Week in Review 
For the week 1/22/2007 - 1/26/2007
Brian Trumbore
President/Editor, StocksandNews.com

Iran and Iraq

"This is not the fight we entered in Iraq, but it is the fight we're in. Every one of us wishes this war were over and won. Yet it would not be like us to leave our promises unkept, our friends abandoned and our own security at risk. Ladies and gentlemen, on this day, at this hour, it is still within our power to shape the outcome of this battle. Let us find our resolve and turn events toward victory."
--President George W. Bush, State of the Union, Jan. 23, 2007

On many levels the debate now taking place in the Senate is a good one and it's only going to heat up this coming week. But while I continue to support the troop surge, let me remind the president that the reason why many are skeptical of success has to do with the simple fact this administration has already been given one opportunity after another and failed.

I take you back to the way I started out this column on Nov. 15, 2003.

"The stunning victory in the war to remove Saddam has been followed by an almost equally stunning lack of seriousness about winning the peace, despite the vital importance of creating a stable, secure, and democratic Iraq."
--William Kristol and Robert Kagan / The Weekly Standard

Washington Post columnist Jim Hoagland added that the mission in Iraq is a "strangely unfocused U.S. campaign," while Senator Joseph Biden said Iraq is a "country in search of a strategy."

All of the above comments were made early in the week, before the White House suddenly shifted into hyper mode, sensing that the operation was spinning out of control.

And the solution itself appears to be speed, by their way of thinking; speed in shifting power to the Iraqi Governing Council, or a reasonable facsimile thereof, as quickly as possible, while signing up an Iraqi security force capable of replacing U.S. soldiers by 2005. But as Senator Biden says, "The faster we go, the more poorly trained and less legitimate the police and army will be. Putting them in charge is a recipe for failure." [Washington Post]

Senator John McCain, also in a Post op-ed piece:

"If our troop deployment schedules are more important than our staying power, we embolden our enemies and make it harder for our friends to take risks on our behalf?.President Bush speaks frequently of the need to take the offensive in the war on terror but in Iraq we too often appear to be playing defense."

McCain adds, the existing troop levels "preserve the illusion that we have sufficient forces in place to meet our objectives," and in the end "It is our responsibility to help create the security in which Iraqi politics can flourish. We can leave it to the Iraqis to decide what kind of tax code they should have."

[Continuing, 11/15/03]

For those Iraqis and Washington leaders looking for a more secure Iraq it was another debilitating week and I for one grow weary of some of the "happy talk" being fed us. I have never denied there is a ton of good taking place across Iraq, but you can not just slough off the horrible bombing in Nasiriyah that claimed 31 lives, including at last count 16 Italian policemen. Coupled with a blast in Basra that killed 6 Iraqis, it's quite apparent violence is no longer limited to the Sunni triangle, Nasiriyah and Basra being in the heretofore peaceful south.

Our president keeps telling us we will stay the course, and we can not afford to lose, yet by his failure to send more troops and recognize the problems in a post-war Iraq, we telegraph a mixed message. At least this week the U.S. military counterattacked with a vengeance and hinted at finally being able to identify just who the enemy is. But in some respects it's already too late as nations who once pledged substantial troops to the cause, such as Japan and South Korea, now want to hold off until the situation on the ground improves. It will, but only when the president decides to ignore the election cycle?the existence of which, incidentally, screams for a constitutional amendment changing the office of president to a single 4- or 6-year term. I can't be the only American ticked off to see our leader jetting about for all manner of campaign stops during a time of war.

Lastly, I leave you with the observations of Arab affairs expert Fouad Ajami from his op-ed in the November 17 issue of U.S. News & World Report.

"It is idle to debate now whether this was a war of choice or of necessity. We stand sentry here?having decapitated the old regime and pledged to build a better one in its place. Our truth is being redeemed in the most painful of ways - by predominantly young men and women who carry the heaviest of burdens - so many of whom have now made the ultimate sacrifice. The question of whether a single national society exists in Iraq is yet to be answered. The insurgency in the Sunni triangle is the rebellion and the rear-guard action of a terrible breed of people eager to restore their own hegemony and the reign of terror that came with it. To a great, liberal country free of tribal and sectarian feuds now falls the grim task of quelling a rebellion of the darkest atavism. Imperial power has always carried with it heartbreak. In the shade of these palm trees of Mesopotamia, the best of our young people give the Iraqis their first exposure to an army that does not plunder and terrorize. May our sacrifices in that land not be in vain."

---

That was 38 months ago. Sad, isn't it? And to those whose faulty memories continue to lead them to say John McCain is a Johnny come lately to criticizing the war effort while calling for more troops, I would also point you to my column of 8/23/03 where I reported on his comments from Iraq at that time.

But we are where we are, as everyone is so fond of saying these days. We've also had a rough week in terms of American casualties and it's far too early to tell if the crackdown on some militias we've been hearing of is a sign that Iraqi Prime Minister Nouri al-Maliki gets it or if he's just buying time for himself, waiting out the United States until it begins to withdraw.

For now the surge, even as limited as some of us see it to be, is coming and the impact this will have on the likes of Shia militia leader Moqtada al-Sadr is also yet to be seen. Sadr has shown signs of cooperating recently, but it's more likely he too is just trying to buy time as it appears he sent most of his forces to ground.

As for the debate in the Senate and the nonbinding resolutions working their way through various committees, it will be interesting to see just how many Republicans turn against the president aside from Chuck Hagel, John Warner, Susan Collins and a few others. Sen. Warner of Virginia said "The American GI was not trained, not sent over there, certainly not by resolution of this institution, to be placed in the middle of a fight between the Sunni and Shia and the wanton and just incomprehensible killing that's going on at this time. That's a mission that's important?but it should be performed by the Iraqi forces and not the coalition forces." [Wall Street Journal]

Conservative commentator David Brooks of the New York Times:

"I for one have become disillusioned with dreams of transforming Iraqi society from the top down. But it's not too late to steer the situation in a less bad direction. Increased American forces can do good - they are still, as David Ignatius says, the biggest militia on the block - provided they are directed toward realistic goals.

"There is one option that does approach Iraqi reality from the bottom up. That option recognizes that Iraq is broken and that its people are fleeing their homes to survive. It calls for a 'soft partition' of Iraq in order to bring political institutions into accord with the social facts - a central government to handle oil revenues and manage the currency, etc., but a country divided into separate sectarian areas to reduce contact and conflict. When the various groups in Bosnia finally separated, it became possible to negotiate a cold (if miserable) peace."

[Brooks acknowledges this is essentially the Biden plan.]

Editorial / Washington Post

"On Tuesday nearly every member of the Senate Foreign Relations Committee warmly endorsed Lt. Gen. David H. Petraeus, the new U.S. commander in Iraq, and a number wished him success or 'Godspeed' in his mission. Yesterday some of the same senators voted for a resolution that opposes the increase of troops for Gen. Petraeus's command - even though the general testified that he could not accomplish his mission without the additional forces and hinted that such a resolution could encourage the enemy. Such is the muddle of Congress on Iraq: A majority may soon go on record opposing the new offensive in Baghdad even while encouraging the commander who leads it?.

"But legislators need a better way to act on their opposition to the current policy than the passage of nonbinding resolutions that may cover them politically but have no practical impact - other than, perhaps, the negative one suggested by the general.

"As it happens, Gen. Petraeus made his own suggestion at Tuesday's hearing, offering to report to Congress regularly about the mission, including updates on the performance by Iraqis on their commitments. 'I want to assure you that should I determine that the new strategy cannot succeed, I will provide such an assessment,' he said. Taking Gen. Petraeus up on that, and closely and systematically monitoring the progress of events in Iraq during the coming months, is probably the best contribution that Congress can make to helping the new American commander address what he calls a 'dire' situation."

What we don't need from President Bush right now is more talk like that on Friday when he said "I'm the decision-maker." You'd think he'd have learned to tone down the rhetoric by now.

But when you talk of the war in Iraq and the broader one on terror, while President Bush likes to compare himself to Harry Truman, which many take issue with, Kenneth Walsh pointed out a truth in U.S. News & World Report.

"(Scholars) admit that if there are no more major terrorist attacks on the United States by the end of his presidency, Bush can argue that he accomplished his most vital mission - keeping America safe. That would be an accomplishment that historians couldn't ignore. Both Bush and Vice President Cheney have always linked the war in Iraq to the global war on terrorism. They say fighting in Iraq is keeping the 'evildoers' at bay and preventing them from taking their battle into the United States."

Turning to the issue of Iran, I have trouble with those who don't agree with the president on his pursuit of Iranian operatives in Iraq, but the pressure is immense to make sure that any who are captured or killed are indeed Revolutionary Guard members or agents. It's one thing to have a civilian casualty of war, it will be quite another to have one that, say, the Iraqi government would agree was a diplomatic operative or expert on the electricity grid.

It's also clear that as I've written for months now, the period between Feb. 11 and 20 is key; a time when I'm guessing Iran will formally announce its latest successes on the nuclear enrichment front. International Atomic Energy Agency chief Mohamed ElBaradei said as much on Friday, while President Mahmoud Ahmadinejad injected "Ten more UN resolutions will not affect our economy."

But clearly the UN sanctions and other moves by the West are having their intended impact as Ahmadinejad faces increasing pressure on the home front. Iran is drawing $52 billion in oil revenues these days and from the stories I'm reading, what upsets many of the mullahs and the Iranian president's prime rival, former president Hashemi Rafsanjani, is Ahmadinejad's use of the 'rainy day fund' to help pay for costly subsidies on bread, medicine and energy. In other words, he's bleeding it dry.

I have been urging the United States to talk to Rafsanjani, but in terms of the nuclear weapons program I've also said it's probably too late. This week, however, Rafsanjani met with British Ambassador Jeffrey Adams, even as Ahmadinejad lumps Britain in with Israel and the United States when he issues his threats.

According to the Tehran Times, Rafsanjani "stated that confidence building during talks with the West on the nuclear issue is possible but ruled out any preconditions for the resumption of talks." [That being the suspension of uranium enrichment.]

Then Rafsanjani told Ambassador Adams, "If any efforts were made to solve the problem through proper channels, Tehran would be ready for any type of verification process conducted by relevant authorities as a means to prove the peaceful nature of its nuclear program."

But with Iran's economy in a stupor, despite all the oil wealth, listen to Rafsanjani, as reported by the Tehran Times.

"Iran will not develop unless the Article 44 privatization plan is implemented and the private sector becomes involved, Expediency Council Chairman Rafsanjani said here on Monday.

"Supreme Leader Ayatollah Ali Khamenei issued a decree in early July to privatize state industries by amending Article 44 of the Constitution, which had banned private ownership of state institutions.

" 'The Supreme Leader expects the Article 44 policies to cause an economic revolution in the country,' Rafsanjani told a national seminar.

" 'The Leader has stated that after the (1979) Islamic Revolution, the situation did not allow us to take an appropriate measure for (future) economic developments, but at this stage we should harmonize our economy with the global economy as soon as possible,' he added.

"As the Leader has said, Iran should become a center of economic development in twenty years, he noted."

" 'We should bring about a noticeable change in the country. Otherwise, the countries which are less developed than us will surpass us,' the former president warned. 'We should activate the private sector in such a way that people can feel assured that the government will fully support their major investments.' He went on to say that there is an enormous amount of capital in Iran but 'we have not been able to use it properly because we have not adopted the policies necessary to encourage investment in the country.'

" 'We should take the private sector seriously?We should draft regulations to guarantee people's (financial) security and eliminate the laws that could create obstacles for them,' Rafsanjani suggested."

Because of statements like those above, it's been long known that of all the leaders in Iran, Rafsanjani is the most pragmatic. He also remains virulently anti-Israel, but since it seems clear to me he will soon take over for Ahmadinejad, the Bush administration can either choose to deal with him or not. We will be making a big mistake if we don't.

I imagine, though, that few Israelis would like to see this, but Vice Premier Shimon Peres, a veteran of 60 years of Israeli history, as he himself put it this week, told the Herzliya Conference, "I'm telling you - there have been harder days. Israel will not fall - Ahmadinejad will fall."

Peres disagrees with opposition leader and former prime minister Benjamin Netanyahu, the latter comparing the current situation to the eve of World War II.

"This is not 1938," said Peres. "It's not the way it was then. We will not sit on the sidelines, but we also do not need to jump." [Jerusalem Post]

Peres emphasized there was already an agreement to transfer 90% of the West Bank to the Palestinians, and that Israel was ready to deal. Of course Israel needs a partner on the other side of the negotiating table. U.S. News & World Report's Editor-in- Chief Mort Zuckerman has his doubts.

"The crux, as it has been all along, is Hamas's refusal to accept Israel's right to exist, which stems from a visceral hatred of Israel, the blood lust of popular resistance, the destructive influence of radical Islam, the interference of Iran, and the belief in so many Arab hearts that sooner or later Israel will disappear from the map because it has no right to exist.

"The U.S. role in this nightmare scenario ought to be clear, though it is anything but. Washington is banking on the hope that Palestinians will remove Hamas from power and strengthen President Abbas and Fatah. That, this hopelessly wishful thinking goes, would prepare the grounds for negotiations, which would then be confirmed by a referendum, after which a Palestinian state with temporary borders would be established.

"The presumption here is that Hamas will be contained and the security threat it represents eliminated - not a chance! We were foolish in believing that Hamas couldn't win an election, and we were dead wrong to overrule Israel's desire to retain control of the Gaza-Egyptian border, the source of so much of today's chaos.

"The American proposal for this spiraling crisis is worse than premature. It will damage our credibility and our influence. The last thing America needs in this increasingly dangerous part of the world is yet another demonstration of its naivete."

Newt Gingrich, addressing the same conference Shimon Peres did.

"Israel is facing the greatest danger for its survival since the 1967 victory. Three nuclear weapons is a second Holocaust. We have enemies who are quite explicit in their desire to destroy us. They say it publicly, on television, on Web sites. We are sleepwalking through this as though it is all a problem of communications, and that somehow diplomacy will enable us to come together and have a wonderful fiesta in which we will all learn to love one another." [Jerusalem Post]

There you have it. All sides of the Middle East debate. I would just reiterate, again, that I understand why President Bush doesn't want to talk to the likes of Ahmadinejad, let alone Hamas or Hizbullah. But to think that we can't open a dialogue with others is absurd. And I would suggest Bush missed a huge opportunity during the State of the Union when he couldn't find space for one line addressing the Iranian people directly, reaching out to them. Ahmadinejad is in trouble for a reason. The people are restless. It's time to talk to Rafsanjani.

---

Wall Street

Volatility picked up some, stocks fell a bit, and interest rates rose to their highest levels since last August amidst fears the economy's strength could lead to higher, not lower, interest rates down the road. Since most everyone has been counting on a cut by the Federal Reserve the first half of the year, the first of many depending on who you're talking to, this has caused a bit of indigestion.

Case in point, housing. Unbelievably, some took the December data for existing and new home sales, mixed at best, as yet another sign the all-clear signal has been issued. Wrong.

Existing home sales were slightly worse than expected and down 8.4% for all of 2006, the worst performance in over 20 years, while new home sales were a little better than expected but still off 17.5% for '06, the worst performance here since 1990.

As for the important median sales price data, call both existing and new home figures unchanged over the course of the past year; which means some were up slightly, and some were down. But recall the market really didn't start topping out in a big way until last spring and summer so the more meaningful comparisons are yet to come.

For now, though, rely on what the homebuilders themselves are saying.

Beazer Homes: We have "yet to see any meaningful evidence of a sustainable recovery in the housing market."

D.R. Horton's CEO: "Most downturns are longer and deeper (than people expect), and right now we are not seeing anything on the horizon to change that opinion."

WCI Communities' CEO, WCI specializing in tower residences and communities in Florida: We have seen a "higher level of defaults than expected (and) cancellations are outnumbering new orders."

And this from a Goldman Sachs analyst: "The worst may be past, but the housing market remains troubling."

Additionally, defaults are clearly rising, substantially, as in up 145% in California for the 4th quarter. But to be fair this is a poor comparison off what was still a solid market one year earlier. Again, better ones will emerge later.

But think about it. Not only has the bubble cracked, but the unease is in an environment where employment can't get any better. So what happens when the job picture gets truly iffy? Plus this recent rise in rates is killing any chance of a sustainable recovery. It's still largely about affordability, remember.

I promised you a break on all the housing talk, though, and that you'll get the next few weeks until the data for January, figures that mercifully won't include summer-like December weather in the northeast that distorted the true facts.

So let's turn to energy, shall we? In his State of the Union address, President Bush proposed a bunch of new government programs designed to regulate what we drive and what fuels to use, while at the same time not mandating new fuel-efficiency standards; rather he made some assumptions that the auto industry will become 4% more fuel efficient with each passing year.

And then there's ethanol. Watching Tuesday, you'd have thought Iowa Sen. Chuck Grassley had won the lottery with the jig he did in the aisle when Bush mentioned that ethanol was the cure for all our nation's ills, and by gosh, Grassley should be one happy land crab because anyone with decent soil and any kind of growing season, like Iowa's, can now grow corn and profit forever?or so we've been told. I've touched on it in the past, but ethanol is a sham. Many have already figured this out and countless others will in the near future. Other synthetic fuels, some of which have yet to be developed to their potential, may on the other hand be wild successes.

What is also increasingly clear, though, is the free market is beginning to work, as it is wont to do, and Corporate America is clambering aboard the Clean Energy Express. Yes, those multi- millionaire CEOs are beginning to stir because they know if they don't act they'll be passed by. This is a global movement, after all, and this week even the Chinese government said one way to cool its white-hot economy was to crack down on pollution deadbeats and begin to close unnecessary smoke-belching factories.

What's also interesting to observe is seeing conservatives suddenly jump on the gasoline tax bandwagon. They don't come any more conservative than the Washington Post's Charles Krauthammer and on Friday he wrote:

"There are three serious things we can do now: Tax gas. Drill in the Arctic. Go nuclear."

Sure, the free market will at the same time pursue other alternatives, whether it's hybrid cars, biofuels, and solar or wind power, but in the immediate term even I have accepted that we should tax gasoline.

Krauthammer:

"The president ostentatiously rolled out his 20-in-10 plan: reducing gasoline consumption by 20% in 10 years. This with Rube Goldberg regulation - fuel-efficiency standards, artificially mandated levels of 'renewable and alternative fuels in 2017' and various bribes (err, incentives) for government-favored technologies - of the kind we have been trying for three decades.

"Good grief. I can give you 20-in-2: Tax gas to $4 a gallon. With oil prices having fallen to $55 a barrel, now is the time. The effect of a gas-tax hike will be seen in less than two years, and you don't even have to go back to the 1970s and the subsequent radical reduction in consumption to see how. Just look at last summer. Gas prices spike to $3 - with the premium going to Vladimir Putin, Hugo Chavez and assorted sheikhs rather than the U.S. Treasury - and, presto, SUV sales plunge, the Prius is cool and car ads once again begin featuring miles- per-gallon ratings.

"No regulator, no fuel-efficiency standards, no presidential exhortations, no grand experiments with switch grass. Raise the price, and people change their habits. It's the essence of capitalism."

At the same time I've always agreed with Krauthammer's second conclusion?drill in the Arctic. Even if it's 'just' a million barrels a day it would be 5% of current consumption. We then wouldn't have to screw around with another of the president's proposals?increasing the Strategic Petroleum Reserve from its current 55 day supply of net oil imports to closer to 100 days. For starters, the White House is calling for this by 2027 and who the heck knows what the situation will be then, or what new technologies will be prevalent. I just note the 100 day figure because that's what the administration said, but it is deeply flawed, just like any budget projection over one year is.

As for Krauthammer's third suggestion, going nuclear, it is amazing how many decades we've wasted on this topic. Last I recall, no one died at Three Mile Island and in the intervening years hundreds have perished crossing some of New York City's more dangerous intersections.

But back to oil, we can talk about alternatives and reducing consumption through taxes and/or increased fuel efficiency, yet the fact is we're still going to be using gobs of it for decades to come, as will the likes of China and India.

So while President Bush touts "energy independence," oil expert Daniel Yergin responds.

"How dependent is the U.S.? If we look at total energy - including coal, nuclear and a small but growing share from renewables - the country is over 70% self-sufficient (already). Oil?is where most of the current dependence comes from. The risks do not owe to direct imports from the Middle East, contrary to the widespread belief. Some 81% of oil imports do not come from that region. Thus, only 19% of imports - and 12% of total petroleum consumption - originates in the Middle East.

"Our largest source of oil imports is Canada. It's also the source of most of our current natural gas imports, via pipelines. One can hardly say that either Canada or energy imports from Canada constitute a major threat to national security?.Our second largest source is Mexico, with which we are also in a dense relationship."

Well it gets more complex after that, thanks to Venezuela, but as Yergin points out, "the source of imports is significant only up to a point. Energy security is a global issue. Although oil around the world varies greatly in terms of physical qualities and transportation costs, there is only one world oil market. So disruptions and loss of supply in one place radiate throughout the global market - and global politics - affecting consumers everywhere. Even if the U.S. did not import a drop of oil, it would still be vulnerable to turmoil involving oil outside its borders."

One last note on crude. Those saying we are awash in it in terms of future reserves (including Yergin, actually) are wrong. For some time I've been talking about production issues in Norway and Mexico, two rather important players, and my friends at Strategic Energy Research dug up some great stuff concerning Mexico's all-important Cantarell field that is the source of 60% of that nation's proven reserves.

"The progressive decline in Mexico's capacity to produce oil is rapidly becoming more worrisome than the slump in global crude prices," notes El Universal. "According to estimates by the state oil company, Pemex, petroleum exports will decline dramatically during the Calderon administration."

Pemex spent $4 billion on exploration last year and came up dry. But as a former Pemex director put it, "it might be time for us to learn from the experience of other international producers and redouble our exploration efforts. It is impossible to ignore the fact that our reserves are rapidly shrinking."

Who benefits? One would think the drillers and oil-service companies, wouldn't you?

Street Bytes

--The major averages lost some ground with the Dow Jones declining 0.6% to 12487 after hitting a new all-time high of 12621. The S&P 500 also lost 0.6% to 1422 and Nasdaq dropped 0.7% to 2435. Earnings were important, as noted below, but in the end it was about the Fed.

--U.S. Treasury Yields

6-mo. 5.17% 2-yr. 4.97% 10-yr. 4.88% 30-yr. 4.98%

Rates rose, in the case of the 10-year to its highest level since August, on what was seen as better than expected news on housing, a solid durable goods figure, and increased inflation pressures. On this last point there is no inflation to be concerned with, for crying out loud, but the bond market will latch onto the fact that when the Fed issues its statement on Tuesday it will leave the bias towards tightening in place.

--On the earnings front:

Ford's loss for all of 2006 was a company record $12.7 billion and the outlook for 2007 isn't much better, though actual losses shouldn't approach 2006's level due to the fact Ford has already written off everything but the kitchen sink. [Meanwhile, General Motors announced it was still trying to figure out its books and it was delaying its report.]

It's interesting to note, though, that Ford's sales in North America were just $15 billion in the 4th quarter vs. $21 billion a year earlier, but while North America continues to account for a lion's share of the company's red ink, Ford, like General Motors, continues to earn money in Europe and South America.

Microsoft's earnings numbers were decent as Xbox 360 videogame consoles flew off the shelves, accounting for a 76% jump in revenue for the entertainment division, but otherwise it's all about the launch on Tuesday of the new Vista operating system. This is the driver going forward and I would expect Microsoft to have a bang up year, but at the same time the stock isn't cheap?over 20 times expected earnings?so the value investor in me just doesn't see much upside unless we enter a stirring new bull phase for the market overall.

Yahoo's 4th quarter topped estimates, though 4th quarter profit declined 61% over a year ago. But shares rallied a bit on news its upgraded advertising program is about to be launched. [I'm underwhelmed by this new project.]

Advanced Micro Devices had previously warned its 4th quarter results would be miserable, but it's now apparent the price war in the chip market is having a far greater impact than even the company once thought as it reported the gross profit margin fell to 36.1% from 46.4% a year earlier. Shares in AMD plummeted anew.

But Sun Microsystems returned to profitability as the server king earned 3 cents per share, $126 million, vs. a loss of $223 million a year ago. Analysts, though, are waiting to see if Sun can have two positive quarters in a row.

The new Alcatel-Lucent continued the tradition of the U.S. partner as it warned 4th quarter revenues would fall far short of expectations. CEO Patricia Russo, from the Lucent side, said "In the past few months, (the merger) created short-term uncertainty for our customers and for our people as we worked to develop the combined company's product portfolio and new organization structure." Well, that was to be expected, Ms. Russo. But you're still falling short by about 20%.

--Pfizer said previously announced job cuts would amount to 10%, or 10,000 workers, as a result of generic drug competition, expiring patents and a pipeline of new medicines that is expected to generate just half the revenue lost from the older drugs. By 2008, Pfizer is expected to have 48 plants overall, down from 93 in 2003.

--Americans have been driving less. Per-driver mileage was down 0.4% in 2005 and Los Angeles-area mass transit ridership is up 6%

--The European Union is increasingly concerned with Russia's attempts to forge a natural gas cartel with Algeria; Russia supplying 25% of Europe's needs while Algeria is responsible for 10%.

--Chinese authorities are warning of a stock market bubble as it was announced the economy grew 10.7% in the 4th quarter. Price-earnings multiples on the Shanghai Exchange are double the average of other emerging markets following a 130% rise in 2006. The government cautioned "blind optimism" is driving gains.

Separately, China's number of Internet users could surpass that of the United States in two years. Last year the number surfing the Web in China hit 137 million vs. 210 million in the States.

But, President Hu Jintao vowed to "purify" the Net. The Communist Party had to "strengthen administration and development of our country's Internet culture," Hu said. "We must promote civilized running and use of the Internet and purify the Internet environment." [South China Morning Post]

--Home Depot announced it would pay Robert Nardelli's successor, Frank Blake, up to $8.9 million this year assuming he meets certain performance targets. Nardelli was paid $225 million over his six-year term, plus he left with a $210 million severance package. Blake's contract, aside from not only being fair considering the size of the operation he's handling, does not contain a severance package. So hat's off to Home Depot.

--Merrill Lynch CEO Stan O'Neal is taking home $48 million for his efforts last year, a cool 30% hike from 2005. Of course by my back of the beer coaster calculation, O'Neal is earning about 1,000 times the average American worker's pay.

--Last week I wrote of the layoffs at Time Inc., but I just saw where Detroit's automakers had slashed their advertising budgets with Time's offerings by more than $100 million last year, with General Motors responsible for almost half of this total.

--Electronic trading has hit the floor of the New York Stock Exchange with a vengeance and the specialist firms are slashing staffs. One of the larger ones, Van der Moolen Holdings, said it would cut its work force by about 30%. It's getting embarrassing for CNBC to be broadcasting from there and I'm thinking I might use some of the now-empty space to store my books.

--In a piece on the divide between the haves and have nots, Barron's Michael Santoli had this tidbit. According to the Economic Policy Institute, "the richest 1% of Americans had net wealth 190 times that of the median household, up from a ratio of 168 in 1998 and 131 in 1983. The top 1% owned 37% of all domestic stocks held by individuals in 2004, and the top 10% owned 79% of all stock."

Santoli doesn't mention this but the above helps prove my point that the dividend tax cut should be done away with, while keeping the Bush tax cuts on income and capital gains.

--According to Bloomberg News, Apple CEO Steve Jobs has been questioned by the SEC about the backdating of stock options issue. Assuming there has been some wrongdoing here, I still like my idea of suspending Mr. Jobs for a year. It wouldn't kill Apple or hurt its shareholders that much, but it would certainly send the right message.

As for the backdating issue in general, a study by academics at Portland State University and the University of Utah estimated that by 2002, over 40% of corporations in America were backdating options; the authors having gleaned this by focusing on boardroom behavior. Specifically, the fact so many members are on multiple boards and if you found backdating at one corporation you could assume the chances were good it existed at other companies where a tainted board member sat. [Mark Hulbert / New York Times]

And along these lines, Broadcom announced it would be restating financial results by $2.24 billion to account for what the Journal described as "slapdash options-granting procedures" from 1998 to 2003. Today's investors didn't seem to care, however, even though prior ones were being fed fraudulent data.

--Last week I noted it was amazing what General Electric got away with in its earnings statements, so by way of follow-up I have to cite some passages from a piece by the Journal's Kathryn Kranhold that I saw after I posted my own thoughts.

"(GE's) 4th quarter earnings?caused concern among investors and analysts who noted that the company again got a boost from a lower-than-expected tax rate?.

"Analysts estimated that lower tax rates at GE's industrial and financial business boosted earnings by three to four cents. 'A Rubik's Cube may in fact be easier to figure out' than the meaning of GE's results, wrote Scott Davis, an analyst with Morgan Stanley."

GE, you'll recall, had also restated earnings back to 2001 due to a new way of looking at the accounting of its derivatives positions. "GE believed it was following proper procedures. But the SEC's chief accounting officer disagreed, prompting the restatement."

--Sam Ali of the Star-Ledger (N.J.) had a story on real estate commissions and the disputes that can arise and I have to admit I had no idea of the following regarding brokers and buyers.

"For example, have you ever called an agent or a broker for information about a listing? Given an agent your contact information? Toured one or more homes with one or more salespersons?

"Then you may have unknowingly gotten married to that agent, says Tom Wemett, a founding member of the National Association of Exclusive Buyer Agents?

"Even typing your e-mail address over the Internet to receive information about a listing from an agent can result in a claim by that agent to be paid a commission, even if you wind up buying that property through another agent, or even the seller."

Bottom line?if you're at an open house don't give out any information except perhaps your name. J. Fred Muggs would probably do the trick.

--New York City's financial picture continues to get better by the minute as a result of Wall Street's riches. Now the budget surplus is expected to be $4 billion. But the ever cautious businessman/mayor, Michael Bloomberg, is defraying at least $1.4 billion to deal with projected shortfalls in 2009.

--Some of us are getting a real kick over the flap concerning CNBC's Maria Bartiromo and her relationship (all business, we're told) with recently-fired Citigroup executive Todd Thomson. For starters, Thomson was a poster-boy for arrogance and hubris on Wall Street.

From the Wall Street Journal:

"An angry (Citigroup CEO Chuck) Prince told Citigroup directors last week that the expense (of giving Ms. Bartiromo a lift on the corporate jet) was among a number of lapses of judgment by Mr. Thomson - from improper use of Citigroup's plane to installing a wood-burning fireplace in his office to spending Citigroup money on functions featuring Ms. Bartiromo, according to a person familiar with the situation?.

"Inside the bank, Mr. Thomson's friendship with Ms. Bartiromo became an issue. When (senior executive Robert) Druskin, then Citigroup's investment-banking chief, took his management team to a holiday dinner in 2005 at the ritzy Daniel restaurant, he spotted Mr. Thomson having dinner with the CNBC anchor, according to people familiar with the situation. Word of the sighting spread through Citigroup the next day."

Thomson had been told to reduce his contact with Bartiromo, but he always had an explanation as to why it was good for business. The payoff, though, was a flight in the corporate Gulfstream that Bartiromo took with Thomson from Asia last year. While CNBC compensated Citigroup for the lift, Thomson bumped senior executives from the flight at the last minute so that he could fly solo with Bartiromo. Well, you can imagine the daggers were out then. For her part, Maria said it was all about "source development."

I have to admit I feel a little sorry for her. Certainly Bartiromo's career trajectory has been one to admire, but she's exhibiting some very poor judgment. [Meanwhile, Todd Thomson was replaced as head of the Global Wealth Management division by Sallie Krawcheck, who had been Citigroup's CFO.]

--Wohhh?if you're an investment banker in Britain and just had a banner year in terms of your bonus (over $17 billion in bonuses were handed out to London bankers in '06), you don't want to go through a divorce in Britain, according to Bloomberg News. A judgment involving an antique dealer and his wife "may let ex- wives claim a portion of payouts awarded long after a breakup, burnishing London's reputation as a top venue for big-money divorce settlements." A court ruling classified bonuses earned "at least" 12 months after separation as marital assets. That leaves it open for wives to claim half of future bonuses. And pre-nuptial agreements aren't binding in the U.K., as we've learned from various celebrity breakups there, right sports fans?

Foreign Affairs

Lebanon: What a horrible week as two separate incidents claimed at least seven lives in clashes between pro-government and Hizbullah-led forces. In his State of the Union address, President Bush once more referred to the plight of Lebanon, tying it to the theme "nothing is more important than for America to succeed in the Middle East," a statement that while true continues to infuriate me because of the White House's total disengagement following the Cedar Revolution in the wake of the assassination of former prime minister Rafik Hariri. And I'll say again, the Bush administration's failure to intercede in the conflict between Israel and Hizbullah was criminal and obviously helped sow the seeds for the crisis that followed.

This week we had a general strike on Tuesday, called for by Hizbullah's Sheikh Nasrallah, which resulted in the death of three protesters in clashes in the heart of Beirut's financial district. Then on Thursday, two students, one Sunni and one Shia, got into an argument at Beirut's Arab University, one spat at the other, and within minutes it escalated into a brutal riot, with vigilantes carrying chair legs, pipes and chains. Snipers also manned rooftops and the result was four dead and over 150 wounded, including many members of the Lebanese Army which has been rather busy lately.

All of this was occurring as Prime Minister Fouad Siniora, who has heroically refused to buckle under Hizbullah pressure, was in Paris seeking donations for the rebuilding of his country following the war, as well as debt relief; Lebanon owing a staggering $41 billion to its creditors. Despite Thursday's violence some $7.6 billion was pledged, most of it by Saudi Arabia (a major backer of Rafik Hariri), the U.S., France and the EU. Lebanon faces default on a $7 billion interest payment at the end of this current quarter.

Rami Khouri / Daily Star (Beirut)

"In Lebanon the Siniora government and the Hizbullah-led opposition are fighting an intense battle on many fronts, just as the Hamas and Fatah camps square off in Palestine. They do so as part of a local political power struggle, but also explicitly as part of the wider confrontation between the U.S. and Iran-Syria. The fact that these face-offs now occur with Arab countries, rather than between different countries, reflects a bizarre reality: Most Arab countries - in some cases half a century or more after their birth - still have not achieved stable statehood based on the collective allegiance of satisfied citizens. Different groups not only compete for political control of the government, but for the even more basic ideological definition of the state and its policies." [As best exemplified by the clash between Hamas and Fatah.] "There is simply too large a gap between Hamas' refusal to recognize and deal with Israel and Fatah's insistence on resuming peace talks with Israel for this to be bridged by a vague national unity government agreement whose main advantage is diplomatic imprecision."

[One sidebar to the Lebanese aid effort; kudos to Cisco Systems' CEO John Chambers who is pledging $10 million to expand computer training that he hopes generates up to 3,000 new jobs over the next few years.]

China: For over 10 days China said nothing about its successful test to destroy one of its satellites and some wondered if President Hu Jintao himself even knew of the timing of it. As the New York Times' David Sanger and Joseph Kahn reported, "The mysteries surrounding China's silence are reminiscent of the Cold War, when every case of muscle-flexing by competing powers was examined for evidence of a deeper agenda."

Eventually, the Chinese issued a statement that "this was not meant as a threat against anybody and it's not meant to spark a race to militarize space."

But Peter Brookes noted the following in an op-ed for the New York Post as to why the "satellite-killer" launch caused so much heartburn.

"The missile test, launched from the Xichang Space Center in central China, was unannounced and appeared to have taken place without the prior consultation of other countries with space-based assets, such as the United States.

"The destruction of the target created a major debris field - 'space junk': hundreds of metal objects that could damage other space vehicles that come into its path, including satellites or even the space shuttle.

"China has long pushed for a ban on space-based weapons and voiced strong opposition to any 'weaponization of space' at the United Nations - and elsewhere. This launch totally flies in the face of all that rhetoric.

"The successful test means China not only can track but also can destroy low-Earth-orbit satellites, such as weather, communications, surveillance and global-positioning satellites. This could seriously hamper U.S. military operations.

"The Pentagon believes Beijing is developing laser and/or radio- frequency weapons, which would enhance its ASAT capabilities. Thus, China could eventually threaten other critical orbiting military satellites, including high-value spy-sats. Beijing may have 'lazed' - pulsed with a high-intensity laser - one of our imagery satellites last year."

North Korea: Once again we are seeing optimistic statements regarding the prospects for a resolution to the nuclear weapons program stalemate. South Korea's foreign minister said Pyongyang was showing "flexibility" to a "proactive" offer by the U.S. and the South. We've heard this before, and we all know it's really up to China?so we wait 24 hours.

Afghanistan: The New York Times' Carlotta Gall had a powerful piece last Sunday on the support Pakistan's intelligence agencies are giving the Taliban in strongholds such as Quetta. "The Pakistanis are actively supporting the Taliban," one Western diplomat told Ms. Gall in Kabul. [Ms. Gall was also roughed up by what were presumed to be ISI agents.]

And as noted last week, the White House is preparing a package of aid for Afghanistan in the amount of at least $7 billion mostly for infrastructure projects. The U.S. and its NATO allies are concerned about a spring Taliban offensive.

I just have to add that at least the White House recognizes the importance of good roads when it comes to development anywhere. I think back to the Clinton administration when it would promote buying PCs for Africa; one of Al Gore's pet projects. Good roads and clean water had to come first! I wrote back then. Let alone the fact that in those days it was pretty hard to foster computer usage where there was no electricity.

Serbia: One of my predictions for 2007 was that the Balkans would reemerge as an issue and Sunday's election results in Serbia certainly don't dispel this thesis. The Radicals, who once ruled together with Milosevic, captured the leading share, 28.7%, to give them 81 seats in Serbia's 250-seat parliament. While it's still expected a pro-Western coalition will emerge, it needs to be noted the Radicals are led by Vojislav Seselj, who is awaiting trial at The Hague for war crimes.

With this vote, however, attention will now be focused on Kosovo, with the U.S. and its European allies supporting Kosovo's permanent secession from Serbia under international supervision; which could occur as early as this summer. Under the plan NATO would continue to patrol the new state to help protect minorities, particularly the remaining Serbs who face Albanian retribution. [Albanians comprise 90% of Kosovo.]

For its part, Serbia's leaders have campaigned against separation and have been relying on its protector, Russia, to veto the matter when it's presented to the UN Security Council for a vote.

But as reported by R. Jeffrey Smith in the Washington Post, Moscow "is prepared to support (separation) in exchange for U.S. and European acquiescence to the formal secession of two Russian-backed regions of Georgia." Thankfully the White House opposes this, but it will be interesting to see how it plays out.

Russia: Speaking of Georgia, the Kremlin lashed out at a report that Tblisi foiled an effort by a Russian man to sell weapons- grade uranium, which casts doubt on whether Russia can secure its nuclear materials.

What has come to light is an effort about a year ago where U.S. and Georgian authorities set up a sting operation that led to the arrest of a Russian citizen with 3.5 ounces of highly enriched uranium, suitable for use in an atomic bomb, though not nearly enough to pull it off. It appears the story was released to the AP to build up Georgia's image as an ally of the United States, and also to showcase Russia's status as a nuclear supermarket.

But Russia had a great week on the nuclear power front. While Washington and New Delhi recently concluded an agreement to share civilian nuclear technology for the purposes of helping India build modern nuclear reactors, Vladimir Putin concluded his own deal with his Indian counterpart, Manmohan Singh, to build at least four here in a deal worth over $10 billion.

The package is not complete, though, without India receiving the approval of all members of the Nuclear Suppliers Group - 45 countries that possess nuclear technology and regulate international trade in the field. Washington may now decide to delay its cooperation until it can ascertain which sites may be applicable for its own deals with Delhi. While the Russia-India agreement is a blow to the U.S., it can still gain its fair share of what promises to be a huge market.

Venezuela: President Hugo Chavez told his weekly radio and television audience that the U.S. can "Go to hell, gringos!" while calling Condoleezza Rice "missy" in attacking U.S. intentions in the Middle East.

"What does the empire want? Condoleezza said it. How are you? You've forgotten me, missy?Condoleezza said it clearly, it's about creating a new geopolitical" map in the Middle East, Chavez said. [USA Today]

Looks like Hugo will be in the running for "Dirtball of the Year." Chavez also said his government will not pay market value for Venezuela's largest telecommunications company, CANTV, of which Verizon holds a 28.5% stake. "I'll pay when the law dictates and in the form the government decides."

Turkey: This is a troubled place these days and this spring's elections could be volatile, but at least there was a bit of good news in the fact that 100,000 mourners turned out for the funeral procession of Hrant Dink, the Armenian journalist gunned down in Istanbul. Most were on hand to show support for a more open and liberal Turkey, but the nationalist movement in the country is still a most powerful, and dangerous, one.

Mexico: President Felipe Calderon is off to a good start, at least in the eyes of many in America, as he extradited four major drug traffickers to the U.S. in a sign he would deliver on a promise for more cooperation in fighting cross-border crime. U.S. Ambassador Tony Garza said "I cannot say enough about the extraordinary leadership, courage and conviction demonstrated by President Calderon."

Libya: It's been a long time since I mentioned this place, which is normally a good sign. Today, though, if you are a government worker here you're on pins and needles. Col. Muammar Qaddafi's regime is prepared to lay off 400,000, or more than a third of its work force, to ease budget pressures and stimulate the private sector.

Actually it's not too bad a deal. "Each public employee who is laid off will be given a full salary for three years or will be granted up to $40,800 in loans to start a business." No word on whether there is a third choice, the curtain where Carol Merrill is standing.

France: The race for president is a hot one and I got a kick out of a gaffe by Socialist candidate Segolene Royal. As reported by Adam Sage in the London Times, Royal was asked how many ballistic nuclear missile-carrying submarines France possessed.

"One," she said. "In fact, it is seven," said the journalist interviewing her. "Ah yes, seven," she replied. Page reports the true figure is four.

---

Pray for the men and women of our armed forces.

God bless America.

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Gold closed at $651
Oil, $55.20

Returns for the week 1/22-1/26

Dow Jones -0.6% [12487]
S&P 500 -0.6% [1422]
S&P MidCap +0.3%
Russell 2000 +0.4%
Nasdaq -0.7% [2435]

Returns for the period 1/1/07-1/26/07

Dow Jones +0.2%
S&P 500 +0.3%
S&P MidCap +1.9%
Russell 2000 +0.1%
Nasdaq +0.8%

Bulls 52.7
Bears 20.9 [Source: Chartcraft / Investors Intelligence]

Have a great week. I appreciate your support.

Brian Trumbore

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