Week in Review 
For the week 1/15/2007 - 1/19/2007
Brian Trumbore
President/Editor, StocksandNews.com

The Middle East

As Secretary of State Condoleezza Rice crisscrossed the region this past week, there were both statements of support for the Bush troop plan in Iraq as well as the administration's renewed focus on tackling the Israeli-Palestinian issue. But if you read all the dispatches, as I tried to do from a myriad of sources, one would sound optimistic, the next less so. It's the Middle East, after all, and things are never as clear as they might initially seem.

The following editorial from Wednesday's Arab News perhaps sums up the diplomatic rollercoaster the U.S. finds itself on.

"If the views expressed by U.S. Secretary of State Condoleezza Rice in Riyadh yesterday represent a genuine re-engagement with the Middle East, then the entire world - and not only the Middle East - should be considerably encouraged. With civil conflict in Iraq, Sudan and Somalia and also hanging over the Palestinians and even the Lebanese, plus the continued Israeli oppression of the Palestinians and occupation of their land and the threat of Iran and Syria being the next areas of conflict, the wider Middle East is the world's most dangerous region. American commitment to solve just one issue would be a boon. In fact, although a solution to the Israeli-Palestinian issue would not immediately translate into peace in Iraq, let alone Somalia, the problems are all more or less interlinked. Solve one and it enables a second to be solved which in turn opens the door to a third and so on.

"That is why it is good to hear Rice saying that the U.S. still believes in a single united Iraq free from outside interference, that it plans to strengthen its efforts to find peace between Palestinians and Israelis and set up a Palestinian state, that it is listening to what Saudi Arabia is saying on the Middle East, that this 'rather challenging time' could become 'a time of opportunity.' These are the views of every fair-minded Arab. We are talking the same language. It is good to know that Washington has not been swayed by siren voices singing that Iraq should be allowed to break up.

"But to what extent is Rice just another siren, mesmerizing the Middle East with pleasing songs while dragging it onto the rocks of fresh conflict because of her own country's incompetence? Too many times we have been duped into believing peace between Palestinians and Israelis is on the horizon, only to have the flames of hope doused by inaction or fresh provocation. Only a masochist would be an optimist again, especially when the news from Iraq is so grim. How can anyone be encouraged when violence there is at record levels (seen in yesterday's murderous car bombs in Baghdad) or when the U.N. reveals, as it did yesterday, that more than 34,000 civilians were killed in Iraq in 2006?

"The chasm between these good intentions and bloody violence has to be bridged. That means action by the U.S. and those others who have influence in the various conflicts. But it also requires commitment from those directly involved. As the Kingdom's foreign minister, Prince Saud Al-Faisal, said yesterday, the Iraqis themselves have to be committed if peace is to happen. Outside parties can make things worse (and have done so) but they cannot make them better without an Iraqi will for peace. The same is true for the Palestinians; there will be no breakthrough with the Israelis if they are not united. It goes for the Arab world as a whole, too. No one, not the U.S., not the U.N., not anyone, is going to deliver the peace and justice the Arab world should have as a right without first being confronted by a unified Arab voice that demands it. That is the imperative."

On Wednesday, Saudi Foreign Minister Prince Saud told Rice "We agree with the American president on the need for a new strategy in Iraq which has clear agendas that respond to recent developments and are practical on the ground." Saud said he was encouraged by plans to distribute the oil wealth, adding "We hope that some small changes will be made to the constitution in order to guarantee the participation of all groups in the political process," a reference to their favored Sunni brethren.

Earlier, Egyptian Foreign Minister Ahmed Aboul Gheit, who normally gives the U.S. a hard time, said "Bush's strategy is not merely a military action or operation or a unilateral military program. It represents a vision with different political, military and economic aspects."

So that was positive. But then the Saudi ambassador to the Arab League said he doubted the U.S. would take "an evenhanded, non-sectarian path" by targeting both Shia militias and Sunni insurgents, as Rice had claimed. "The main objective now is how to achieve national reconciliation," said Ambassador Ahmed al-Qatan. "Unfortunately the deteriorating conditions cannot provide any hope. The situation won't stabilize soon and the current curve (of violence) will continue for a long time."

For his part the emir of Kuwait couldn't understand why the Bush administration wouldn't talk to either Syria or Iran.

Editorial / Washington Post

"Secretary of State Condoleezza Rice's tour through the Middle East this week has been designed to exploit the 'opportunities' of what she views as a new divide in the region, 'between extremism on the one hand and mainstream states on the other.' On one side, she told The Post recently, 'you have Iran, Hizbullah, Hamas and Syria?.On the other you have the so- called moderate Arab states, I'll call them mainstream states - Saudi Arabia, Jordan, Egypt and the Gulf states.' ?.

"The new strategy explains a series of reversals of U.S. policy that otherwise would be baffling. In addition to embracing the Middle East peacemaker role that it has shunned for six years, the administration has decided to seek $98 million in funding for Palestinian security forces - the same forces it rightly condemned in the past as hopelessly corrupt and compromised by involvement in terrorism. Those forces haven't changed, but since they are nominally loyal to 'mainstream' Palestinian President Mahmoud Abbas and serve as a check on the power of the 'extremist' Hamas, they are on the right side of Ms. Rice's new divide.

"So is Egyptian President Hosni Mubarak, a thuggish autocrat who was on the wrong side of Ms. Rice's previous Mideast divide between pro-democracy forces and defenders of the illiberal status quo. In past visits to Cairo, Ms. Rice sparred with Mr. Mubarak's foreign minister over the imprisonment of democratic opposition leaders such as Ayman Nour and the failure to fulfill promises of political reform. On Monday, she opened her Cairo news conference by declaring that 'the relationship with Egypt is an important strategic relationship, one that we value greatly.' There was no mention of Nour or democracy?.

"The attempt to divide the Middle East into two opposing camps is nevertheless wrongheaded and dangerous. It ignores the many differences among the 'extremists' - including internal divisions within Iran - that could be exploited by a subtler policy. The 'mainstream' coalition of U.S. allies, all Sunni-led states, must look threatening to Iraq's Shiite government, which itself considers Iran a close ally. That Sunni leaders are publicly supporting the U.S. escalation in Baghdad is at best a mixed blessing, since they have made it clear their motive is sectarian: They hope Shiite militias will be confronted."

Here are a few thoughts from Iran's leaders.

Supreme National Security Council Secretary Ali Larijani:

"In their Greater Middle East Initiative, the (United States and Britain) are concerned that the regional countries may unite and thus not need an outside power to establish stability and security."

Larijani paid a visit to Saudi Arabia, the day before Rice's visit to the region, looking to form a twisted partnership for peace that could exclude the U.S. and Saudi Arabia, in turn, then used oil as a weapon against Iran. As the price tumbled to $50, from a high last year of $78, the kingdom said there was no need for emergency steps to prop up the price, a direct slap at Iran which desperately needs $60 plus oil to meet its budget.

Meanwhile, Iran has completed the installation of 3,000 centrifuges at its Natanz facility, by all accounts, which is a giant step in the production of nuclear fuel on an industrial scale. The International Atomic Energy Agency's Mohamed ElBaradei, however, said the sanctions currently levied against Iran could backfire and "lead to an escalation on both sides."

I don't agree with ElBaradei, but I do believe in talking to Iranian leader Ali Akbar Hashemi Rafsanjani, who lost to President Ahmadinejad in the 2005 presidential race and has been a critic of Ahmadinejad's virulent anti-West/anti-Israel rhetoric.

As I noted last week, the Iranian president is facing increasing pressure on the home front and opposing voices are finding their way into the press. A fundamentalist newspaper in Tehran, which often reflects the views of Supreme Leader Ayatollah Ali Khamenei, accused Ahmadinejad of using the nuclear issue to deflect attention from the government's failing economic policies.

"Turning the nuclear issue into a propaganda slogan gives the impression that you, for the sake of covering up flaws in the government, are exaggerating its importance. This is harmful for you and your government."

There has also been a lot of criticism, internally, about the Holocaust conference that was staged in Tehran last month. The conservative-dominated parliament went so far as to label it "inappropriate" and that it had influenced the U.N. Security Council and its decision to levy sanctions.

So in some respects Iran is in a state of flux and the White House needs to understand it can exploit this by circumventing Ahmadinejad. I noted a long time ago, before the invasion of Iraq, that this was going to be a dirty war, as Donald Rumsfeld himself once said but then never followed up on the execution. A dirty war means dirty deals. This is the Middle East, after all, home of the bazaar. In this case, Iran needs nuclear power because it is using up, domestically, an increasing share of its prime revenue source and export, crude oil. Therein lies the makings of a deal. But at this stage it's probably too late. As much as we all would like to see Ahmadinejad replaced, Rafsanjani is still a hardliner and would almost certainly seek the bomb too.

In the meantime, Iran has staked its claim on Iraq with deadly consequences for the U.S. military. Ayatollah Khamenei told an audience in Tehran on Monday:

"The most insecure places in Iraq are where the U.S. troops are present."

Addressing the goal of unifying the Islamic world, Khamenei said "If this unity is achieved, it will be a support for the Islamic states, and these states will not be forced to turn to the United States and Britain out of fear or weakness."

"In the modern era," he added, "colonialism made the maximum use of (Muslims') ignorance, prejudices, and unsound understanding to create division, and after the victory of the [1979] Islamic Revolution, this process was intensified?.the Revolution revived Islamic pride and honor among Muslims, and today the glory and awakening of the Islamic ummah [holy community] is more conspicuous due to the failure of the enemies."

Much of the above may be about Iran and its growing influence, but it also pertains to Iraq. Here, like everywhere else in the region there were once again conflicting signs. On one hand the government of Prime Minister Nouri al-Maliki has taken some initial steps to confront the Mahdi Army of Moqtada al-Sadr, a supporter of Maliki. But you just don't know how much to believe. It will be weeks, maybe months, before we know how serious the effort is. For now, the U.S. military confirmed that Shia militia members that were recently captured were not then released the next day?they remain in custody. Believe it or not, that's a major first step.

What does seem clear is Sadr's army has begun to melt away, waiting for the heat to die down. If ever there was an instance to follow my adage of 'wait 24 hours' it's now.

And while I support President Bush's troop increase, the Big Picture, over any time period, remains incredibly bleak. A story in Newsweek supplied some of the depressing details concerning Iraq's young. Half the population today is now under the age of 18 and these kids have known nothing but violence, prime recruits for the terrorists. 70% of the elementary schoolchildren don't attend class regularly.

This week Sunni Vice President Tariq al-Hashemi made note of the brain drain, following the horrific bombing at the university in Baghdad that killed over 70 on a day in which 140 died in various attacks. Why would you return to Iraq if you were fortunate enough to get out in the first place?

For Bush and his surge in forces, two different polls, USA Today/Gallup and L.A.Times/Bloomberg, both show 60% of the American people opposed. I said at year end that in six months the situation in Iraq could show some improvement but that we would be too impatient and the calls to come home would only grow. I've seen nothing thus far in '07 to dissuade me of this opinion. One look at the congressional debate tells you as much.

But while current attention is rightfully focused on Iraq, and Iran, Afghanistan can't be ignored. Many would be surprised to learn, for example, that the current U.S. force there is the largest ever, 24,000. American generals want $billions for road construction, seeing this as the best way to help the fledgling Afghan Army and its increasing battles with the Taliban. I agree with Senator Hillary Clinton who in a trip to the country this week said we should be increasing our troop levels to beat back the renewed Taliban effort. [I of course disagree with her on Iraq.] Secretary of Defense Gates basically echoed the same theme, saying we risk backsliding. At worst, gains already made here must be maintained.

Finally, a few words about Israel. The architect of the disastrous war with Hizbullah, Israeli Chief of Staff Lt. Gen. Dan Halutz, resigned after a series of investigations into the conduct of the war had wrapped up.

"With the echoes of battle having faded, I have decided to act on my responsibility," Halutz said in his resignation letter.

Dan Shomron, a retired Israeli general who led the main inquiry, told the Knesset that the war had been conducted with no clear objective. "He added that the threat of rockets being fired at Israel from southern Lebanon remained as it was before the war." [London Times] And Israel still hasn't gained the release of two captured soldiers that precipitated the whole disaster.

Because Halutz admitted to gross incompetence, in so many words, pressure is mounting on Israeli Prime Minister Olmert to resign himself; this as Olmert and Palestinian President Abbas are slated to renew peace talks, now that Abbas has been propped up by new U.S. aid. The timing of the internal debate in Israel couldn't be worse.

Former President Jimmy Carter, who continues to catch flak over his new book "Palestine: Peace Not Apartheid" offered the following in an op-ed for The Washington Post.

"The clear fact is that Israel will never find peace until it is willing to withdraw from its neighboring occupied territories and permit the Palestinians to exercise their basic human and political rights. With land swaps, this 'green line' can be modified through negotiations to let a substantial number of Israeli settlers remain in their subsidized homes east of the internationally recognized border. The premise of exchanging Arab territory for peace has been acceptable for several decades to a majority of Israelis but not to a minority of the more conservative leaders, who are unfortunately supported by most of the vocal American Jewish community."

Wall Street

Lots of economic news to digest this week. First off, the inflation figures for December were tame, ex-food and energy that is, as both the producer and consumer price indices came in at 0.2%, with the core CPI having risen 2.6% over the course of 2006, up from 2.2% in 2005. But unless we get much higher, the Federal Reserve can't possibly raise rates when most of us know there simply isn't any real inflation. Now if you tell me wage growth continues to accelerate you might have a case, but even here everyone understands there is little if any real growth for the average worker. [For those at the top, however, wages appear to be rising at a cool 654% a year.]

The Fed's beige book, the view of the economy from a regional standpoint, continues to show growth in the U.S. at a "modest pace," as the 0.4% rise in industrial production later confirmed, even with "continued softening in housing markets, and high inventories of new homes."

Ah yes, housing. This week we learned that December housing starts rose a strong 4.5%, far better than expected, while building permits increased 5.5%. So that shoots the bear case to hell, right?

Not exactly. In case you didn't notice, December was a delightful month to not only build a home in many parts of the country, but also to hold that annual December company picnic, for crying out loud. No wonder housing starts were up. Even beavers showed record levels of activity as they forsook hibernation for another month due to the balmy weather.

More importantly, the homebuilders themselves continue to talk of earnings far less than once thought just a few months ago as the likes of Centex, Pulte and Lennar write down more land, just as we said would be the case over a year ago. And there's no doubt that rising incentives are playing an increasing role in distorting some of the sales figures.

In fact Peter Coy of BusinessWeek had this interesting take in the January 22 issue. As in you just can't trust the figures the real estate folks are giving you.

"When many homes in an area are relisted as new, it skews the 'average days on market' statistic, making the market look healthier than it really is. For sellers, refreshing a listing can also disguise the fact that the previous listing was at a higher price. Buyers often regard a price cut as a sign of weakness.

"Whether it's within the local rules or not, the practice of relisting houses to give them a new debut is a symptom of an imbalance in market knowledge. Buyers can sometimes spot manipulation of the databases, but you have to know what to look for, and many buyers' agents don't."

The New York Times had a piece on the Washington, D.C.-area condo market and here, too, the situation is far worse than the data may indicate. In fact, as the article points out, there is no accurate data when it comes to condos. What we do know is that an increasing number of developers are turning their dream projects into rentals until the market turns.

The bottom line for housing these days is we have a ways to go before anyone can issue the 'all clear' signal. As in at least another year by my reckoning, and far longer if and when the economy finally falls apart and employment is impacted. I also have to continue to pound the table on the key to this debate, affordability. For lower- and middle-income America, in particular, this remains a huge issue and a big negative. But next week we'll see December data on both new home sales (as opposed to 'starts') and sales on existing ones. I'll try not to repeat myself for the umpteenth time but I suspect we're about to find that beavers weren't just building new homes, they were gobbling up existing abodes as well.

Turning to corporate earnings, it being reporting season, it wasn't the best of weeks, particularly for tech. Apple recorded record revenue as it sold another 21 million iPods in the fourth quarter, accounting for almost half of the company's total sales, but its guidance for the second quarter was below analyst estimates so the Street slapped it around to the tune of about 10% from its all- time high.

IBM issued a generally solid report, beating estimates, but investors focused on moribund hardware sales and its shares lost $3 on Friday; though to be fair like so many of this week's tech victims, they've had a good run since the July market lows.

Intel's report was sloppy all around as net income fell 38% from a year ago and revenues declined 5%. The market didn't treat it well in response as Intel continues to suffer from a pricing war with its steel cage opponent, AMD.

Motorola said the average selling price on its mobile phones declined $12 in the 4th quarter; not normally a good thing, as Martha Stewart might offer. Globally, handset sales are slowing to a below double-digit rate; another negative for this business overall. And Motorola announced it would reduce its workforce by 5%, or 3,500 positions in order to save $400 million. Of course in the perverse order of Wall Street this is a positive so MOT's shares rebounded some.

In the non-tech universe, General Electric reported earnings that were just in-line and its shares dropped after the news. It didn't help that GE restated earnings going back to 2001, but we were told not to worry?.just a little accounting issue concerning the calculation of derivatives on its books. [It's amazing what GE gets away with sometimes.]

What was good? Once again investment banks, including Merrill Lynch and J.P. Morgan, while Citigroup continues to flounder under the Prince Spaghetti guy.

Two other bits. Oil traded below $50 briefly, before rallying back a bit to close around $52. Oil stocks rallied strongly by week's end and the shares have been outperforming the price of crude for some time now. [Encouraging to those of us who recently put a toe back into the water in this sector.] Aside from the Saudi Arabia comment in the opening segment above, I have a few other remarks on energy below but will save some Big Picture items for next week, which is another way of saying I need to hash some things out in my mind before putting pen to paper.

And we'll finish up on a positive note. A survey for The Economist shows that global business confidence is at its highest level in five years as executives cite the dynamism of China, India and other emerging markets. I would counter that?.oops, I said I'd finish on a positive note.

Street Bytes

--The Dow Jones and S&P 500 were virtually unchanged on the week, while Nasdaq lost 2.1% thanks to the above noted earnings disappointments.

--U.S. Treasury Yields

6-mo. 5.16% 2-yr. 4.92% 10-yr. 4.78% 30-yr. 4.86%

Bonds also ended the week unchanged despite all the data and Fed Chairman Bernanke's testimony before a Senate committee, which ended up having zero to do with the economy. Instead, Bernanke warned Congress that failure to act on entitlement spending, specifically Social Security and Medicare, is bound to propel interest rates. "Thus a vicious cycle may develop in which large deficits lead to rapid growth in debt and interest payments, which in turn adds to subsequent deficits ?(sparking) a fiscal crisis, which could be addressed only by very sharp spending cuts or tax increases or both." Of course Congress won't do anything until it's too late.

In the here and now, PIMCO's Bill Gross has been calling for falling yields, at one point last summer saying the 10-year Treasury would not only dip below 4%, but eventually 3% over the next two years as the economy softened. He may still be right, but everyone, including Gross and PIMCO is being forced to readjust their forecasts as the economy remains fairly strong and the Federal Reserve is showing no signs of cutting rates. So his choice, and that of countless other managers, is to move an increasing percentage of the portfolio into mortgage-backed securities to pick up incremental yield.

"We're simply in a period of time when there are leads and lags here, much like the leads and lags of Federal Reserve policy," Gross told Bloomberg News.

--In reading the first thoughts of the annual Barron's roundtable, what stood out were the concerns over soaring margin debt levels and the impact of mortgage cash-outs, or, more specifically, the fact the latter have dried up and the effect this inevitably will have on consumer spending at some point. [Geezuz?when are us doom and gloomers going to be right on the consumer?]

--President Bush will emphasize "energy independence" in his State of the Union address this Tuesday, not that he or his predecessors haven't done this before. But the new Democratic Congress provides some hope and room for compromise as the two parties should find agreement on items such as tougher fuel- economy standards, finally.

Democrats, though, advocate a doubling of the amount of corn- based ethanol to be used in gasoline to 15 billion gallons by 2012, from the current level of 7.5 billion gallons. As Democratic Representative Collin Peterson of Minnesota told Bloomberg News, "Every member of Congress now has discovered ethanol." And this creates its own problems, sports fans.

I have some farmer friends in the Oklahoma Panhandle, the Bakers, whom I've talked about from time to time. With all the bad weather in that part of the country the past few weeks I was growing concerned about their welfare, especially knowing how isolated their farm is, so I checked up on them.

It turns out the Bakers had survived (at least up to this weekend's storm), but in discussing the fate of their dairy farm (they raise hogs as well) I asked them how business had been, knowing that they had done very well in 2004 and '05.

"Lots of people out here are excited because of ethanol," said Eugene. "But the high price killed us last year" as the Bakers use corn for feed.

And therein lies the dilemma. The price of corn has doubled in one year because of the unprecedented demand for ethanol. Some companies, from chicken processors like Tyson Foods, to soft drink bottlers such as Coca-Cola, are paying a steep price. [Tyson uses corn for feed and Coke is dealing with the rising price of corn syrup.]

Tons of farmers, on the other hand, are now cashing in by switching to corn as their prime crop, but as alluded to above any livestock business is a loser as corn for feed consumes a major share of the total crop.

Prasenjit Bhattacharya wrote in the Wall Street Journal, "This has fueled concerns that corn, a staple food ingredient in many countries and widely used as feed in the poultry and livestock sectors, might become out of reach for poorer consumers, boosting food prices in general."

"Soaring food prices could cause urban riots in scores of low- income countries that rely on grain imports, such as Indonesia, Egypt, Algeria, Nigeria and Mexico," said Lester Brown, founder of the Earth Policy Institute.

For its part the U.S. is both the leading corn producer and corn exporter. Look for the debate over ethanol, its efficacy, the true impact on the environment and food prices, etc., to heat up six- fold over the coming year.

--And speaking of prices, California citrus growers face a $1 billion loss as a result of the record freeze in that state when you add in avocados, strawberries and fresh-cut flowers. The price of orange juice has already tripled in some spots and as one teacher told the AP, "We may be drinking our Coronas without limes." I also have to note as an aside that this winter's weather has been so strange that Malibu has received more snow than New York City.

--The House voted to rescind various tax breaks for oil drillers worth $billions, though the Senate may water it down some. Those looking to slam Big Oil, however, better be careful. We're going to be relying on the stuff, whether we like it or not, for decades to come and at various times in the cycle incentives will be necessary to produce it or the drillers will just close up shop, as has happened before.

And as pointed out in a piece by my friends at Strategic Energy Research, Schlumberger's CEO Andrew Gould, in commenting on the company's strong 4th quarter, said that in looking at SLB's own positive outlook, the industry continues to see "accelerating decline rates, poorer quality reservoirs and an eroding reserve replacement ratio." This is a fact of life in today's energy patch so enjoy the respites in price such as the one we are seeing today.

In the interest of balanced reporting, though, I do have to note that Saudi Arabia announced it would expand its crude production capacity by 40% over the coming two years, though this doesn't mean it will necessarily find all the black gold to begin with, or that it will be the right kind.

--Former Secretary of State James Baker headed up an independent panel looking into British Petroleum and its safety problems and the report blasted BP for failing to provide oversight that could have prevented fatal accidents such as the Texas City, Texas, blast that killed 15 and injured 170 in 2005. BP has set aside a staggering $1.6 billion for victims of this accident.

--The 2007 Index of Economic Freedom is out, as put together by the Heritage Foundation and the Journal. The annual survey grades countries on a combination of factors including property rights protection, tax rates, "business freedom" (impact of regulation), monetary, fiscal and trade policy.

1. Hong Kong
2. Singapore
3. Australia
4. United States
5. New Zealand
6. United Kingdom
7. Ireland
8. Luxembourg
9. Switzerland
10. Canada

Chile is No. 11 and Japan No. 18, but out of 157 countries listed, China and Russia are at No. 119 and No. 120, respectively. I note Chile, a real success story, because by contrast Venezuela is No. 144. Others at the bottom include Iran at No. 150, Zimbabwe No. 154, Cuba No. 156 and last, and least, No. 157? NORTH KOREA! Kim Jong-il, take a bow.

--Not for nothing but Toyota sure has had a ton of recalls, the latest being one for over 500,000 vehicles. The company itself is scared to death?owners may suddenly wake up and the bloom could be off the rose.

--George Will wrote a piece on Boeing's success vs. Airbus and contained therein was a nugget I hadn't seen before. Federal Express says that 98% of the weight of international commerce is shipped by sea, but the 2% moved by air constitutes 40% of the economic value. The number of cargo aircraft is expected to explode over the coming years.

--Follow-up to last week when I mentioned mall developer Mills Corp. and its financial difficulties. This week it agreed to be acquired by Canadian investment company Brookfield Asset Management, with Brookfield assuming the $1 billion loan from Goldman Sachs that I had cited. Without a deal, Mills Corp. was facing bankruptcy.

--Verizon is continuing to spin off its landline business in exchange for a focus on providing Internet connections, wireless and television. It has also been shedding its Latin American operations, though at a substantial probable loss, witness Venezuela's move to nationalize the leading telecom in which Verizon has a 28% stake. But some of us in the New York City area have a major problem with omnipresent Verizon. Even reader Chris C. wrote in this week blasting the company for advertising "Unlimited Broadband/Wireless" when it is far from it. [Chris also noted that some new Dell laptops appear to limit broadband/wireless options to Verizon. Bring back the old Ma Bell, we say!]

--So a few weeks ago I recommended conservationsalmon.com as a source for obtaining true wild fish after receiving a note from a reader. I just have to comment that I thought the salmon was a little on the tough side initially until I learned to marinate it better, and cook it less, and that's done the trick. [I'm a teriyaki sauce guy, myself.] I know a fair number of you have tried the company and I hope the experience has been a good one. Us wild fish proponents need to stick together.

I only bring this up, though, because the Marine Aqualculture Task Force has unveiled guidelines for a new aquaculture industry, one that is expected to grow fivefold by 2020.

What it comes down to is offshore fish farmers will be allowed to lay claim to vast parcels of the sea, with 'farms' in colonies of undersea cages brimming with swimming livestock, anchored in U.S. waters from three to 200 miles from shore. It's hoped that this form of fish farming, which seems a heck of a lot more appetizing than what we deal with today, will reduce the nation's dependence on imports. More than 75% of all seafood eaten in the U.S. comes from other countries. [Anchorage Daily News]

--New York City Mayor Michael Bloomberg unveiled a $1 billion tax cut, $750 million of it coming in the form of property tax relief, the first such cut in these rates since 1983. But the 5% reduction follows an 18.5% hike he levied in 2003 and with revaluations since then, the impact is tiny when reduced to the small-home owner. Nonetheless, it sounds impressive and it's better than nothing.

But I just need to clarify something I wrote last week in discussing New York City's finances. Thanks to Wall Street, tax revenues could be as much as $1 billion higher than initially projected in the current fiscal year, far more than the $250 million I wrote of. Projections keep getting ratcheted up, just as they have been on the federal level. New York City does, however, still face severe fiscal problems down the road, especially during Wall Street's inevitable slumps, and Bloomberg emphasized the cut should be viewed as a one-time event.

--Tough time for those in the media business, particularly the editorial staffs at Time, People and Sports Illustrated. 172 editors at the three are among close to 300 positions being lopped off as print struggles to find a successful model in this Internet era. The New York Post reported that at Time, one insider said "Everyone is completely demoralized, and there is no work being done." I don't read Time, being a Newsweek guy myself, but this tells me 'don't waste your money on the next issue.'

It's sad. No doubt these are good people that have helped inform and entertain for decades. The severance packages I saw also looked pitiful.

Foreign Affairs

Venezuela: Last weekend President Hugo Chavez said his government would still allow some private investment in major oil projects that he otherwise plans to nationalize, though he added, "He who wants to stay on as our partner, we'll leave open the possibility to him. He who doesn't want to stay on as a minority partner, hand over the (oil) field and, goodbye. Goodbye, good luck and thank you very much." Most companies continue to invest despite tightening terms that have included tax and royalty increases.

Iran's President Ahmadinejad was in the region last weekend, visiting not just Chavez but also Nicaragua's new leader Daniel Ortega and Ecuador's newly installed President Rafael Correa. Chavez and Ahmadinejad announced a $2 billion fund to finance development, and, more appropriately, do all they can to stick it to the United States.

But in reading various editorials and reports on the Iran/Venezuela relationship, including from the Wall Street Journal and New York Times, I still can't believe most folks don't seem to get it. There is zero talk of Iranian agents infiltrating not just Venezuela but other compliant Latin American countries as well.

China: I couldn't help but read the stories on China's surprise shoot down of one of its aging weather satellites by a medium- range ballistic missile and think of all the missile technology the nation has stolen over the years and the duplicity of some of our own business leaders such as Loral's Bernard Schwartz. I harped on this topic for years (as did former Times' columnist William Safire) and was disappointed when political investigations, such as that overseen by current SEC Chairman Christopher Cox, ended with a wimper because, I suspect, it was hitting too close to home for some of them. [For my part I won't bring up the Clinton angle. But Safire railed that the missile secrets thefts were far more serious than any other transgressions during his administration.]

I also have to add that on 5/27/99 in my "Hott Spotts" column I wrote of Loral's and Hughes Electronics' culpability, with Loral's Schwartz the leading donor to the national Democratic Party at the time. Among other items over the years, I also noted in WIR on 6/4/05 the following:

"Years ago I was a big fan of (Christopher) Cox but have trouble forgiving him for his failure to follow through on an investigation into the sale of missile secrets to China when he was chairing a committee looking into the matter. Some offered at the time it was because dirty laundry was about to be aired concerning Cox himself."

So last week China performed this daring missile maneuver and it doesn't take a rocket scientist to begin to connect the dots, as some of us warned.

Back in 1985, the U.S. held its last anti-satellite test and then halted them for fears the debris could harm both civilian and military satellites orbiting the earth. At the time there was general agreement among the world's powers that the weaponization of space was off limits.

That's why China's test is so significant and why everyone from the United States, Japan, Canada and Australia have expressed outrage. Back in October, the State Department's chief arms control official, Robert Joseph, voiced concerns that other nations and possibly terrorist groups were "acquiring capabilities to counter, attack and defeat space systems. No nation, no non- state actor, should be under the illusion that the United States will tolerate a denial of our right to the use of space for peaceful purposes."

Of course more broadly speaking, China's successful take down of a vehicle 537 miles into space raises further troubling questions. The bottom line is I write constantly of China's advances on the military front, and threats directed towards Taiwan, for a reason.

While China needs to be engaged at all levels, including economically for obvious reasons, we can never forget the true nature of the regime. China has a totalitarian system bent on attaining military power to counteract U.S. influence in the region, particularly at sea. China is a growing threat?period.

The other week I wrote of China's complaint that the U.S. and Japan were drawing up plans to respond to a Chinese attack on Taiwan. A Chinese Foreign Ministry spokesman said then "China expresses serious concern over this. Taiwan is an inseparable part of China. Any arrangement or consideration should respect and abide by the principle of one China." [Defense News]

What concerns China these days is not an outright call for independence by Taiwan, but quasi-political moves and statements that give Taiwan "de facto independent status." China thus sees U.S. and Japan forward planning as a prelude to military intervention should China act.

But a former U.S. defense official told Defense News that in his view Washington has no obligation to defend Taiwan.

"It's dangerous to assume the U.S. would intervene, since it's a critical unknowable if the U.S. has the will or capability to intervene in the event of Chinese use of force. Without any assurance in writing in the form of a mutual defense treaty, one could prepare for U.S. intervention, and plan for ad hoc coalition operations, all of which has been going on since May 1999.

"The Taiwan Relations Act only calls for 'maintaining the capability' to intervene and to consult with Congress," the anonymous official said. "It's not a treaty, and President Bush's April 2001 statement to 'help Taiwan defend herself' is vague - 'help' could mean just providing intelligence, minesweeping, emergency supplies, etc."

I'm beginning to think the next occupant of the White House will have to deal with Taiwan. I disagree with the gentleman noted above. We are obligated to come to Taiwan's rescue in most circumstances, but the bigger issue will be whether or not the American people will allow it. I suspect not. And who in particular is left hanging, aside from the Taiwanese? Japan.

Back to China and its current leadership, on Monday Premier Wen Jiabao said of the six-party talks on North Korea and its weapons program, "Although (they) have met with difficulties, as long as each side works hard we can overcome the barriers and achieve the final target."

That is truly laughable. Premier Wen, all you have to do is jack Kim Jong-il up against the wall and read him the riot act as the North Koreans cannot survive without China's aid. But thus far you have refused to do that, this much is clear, and blowing a satellite out of the stratosphere, without any advance notice to the likes of Japan, speaks volumes in its own way.

But according to Christopher Hill, the chief U.S. nuclear negotiator, some progress was made in direct face-to-face talks between American and North Korean officials this past week in Berlin. We've heard this all before, but perhaps we'll finally get some good news on the geopolitical front. The North Korean crisis is not about the U.S. as much as it is about China's lack of cooperation and desire to see Washington sweat.

South Korea/North Korea: The top U.S. general in South Korea, who also serves as chief of the U.N. Command, warned that when America hands back wartime command over Seoul's forces it could jeopardize stability on the peninsula.

South Korea has requested it be given control of its own forces, which it turned over to the U.S.-led U.N. Command during the Korean War, with the transition taking place between 2009 and 2012.

But U.S. Army General B.B. Bell said any change in the alliance structure could hamper a response to a North Korean attack in terms of a quick mobilization of forces. Any crisis, says the general, "can almost instantaneously lead to combat operations."

You know why I'm bringing this up? As I read a piece in the South China Morning Post my thoughts immediately turned to how relatively easy it would be for North Korean agents to blackmail/bribe the top South Korean general, who thus compromised purposefully fails to act quickly in the initial moments after an attack as he's ferreted out of the country. Or maybe I'm just trying to hash out a plot for "24."

Separately, concerning Pyongyang, the Journal's Melanie Kirkpatrick wrote of a new U.N. scandal on the heels of Saddam Hussein's $100 billion Oil for Food scam; this one being the United Nations Development Program in North Korea. American officials have been digging into it and according to Ambassador Mark Wallace of the U.S. Mission to the U.N., the UNDP's program in North Korea "has for years operated in blatant violation of U.N. rules, served as a steady and large source of hard currency and other resources for the DPRK government with minimal or no assurance that UNDP funds and resources are utilized for legitimate development activities." The money involved could be as much as $100 million going directly into Kim's coffers, and his nuclear weapons program.

[In essence, the UNDP has been employing workers handpicked by the North Korean government itself, the latter thus gaining direct control of the flow of funds.]

Russia: The Kremlin is refusing to cooperate in Scotland Yard's investigation of the murder of Alexander Litvinenko. The Russkies' top prosecutor is insisting that his agents be allowed to question critics of President Vladimir Putin living in Britain. Yuri Chaika added "We don't rule out that the murder may have been committed by Russian citizens who live abroad." Relations between Britain and Russia continue to deteriorate and while I don't mean to be flippant about such a serious topic, it's times like these that you can understand why Prime Minister Tony Blair recently announced Britain would not give up its nuclear deterrent. It's a decision that's not about today?but somewhere down the road when Russia could very easily be ruled by someone far worse than Putin and the once unthinkable could be back on the table.

And in case you needed reminding on the true nature of today's Russian regime, this week Defense Minister Sergei Ivanov, a very bad guy as I've noted from time to time, admitted Russia had sold Iran 29 highly-sophisticated anti-aircraft missile systems, and that Russia would gladly sell Iran more if they asked, added Ivanov. Of course the United States and other Western nations had asked Russia not to do this. Instead they flipped us off.

Turkey: Last year, a Turkish-Armenian editor, Hrant Dink, was sentenced to six months, later suspended, for insulting Turkey's identity following his comments on the Armenian genocide during World War I. On Friday he was assassinated in Istanbul. Prime Minister Erdogan said "A bullet has been fired at democracy and freedom of expression?.This was an attack on our peace and stability." The killing could further doom Turkey's EU bid as the country also faces a contentious presidential election this spring amidst rising nationalism.

France: It's heating up?the race for president, that is. Two separate polls came up with the exact same result. In a second round of voting (the first is in April and will winnow down the field, assuming no one receives a majority then), Nicolas Sarkozy is ahead of Socialist Segolene Royal, 52-48. [In the first round the two are essentially tied with 30%, while far right candidate Jean-Marie Le Pen is favored by 15% of voters currently.]

Ms. Royal had to defend herself this week against charges that she may have been evading France's wealth tax which kicks in after household assets reach about $950,000, if my back of the envelope euro to dollars calculation is correct.

Britain: A top aide to Tony Blair was arrested for her role in the campaign finance scandal where Blair's party was 'loaned' money in return for seats in the House of Lords. The prime minister's last few months in office threaten to be a nightmare as the investigation is showing no signs of winding down.

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Pray for the men and women of our armed forces, and their families.

God bless America.

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Gold closed at $636
Oil, $51.99

Returns for the week 1/15-1/19

Dow Jones +0.1% [12565]
S&P 500 -0.0% [1430.50?down a fraction of a point]
S&P MidCap -0.5%
Russell 2000 -1.2%
Nasdaq -2.1% [2451]

Returns for the period 1/1/07-1/19/07

Dow Jones +0.8%
S&P 500 +0.9%
S&P MidCap +1.5%
Russell 2000 -0.3%
Nasdaq +1.5%

Bulls 50.5 [big drop]
Bears 22.1 [Source: Chartcraft / Investors Intelligence]

Have a great week. I appreciate your support.

Brian Trumbore

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