Week in Review 
For the week 11/13/2006 - 11/17/2006
Brian Trumbore
President/Editor, StocksandNews.com

President Bush arrived in Hanoi and commented on the primary lesson that can be learned from the Vietnam War when looking at Iraq today. "We'll succeed unless we quit." But while Bush and the top general in the region, General John Abizaid, remain "optimistic," as Abizaid himself told a senate committee this week, when asked if the United States could muster more troops if needed, Abizaid replied the Army and Marines are stretched too thin. So it should then be no surprise that when pressed further, Abizaid said more troops aren't needed.

Some opinion from early supporters of the war.

Robert Kagan and William Kristol / The Weekly Standard

"In every year (since the invasion), military planners hoped to undertake a substantial draw-down of forces in response to hoped-for and much anticipated political developments in Iraq. And every time, those anticipated political developments foundered on the inability of combined coalition and Iraqi forces to provide the basic security necessary to make political progress possible. So the Pentagon kept enough troops in Iraq to avert immediate disaster, and also to prolong the conflict, but not enough to make progress and avert the prospect of eventual disaster.

"The result has not only been a consistently inadequate level of forces. The endless cycle of promised draw-downs, followed by deteriorating security, and then cancellations of the proposed draw-downs, has been politically corrosive both in Iraq and in the United States. In Iraq, American policies have steadily undermined the people's confidence that the United States has either the will or capacity to provide them the security they need and deserve. So they have turned to their own sectarian armed groups for the protection the Bush administration has failed to provide. That, and not historical inevitability or the alleged failings of the Iraqi people, is what has brought Iraq closer to civil war?.

"There is no getting around the fact that under present conditions, an American military withdrawal, even if undertaken gradually, will bring about the rapid collapse of Iraq. These days one gets the impression that many Americans are sanguine about this possibility. Some seem to believe that things are already as bad as they can get in Iraq. This is willful self-deception. Were the United States to withdraw from Iraq prematurely, the sectarian violence we are seeing today would seem minor compared with the bloodshed of a genuine civil war. There would be no decent interval, no moment when the Iraqi people peacefully separated themselves into their respective sectarian quarters. They would battle for control of cities and towns and resources across most of the country. The result would be real, bloody ethnic cleansing - of the kind that the United States twice intervened in the Balkans to prevent, of the kind we failed to prevent in Rwanda, and of the kind we are now shamefully failing to prevent in Sudan. The difference in Iraq would be that this time the United States would be more directly responsible for bringing about this humanitarian nightmare."

But Kagan and Kristol also call for the generals to come up with a strategy for success, including increasing forces by 50,000, yet Abizaid is telling us it isn't possible.

Ralph Peters / New York Post

"To master Iraq now - if it could be done - we'd have to fight every faction except the Kurds. Are we willing to do that? Are we willing to kill mass murderers and cold-blooded executioners on the spot?

"If not, we can't win, no matter what else we do.

"Arrest them? We've tried that. Iraq's judges are so partisan or so terrified (or both) that they release the worst thugs within weeks - sometimes within days.

"How would you like to be one of Iraq's handful of relatively honest cops knowing that any terrorist or sectarian butcher you bust is going to be back on the block before your next payday? And yeah, they know where you live.

"Our 'humanity' is cowardice masquerading as morality. We're protecting self-appointed religious executioners with our emphasis on a 'universal code of behavior' that only exists in our fantasies. By letting the thugs run the streets, we've abandoned the millions of Iraqis who really would prefer peaceful lives and a modicum of progress.

"We're blind to the fundamental moral travesty in Iraq (and elsewhere). Spare the killers in the name of human rights, and you deprive the overwhelming majority of the population of their human rights. Instead of being proud of ourselves for our 'moral superiority,' we should be ashamed to the depths of our souls.

"We're not really the enemy of the terrorists, militiamen and insurgents. We're their enablers. In the end the future of Iraq will be determined by its people. The question is, which people?

"Our na?ve version of wartime morality handed Iraq to the murderers. Will our excuse for a sectarian bloodbath be that we 'behaved with restraint?'

"Any code of ethics that squanders the lives of tens of thousands and the future of millions so we can 'claim the moral high ground' is hypocrisy worthy of the Europeans who made excuses for the Holocaust.

"If we want to give Iraq's silent - and terrified - majority a last chance, we would have to accept the world's condemnation for killing the killers. If we are unwilling to do that, Iraq's finished."

Senator John McCain / "Meet the Press"

"Prime Minister Maliki is going to go where he thinks his interests lie. And the best way to reassure him is to tell him we're going to do what is necessary. Am I sure we can succeed that way? Of course I'm not sure we can succeed that way. But I have said from the beginning, my first trip over there, that we needed more troops, because we didn't have it under control - the looting - all of the things that have transpired?.

"So we're at a decision point. We either set up for a plan for withdrawal, or (do what is necessary to prevail)?.There's no Rosetta Stone here, there's no magic formula for success. We're paying a price for the failure of our policy in the past, and the question, then, before the American people is are we ready to quit? I believe the consequences of failure are chaos in the region, which will spread."

But now we all await the recommendations of the Iraq Study Group headed by former Secretary of State James Baker. It will argue for a region-wide conference, including bringing Syria and Iran to the table, and I can guarantee, whether you agree with the steps President Bush inevitably will take or not, that we'll all be saying in unison "we could have done this three years ago."

By week's end the Shiite-led Interior Ministry issued a warrant for a top Sunni cleric (who is currently in Jordan), which will only inflame tensions further. Said a spokesman for the Sunnis, "The decisions of this government are worthless because it only rules the Green Zone." Almost four years into this conflict and that's the gist of it.

Incoming Secretary of Defense Robert Gates (assuming he survives his confirmation fight) was described by associates as being "distraught over the incompetence of the Iraq operation" when he last traveled to the country as part of the Baker Commission. Sadly, he's in the majority of public opinion these days.

Last week, though, in my mid-term election postmortem, I noted President Bush showed no signs of understanding the bigger picture when it came to the Middle East, including Lebanon. This week British Prime Minister Tony Blair, while largely discredited himself these days, attempted to spell it out for him, not that I agree with Blair's own take either.

Iran and Syria must be involved in the peace process, he said, but only if they stop their interference in Iraq and Iran stops its nuclear weapons efforts. But Blair ruled out military action against Iran, while calling on Bush to lead a new drive towards peace in the region, including Lebanon.

Bush countered that any negotiations with Iran must be preceded by Tehran's abandoning its uranium enrichment program.

Prime Minister Ehud Olmert of Israel met with Bush and said "We know (Iran) is trying to possess nuclear weapons (and) Israel will not tolerate" a nuclear-armed Iran. Olmert and his lackeys then planted stories all around Washington that Bush wasn't afraid to confront Iran militarily.

While this was taking place, President Ahmadinejad of Iran blasted the UN Security Council.

"It is most embarrassing that the Council, which should be the defender of nations' security and rights, threatens countries pursuing nuclear fuel under the law to provide fuel for peaceful purposes." The UN is applying a double standard, he said, noting that "countries armed with nuclear weapons deny the rights of other countries to produce nuclear fuel and exploit it for peaceful purposes." [Los Angeles Times]

Ahmadinejad later threw in a dig at the U.S. election.

The U.S. people should not be held accountable for the behavior of the administration, he said. "Those who have ascended to power through marginal votes should not think that they are free to do whatever they wish." [Agence France-Presse]

Lastly, the Iranian leader spoke of Iran being close to mastering the nuclear fuel cycle. "I am very hopeful that we will be able to hold the big celebration of Iran's full nuclearization in the current year," referring to the Persian calendar which ends in March. [London Times] Exactly what he meant is unclear, but use your imagination.

As for Lebanon, it is hurtling towards collapse. Six ministers resigned; representatives of Hizbullah, Amal (supporters of Hizbullah) and other pro-Syrian groups. The government of Prime Minister Siniora is teetering as Sheikh Nasrallah threatens massive street protests to exact a change in government, a "clean" cabinet as Hizbullah's leader says.

Editorial / Washington Post

"Through political bluff and the threat of violence, (Nasrallah) is attempting to stage a coup against the democratically elected Lebanese government. The pro-Western administration of Prime Minister Fouad Siniora, which lacks Hizbullah's ruthlessness or military strength, has been resisting. But without help from the outside world, Lebanon could soon experience the reversal of its popular Cedar Revolution of 2005 or even a return to civil war?.

"Until Iran and Syria are made to pay a price for their attempts to radicalize the Middle East, they will have no incentive to rein in clients such as Hizbullah."

Israeli intelligence says Hizbullah is rearming in South Lebanon and may actually have more missiles today than it did this past summer. Israel is anticipating renewed warfare by the spring.

Setting aside President Bush and his seeming inability to comprehend the scope of the problems we face today beyond Iraq; one has to wonder when investors will begin to factor the above back into their investment models. I suspect soon.

Wall Street

For the investing class it's been a great run these past three months with the Dow Jones Industrial Average up about 15% and Nasdaq soaring 20%. No need to worry about the rapidly deteriorating Middle East and the implications for oil, and no need to concern oneself with the housing market, it would appear. Earnings continue to grow at double-digit rates, while inflation, as measured by the government, is no problem, and if you wait long enough the private-equity guys will come along and buy every company in which you own a share.

No doubt, this week's inflation data was terrific and almost caused me to whip out my old "Deflation Now" button. Producer prices tumbled 1.6% in October, 0.9% when you strip out food and energy, and consumer prices fell 0.5% with only a 0.1% increase in the core. The minutes for the Federal Reserve's October meeting were released and the governors increasingly believe they have engineered a soft landing, even though there is still some concern on their part that a "tight" labor market poses a risk in terms of higher wages, not that you or I would complain about this personally.

But while some Fed board members do remain concerned about the housing sector and its impact on economic growth, the majority continue to espouse Alfred E. Neuman's "What - Me worry?"

The week started off with Home Depot CEO Robert Nardelli telling us that "housing-related issues came faster and deeper than we thought" as HD reported earnings that fell short of expectations. Something about fewer folks taking out equity from their homes to finance projects, you see.

Next the CEO of leading homebuilder DR Horton echoed statements made by his competitors the previous week in saying "we are in the early stages of a downturn." Cancellations at DR Horton are up 40-50% depending on the market.

Then on Friday we learned that housing starts in October crashed; down 15% to the lowest level in six years, while building permits (an indicator of future activity) also declined yet again.

If there was at least a shred of good news on the real estate front it came in the form of stabilizing prices in the six-county Southern California market, but even here sales are down 22% year-over-year.

So let's assume for the moment the best. Prices stagnating across the board as inventories dry up (sellers throwing in the towel). Let's say prices were flat for the next six to 12 months. Is that good? Will consumers be doing cartwheels? I doubt it and I really don't think prices have bottomed. I just wanted to prove I could be somewhat positive for a nanosecond.

I do believe, however, that Christmas could be pretty good, barring a nasty development on the geopolitical front that has us running to the television vs. scurrying to the mall. Last year, sales rose about 6% over the holidays and most are calling for 4%-5% gains this year. 5% is not too shabby, so maybe we skate by. It doesn't hurt that the price of oil continues to decline, though I maintain the price at the pump has seen its lows in this cycle. Nevertheless, consumers feel much better than they did in July when oil was well above $70 and a gallon of gas was in the $3.00 range.

Otherwise, I'd say the watchword these days is complacency. You know those investor sentiment figures I've been posting down below for almost 8 years? They are flashing a major warning signal. And I'd also suggest that when a company like Dell Computer delays releasing its earnings, refusing to tell investors what's up when the SEC upgrades an investigation into its accounting practices, and yet the stock barely moves, that's complacency.

Two last notes. I've come up with a comparison for housing and the stock market should real estate indeed stabilize for a spell.

Think back to 2000. The major equity averages hit their all-time highs between January and March, tumbled, and then rallied back strongly late summer. By September 1, 2000, the S&P 500 was at 1520, just 7 points from its record of 1527. The Dow was only 500 points from its peak and Nasdaq had rallied back to 4234. Corporate America wasn't necessarily saying everything was hunky dory then, but traders simply didn't want to believe the Bubble era was officially over. Stocks then resumed their slide after Labor Day (the start of a six-week losing streak) and the S&P bottomed at 776 while Nasdaq crashed to just above 1100. Keep this example in the back of your mind, especially when you're tempted to throw caution to the wind.

Street Bytes

--The Dow hit another new record high, finishing the week at 12342, up 1.9%. The S&P 500 gained 1.5% to close above 1400 (1401) while Nasdaq climbed 2.4% to 2445. For the latter two the figures represented six-year highs. Sliding crude oil was a factor behind the gains as oil touched its lowest level in 17 months, below $56, though part of this was due to the expiration of the front month futures contract. Crude will rebound Monday.

Stocks also took heart in the latest on the mergers & acquisition front, particularly the blockbuster announcement that US Airways was making a play for bankrupt Delta. And it didn't hurt to have some solid IPOs, like in the case of Nymex Holdings, operator of the world's largest physical commodities futures exchange. The stock was priced at $59 and finished its first day, Friday, at $132. If you were a seatholder your investment gained a cool $6.5 million.

--U.S. Treasury Yields

6-mo. 5.13% 2-yr. 4.76% 10-yr. 4.60% 30-yr. 4.69%

Despite the great inflation news, Treasuries were unchanged on the week due to the fact they had already rallied the prior one when there was absolutely zero reason to. [Just stating the facts.] This coming week is light on the news front and the Fed meets again the second week in December.

--With the price of crude tumbling, it's important to remember that should the slide continue (I don't think it will?in this particular cycle), that could actually lead to more instability. Iran, for example, is expected to generate $55 billion this year in oil revenues, which has allowed it to increase defense spending to over $6 billion and provide Hizbullah with $hundreds of millions, including for reconstruction following the war with Israel.

But, at the same time, while you might think falling revenues could force Tehran to cut back on funding terrorists, Iran is also heavily subsidizing gasoline for its citizens who pay just 34 cents a gallon at the pump. This subsidy costs $5 billion a year. Some experts see a disaster should oil fall below $50. Saeed Leylaz, an economist in Tehran, notes:

"Immediately after any decrease in the oil price, my prediction is that inflation will go up very fast, and the social structure of Iran, which is very fragile and sensitive now, will be in a dangerous position." [Kim Murphy / Los Angeles Times]

It would be foolish to think such chaos would result in the fall of the mullahs.

--An interesting tidbit from Strategic Investment:

"As of October 2006, the Baker Hughes Worldwide Rig Count stood at 3,130 operating rigs. About 55% of the worldwide total, or 1,734 rigs, are operating in onshore and offshore U.S. basins. Yet according to the EIA (Energy Information Agency), the U.S. produces only about 10% of the total daily world oil supply." And the U.S. is producing 30% less oil than it did in 1970.

Daniel Yergin's group, Cambridge Energy Associates, put out a piece this week refuting the 'peak oil' talk; saying that plenty of new production will be found to meet demand. I would just point to facts such as those above, as well as the examples of Norway and Mexico, two rather large producers that are finding it increasingly difficult to develop new sources; and I'm not even addressing the controversy over Saudi Arabia and its oil fields.

--Meanwhile, in the here and now, I've been writing about Russia and its quest to create a second OPEC and this week the Financial Times indeed ran the headline "NATO fears Russian plans for 'gas OPEC'".

"A confidential study by NATO economics experts, sent to the ambassadors of its 26 member states last week, warned that Russia may be seeking to build a gas cartel including Algeria, Qatar, Libya, the countries of Central Asia and perhaps Iran."

For example, Russia and Algeria alone account for 34% of the European Union's natural gas and about 40% of its crude.

Related to the above, the Republic of Georgia is frantically trying to line up new sources of natural gas after Gazprom decided to double the price it charges Georgia, and the Tblisi government is now negotiating new deals with the likes of Azerbaijan, Iran and Turkey. Currently, Georgia gets 100% of its gas from Russia and it's attempting to cut this to 20% by the end of 2007.

Georgia has every reason to be very concerned. Its rebel region of South Ossetia voted last weekend to stay independent, an act orchestrated by Vladimir Putin as yet another way to stick it to Georgia for backing the West. The U.S. and the European Union view the ballot as illegal.

--The proposed US Airways / Delta combination faces a long road before it's approved by regulators. Creating the country's largest carrier raises major antitrust concerns, while Delta itself has until Feb. 15 to present the bankruptcy court with a plan of reorganization; Delta having vowed to emerge as an independent airline.

--Clear Channel Communications was taken out in one of the biggest leveraged buyouts to date, $18.7 billion plus the assumption of $8 billion in debt. Thomas H. Lee Partners and Bain Capital are the acquirers. Clear Channel owns more than 1,150 radio stations and an extensive outdoor advertising business. So the LBO / private-equity boom continues.

Like in the case of Hertz, which just nine months ago was purchased by the private-equity types, shredded for special dividends and such, loaded up with $13 billion in debt, and then returned to the public marketplace in the form of a new IPO on Thursday. Reception for it was tepid at best and I wouldn't touch this stock with a 10-foot pole. Merrill Lynch, however, earned $800 million, double its initial investment, through fees and the dividend.

When does it all end and at what price for the rest of us? Keep your eye on the junk bond market. The laws of economics have not been repealed and one day we will have another recession. All of these LBOs are encumbered by massive amounts of debt and when sales dive some operations will find it impossible to service it. But the bankers won't care. They will have already made their killing.

--Jane Bryant Quinn / Newsweek, on why most of those who went to the polls the other week continue to describe the economy as "not good" or "poor."

"At the top, the 'working rich' are doing stupendously well. In 2004, the wealthiest 1 percent of households (with incomes higher than $315,000) copped 53 percent of all the year's income gains. Americans usually don't care how much other people get as long as they're doing OK themselves. But lately, they haven't been. Median incomes for households with people of working age (65 or less) fell last year for the fifth year in a row. Adjusted for inflation, these families are bringing in $3,000 less, the Economic Policy Institute reports. When the president tells them they're fine, he sounds out of touch."

--Interesting quarterly report from Sears Holdings Corp., parent of Sears and Kmart stores. Despite declining sales, profit tripled thanks in large part to a $100 million gain earned through an investment in "total return swaps," a very complex financial derivative. Chairman Edward Lampert is an old hedge-fund operator, but these kinds of bets can go both ways.

[Speaking of derivatives, the Bank for International Settlements revealed this week that as of June 2006, the total notional value of all outstanding derivatives contracts in the world is now $370 trillion, a staggering increase of 24% in just six months. Defenders say "No problem." I say history shows those on either side of the trade often aren't as smart as they think they are.]

--So I mentioned economist Milton Friedman last week and five days later he dies. The great Nobel Prize winner / free market capitalist once wrote in 1980:

"Self-interest is not myopic selfishness. It is whatever it is that interests the participants, whatever they value, whatever goals they pursue. The scientist seeking to advance the frontiers of his discipline, the missionary seeking to convert infidels to the true faith, the philanthropist seeking to bring comfort to the needy - all are pursuing their interests, as they see them, as they judge them by their own values." [Wall Street Journal]

Yeah, but then you have the dirtballs, of which there is no shortage these days.

And so it's time for another installment of "CSI: Wall Street".

Bruce Karatz, longtime chairman and CEO of KB Home, one of the largest in the homebuilding industry, was forced to resign and return $13 million in profits from backdated stock options. An internal investigation uncovered the unadulterated acts of greed that occurred between 1998 and 2005. Of course KB Home also has a potentially large tax liability as a result; a reminder to those who don't think you can capture back taxes from those gaming the system.

[According to a study by Harvard and Cornell, about 850 U.S. CEOs "received backdated or otherwise manipulated stock option grants that boosted their annual pay, on average, by at least 10%," as reported by the Journal's John Hechinger. The average take through this illegal behavior was $1.3 million to $1.7 million. It should make you sick.]

As should this. Former Fannie Mae CEO Franklin Raines will receive another $2.6 million under a deal disclosed Tuesday that resolves a pay dispute.

This is incredible. Recall the spanking Fannie took for its $10 billion accounting shell game that occurred under Raines' watch, with Fannie forced to pay a fine of $400 million. Yet Raines earned more than $90 million from 1998 to 2003, including over $50 million in bonuses tied to the company's hitting earnings targets?.targets achieved by cooking the books. Raines then left with a $19 million severance package in December 2004. [AP] And now he's being paid $millions more, when he should be in prison.

"CSI: Wall Street" continues?.

Enron's former chief accounting officer, Richard Causey, was sentenced to 5 ? years making license plates and other do-dads, though he could have received far more had he not been so cooperative with federal authorities in helping with the convictions of his fellow fraudsters.

And as noted above, Dell Computer said the SEC upgraded its investigation into its accounting and delayed release of its third- quarter earnings report due to the "complexity" surrounding the inquiry. The computer maker is compounding matters by refusing to release any information whatsoever as to what the investigation may entail.

--What an embarrassment for President Bush that he couldn't deliver on a Vietnam trade deal before he traveled to the country; House Republicans having withdrawn the act (while blaming Democrats), a sign of the many battles to come on this front; none of it good for us free market types.

--The Semiconductor Industry Association is calling for 9% growth in chip consumption through 2009, with consumers accounting for 50% of total sales, whether it's for high- performance PCs or PlayStation 3. Traditional electronics - music players, digital cameras and television sets - account for 20% and cellphones another 20%.

Speaking of PS3 and its launch this week, I have yet to play one video game in my life, so I have no clue what all the fuss is about.

--Some real estate markets may be stabilizing a bit, but in once white-hot Naples, Fla., the bottom is not yet in sight as sales of single-family homes and condos are off 50% from year ago levels and inventories are up 300%. The median price fell 8% in September. Naples was Ground Zero for speculators.

--But in London, the high-end property market is scorching due to huge Wall Street-type bonuses for its bankers and traders. In reading a piece in the London Times, however, there is yet another warning for Wall Street and the New York Stock Exchange.

"London's workforce is predicted to swell by 600,000 jobs in the next decade?

"Employment at Canary Wharf, the office development at London's Docklands that is now home to many international banks and law firms, is currently at 80,000 but is predicted to reach almost 200,000 within 20 years."

Do you see these kinds of staggering employment projections for Wall Street and its surrounding environs? I don't.

--My group healthcare premium is only going up 4.5% next year! An encouraging development.

--Citigroup and its partners have been selected to buy an 85% stake in China's Guangdong Development Bank, thus giving Citigroup bigger exposure to both Shanghai and Hong Kong. Citi becomes the first U.S. lender to gain the ability to control lending operations and set day-to-day strategy. But when the China bubble inevitably bursts, Citigroup could be left holding the bag?.mused the editor, who has been waiting for the China bubble to burst for, oh, about four years.

--Yet another article on click fraud, this one in the Journal titled "So Many Hits, So Few Sales?Click fraud is fast becoming a problem for small businesses advertising online."

But at the same time, the Interactive Advertising Bureau says Internet ad sales are set for another record year, $16 billion projected for 2006 vs. $12.5 billion in '05.

Proponents of online advertising keep talking about the Net's effectiveness in targeting individuals, but I vow in 2007 to identify the six people, worldwide, that not only click on a banner ad but also buy a product as a result. [Today, I suspect those clicking, aside from the scammers, are really chimps taking a break from their participation in scientific experiments.]

--My family and I are having someone else cook our Thanksgiving turkey (a restaurant), but for those slaving away at home the Butterball hotline is 800-Butterball. I didn't see a number for Mrs. Paul's fish sticks.

But I was thinking of the problems Airbus is having with its A380 jumbo jet and I imagined a call to its customer service department goes something like this these days.

"Hello? A380 hotline? Say, if I order one of your planes today, will it be delivered by 2037? It will? Great. I kind of needed to know since I'm working on a business plan."

--Researchers say that most patients with implantable heart defibrillators are buried with the devices still inside them, thus inhibiting efforts by doctors and companies to retrieve valuable data on their effectiveness. Huh.

--Finally, Milton Friedman was a Rutgers grad!

Foreign Affairs

North Korea: Being in the region for the Asia Pacific Economic Cooperation forum, President Bush called on those with influence to exercise it and send a message to Kim Jong il, but while North Korea said on Oct. 31 it would return to the six- party talks on its nuclear weapons program, there are no indications as of this writing just when they are slated to resume.

In South Korea, President Roh is under increasing pressure from the people to act tougher towards their neighbor and Seoul is prepared for the first time to sign onto a UN resolution condemning the North for its human rights abuses, but at the same time Roh refuses to allow his military to board North Korean ships per UN Resolution 1718 because he doesn't want to rile Kim up.

France, however, became the first to physically board a North Korean boat, though upon inspection all they found was cement, one of the North's cash crops along with dirt.

India: The U.S. Senate approved by a vote of 85 to 12 the nuclear cooperation agreement between the two countries; the House having earlier passed it 359 to 68. [Details to be worked out between the Senate and House versions.]

This goes down as a major achievement for the Bush administration and a key figure was Republican Senator Richard Lugar, of Nunn-Lugar disarmament fame, who claimed passage was "one more important step toward a vibrant and exciting relationship between our two great democracies."

There have long been concerns that the technology transfers and access to U.S. nuclear fuel would end up aiding India's own nuclear weapons program, and/or could help with Iran's activities on this front, India and Iran having long cooperated on some nuclear, chemical and missile-related transfers.

But the fact is India is the world's largest democracy and a critically important ally for the United States. India has never been accused in the past of transferring any of its actual nuclear weapons know-how (as opposed to Pakistan) and there should be little cause for concern. After all, I've been long touting a new supra-alliance; the U.S., Britain, Japan, Australia and India.

As for the critical relationship between India and Pakistan, the two held talks for the first time in about a year but little was accomplished as the topic of July's Bombay train bombings did not come up, even though India has accused Pakistan's intelligence apparatus, the ISI, of complicity in it. India is waiting for all the evidence to be assembled before formally confronting the Musharraf government. On the issue of Kashmir there was also zero progress. But at least the two sides got together.

Finally, some in Washington are concerned the nuclear deal with India could lead to further cooperation between China and Pakistan, but to those tempted to say "Ah ha! I told you there was a downside," I would simply say, "You think China would have been stopped regardless?!" We will, however, learn just how far Beijing wants to go in risking the wrath of many around the world should it supply Pakistan with the latest in technology, though as a Pakistani official told the Financial Times:

"If the U.S. can supply nuclear energy reactors to India under what it says are adequate safeguards, why can't that logic apply to Chinese reactors for Pakistan?"

This has also been Ahmadinejad's clever argument, until he's reminded he's not exactly a civilized type in calling for Israel's destruction.

China: Last Saturday I wrote in my introduction, "China is busily modernizing its military, focusing on sealift and an offensive capability. Our Pentagon is warning of the threats, but what are both it and the president going to do to address this over his remaining two years?"

A rather timely comment, as it turns out, because on Monday the Washington Times' Bill Gertz broke the story that a Chinese sub had been stalking the USS Kitty Hawk, an encounter that evidently caught the Pentagon off guard. [It later confirmed the episode.]

Gertz writes:

"The incident is a setback for the aggressive U.S.-China military exchange program being promoted by Adm. (William) Fallon, who has made several visits to China in recent months in an attempt to develop closer ties.

"However, critics of the program in the Pentagon say China has not reciprocated and continues to deny U.S. military visitors access to key facilities, including a Beijing command center. In contrast, Chinese military visitors have been invited to military exercises and sensitive U.S. facilities."

On Wednesday the Journal weighed in.

"China's expanding armed forces have become more assertive in recent years. Tokyo says it has scrambled fighters more than 100 times this year to intercept suspected Chinese spy planes. China's submarine activity also has picked up in the waters near Taiwan."

Sounds like Adm. Fallon has some 'splaining to do. And you also see just how close we are to an incident, though with China focused on the 2008 Olympics you'd think that would be the last thing it wants. 2010? That's a different story.

Russia: President Vladimir Putin on his nation's nuclear capability.

"Maintaining a strategic balance means that our strategic deterrent forces must be capable of destroying any potential aggressor, no matter what modern weapons systems it has."

Putin is calling for "new strategic weapons systems," adding, "We're not going to keep comparing quantities of strategic forces in nuclear powers as we have been doing for decades, although it still makes some sense. In the modern world, it's the quality of weapons that is more important than the number of nuclear warheads."

Russia's estimated defense budget will be $31 billion next year, with about 40% of it spent on 17 new intercontinental ballistic missiles, a big increase over prior years.

Separately, Defense Minister Sergei Ivanov touted the fact there have been only 20 deaths in the military for the first ten months of the year as a result of bullying vs. 26 last year for the same time period. Isn't that great?! [Moscow Times]

And back to the oil and gas front, following a management shakeup at Gazprom, approved by Putin himself no doubt, Gazprom and Lukoil are forming a joint venture aimed at acquiring assets both at home and abroad.

Many wonder when Lukoil will fall under the sway of the Kremlin, even though its 20% owned by ConocoPhillips, but for now Lukoil's good relations with Gazprom, Putin's farm team for future political leaders, have prevented this.

Lastly, Poland is riling up the European Union by blocking negotiations on a new energy framework with Russia. Warsaw is insisting Moscow sign a charter that would open its pipelines to third-party competition. Europe is increasingly split between those favoring increased ties with the Kremlin and the rest, like Poland, who distrust Russia. Can't say I blame the latter.

Turkey: At the funeral of former Prime Minister Bulan Ecevit, a revered secularist, there were chants for him among the thousands lining the route as well as cheers for the pro-secularist generals and the president. But Prime Minister Erdogan was booed.

Somalia: Islamist forces are extending their grip on the nation as the U.S. warns of suicide bombers based here planning activities in Kenya and Ethiopia. Look for al Qaeda to make itself at home.

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Pray for the men and women of our armed forces.

God bless America.

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Gold closed at $622
Oil, $55.81

Returns for the week 11/13-11/17

Dow Jones +1.9% [12342]
S&P 500 +1.5% [1401]
S&P MidCap +1.7%
Russell 2000 +2.5%
Nasdaq +2.4% [2445]

Returns for the period 1/1/06-11/17/06

Dow Jones +15.2%
S&P 500 +12.3%
S&P MidCap +9.2%
Russell 2000 +17.1%
Nasdaq +10.9%

Bulls 56.4
Bears 22.3 [Source: Chartcraft / Investors Intelligence]

Happy Thanksgiving. Travel safe.

Brian Trumbore

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