Week in Review 
For the week 2/12/2007 - 2/16/2007
Brian Trumbore
President/Editor, StocksandNews.com

Diplomacy and North Korea

I believe in talking to one's adversaries. I believe in diplomacy and negotiation if for no other reason than to flush out your opponent's position for all to see; have everyone lay their cards on the table and then you decide how best to proceed.

But throughout history diplomacy hasn't always worked, as in 1938 and the Munich Agreement, thanks to one party or another being duped.

Such may possibly be the case with the just concluded arrangement at the six-party talks over North Korea's nuclear weapons program, though my adage of 'wait 24 hours' should probably be applied in the interest of fairness. My guess just happens to be that shining more light isn't likely to brighten the picture any.

Here's what we do know. Kim Jong-il will initially receive 50,000 tons of badly needed fuel oil, with another 950,000 tons to come if in 60 days North Korea seals its reactor at Yongbyon and begins accounting for other nuclear weapons-related activity. That's basically it.

Under the agreement, North Korea keeps its existing nuclear weapons (generally thought to be up to 12), while Pyongyang's initial reaction to the papers signed in Beijing was to call it merely a "temporary suspension" on work at its disputed facilities.

The White House says that nonetheless this is an important first step, and indeed it may well be; that North Korea can receive more cash (in terms of a reduction in financial sanctions) and prizes (food, oil and security guarantees) if it does in fact go on to dismantle the nukes.

But as of today it doesn't have to, so it just buys more time and further opportunities to hold up the United States, and to a lesser extent the other parties at the table, for greater concessions.

Former UN Ambassador John Bolton immediately blasted the deal, saying the "(risk of war) is greater on the Korean Peninsula" than ever before in providing Kim benefits for minimal effort. "(It's) a charade; gives people the illusion of success," said Bolton, adding it also says to Iran "you can wear the United States down." Mr. Bolton is spot on when he observes that all we've seen is "change after change after change in U.S. policy."

For its part the White House is trying to convince us this is a better deal than the unmitigated disaster worked out by the Clinton administration, but it's nothing more than more of the same.

The fact is North Korea has nuclear weapons activities taking place at far more locations than just Yongbyon and the negotiations to open these up will be tortuous.

The other problem is if this had been a one-on-one negotiation just between the U.S. and North Korea, from the start, then if you were so inclined you could simply call it a good or bad deal. But South Korea, Japan, Russia and China are also involved. Japan is basically on our side, seeking even tougher sanctions on the North, Seoul and Beijing are placating Kim for different reasons, while Russia is ambivalent.

Both Russia and China are not ambivalent when it comes to the issue of Iran and its weapons program. And as John Bolton correctly states, this is where the North Korean framework hurts the United States. The mullahs would be idiots not to hold us up, while at the same time the Bush administration will receive zero real cooperation from Moscow and Beijing; the former wanting to keep its lucrative contracts with Iran as well as the formation of a possible natural gas cartel (I'm not worried about this last one, however), while China desperately needs Iran's oil so of course it's not about to fully support any hard line taken by the White House.

Now, as the UN Security Council resolution on the suspension of Iran's uranium enrichment activities reaches its deadline next week, Iran is reportedly going to show the International Atomic Energy Agency that it has only produced a small amount of lower-enriched uranium in order to keep the heat off for a while longer. But this fails to address Iran's other activities on the weapons front, at other facilities, and the IAEA is set to lay out further instances of stonewalling on Tehran's part when it releases its report to the Council by Feb. 23.

While I admit I haven't given the following conclusion as much thought as I'd like to, my gut reaction is for the U.S. to scuttle both the six-party framework with North Korea (once the North inevitably jerks us around) as well as the European-led effort over Tehran and deal directly with both, solo. I fail to see what we've gained with this North Korean agreement, and I'm afraid President Bush has telegraphed his intentions to Iran over any coming agreement there.

But perhaps one part of the Iranian story is true; that U.S. and Israeli intelligence have been feeding them bad parts to slow progress on the enrichment front. One can only hope.

What we do know is that for 18 years Iran hid from the world, and the experts, a nascent nuclear weapons program and there is zero reason to believe anything the Iranians say today. At the same time Iran does have a right to nuclear power, but only under a responsible regime.

In this regard, we know that President Ahmadinejad is skating on increasingly thin ice, which is probably why he did not announce a breakthrough on Feb. 11 as I thought he would. Glitches and/or the fa?ade of only producing lower-grade uranium? Perhaps. Political pressure to tone down the rhetoric? Likely.

So, I say again, it's time for the U.S. to open direct talks with Ahmadinejad's rival, Hashemi Rafsanjani, and end-run the Iranian president. Flush out Iran's position?but do it alone. The initial sanctions were biting, but there is zero guarantee the Europeans, let alone Russia and China, will be useful going forward. We're the superpower. It's time to start acting like one and let the others fend for themselves after we, and we alone, have dictated the terms of the game.

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I do have to add that with regards to Iran's involvement in Iraq, I don't disagree with President Bush's assumption that the government has some direct involvement in the supplying of sophisticated weaponry that is taking out our troops and fomenting civil war. But this is all the more reason for direct, face-to-face talks, not with some lower level officials, but a Rafsanjani. If we have the evidence, explain in no uncertain terms this can not stand. To do it through the airwaves is only inflaming the situation and supplying Ahmadinejad with fodder for public consumption?more "evil Satan" talk.

As for Iraq, finally the surge is on. But if Baghdad becomes increasingly secure, however you want to define this, is it already too late in terms of public opinion here at home? I said in my yearend review and look ahead that it would be. I hope I'm wrong. Friday, the House voted 246-182 on a resolution opposing the increase in troops, a first step in cutting off funding. Today the Senate weighs in?unless Republicans can prevent the House measure from even hitting the Senate floor.

Then there's???Russia.

For years I have warned that Defense Minister Sergei Ivanov is a "bad man" and the most significant event in a week filled with them in discussing the rapidly deteriorating U.S.-Russian relationship was his elevation to first deputy prime minister, putting him more than ever out front in the race to succeed Vladimir Putin, should Putin indeed step aside next year as the constitution mandates. [I will have my own doubts about Putin's intentions until it actually happens.] Putin is bad enough. Ivanov would be a return to tension city.

But for now, this week Putin told a security conference in Munich:

"One state, the United States, has overstepped its national borders in every way. This is very dangerous. Nobody feels secure anymore because nobody can hide behind international law. This is nourishing an arms race with the desire of countries to get nuclear weapons."

Putin is particularly upset these days with Washington's moves to place components of a missile defense system in Poland and the Czech Republic, subject to negotiations with both.

Of course Mr. Putin conveniently ignored Russia's own actions to destabilize the government in Georgia, let alone its holding Ukraine, Georgia and Belarus hostage at times with regards to the energy supply. And Putin ignores Russia's arms sales to Syria and Iran.

No, instead he alludes to the United States with statements such as these.

"(There is today) one single center of power. One single center of force. One single center of decision making. This is the world of one master, one sovereign."

Like I said above, when it comes to issues such as Iran and North Korea, why shouldn't the U.S. increasingly go it alone? Do you think Vladimir Putin is going to act in our best interests? Give me a break.

But while President Bush and Secretary of Defense Robert Gates handle the Kremlin's intransigence with kid gloves, Senator John McCain, who distrusted Putin from day one, remember, said:

"In today's multipolar world, there is no place for needless confrontation." The United States won the cold war in partnership with powerful nations of Western Europe, and "there are power centers on every continent today.

"Will Russia's autocratic turn become more pronounced, its foreign policy more opposed to the principles of the Western democracies and its energy policy used as a tool of intimidation? Moscow must understand that it cannot enjoy a genuine partnership with the West so long as its actions, at home and abroad, conflict fundamentally with the core values of the Euro- Atlantic democracies." [New York Times]

But as if Putin's remarks last weekend weren't enough, now Russia is threatening to break out of the historic 1987 Intermediate-range Nuclear Force treaty that banned nuclear and conventional ground-based ballistic and cruise missiles. That was one of Ronald Reagan's big achievements. Oh were the likes of him around today, not that John McCain couldn't fill the void. Few others on the scene can.

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Wall Street

I kept up on events as much as I could the past week, but aside from the ongoing real estate story it doesn't appear there is too much to discuss. Fed Chairman Ben Bernanke gave his semi- annual state of the economy message to both Houses of Congress and he basically told everyone what we already knew, at least readers of this space. Inflation is not an issue, for crying out loud. Of course he threw in the obligatory verbiage that if the economy heats up too much the Fed may have to raise rates anew, but this is all garbage. Sorry to repeat myself, but, again, Bernanke, who has obviously done a masterful job thus far, knows it would be financial suicide to hike rates, though that doesn't mean he's about to lower them either.

Of course where a surprise rate hike would hurt the most is in the housing sector. Lord knows there is enough suffering already, and now actual employment in the residential construction market is about to take a dive as builders wrap up their last projects that they insisted on completing. They'll then begin to take a collective time out, hand out pink slips, and let demand catch up again with supply. Just how long this takes is anyone's guess.

But with this week's release of the worst housing starts figure in 10 years for the month of January, down 14% and far worse than expected, I'm taking a bow for being bang on throughout housing's slide from Mt. Olympus, even if I was a few years early.

For every indicator that flashes a signal we may have hit a bottom, another one or two come around to slap us in the face in the form of a further reality check. And aside from the abysmal number on starts, the subprime market continues to take it on the chin as one lender after another goes under.

Even in the six-county Southern California market, where median prices have remained surprisingly stable, foreclosure rates are soaring, as Josh P.'s latest data confirmed is the case in once white-hot San Diego County.

Here's what it comes down to. You have a large player like KB Home issue a statement that it was "encouraged" its cancellation rate of 48% in the fourth quarter was an improvement from the 53% logged in the third. Now that is truly pitiful and not even worthy of being called 'spin.'

Even the National Association of Realtors, whose own chief economist just last year wrote a rosy book on investing in the real estate boom, had to admit sales were down 31% in Florida for the fourth quarter and off 27% in Arizona. I keep thinking back to what I saw in the Tucson market last October during a trip there; mile after mile of empty developments, as I reported to you at the time. Scary stuff if you're on the wrong side of that trade.

Lastly, in the Feb. 12 edition of Barron's, columnist Jonathan Laing had this to say:

"The future seems anything but bright. The U.S. has yet to feel the full brunt of upward rate resets on the adjustable-rate mortgages of recent years, when underwriting standards slipped. Defaults should spiral higher as monthly payments surge."

Two items on the energy front of note; al-Qaeda is making waves about disrupting the flow of oil and gas from Canada and Mexico to the United States. I said long before 9/11 that I was surprised terrorists hadn't targeted Canada's hydro-electric plants, so, regardless, one would assume that by now the appropriate precautions have been taken?you have done that, right guys?

And the price of crude, which had fallen below $58, rallied back to finish the week at $59.35 on reports the violence in key-oil producing Nigeria was set to expand.

Street Bytes

--Another record for the Dow Jones, the last three days of the week, in fact, as the index closed up 1.5% to 12767. The S&P 500 tacked on 1.2% and Nasdaq added 1.5%. All is calm?all is bright; except for the fact earnings growth will be decelerating all year and the news from tech land recently has been far from inspiring.

--U.S. Treasury Yields

6-mo. 5.14% 2-yr. 4.83% 10-yr. 4.69% 30-yr. 4.79%

Treasuries staged a solid rally as Friday's tame report on producer (wholesale) prices, coupled with the weak housing data and Fed Chairman Bernanke's sanguine comments, assuaged trader's fears the Fed will have cause to hike interest rates.

But while it didn't move markets, it does still need to be noted the U.S. closed 2006 with another record trade deficit, $765 billion, including a $233 billion one with China, which thus guarantees more talk of protectionism.

--DaimlerChrysler is going to be laying off 13,000 in its Chrysler division, as well as closing plants, and it's strongly hinting it would be willing to sell all or a portion of Chrysler outright; a stark admission the merger has been a disaster. On Friday, Automotive News reported GM could be the acquirer, which would lead to yet another massive downsizing effort, a sharp reduction in brands, etc.

--The reception for Microsoft's new Vista operating system software has been so poor, even CEO Steve Ballmer had to admit the company's own normally conservative forecasts were "overly aggressive."

--I see I missed quite a weather mess back home [it's sunny and 70 in Casablanca], with some of the biggest sufferers being those flying on JetBlue out of New York and one particular Delta international flight. I've been stuck on a runway for four hours due to weather, but I can't imagine how I'd react if it were 10 or 11 like these passengers were forced to endure. Actually, I do know what would happen. I'd snap?and the plane would be reduced to a tiny pile of steel, leaving startled fellow passengers and crew on the tarmac saying "Everything is going to be alright, Editor. Now calmly drop the last pretzels."

--The Venezuelan government offered Verizon $572 million for its 28.5% stake in national telecom CANTV, or about $100 million less than one prominent investor was willing to pay Verizon before President Hugo Chavez decided to nationalize the company.

--Google was accused by major media groups of benefiting from the sale of pirated movies by directing traffic to sites engaged in fostering piracy. It's not as much about actual money (though Google would be paid by any advertisers), but rather yet another important example of Google's sloppy internal controls.

--The investigation into Germany's Siemens AG, already involving over $500 million in fraudulent transactions, is now spreading to include Russia's telecom minister, Leonid Reiman, who, surprise surprise, happens to be yet another of Vladimir Putin's dear friends.

--By one gauge, CD music sales are off a staggering 20% thus far in 2007.

--For the archives, I just have to list a few facts from the Fortress Investments IPO that came out about 10 days ago and which I failed to report on. It was the first private equity/hedge fund to be offered in such a manner to the public and its shares soared 68% the first day. But what I didn't know until last weekend was that Fortress's five principals saw their stake worth a collective $9.7 billion at the close the first day. In other words, expect a lot more of these.

--Hershey's is lopping off 1,500 jobs and moving more production to Mexico. "Some Reese's Pieces, Senor?" "Si."

--CNBC's Maria Bartiromo is certainly receiving her share of tabloid press these days. In fact it's gotten so bad the New York Post is dredging up stories concerning her high school flings.

But you have to laugh at the more 'serious' stories in the Wall Street Journal and New York Times, because you know the reporters just want to come out and write what is on everyone's mind. "Yoh, Maria, did you sleep with Todd Thomson or what?!"

[It's also clear Maria has really ticked off some of her colleagues at CNBC, yet the station officially continues to back her.]

--My portfolio: I haven't done anything in weeks since a little flurry of activity buying some oil and gas issues, as well as alternative energy plays, but I have to comment on the carbon fiber stock that was my predominant holding all of 2006. Rounding off, long-time readers will recall I bought it around $10, watched it soar to $39 early in '06, didn't sell, and then watched it tumble back to $20.

It was one earnings disappointment after another, but more importantly a classic case of mismanagement. However, I still believed in the story.

Then this lawsuit out of leftfield came up and it appeared it would drastically impact the company's ability to add more carbon fiber lines to fuel future growth. It also called into question the company's very viability.

So with management providing zero guidance, I dumped the shares at $20, the stock moved down to $17, and then early this year stabilized again around the $20 level. There was no news whatsoever, the outfit having the worst investor relations department in the history of Wall Street (excepting acts like Enron, of course), but I thought what the heck, I'll just buy back a little (exactly 1/12th of what I had before), in case the suit works out. I believe in one column I wrote I'd feel better buying it back at $26, in size, if there was a satisfactory resolution to the case, but until then I couldn't do more.

Well, guess what? The stock is at $31, having soared the past two weeks on a better than expected earnings announcement, but still nothing more on the lawsuit and remaining questions about the ability to finance future expansion needs.

I look at this whole situation from two angles. First, I'm sick for not holding it after all my trouble. [I once schlepped down to Abilene, TX, to check out one of its two main production facilities.] Second, I'd like to think I'm a fairly smart investor and I have still been given zero cause for optimism on the suit not impacting future growth. In other words, you're still largely buying 'hope' and I've been down that road before.

So on one hand I'm slightly happy my now drastically reduced stake is at least rising. On the other, I'm one frustrated cowboy because I don't see where I went wrong in my thinking and yet I feel like I'm personally being punished?.and that's the last you'll be forced to read about it.

More Foreign Affairs

Afghanistan: Sen. John McCain, in comments to the Financial Times that were later largely echoed by President Bush.

"There will undoubtedly be an offensive this spring?.The only question is whether it will be NATO's offensive or the Taliban's. NATO members can help ensure that we keep the Taliban on their heels by at least matching the U.S. troop increase of 3,000 and by reconsidering national caveats [such as in use of force]?.

"If NATO does not prevail in Afghanistan, it is difficult to imagine the alliance undertaking another 'hard security' operation - in or out of area - and its credibility would suffer a grievous blow."

McCain also emphasized that NATO should be contributing the same amount of money the U.S. is, over $10 billion, towards a renewed reconstruction effort, citing the outgoing commander of U.S. forces in Afghanistan, Karl Eikenberry, who said "Where roads end, the Taliban begins."

China: Since the 1980's, 2/3s of those who have studied abroad stayed there and didn't return to the homeland. This brain drain has China's government worried big time?as it should be. [Of course some of those who remain overseas are spies.]

Zimbabwe: Remember 1,000 inflation? It's now 1,600%! Can you imagine having to play "The Price is Right" here? "Oh, so sorry, Mr. Mugabe. Your figure of $1,000 may have been correct just two days ago, but now that refrigerator goes for $25,000."

Morocco?and why am I here? I have to admit, while I've always known Morocco was a friend of the United States, I didn't realize just how historic some of our ties are. Like did you know Morocco was the first, back in 1777, to recognize the fledgling government being hashed out in Philadelphia, and that the 1787 peace treaty signed between the sultans and America is the longest, unbroken one the U.S. has? It's true.

The U.S. and Morocco also concluded a free trade agreement just last year, though the level of commerce between the two is minimal thus far. Nonetheless, it was a significant first step in the creation of a Middle Eastern free trade zone, if the Democrats will let it happen.

Of course technically Morocco is in North Africa, but most think of it as part of the Middle East because it shares many of the latter's problems and much of its history.

Back in 1986, then King Hassan II boldly invited Israeli Prime Minister Shimon Peres to Morocco for talks at a time when this was frowned upon throughout the region, to put it mildly, and Morocco was one of the first to declare solidarity with the U.S. following 9/11.

Morocco is a country of about 33 million, with the political capital in Rabat and the financial center here in Casablanca. It's 99% Muslim (really 99.9%...and almost solely Sunni), with perhaps 4,000 Jews and an equal number of Christians. However, both Jews and Christians are allowed to practice their faiths freely and there is no conflict whatsoever in this regard.

Where there is a problem, as is the case throughout this entire region, is in opportunities for the downtrodden and less educated. The literacy rate in Morocco is only 52% and unemployment is about 20% in the urban areas. This breeds restlessness, and these days, terrorists.

So it was that on May 22, 2003, a staggering 14 suicide bombers (one was caught beforehand) set themselves off in Casablanca, killing over 40 others at five key places, including a hotel and restaurant frequented by foreigners. I have seen two of the locations thus far and one is still a shambles, while the other, a hotel, has taken four years to repair (and will reopen shortly it would appear).

And this week the trial of 29 suspects in the Madrid train bombings of 3/11/04 got underway, significant here because the leaders are all said to be Moroccan, as were many of the bombers.

So as I walk along the streets of Casablanca, I'm well aware that someone I might pass could be an evil doer. But then when friends and family question some of my travels, all I have to do is point to incidents like at the shopping mall in Utah or the shooting at a board of directors meeting in Philadelphia. Trust me, the biggest danger we all face in life is when we're in our cars or just crossing the street. Speaking of the latter, I have never been anywhere in my life where pedestrians just blindly cross major roadways with such disregard for their safety as they do here. At least in Shanghai, it's the drivers who are out to kill you. In Casablanca, it seems like the pedestrians have their own death wish.

Spain: Just a brief note on another item of interest here. The Spanish Supreme Court created quite a furor when it cut the prison sentence of a Basque separatist (ETA) killer from twelve years to three. It's even more remarkable that the man, who was convicted of 25 killings in 1987, was originally just sentenced to 18 years, then given another twelve, but now the court has ruled this was basically too much. For the families of more than 800 victims of ETA bombings and attacks, it's a travesty.

Britain: And here's an outrage. Six truckloads of potentially infected turkey meat from the Bernard Matthews plant in Britain were sent to Hungary last week even after it was confirmed the H5N1 bird flu virus had been found in other birds tied to the facility. This is causing a real stink between the two countries, to say the least, and it's through such callous behavior that some day a lethal virus will erupt across the globe. [On a related matter, Indonesia continues to be obstinate in handing over some of its bird flu records to world health officials.]

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Pray for the men and women of our armed forces.

God bless America.

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Gold closed at $673
Oil, $59.35

Returns for the week 2/12-2/16

Dow Jones +1.5% [12767]
S&P 500 +1.2% [1455]
S&P MidCap +1.6%
Russell 2000 +1.4%
Nasdaq +1.5% [2496]

Returns for the period 1/1/07-2/16/07

Dow Jones +2.4%
S&P 500 +2.6%
S&P MidCap +6.8%
Russell 2000 +3.9%
Nasdaq +3.4%

Bulls 51.1
Bears 21.1 [Source: Chartcraft / Investors Intelligence]

Have a great week. I appreciate your support.

Brian Trumbore

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