Educate Yourself

Week in Review
For the week 2/26/2007 - 3/2/2007
Brian Trumbore
President/Editor, StocksandNews.com

"But while the global bull run in equities continues, you have to wonder about excessive speculation in all assets. When does it end, and how? Here in the U.S., for example, margin debt reached an all-time high?the highest since March 2000. There certainly is a herd mentality at play, as well, exacerbated by hedge funds. When does that end? What changes perception?"

Whether or not this past week represented a real sea change remains to be seen, but certainly sentiment is suddenly on the gloomy side.

So let's look at our three-legged stool for clues as to where we're headed; housing, the consumer, and capital spending.

The housing sector is nowhere near a bottom, a fact reinforced by sliding equity markets that further impact confidence. As the subprime market (those who had no right buying in the first place) craters, lending standards are tightening quickly. The Federal Reserve warned banks on Friday to be more transparent when it came to disclosing risks and earlier mortgage giant Freddie Mac said it would no longer buy the riskiest types of subprime paper, with CEO Richard Syron adding:

"The steps we are taking today will provide more protection to consumers and enhance the level of underwriting standards in the market" and, as of September, Freddie would stop buying "no income, no assets" mortgages in which borrowers are not asked to provide financial information; "stated income, stated assets" products, for which borrowers' incomes are not easily verifiable; and certain kinds of mortgages offered with teaser rates."

"It's a tough situation," said Syron. "There's a very delicate and difficult balance between getting as many people into houses as you can, and at the same time not putting them into houses they can't keep unless home prices are appreciating or interest rates are very low." [Financial Times, USA Today]

Countrywide Financial, the largest U.S. home mortgage lender, said late payments on its loans were rising rapidly, to 2.9% of prime home-equity loans, up from 1.6% a year earlier; while 19% of its subprime mortgage loans were now late, up from 15.2% at the end of 2005. Not a disaster for Countrywide, yet, but you can't ignore trends that are only going to worsen.

And then you throw in the derivatives angle. Years ago, Lewis Ranieri basically created the mortgage market. [He is best known to others for his central role in the 1989 book "Liar's Poker."] Ranieri was the man who came up with the idea of pooling mortgages, then slicing and dicing them to be resold as bonds to pension funds and institutional investors. It was the start of the derivatives market, in many respects.

So last weekend Ranieri told the Wall Street Journal's James Hagerty that the business has changed so much that if the housing market goes down much further, no one will know where all the bodies are buried, which has been my point on derivatives for years, frankly. Ranieri said "I don't know how to understand the ripple effects through the system today." If Lew Ranieri doesn't, do you think some fresh-faced trader does? I think not; let alone the fact there are two sides to every trade. Actually, in the derivatives market that's part of the problem. Often there isn't another side; it just floats out there in the Kuiper belt.

As talk increased this week of problems in housing and derivatives thereof, I couldn't help but think of how we are also seeing a worsening of the haves vs. the have nots. Many of the have nots are seeing their dreams go up in flames, while the haves, battered, are nonetheless still in fine mettle, overall. If a rising tide lifts all boats, some higher than others, a receding one carries out the dead, while leaving the rich still sipping pina coladas from their decks on shore.

But if you are in the misery loves company camp, take heart in a report by the Journal's Robert Frank, who points out that the richest 1% control 51% of the country's individually held stocks (as of 2004, the latest period measured). No doubt the mega- millionaires got spanked around a bit this week, unless their net worth was all tied up in Treasuries, which, come to think of it, is often the case with these folks.

[The point of Frank's article, though, was that today the rich have doubled their exposure to risk in investing in more hedge funds or private equity pools. So maybe they lost 5% or so this week. But that's 5% of a substantial pool with zero impact on their standard of living, I'd argue, while the typical subprime candidate is having many a sleepless night.]

Back to our three-legged stool, yes, some of us have been wrong for years in talking about the death of the American consumer. But we may finally have our day, unfortunately. And as for business spending, I have been doubting this part of the economy for quite a while and I've also warned that, heaven forbid, should we suffer another significant terrorist attack, this is the first of the three legs to be sliced off.

So bottom line, if you were sitting on the stool, with one leg, housing, sheered off and the other two wobbly, you have a sore tailbone as a result.

But if you needed to be cheered up this week, take heart from Fed Chairman Ben Bernanke who said the markets were working well and the economy was just Jim Dandy.

He certainly wasn't looking at the revision on fourth quarter GDP, up only 2.2% from the first estimate of 3.5%. This is the progression in growth for the four quarters of 2006; 5.6% (Q1), 2.6%, 2.0%, 2.2%. If we have now settled into a 2%-3% pace, then, yes, that's happyland. Slow growth, low inflation, low interest rates. Even with decelerating earnings, any damage would be limited.

But 2%-3% is not what we'll see. Try 1%-2%, possibly worse. It will sure begin to feel like a recession.

Of course about now you may be thinking to yourself, when is the editor going to get around to telling us why stocks fell, with the major indexes off 4%-6%? There is no clear-cut answer to this one, though I'll go with we simply became far too complacent, not even having as much as a 2% down day since May 2003, and then on Tuesday, China's Shanghai market dropped 9%, Europe choked, and the U.S. gagged.

There are other reasons, like this yen carry trade deal that is most important to hedge funds, and no doubt this particular game played a role, but the bottom line is we forgot that investing can be risky and that our world is increasingly interdependent, with cash whipping around from Tokyo to Shanghai to Bombay to Paris to London to New York and Chicago, faster than you can say Anna Nicole Smith. That's just the way it's going to be for the foreseeable future and the riskiest places, read emerging markets, probably aren't where you want to throw most of your investment dollars until the next up cycle starts.

Back to Wall Street in a bit, but let's take a break and focus on the international news front, seeing as that can impact financial markets as well.

If you want to be an optimist, it was one of the better weeks for the effort in Iraq, looking at the big picture. The three main factions finally got together on an oil revenue-sharing agreement, one that even satisfied the independence minded Kurds, and since oil accounts for 90% of Iraq's government revenues this is rather encouraging.

And Americans, despite all the talk in Congress, continue to oppose cutting off funding. We don't agree with the president's handling of the war, but we aren't ready to throw in the towel. I, like the majority, want to give Iraq one last chance. What is frustrating, though, is how long it is taking to get the troop 'surge' in place, but that's a different topic.

I am also pleased to see the White House finally accept the idea of talking to one's enemies. This isn't about Neville Chamberlain-style appeasement; it's about laying the cards on the table so that the world sees, once and for all, where the parties stand. Unfortunately, I just believe some of the effort will be too late, particularly when it comes to Iran's nuclear weapons program that isn't even on the table as yet in terms of the "diplomatic initiative," as it's being called by Secretary of State Condoleezza Rice.

The U.S. will be participating in Iraqi Prime Minister Nouri al- Maliki's Baghdad conference, commencing next week, along with the other members of the UN Security Council, the Arab League, and Iraq's neighbors Syria and Iran. Secretary Rice said there will be no one-on-one negotiations with either Iran or Syria and the White House is insisting this isn't a change in policy (or an adoption of the Iraq Study Group's ideas), but of course it is. Rice just a few days earlier said she wouldn't give in to extortion, which is what she says about any discussions with the two, which itself is absurd unless we have totally lost our self- esteem.

"In the past, U.S. President George W. Bush has frequently tried to convince the world of his baseless idea that things are getting better in Iraq. But rarely has the news from the war-torn country ever substantiated his claims. On the contrary, the daily reports of bombings, sectarian killings and seemingly endless bloodshed have painted a bleak picture of a country that has no hope of ever becoming a stable and prosperous democracy. However, one recent development gives cause for optimism: The Iraqis are taking more initiative to secure their own country?.

"(Iraq says) they will use (the Baghdad meeting) to ask all of their neighbors - not just Iran and Syria, but also Saudi Arabia, Jordan, Turkey and Kuwait - to make contributions toward improving Iraq's security. The meeting could also go a long way toward defusing regional tensions, since it will provide a forum for the United States to meet face-to-face with its arch-foes, Iran and Syria, with whom the Bush administration has refused to communicate, despite the recommendations of a key bipartisan panel on Iraq.

"The most significant thing about the conference, however, is not who will or will not attend; rather, it is the fact that it has been organized by the Iraqis themselves and marks the first time that they are taking the lead in securing Iraq. This development bodes well because the Americans, who have been in the driver's seat until now, have been steering the Iraqis off a cliff. U.S. officials with little or no knowledge about the country they are trying to shape have been running Iraq with all the detached arrogance of a colonial power. They created a coalition around themselves instead of the Iraqis. They tried to impose their view of a democratic Iraq, but this was little more than a fantasy conceived in the corridors of power in Washington. They craft security plans from the comfort and isolation of their cocoon-like fortress in the Green Zone, but these strategies have little impact in terms of quieting violence in the war-ravaged country?.

"What is worse is that the Americans have refused to accept responsibility for their own failed policies. Instead, they have blamed Iran and Syria for the escalating violence?even though a significant number of insurgents and militants have poured into the country from across the borders of other states that are allied with the U.S.

"The Iraqi-led conference may be the first sign that the Iraqis are rising up from under the mountain of American mistakes and setting their own security agenda. Because the conference is being organized by the Iraqis, and not the Americans, it would be inappropriate for Bush to claim it on his (highly questionable) scorecard of benchmarks achieved. But it could prove to be more of a real turning point than any of the occasions on which he has declared 'mission accomplished.'"

But in the case of Iran, so much time has been wasted when we could have been engaging the regime. Today, President Mahmoud Ahmadinejad remains in control, even if tenuously, and while the level of his rhetoric has been toned down some, he still says of the nuclear program that "The train of the Iranian nation is without brakes and a rear gear?We dismantled the rear gear and brakes of the train and threw them away sometime ago."

"The true believers (in Iran) will proclaim that revolutionary purity trumps all, but worldly needs and affairs ultimately prevail. A society that spends $20 billion a year to subsidize the price of energy, electricity, and gasoline will in the end have to contend with the wrath and disappointment of its people. There is swagger in Iran, and there is menace, for its rulers are without scruples. Terrorism, for them, is always an option. But theirs is a vulnerable and brittle society. There is no need to 'engage' them and bail them out as they stumble. The regime should be harassed, contained, and held to account. We may not have to wait two centuries to pronounce on the fate of this revolution. [Ed. a reference to Ajami's earlier quoting of the late Chinese leader Zhou Enlai, who when asked for an evaluation of the French Revolution of 1789 said "It's too soon to tell."] The swagger abroad and the rot at home: It is a trajectory we are all too familiar with by now."

"Viewed from the inside, Iran is hardly the formidable power that some see on the outside. The natural outcome of increasing popular opposition to extremist rulers, of widening ethnic divisions and bitter Sunni resentment of Shia oppression is a breakup. Certainly there is no reason why Iran should be the only multinational state to resist the nationalist separatism that destroyed the Soviet Union and Yugoslavia, divided Belgium in all but name and decentralized Spain and even the United Kingdom, along with other states large and small.

"Once again, there is a better alternative to d?tente with a repulsive regime, and that is to be true to the Wilsonian tradition of American foreign policy by encouraging the forces of national liberation within Iran."

Ajami and Luttwak are wrong in one key sense. Engaging Iran, and end-running Ahmadinejad, has a better chance of getting the Iranian people to give up on their existing leadership than what we've seen out of the White House to date. I'm convinced the opposition will see U.S. involvement as a sign of support.

But, again, there is one big problem. The Iranian nuclear program is probably too far along to stop. Here it's about national pride at this point.

"On the surface, it appears that nothing should prevent (the U.S. and Iran) from sitting down and hammering out a deal, and U.S. Secretary of State Condoleezza Rice should write a letter inviting Iran to talks before the dangerous war maneuvers in the Gulf result in an accidental war. However, as (Iran's top nuclear negotiator Ali) Larijani has pointed out, Iran has so far refused to meet the U.S. demand to halt its enrichment program before talks begin, because 'setting preconditions means indicating the outcome of talks in advance.'

"Several officials from the United Kingdom, France and Germany?have pointed out that they have been unable to negotiate a deal on Iran's nuclear program because Tehran has asked for certain guarantees that can only be provided by Washington?.

"The Iranians have long stated that their nuclear program is peaceful, and the Islamic Republic's supreme leader, Ayatollah Ali Khamenei, has even issued a fatwa saying that the production, stockpiling and use of nuclear weapons is forbidden under Islam. The United States is free to suspect that something else is afoot, but there can be no harm in discussing the issue in the mature manner that its allies have done. On the contrary, the potential benefits are incalculable - if only Rice would write that letter."

I repeat an opinion from before. We are not France. The United States is the superpower. It's time to act like one.

--So much for the solid start to 2007 as the gains have all been washed away. By some measures it was the worst week since January 2003 and the major indexes are at their worst levels since last November.

What did I do with my own equity holdings? Not much. I actually did a very small amount of buying but no selling. In all my accounts combined I have about a dozen stocks, total, and as a longer-term investor, nonetheless each day I think "do I still want to own this a year from now?" With one exception the answer this week kept coming back "yes." [Regarding the 'exception,' I simply blew it and hope for a rally next week to then unload it.]

While I've been recommending an 80/20 split between cash and equities for well over a year now, my own portfolio was more like 70/30, thanks to appreciation and a few buys in '07. But having been slaughtered like most everyone else this week, I'm closer to 75/25.

Treasuries rallied big time, as you might expect given the carnage in the equity market, plus aside from the downward revision to GDP, big ticket / durable goods orders in January tumbled almost 8%. This is a most volatile number to be sure, but the far worse than expected reading had to grab your attention.

Other readings on manufacturing, though, were mixed. The national Institute of Supply Management index was up to 52.3 (below 50 signaling possible recession), but the Chicago area figure was 47.9.

And back to real estate, existing home sales were up more than expected, but new home sales collapsed 17%. In both cases, median home prices were off year over year by 2%-3%.

If you decide to dabble in the bond market these days, however, do yourself a favor?buy quality. Also, buy short term. Better yet, save yourself some aggravation and just keep your money in a money market fund paying over 4.5%, just as we do here at StocksandNews.

--There was much talk of the yen carry trade this week. This impacts the hedge fund community in a big way and by extension the equity and credit markets if these positions are suddenly unwound.

In a nutshell, investors borrow in currencies with low interest rates, such as Japan and its 0.5% benchmark lending rate, to invest in those paying higher rates, such as?.anywhere else in the world! It's interesting that as of the end of January, Barclays Capital had estimated these speculative trades had reached their highest level since the Russian crisis of 1998, and that was a most sloppy time.

The risk is in the speed of any changes in the underlying currency, in this case the yen, and this week the U.S. dollar weakened considerably vs. it. So that's a losing proposition, especially considering the amount of leverage employed by most players participating in this game. It's too soon to know where the bodies are, but if there were any accidents this week, and in succeeding ones, we'll know soon enough.

--China's trade surplus jumped 67% in January. The biggest risk the U.S. financial markets face, longer term, is protectionist legislation out of Congress and this number doesn't help.

--Oil was basically unchanged, but perhaps the big story was a note on the weather front that La Nina is taking over for El Nino, ergo, the risks of a volatile hurricane season in the Atlantic just rose. It's one reason why I'll continue to hold onto my own two oil plays, at least for now, unless the global economy, and thus energy demand, goes into freefall. The problem with this logic is, admittedly, that you have to foresee this before everyone else does.

--Professor Jeremy Siegel and his investment partner Jeremy Schwartz (one should change their name to Chad) noted in a Journal op-ed that this week marked the 50th birthday for the S&P 500. Through the end of 2006, the annualized return on the blue-chip index has been 10.83%. The S&P comprises about 80% of the total value of all U.S. stocks.

Aside from being the prime benchmark for money managers, the history of the S&P also speaks to the changes in America. Back in 1957, for example, the technology, health-care and financial sectors made up just 6% of the index vs. about 50% today.

--Because of a serious computer glitch on Tuesday thanks to a data backlog at Dow Jones, the company faces a slew of lawsuits because it misled investors as to the actual damage in the markets. When the index plunged 178 points in the span of a minute, the move implied stocks were in far worse shape than they actually were because the share prices of the individual issues were in fact accurate all along. Lawyers will argue, though, that investment decisions were made based on faulty information, including with index-linked mutual funds.

--Kohlberg Kravis Roberts and Texas Pacific Group have teamed up to acquire TXU, one of America's largest utilities, in what would be the largest private equity deal on record, about $45 billion. However, the deal faces stiff regulatory approval as TXU is the top provider of electricity to the state of Texas. KKR and Texas Pacific sought the backing of environmental groups by agreeing to scrap plans to construct 8 of 11 controversial coal- fired power plants, but then that leads to the issue, where does the needed capacity come from?

Also, as part of the attempted takeover the SEC is looking into suspicious activity in TXU options in the days leading up to the announcement. As Chicago trader Jon Najarian put it, the patterns fit "a textbook example of insider trading."

General Motors?+3.7% (a pleasant surprise)
Ford Motor?-14%
Chrysler Group?-8.3%
Toyota Motor?+12% (strong demand for the Prius hybrid)
Honda Motor?+3.2%

Separately, Toyota announced it is building a new assembly plant in Tupelo, MS, birthplace of Elvis. Toyota said it would be building the Highlander car-SUV crossover at the facility.

--Warren Buffett, in his annual shareholder letter, criticized hedge funds ("Wall Street's pied pipers of performance") for their exorbitant fee structure. Buffett is also looking for a new chief investment officer, someone who can deal with the "bizarre" things markets do these days. "Certain perils that lurk in investment strategies cannot be spotted by use of the models commonly employed today by financial institutions," he wrote. On the issue of executive pay, Buffett said the system, including the role of consultants, is broken with an "all the other kids have one" attitude to perks.

--Michael Dell is trying to convince everyone the company's restructuring efforts will bear fruit, but the fact is revenues continue to slide; $14.4 billion for the last quarter vs. $15.2 billion a year ago. Dell also continues to deal with the SEC investigation into its accounting practices.

--Incredibly, Nortel Networks announced it will be restating earnings for the fourth time in four years, thus delaying its 2006 annual report, though this time it's not about fraud, it would appear, only a faulty abacus. [Seems that one of the thingies fell off the wire.]

--The SEC is examining Google's accounting methods for determining income taxes, the first time the search giant has attracted the attention of regulators since going public in 2004.

--The feds busted a sweeping insider-trading ring involving at least 13 people, including employees (or former ones) at UBS and Morgan Stanley. [MS has to be thrilled with the headlines in Friday's New York tabloids? "Morgan Scamley."] An executive at UBS and a former compliance officer at Morgan Scamley tipped off traders and brokers to new analyst ratings and secret takeover talks. At least four professionals at Bear Stearns then traded on the information in conjunction with hedge funds, which is a common occurrence. Four of the 13 accused have already pleaded guilty. It's important to note, though, that none of the firms themselves were charged with wrongdoing.

--Despite all the talk on the backdating of options scandal, it would appear a vast majority of the executives involved will skate free. As Peter Burrows points out in the March 5 issue of BusinessWeek:

"As legal experts take a closer look, some are questioning how well it will play in court. Recent history illustrates why. Plenty of business practices that were roundly condemned by government lawyers, academics, and columnists - including allocating hot IPO shares to favored investors and trading mutual funds after market close - failed to produce the expected jail sentences. And plenty of executives whom the pundits expected to see in orange jumpsuits, such as former HealthSouth CEO Richard Scrushy, are walking free. 'My prediction is that a lot of these cases are going to prove to be a lot murkier in terms of criminality than the seemingly stark allegations as they initially emerged,' says Larry E. Ribstein, a law professor at the University of Illinois. 'There will be difficulties finding out who did what and whether they knew it was wrong.'"

--Years ago, Citigroup agreed to pay $215 million to settle Federal Trade Commission allegations of deceptive and abusive lending practices at its Associates First Capital subprime lending arm which Citi acquired in 2000. Now the SEC is looking into the accounting practices at Associates. This was a Sandy Weill special, one that he now admits was "one of the worst acquisitions of my career."

--Airbus is going to be laying off 10,000, mostly in France and Germany, as a result of its massive restructuring. To compound matters, UPS canceled an order to buy 10 Airbus A380 freighters, leaving Airbus with no customers for the freight version of its superjumbo flying wiener.

--China has become a net importer of coal for the first time. Ten years ago it became a net oil importer and it's the increased demand of the latter that has been a large factor in crude's rise.

China has a lot of coal, itself, but the problem is in transporting it from the mining sites to the heavily industrialized coastal regions, which is why the coastal areas need to import. Coal still fuels 70% of the country's electrical generation.

China's biggest problem, though, remains pollution. This Sunday, the Hong Kong Marathon is being held and the head of the University of Hong Kong's department of community medicine stated, "The bottom line is that it is not a good idea to be running marathons in intensely polluted air. I don't want to be seen to be scaremongering, but for some people it could have serious health consequences. People have asked me whether they should run in this and I feel compelled to say if it were me I would give it a miss," said Dr. Anthony Hedley. [South China Morning Post]

This kind of publicity, though, helps spur action and that has indeed been the case the past few years. China is also obviously focused on the Beijing Olympics and it's doing what it can to shape the attitudes of those who will be covering the Games.

--Beer prices are soaring thanks to the ethanol craze and that has yours truly steaming. Instead of planting key beer ingredient barley, farmers are going for corn, soybeans and other biofuel feedstocks. Barley and hops account for 7-8% of brewing costs.

--David Letterman, in talking about Tuesday's mini-collapse on Wall Street and its economic impact, noted it was so bad "Taco Bell had to lay off 200 rats."

--The amount of counterfeit money in circulation in the U.S. has soared 69% in the past three years, according to data USA Today obtained from the Secret Service.

--Online shopping, despite its 20% growth rate, is still just 3% of total retail sales in the U.S. and that's projected to rise to only 4% in 2010.

"We're in a war and we cut taxes to stimulate the economy - and it probably did - and we are having million-dollar parties at home while our soldiers are paid starvation wages to offer up their lives in Iraq? We're in a war and the government cannot afford to pay for adequate training for our soldiers, but the society at home is routinely having million-dollar weddings and bar mitzvahs?

--This is classic. I saw the following blurb in Investment News on Tues., the day the market dived.

"Hedge fund Keel Capital?is closing this week due to the lack of short-selling opportunities?according to MarketWatch?..

"Managers had to choose between changing strategy and closing up shop, and they picked the latter?.

"(Co-founder Jeff Bernstein) said the fund's approach, which was to limit market exposure and position sizes, as well as avoid index and exchange traded funds for hedging, was too restrictive during a period of low stock market volatility and steady gains.

" 'It has become somewhat systemic: With the growth of hedge funds, short interest is higher and that has dampened volatility and could lead to long periods of lower volatility in the future," said Mr. Bernstein."

That was Tuesday?Dow down 416. Even Mr. Bernstein's mother had to be telling him the obvious on Wednesday. "Nice going. And don't just think you can move home!"

--Lastly, in a small shopping district near my home I now have a choice of three restaurants that have popped up in just the past year; a Subway's, Quiznos and Cheeseburger Cheeseburger. Remind me not to get the 13-oz. cheeseburger, by the way. Tasty, but a bit too much.

Anyway, I've been in Quiznos just twice, though the sandwiches were good, but I pass it all the time and can't believe the minimal traffic inside versus the other two options.

So I read with interest a piece by Julie Creswell in last Saturday's New York Times on the plight of some franchisees. One, Bhupinder Baber, committed suicide last November in his franchise on the outskirts of Los Angeles.

In a note he left behind, Mr. Baber wrote "Someone must do something about what Quiznos is doing to the trapped franchisees. I deeply regret getting into Quiznos. I wish I had never heard of them."

Quiznos has grown to 5,000 stores from just 100 a decade ago. But lawsuits are springing up because the company appears to be pocketing the $25,000 licensing fees without finding store location within an allotted one-year timeframe. Other suits contend the licensing agreement forces them to buy everything, including soap in the bathrooms and accounting systems, from designated suppliers and distributors owned by Quiznos that charge exorbitant prices, much of which then goes, of course, into the pockets of headquarters.

Julie Creswell writes that one lawsuit "cites a memorandum drafted by a Quiznos lawyer in 2003 that stated 40% of Quiznos units are not breaking even" - a fact that prospective franchisees say they were never told.

But for those thinking of buying a franchise of any kind, keep this classic example in mind.

"In early 2004, after attending a business seminar at a Hilton hotel conference room in New Jersey, (Elisa) Whitehall was told she could open a restaurant in her selected area, Palm Beach, Fla., within the year. Ms. Whitehall, who owns two Curves fitness franchises in New Jersey that she claims are successful, said from 2004 to 2005 she was shown three locations: an empty lot that could not be developed because of environmental concerns, an existing restaurant that was losing money, and a third spot that turned out to be 35 miles away from where she wanted to open a restaurant. None of the sites were close to what she had agreed upon, Ms. Whitehall says.

" 'It's almost three years now since I signed the franchise agreement and even if they called and said they had a store for me, I absolutely would not do it. Every single one around me is closing their doors,' Ms. Whitehall said.

"From 2003 to 2005, Quiznos collected about $7 million in fees from the 350 franchising licenses that it sold but never found locations for, the New Jersey lawsuit contends."

Israel / Lebanon: The good news is that the Shia / Hizbullah efforts to topple the government are not working. The bad news is that it is increasingly clear Hizbullah is rebuilding its defenses in south Lebanon, including buying up land for cash to help in establishing a de facto Hizbullah state or province. The United States must do more here, like in insisting the tribunal on the assassination of former prime minister Rafik Hariri go forward, for starters, to finally bring those accountable to justice. And as part of any Israeli-Palestinian negotiations that must include players like Egypt, Jordan and Saudi Arabia, Hizbullah needs to be told to back off. In turn, to prove it's an honest broker, the United States must tell Israel to stop expanding the settlements and to cease with the flyovers in Lebanon that are violating its sovereignty. Granted, at this point this requires diplomacy on the level never before seen in the history of mankind?which is why some of us light candles.

North Korea: Questions are suddenly arising concerning U.S. intelligence with regards to Pyongyang's suspected uranium enrichment activities; the nuclear device they tested last October being of the plutonium variety and manufactured in Yongbyon. The recently signed six-party agreement pertains specifically to this facility and calls for the dismantlement of any weapons capabilities there.

But since 2002, the U.S. has accused North Korea of operating a clandestine uranium enrichment program, something Kim Jong-il and his folks have consistently denied. Now the New York Times says the CIA and others may have goofed yet again. Here's the bottom line, as I've noted for years; we just don't have a clue here, just as we don't when it comes to Iran and its weapons program. However, this in no way should impact North Korea's agreement to suspend enrichment at Yongbyon within 60 days from Feb. 13.

All manner of exchanges have taken place the past week, or are about to, between the parties involved.

North Korea's No. 2 told a high-level South Korean delegation that "The denuclearization of the Korean Peninsula is the dying wish" of the country's late founder Kim Il Sung. The North "will make efforts to realize it," said Kim Yong Nam.

Good. Do it. No. 2 also called on the two Koreas to speed up reunification and inter-Korean collaboration. That's not so good, as even Seoul understands. Maybe down the road, but first things first. Shut Yongbyon down, as mandated, and maybe we can talk later.

It's tempting to rush to praise the six-party agreement, but it's yet another case of 'wait 24 hours.' Hope for the best, but keep your eyes wide open. It's not just about Yongbyon, it's about everything the North has been doing for decades. If it wants to normalize relations with the United States, gain security guarantees, and a million tons of fuel oil, it has to come clean.

Meanwhile, words are being exchanged between other parties in the region. South Korean President Roh Moo-hyun said Japan must atone for the atrocities committed during World War II, an issue that isn't about to die.

"(Japan) may try to cover the sky with its hand, but we were able to confirm once again that the international community does not forgive the atrocities committed by imperial Japan," said Roh in a speech marking the 1919 uprising in Korea against Japanese colonial rule. "We hope that Japan will not try to glorify or justify a mistaken past, but instead show sincerity by following its conscience and the international community's generally accepted precedent."

But some Japanese lawmakers said a 1993 apology acknowledging a wartime brothel program, where South Korean women were forced into sexual servitude, "damaged Japan's image and invited misunderstanding of the facts."

Prime Minister Shinzo Abe then denied Japan's military had forced the women into sexual slavery. "There is no evidence to prove there was coercion, nothing to support it," he said in a statement. The U.S. House of Representatives has been deliberating a resolution that would call on Tokyo to apologize for the military's role in the alleged practice. For his part, Abe, whose poll numbers are sliding precipitously, is pandering to the conservative base in Japan. This is no small issue in a region where people have long memories.

Then there's China, which called on Tokyo to be more open about its defense spending and the status of Taiwan in Japan's plans, this after Japan demanded more information on China's arms buildup.

"It is very strange that Japan, with only one-twenty-fifth of China's land and one-tenth of China's population, possesses such a huge military expenditure?Meanwhile, it claims China is a threat," said a foreign ministry spokesman. "Can they explain their military development and action including putting Taiwan into their law on contingencies in surrounding areas and the so- called Taiwan Act?"

Well this is a total crock. China reports that it spends $35 billion on defense, vs. Japan's $42 billion, but the actual figure for China is far higher; they just don't have the transparency that Japan, let alone the United States, has.

Pakistan: According to various reports, the former Taliban defense minister, Mullah Obeidullah, among the top four in the entire Taliban leadership, was arrested in Quetta, Monday; the day Vice President Cheney was in the country pressuring Pakistani President Pervez Musharraf to do more to crack down on the Taliban. If true, Obeidullah is the most senior officer to be arrested since the U.S. moved into Afghanistan in 2001.

But if the Taliban's hierarchy is hiding out in Quetta, as suspected, why can't they pick up more?

Russia: Foreign Minister Sergei Lavrov responded to the reaction to President Vladimir Putin's recent speech in Munich in an op- ed for the Washington Post. In part:

"Defense Secretary Robert Gates got it right when he responded by asserting that 'one Cold War was quite enough.' Indeed it was, so let's not declare - or look for a pretext to declare - a new one. At a time when Russia is ready and eager to play a positive role in world affairs and integrate into the global economy, it does far more harm than good to treat Russia as a hostile nation whenever Moscow and Washington disagree?.

"Our American colleagues tell us that the United States needs Russia and other key countries to help resolve numerous regional conflicts. Against this background, America's unilateral actions look puzzling. It's also ironic that Putin's speech was deemed threatening. Russian citizens ask themselves: Who threatens whom? With the Warsaw Pact dissolved for more than 15 years, why does NATO still spread toward Russian borders? What should Russia believe when the United States seeks to place anti- missile systems in Eastern Europe? And instead of joining efforts to counter global threats, should our two countries really be engaged in searching for deficiencies in each other's domestic life? ....

"In any relationship, disagreements arise. But observers make a grave error when they mistake the honest and open airing of concerns as some sort of cassus belli. President Bush rightly emphasized the other day that, while differences exist between our two countries, 'there's also a relationship in which we can find common ground to solve problems.' Russia is ready to work with the United States on an equal and mutually respectful basis.

"Another Cold War? Certainly not. A democratic world in which a strong Russia coexists with a strong United States, as well as a strong Europe, China, India, Brazil and others? That is Vladimir Putin's vision - and it is well worth considering."

My opinion on the above by Foreign Minister Lavrov? Total garbage. But there is little doubt the level of rhetoric between the two countries continues to be ratcheted up. U.S. National Intelligence Director Michael McConnell told the Senate Armed Services Committee the other day:

"The march for democracy has taken a step back (in Russia). And now there are more arrangements to control the process and the populace and the parties and so on, to the point of picking the next leader of Russia. As Russia moves toward a presidential election in March 2008, succession maneuvering has intensified and increasingly dominates Russian domestic and foreign policy," adding that Putin is now surrounded by "extremely conservative" advisers.

As a Russia expert, Ivan Safranchuk, told The Moscow Times, escalating criticism between Washington and Moscow reflected the lack of a "safety margin" in U.S.-Russian relations. "Each side says that a new Cold War would be a bad thing, and then tells the other: 'But you're the bad guys.'"

Spain: Imagine you are the family of one of 800 victims of ETA (the Basque separatists) terror attacks. Then imagine one of the top killers in the group is suddenly released after going on a hunger strike for 114 days. Imagine the ensuing uproar. That's just what happened this week as the government opted to release Inaki de Juana on "humanitarian grounds."

To be fair, however, Spain's leaders were in a box as they feared de Juana's death would trigger a new cycle of violence. Only time will tell if his release does.

Turkey: A potential oil and gas bonanza has been found off the divided island of Cyprus and Turkey is challenging agreements that Cyprus has already signed with Lebanon and Egypt to facilitate exploration. Turkey says it has rights in the area too. This is worth watching.

Italy: He's baaaaaaack! Prime Minister Romano Prodi, that is. Actually, it's hard for someone sitting in New Jersey to tell if Prodi was ever technically out of office following his resignation as a result of a key legislative defeat. It would seem the unwieldy nine-party coalition agreed to back Prodi again, barely, because the alternative was the return of Silvio Berlusconi; he of the wandering eyes.

Guatemala: President Bush is slated to visit here shortly and let's hope a current crisis is cleaned up by then. About ten days ago, three visiting Salvadorean lawmakers were killed by four police officers. The officers were then arrested.

Then, a number of suspected gang members were allowed past extensive security at the prison where the police were being held and the four officers were gunned down. The head of the prison and 21 employees have been arrested.

The four policemen were part of the country's organized crime unit, including the head of it. Some say the four were killed to stop them from telling who ordered the deaths of the three Salvadoreans.

So who wants to go to Guatemala? Frankly, if I were President Bush, I'd reschedule.

Gold closed at $641?down over $40. So much for it being a safe haven.
Oil, $61.57

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