran, Iraq and North Korea), Afghanistan, the Israeli-Palestinian issue, and China.

Today? Try eight, leaving out the likes of Pakistan, Syria and Venezuela.

Iraq, Iran, North Korea, Afghanistan, China, Palestine, Lebanon and Russia.

How did this happen? Whose fault is it? Look no further than 1600 Pennsylvania Ave.

Let's give the White House grades on each.

Iraq: "F". And what did we hear this week? President Bush reassured us he has "a plan for success." Then he told us Secretary of Defense Donald Rumsfeld, the architect of the disaster, was staying (as was Vice President Cheney, though no one thought Cheney would be shown the door at this stage).

From Iraq itself we had a joint statement between Prime Minister al-Maliki and President Bush that began thusly, "As leaders of two great countries?." I need not go further with that one, unless you're nuts and think Iraq is great. Maliki earlier was all bent out of shape and said "I am a friend?but I am not America's man in Iraq." Then he proved he is not even a friend when he demanded the blockade on Sadr City (Moqtada's hangout and the hideout for his death squads) be taken down following a U.S. raid that sought to find a kidnapped American soldier as well as bring to justice a chief henchman of Sadr's.

This week also saw the 156th university professor killed in Iraq since the war commenced, while during the same time period 250 doctors and health care workers have been murdered, along with tens of thousands of Iraqis of various description, many buried without their head?.or the head without the body, I guess.

We also learned the past few days that the U.S. military has failed to write down serial numbers on many of the arms provided to Iraq's security forces, so we can't even trace those which are being used by the militias that have infiltrated the ranks.

Ralph Peters, conservative commentator for the New York Post and a long-time staunch supporter of the war effort has been changing his tune the past few weeks as I've chronicled in this space. The other day he wrote:

"We went to Iraq to overthrow a police state. Through a combination of stubbornness, naivete, and noble intentions we've replaced it with another police state - more violent, more corrupt and less accountable."

The secret police are back in the form of death squads, Peters writes, but there is one last chance; to expand and develop the Iraqi Army to then take on the corrupt police and insurgents / militias. I agree with this.

But to those aligned with the president's policies thus far, I can't help but think of George Will's succinct summation the other week.

Will said that supporters of the current situation keep saying that if we get out of Iraq there will be chaos. "There already is chaos," he said.

Afghanistan: "D". Talk about cut and running. The U.S. reduced forces significantly to pursue the Iraq operation without completing the job in Afghanistan. President Hamid Karzai, however, is as good as we could have hoped for, and there is hope for the Afghan Army, but now NATO is in charge and its track record the past few decades is spotty at best.

Iran: "F". They are on the verge of obtaining a nuclear capability; either home-grown, stolen, or both. Russia and China continue to say they will not allow harsh sanctions to be placed on Iran for defying the UN. We do nothing but whimper in return. And as an aside, Saturday's Times of London reports that Algeria, Egypt, Morocco, Tunisia, UAE and Saudi Arabia all announced they now desire nuclear technology. Russia will be the first to offer it to them, just wait.

North Korea: "F". The hermit kingdom with the little whacko tested a nuclear device. Our whole policy was built around Kim Jong-il's not doing so. Since the last election in the U.S., Kim has done nothing but jerk us around.

Here, however, there is a shred of hope. The North has announced it would return to the six-party talks, having been pressured by China to do so, but only if the Bush administration agrees to discuss the financial sanctions placed on Pyongyang. The White House should say no. "We're going to discuss the complete dismantlement of your nuclear weapons program in return for some security guarantees and possible economic ties and nothing else," then turn to China and say "Make it happen."

This contest has a long, long ways to go and, yes, it was encouraging China finally put the screws to Kim, but as I wrote just a few weeks ago, Kim is looking to get through the winter at this point and he needs China's oil.

I also loved how the Bush administration trumpeted the potential return to the negotiating table as some great victory. Spokesman Tony Snow, chief b.s. artist these days, said it was a "vindication of our policy."

I prefer the line from a Washington Post editorial.

"(It was) a victory for China and its strategy of preserving Kim Jong-il's totalitarian regime."

Israel / Palestine: "F". This ongoing crisis has taken another decided turn for the worse and the Bush administration refuses to question anything Israel does.

I understand that Israeli settlers should not be under constant rocket fire, but the fact is following the kidnapping of Cpl. Gilad Shalit, over 300 Palestinians have been killed in retaliation, many of whom were totally innocent victims.

Lebanon: "F". This wasn't even on the radar screen until the assassination in 2005 of Rafik Hariri, and then when people power helped expel the Syrians, with pressure from the U.S., France and the UN, the White House totally abandoned the fledgling Siniora government and its cries for help so pro-West Lebanese could begin to rein in Hizbullah.

Then Hizbullah kidnapped two Israeli soldiers, kills some more who went out to find their comrades, actions that, unfortunately, had occurred on countless occasions in the past, but suddenly this time Israel went bonkers. The United States then looked the other way, feeling Israel was only doing its bidding in the war on terror, and instead it helped buttress another generation of disaffected youth who hate both Israel and America even more than before. Hizbullah, battered, still survived to fight another day and now Washington, just this week, admitted what I've been writing since the war ended that the Siniora government is on the verge of being taken down by a coup orchestrated by Hizbullah, Syria and Iran.

None of this ever should have happened and it's beyond me why the Bush administration hasn't been taken to task for the Lebanese conflict.

The United States must be seen as an honest broker in the Middle East and it isn't. Do you really think one or two swings through the region by Secretary of State Condoleezza Rice is all that's needed?

China: "C". The White House, I'm sure, would tell you our policy towards China has been terrific; that we've gotten China to bend on many an issue and that all one needs to do is look at North Korea. I, in turn, would point to a total lack of cooperation on issues like Iran, as well as China's aggressive moves in both Latin America and Africa, while the White House twiddles its thumbs.

But at least in other respects we're engaged, and that's why it's a "C" and nothing worse at this point. But unless China pulls a rabbit out of its hat, one pleasing to us when it comes to North Korea and Iran, the grade gets lowered.

Russia: "D". Another not on the radar screen as a top hot spot from the standpoint of acting counter to western sensibilities until the past two years and the spike in oil prices. Since then, Russian President Vladimir Putin has been feeling his oats and he's strutting, in full bloom. 'Look at me,' he says to the rest of us. 'Just look at my power.' And then he goes into a room and turns off the gas spigot to some poor souls, or extorts huge sums, like he did to Ukraine last winter and is now doing to Georgia.

You know what's truly pitiful? Georgian President Saakashvili is more American than some of our own corrupt politicians are. He loves everything about our country, our history, the Founding Fathers. I wish he was my governor, for crying out loud, yet the White House can't even get Russia to back off.

So there you have it; one voter's opinion. In China I'd be thrown in jail for writing what I just did, and it's very possible that since this isn't a presidential election, merely a mid-term conniption, the vast majority of Americans couldn't give a damn about the above and vote for more of the same.

Of course the Democrats haven't offered a scintilla of a plan of their own outside of holding some grand international conferences, and/or just pulling our troops out before a last concerted effort to salvage some sort of stability in Iraq. Instead it's the American people who are the losers in the 2006 vote.

Wall Street

Stocks finally stumbled in unison this week for the first time in six as all the major averages registered declines, with the Dow Jones leading the way, down 0.9% to 11986, while the S&P 500 lost 1% and Nasdaq 0.8%.

It was a pretty orderly slide as virtually every piece of data early on in a busy week showed that the economy was continuing to slow and the only question that remained was whether it would be a hard or soft landing.

Leading indicators of manufacturing, for example, came in far below expectations, a key reading on consumer confidence was less than expected, and ditto for consumer spending, a fact major retailers then confirmed with the release of their October sales figures, topped off by Wal-Mart's dismal 0.5% same-store sales growth and a flat forecast for November.

On the housing front, pending home sales were down and foreclosure rates soared; regarding the latter to the tune of 17% in the third quarter over the second and 43% over a year ago. In Florida, foreclosures soared 55% in the quarter. What was that about Alan Greenspan recently saying real estate was bottoming?

Meanwhile, with all the gloomy news on the economy bonds were rallying, with the yield on the 10-year Treasury hitting 4.56% intraday on Thursday.

Then all hell broke loose, at least in the bond pits, with Friday morning's release of the October jobs report. 90,000 new jobs were created, not a super number in and of itself but the figures for August and September were revised sharply upward.

"Omigosh!" bond traders said as they spit up their coffee and donuts. "Sell!!" and bonds dutifully tanked in the biggest drubbing in about 16 months. By the close on Friday the yield on the 10-year was back up to 4.72%.

Suddenly everyone came to the opinion that the Federal Reserve will not be lowering interest rates anytime soon because the economy is not doing as poorly as they thought at 8:29 a.m., before the 8:30 release of the jobs data.

Totally absurd. The economy is indeed slowing and, remember, we don't need to dip into negative territory on GDP in order for stocks, and earnings, to underperform going forward. If we have a string of numbers between 1 and 2 percent in the quarters ahead, I can virtually guarantee stocks will not do well as earnings miss still frothy expectations.

But while the White House celebrates the 4.4% unemployment rate, it still all comes down to housing, with the true impact on the consumer still yet to be felt. Maybe we salvage Christmas on the retail front, but you have a hard time convincing me that by February or March we won't be seeing a major pullback in spending.

One last item why the Bush crowd shouldn't be so smug when it comes to the voter and the economy. A survey for the Financial Times got a lot of ink this week and for good reason. Looking at CEO pay for 375 of the S&P 500 companies, total CEO compensation in 2005 increased 20%, versus a 15% increase in earnings and a 9% gain in shareholder returns. [Average wages, meanwhile, are finally rising but at about the 4% level.]

American workers and shareholders know this isn't right, and it's why many of us see two different economies; the kind of environment the official statistics just aren't picking up because of distortions at the top.

Street Bytes

--U.S. Treasury Yields

6-mo. 5.17% 2-yr. 4.82% 10-yr. 4.72% 30-yr. 4.81%

--Auto sales rebounded in October, but they need to be placed in context to the dismal levels of a year ago. General Motors' sales of cars and trucks were up 17%, Ford's 8% and Toyota's 9%. DaimlerChrysler's, however, were down 3%.

--Let's go to the tapes of "CSI: Wall Street," shall we? Former Computer Associates CEO Sanjay Kumar was sentenced to 12 years and fined $8 million for his role in the company's extensive accounting fraud. Over $2 billion in revenue was misreported as CA sought to beat, or at least meet, the Street's estimates on earnings. Kumar will have to serve at least ten years of his term.

--And former Cendant Chairman Walter Forbes was found guilty on three counts of securities fraud for attempting to inflate the stock of predecessor CUC International. This $3 billion crime scene has already claimed Forbes' vice chairman, who has been sentenced to ten years.

--Hong Kong has topped New York in terms of market capitalization of IPOs thus far in 2006. [London is first.] This is a big issue and speaks to the health of the financial industry's job market unless reforms are implemented, including a review of Sarbannes-Oxley. [For more see my "Wall Street History" column.]

--Canada's markets were roiled on Wednesday on word the government wants to clamp down on income trusts. These are the vehicles that pay out virtually all of their income to shareholders, with tax advantages. But the conservative government cites the fact the practice has exploded beyond the old energy and natural resources realms to include all manner of activities and the proliferation of them (over 250 are now registered) is creating large distortions in the economy and far less revenues. So the government is proposing that over four years the distributions would be taxed at the maximum corporate rate?46%, if I recall correctly.

--Housing prices in the UK have risen 187% in 10 years. This has created a giant wealth effect, particularly in Northern Ireland (and the Republic for that matter), where in the border town of Newry, for example, home prices have risen 371% over the decade. I think it was 1992 that my friends and I went through Newry, during "The Troubles," and had a gun pointed at our car at the checkpoint; until the British guard realized we were Americans. I also had this bizarre dream this week where I was in Ireland and everyone I met was superrich. Then I awoke in a cold sweat.

Turns out the worrying is warranted. Despite the housing boom in the UK and Ireland, in the former, at least, personal bankruptcies are suddenly at record levels. Like in the U.S., it's about the housing bubble, affordability, and too much debt. [Brits have twice the amount of credit card debt Americans do.]

I can't emphasize enough this is a global problem. Yes, even the Irish housing bubble will pop at some point, but I'm more interested today in cases like Spain, where everyone European I've met over the past few years seems to have purchased a second home there.

--Morgan Stanley is buying up hedge funds left and right; not a big surprise when you realize CEO John Mack worked with one, Pequot Capital.

--Related to the above, private-equity funds have raised $178 billion thus far in 2006, exceeding the record set in 2000; and we all know what happened then.

--Newspaper circulation is plummeting. The New York Times and Washington Post have both seen their numbers drop 3.5%, while the Wall Street Journal's are off 2% [Up on the new weekend edition, however.]. The New York Post is bucking the trend, up over 3%. I have to admit this current trip of mine I haven't missed for a second not having hard copies of various papers, being able to access anything I want to.

--It was pile on time for British Petroleum, not that it doesn't deserve it, as "60 Minutes" aired a devastating segment on the Texas City refinery fire of March '05 that claimed 15 workers, and federal officials said BP's cost-cutting directly impacted safety.

--Inflation Watch: Brad K., owner of International Swimming Pools, maker of fine steel models since 1643, said Mittal just announced prices are going up anywhere from 11 to 27 percent, depending on the timeframe. But Brad said the pain is alleviated because he has inventory, which is also more valuable, so he's now selling scrap along the highway during lunch hours.

--The New York Times was the latest to run a story on click fraud; reporting that large advertisers are demanding more be done to prevent it.

--YouTube is frantically returning copyrighted clips, while new parent Google is rushing around trying to sign deals with those currently being ripped off.

--KFC gained a ton of publicity in announcing it was cutting out trans fats in its cooking oil, while on Thursday night I saw foie gras on the menu at the restaurant I was eating at and couldn't resist. So I compensated by having a glass of red wine, having just seen the latest study on the benefits of it. I then went to a sports bar to watch Louisville-West Virginia and had another 299 glasses of red wine because I was told that's how many I needed to drink to gain the benefits that lab rats had. But because I had the foie gras, I probably needed to drink another 6,000. It's all so confusing.

--A study in the Journal Science made news around the world. There will be no edible sea fish left in 50 years unless we act immediately to create more protection zones. This is kind of depressing, but it creates a business opportunity.

Wait for real estate and land prices to bottom, in 2023, and then buy up properties that will be perfect for fish farming. Aquaculture is the game of the future, sports fans. [Or just buy into the existing players, including the feed companies.]

--My carbon fiber play had been rallying recently, but suddenly took on gas for no apparent reason. [Hedge funds messing around, probably.] I'm also running out of patience with management, the absolute worst in investor communications I've ever come across. More on this next time if appropriate.

--Lastly, I saw a ton of cattle while cruising the West and Plains the past two weeks in my Ford Taurus rental. I can't get enough of the scene, frankly. Call me Mr. Bucolic. But as you pass the ranches with miles and miles of fence to tend you can't but help think of cattle theft. So I took note of the story this week that thefts in Texas, Oklahoma and New Mexico soared in 2005? $6.2 million worth vs. $4 million in 2004?.due mostly to rising beef prices during that timeframe.

Foreign Affairs

China: The commies are playing host to 48 of 53 African leaders as they attempt to buy them off and pillage their minerals and oil. The heads of state were all too eager to be wined and dined. It's fun for them, you know.

The Chinese government did announce a significant step in providing some form of human rights. All death sentences will now have to be approved by the Supreme People's Court, headed up by Judge Judy Zedong.

Meanwhile, off the coast, Taiwan's President Chen Shui-bian once again hinted he was considering a new constitution that would specify Taiwan is independent. China has always said if Taiwan ever went through with this it would be war.

However, Chen already has his hands full over the corruption scandal that has now claimed his wife, who was indicted this week on charges of embezzlement. The chief prosecutor said Chen could face charges when he leaves office in 2008. For now he is immune, but this weekend there is a movement afoot to force him out.

In other words, there is no way Chen can act on a new constitution, even if he survives; all of which makes it easier for China to in effect launch a de facto coup by ensuring its favored son succeeds Chen.

Russia: As alluded to above, the Kremlin's personal gas-boy, Gazprom, has doubled Georgia's natural gas price, directed by Putin to do so as he wields the energy card with vigor.

Pakistan: There was all manner of confusion following the attack on the suspected al-Qaeda camp that killed 80. Forget whether the victims were really terrorists or not; regardless, the tribal leaders would be upset, but at first the reports had the missiles being fired from a U.S. drone. [NBC reported this.] Then we learned that, yes, it was Pakistani military helicopters that carried out the mission, though with support from U.S. intelligence. Either way, the attack showed guts by President Musharraf, knowing the extremists will only want to target him more.

Turkey: Prime Minister Erdogan is blowing off Pope Benedict's upcoming visit, instead choosing to attend a NATO summit. With an election next year, Erdogan doesn't want any pictures of the two of them together, especially after the Pope's comments on Islam. Separately, as I said long ago, Turkey's EU bid is dead, finis?history. Unless it made a sudden move to accept Cyprus, talks of membership will grind to a halt and the West will have lost a great opportunity. But in this instance, Erdogan and the Turkish people share the blame.

Nigeria: Oil rallied a bit on rumors insurgents would renew their attacks on the nation's oil facilities. Earlier in the week there was another plane crash, the third in a year here, that claimed the leader of Nigeria's Muslim community. The pilot evidently ignored warnings to wait for a thunderstorm to pass before taking off.

Venezuela: After 47 ballots, President Hugo Chavez and his negotiators reached a compromise with Guatemala on Latin America's representative to the UN Security Council. Guatemala, the preferred choice of the United States, and Venezuela were stalemated and the new winner is?.Miss Panama!

Cuba: He's alive! Fidel Castro is alive and he walks! But geezuz he looked as bad as some of the jalopies tooling the streets in Havana.

Brazil: President Luiz da Silva (Lula) cruised to reelection in the run-off, 60-40, but now comes the hard part. Following through on needed economic reforms.

---

Pray for the men and women of our armed forces.

God bless America.

---

Gold closed at $628?highest since Sept. 1
Oil, $59.14

Returns for the week 10/30-11/3

Dow Jones -0.9% [11986]
S&P 500 -1.0% [1364]
S&P MidCap -1.4%
Russell 2000 -1.7%
Nasdaq -0.8% [2330]

Returns for the period 1/1/06-11/3/06

Dow Jones +11.8%
S&P 500 +9.3%
S&P MidCap +5.2%
Russell 2000 +11.8%
Nasdaq +5.7%

Bulls 53.7
Bears 28.4 [Source: Chartcraft / Investors Intelligence]

Have a great week. I appreciate your support.

Brian Trumbore

BUYandHOLD does not offer or provide any investment advice or opinion regarding the nature, potential, value, suitability or profitability of any particular security, portfolio of securities, transaction or investment strategy. Any investment decisions you make will be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance, and liquidity needs. The securities mentioned above are being used for illustrative purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy. The securities markets are subject to the risks of fluctuating prices and the uncertainty of rates of return and yields inherent in investing. Past performance is no guarantee of future results. The opinions expressed above are not necessarily those of BUYandHOLD, Freedom Investments, its officers, directors or any of its affiliates.