Educate Yourself

Week in Review
For the week 3/5/2007 - 3/9/2007
Brian Trumbore
President/Editor, StocksandNews.com

Last week I chose to be an optimist on Iraq because the major parties there had finally come up with a plan to share the oil revenues, the source of 90% of government income. But the proposal from the Council of Ministers still has to be approved by parliament, so guess what? After a month-long recess (how can you have one in the midst of a war?), parliament reconvened and 12, count 'em, 12 out of 275 members showed up. If I'm a U.S. soldier, busting my hump and risking my life for these people, I'd be furious.

I was all set to quote U.S. ambassador Zalmay Khalilzad on the oil deal from an op-ed in the Washington Post that I wasn't able to comment on last time, but then I learned early in the week of the attendance figure and one of Khalilzad's lines became almost comical.

"While the draft law will need to be enacted by the Iraqi Council of Representatives when it returns from recess, the prospects for passage are excellent??"

There can be no progress, zero, until this single issue is resolved so let's hope the esteemed Iraqi representatives put down their water pipes for a few hours and manage to find their way to the Green Zone and vote on the damn thing.

But if that's not enough, each time one wants to be optimistic and talk of progress on the ground, we end up having another series of attacks, like those taking out 200 Shia pilgrims in two days, let alone the death of 9 Americans in separate incidents in the span of a few hours.

Prime Minister Nouri al-Maliki has vowed to reshuffle the cabinet and pursue criminal charges against politicians linked to terrorists, including all six (of 30 total cabinet ministers) belonging to Moqtada al-Sadr's party.

That's all well and good, you might muse. But then when British and Iraqi army units raided an Iraqi intelligence compound in Basra and found signs of torture, Maliki threw a fit and condemned it. 'Who authorized the action?' he complained.

So it's no wonder that in two separate polls, NBC News/Wall Street Journal and USA Today/Gallup, less than 30% of Americans believe the U.S. will in the end prevail?meaning the establishment of a stable government that is an ally in the war on terror, as our president is fond of saying.

You know where I've stood from day one; a big time supporter of the war effort. I'm one of a still 60% majority that while frustrated does not want to see funding cut off to our troops, as the latest Democratic proposal threatens to do if various benchmarks and timetables aren't met.

But for the life of me, while I did my part (through this column) in urging Americans to give the Iraq war one last shot, after all the mistakes this incredibly incompetent White House has made, I don't understand how anyone in their right mind could not see that by late summer, if the 'surge' hasn't worked it's over.

And let's talk about the surge. I went to see Sen. John McCain at a fundraiser in New York City on Thursday, being an unabashed supporter, but even he told us it is truly pitiful (my word?I forget his exact term) that the world's best military still can't get five brigades to Iraq before June. Of course we're stretched way too thin these days and we need to expand the Army in particular, as McCain himself advocates. But all we can do at this point is continue to pray the surge works; that it buys enough time for Iraq's government to finally get its act together. In the meantime I leave you with this.

"Imagine the reaction if Western agents slaughtered a hundred Sunni pilgrims on their way to Mecca. The outrage would spark incendiary rhetoric, riots and revenge killings from Peshawar to Paris.

"But when Sunni suicide bombers murdered 118 Shia pilgrims (and wounded almost 200 more) on Tuesday, Sunnis around the globe looked away. Shias only count as Muslims when America can be blamed for their suffering.

"Many of those Shia victims of religious totalitarianism were traveling on foot to Karbala to honor Mohammed's grandson Hussein - who was butchered by the founders of Sunni Islam, to whom power was worth more than the Prophet's family. The hatred goes deep?.

"The Sunni Arab campaign against Shias isn't just a struggle for political advantage: It reflects an impulse to genocide. And it makes a grim joke of claims of Muslim unity?.

"Where was the outcry? Human-rights groups were too busy applauding European requests for the extradition of CIA operatives (the real enemies of Western civilization, of course). Since this butchery wasn't the fault of Americans or Brits, the Europeans themselves took no interest.

"American leftists, who raged that Abu Ghraib was another Auschwitz, didn't offer a single word of pity for the Muslim victims of Muslims?.

"But shouldn't Muslims have denounced the attacks on the pilgrims? ?..Where were the public statements of sympathy by government ministers and mullahs? Where was the noble Arab media? Where are the outraged demonstrations?

"Not only is Islamic unity a sham, the Middle East's hypocrisy stinks like a shallow grave?.

"The moral issues are bad enough: To the Saudi royal family, dead Shias aren't tragedies - they're trophies. One almost expects those bloated, bigoted princes to organize Shia-hunting safaris the way they slaughter endangered species when vacationing in impoverished African countries (been there, seen that)?.

Peters' column was written the same day Jordan's King Abdullah was in Washington, making a speech before Congress. Many of us in this country tend to like Abdullah, because for the most part he is as good a friend as we have in the Arab world (not that this is saying much), he is Westernized in some respects, and if you follow the world you know he has a huge Palestinian problem of his own, one that could take him down in the blink of an eye.

"Sixty years of Palestinian dispossession, 40 years of occupation ?have left a bitter legacy of disappointment and despair."

"Nothing can assert America's moral vision more clearly, nothing can reach the world's youth more directly than your leadership in a peace process that delivers results, not next year, not in five years, but this year. We need all hands on deck."

Well I'm one who has said we need to do more to bridge the yawning gap in the region, but obviously today the Palestinians themselves still can't decide on something rather basic: Recognizing Israel's right to exist!

"In a speech Wednesday to a joint session of Congress, Jordan's King Abdullah made the remarkable claim that 'the well-spring of regional division, the source of resentment and frustration far beyond, is the denial of justice and peace in Palestine.' Solve that, he said, and 'hope to our region's people' could be restored.

"This is not the first time such sentiments have been expressed, nor is King Abdullah the only one who believes them. For decades, conventional wisdom held that the conflict between Arabs and Israelis lay at the heart of most of the Middle East's troubles. Does anyone seriously believe that anymore?

"On Monday, 38 Iraqis were killed and 100 injured by a car bomb in downtown Baghdad. Apparently, King Abdullah would have us believe that the Sunni terrorists behind that massacre of their fellow Arabs were registering a protest against Israel's occupation of the West Bank. Perhaps he also thinks that the murder in 2005 of former Lebanese premier Rafik Hariri was a function of Israeli policies, and not of Syria's desire to dominate its neighbor?.

"Jordan is a friend of America; it played a significant role in killing Abu Musab al-Zarqawi last year. Too bad its king can't match the hard-headedness he's shown in private with some candid public speaking about the real source of the Arab world's woes."

It was very much intentional that last week I didn't mention former Federal Reserve chairman Alan Greenspan, for those who wondered about this omission. There is a simple reason for this.

There is absolutely no way that Alan Greenspan was responsible for the slide in equity prices two weeks ago when he talked of the risk of recession. Just as his comment this week, in an attempt to clarify those remarks, that there was a "1/3rd probability" of a recession, didn't carry any weight either.

The man is irrelevant?and I see zero reason to bring him up in the future, unless it's about his earlier forecasts as chairman which fell woefully short of being accurate.

Now that I have that out of the way, let me also interject that some such as Larry Kudlow say Treasury Secretary Hank Paulson is the main man these days, not Fed Chairman Ben Bernanke. That too is a bunch of garbage. Paulson is a far better treasury secretary than his two predecessors, that's for sure, but to think anything he says about the economy is important is absurd. He's a cabinet member; what do you expect him to say? His comments on China and the currency can, however, be newsworthy, but for Paulson to get credit like he did this week for saying there is "solid growth, low inflation and high levels of liquidity" makes zero sense.

So what should you care about these days? Let me put it to you this way. You know how Lucy Van Pelt told Charlie Brown the only thing she wanted at Christmas was real estate? She was last seen huddling with her real estate expert and accountant on how much further she needed to slash the sales price of the 600 condos she was intending to flip in order to stay solvent. It was a fun ride for Lucy on the way up?.but there is hell to pay on the way down, and lord knows Lucy isn't handling it well. [As for Charlie Brown he's chuckling over Lucy's problems, after all she did to him. The kid who once gave a home to a scrawny little tree put the standard 20% down on his first and only home years ago and is sleeping soundly today. Yes, good things do happen to good people.]

You see, today's crisis in the subprime market continues. In fact it's almost comical how some just a few weeks ago, let alone months, were trying to convince you the bottom was in. As John Wayne would say, gaze fixed on an unknowing target, "Well hold on there, pilgrim. You see a bottom?" "Ah, no, Mr. Wayne. Sorry I brought it up."

You know you have problems when the nation's second-largest subprime mortgage lender, New Century Financial, may have filed for bankruptcy by the time you read this. Or when every developer, like Hovnanian, or a bank such as HSBC, continues to speak of serious issues in the housing sector, overall, and not just subprime.

In fact as you've undoubtedly heard, but which I would be remiss in not mentioning at least for the archives, Donald Tomnitz, CEO of builder D.R. Horton, told investors in New York that "2007 is going to suck, all 12 months of the calendar year." Let me tell you?when this comment hit the tape, it did indeed move the market. Alan Greenspan? Pshaw. Donald Tomnitz? He rocks.

The more serious issue on an individual basis is of course the fact there is real pain out there in America and I truly feel for those who were either given bum advice or didn't know to ask the right questions. Mortgage lenders, like credit card companies, can be masters of deception when it comes to explaining loan or credit terms.

But as I've written before, whenever we do hit the bottom in real estate that doesn't mean we bounce right back up. A long period of stagnation would then ensue and that's not going to do anything of a positive nature when it comes to the wealth effect and the average American's #1 asset. This is why some of us continue to wait for the inevitable consumer spending crunch.

Here's a real life example from Noelle Knox and USA Today that breaks your heart.

"Edward Booker is one of nearly 3 million homeowners with adjustable-rate mortgages who've had trouble paying their bills. And, like Booker, many of them won't be able to refinance their loans once the interest rates start rising. At that point, they'll have to tighten their belts, sell their homes or lose them through foreclosure.

"This month, the mortgage payment on Booker's Chicago home rose $200, to about $1,300. It'll go up again in September. He wants to refinance, but he fell behind on payments after his wife died of cancer in 2005, so no lender wants to take the risk.

" 'I'm just trying to hold onto my house until I can figure out something else to do,' says Booker, 58, a former rail-car inspector who's on disability."

Some of us were telling folks to quickly get into a fixed rate mortgage before reset, and tens of thousands did. But it's easy to forget that once you fall behind it's too late.

Noelle Knox's excellent piece [from 3/5] also points out that "on average, first-time buyers made only a 2% down payment last year," according to the National Association of Realtors. 2%.

But now we have another lag effect to worry about, the job market. Sure, Friday's employment report sounded OK as the U.S. economy added 97,000 to the non-farm payrolls, with yet another revision upwards to December's and January's numbers. But as housing continues to slide and then stagnate, as the large existing inventories, much of which are not accurately reflected in the official data, are eventually sopped up, layoffs will be the order of the day. It starts when builders finish their last projects and then it works down the chain.

Josh P. passed on the musings of one of my favorite CEOs, Richard Manoogian of home supply giant Masco, who once again warned "I think things are worse than you've seen. I think you're gong to see a pickup in unemployment rates and I think that's going to have a positive impact on commodity costs, positive impact on interest rates, because I think the Federal Reserve will act once they see how the economy is softening. We're one company and we're laying off 8,000 people. You multiply us times many other companies in our industry, you get to appliance people and furniture people?I think you will see a little bit bigger ripple effect in the economy than most people expect."

J.P. also passed on the latest from the economists at UCLA. Try 100,000 projected layoffs in the construction sector for California alone over the next 2 ? years. [Source: The San Diego Union-Tribune]

You look at some of the above and is it any wonder that in the latest NBC News/Wall Street Journal survey, only 16% of us believe the economy will get better the next 12 months? Of course not. Interestingly, back in October 2002, when the major market equity averages were bottoming out, 41% said things would be better a year hence.

Meanwhile, the Federal Reserve's survey of regional economic activity, the Beige Book, spoke of housing "remain(ing) weak" and just a "modest expansion in economic activity." That's a comedown from prior pronouncements. It's more like 1-2% growth by my way of thinking, at best.

As for stocks, they staged a modest rebound after the prior week's drubbing with the Dow Jones up 1.3% to 12276, the S&P 500 up 1.1% to 1402, and Nasdaq ahead 0.8% to 2387. Part of the reason for the rebound was a slight weakening in the yen vs. the dollar. I wouldn't make too much of the rally in equity prices. We need to see how real estate plays itself out in terms of damage to the overall economy and, remember, this is largely a global bubble, despite what you may read from across the pond about a still soaring London market. London is like Manhattan. Prices rise for reasons different than anywhere else in their respective countries; huge bonuses related to the financial services and banking sectors. Period. But if the sloppy action of the past few weeks becomes a longer-term trend, the Goldmans and Merill Lynchs of the world won't be shelling out sacks of gold for much longer.

Finally, once again I nibbled at one of my own holdings and purchased a little more, but only at a price I wanted to pay (meaning Mr. Market said, "If that's the way you are, I'm not giving you everything you want!"). Which also means I haven't sold a share during this period of mini-crisis and I still have a considerable cash holding, like 75%. [One issue I told you last time that I wanted to sell, I still haven't.]

I've never been a good trader, and I'm a worse short-seller, but I think I'm pretty good at value type plays and then on the speculative side I pray one of them hits now and then. Most of them don't, but that's the nature of that game.

But in one of the many newsletters I subscribe to, most of which I read in all of 10 seconds unless I see a name that's intriguing, this one fellow Chris Mayer summed up a mistake I've made from time to time. [You'll recognize it, J. P.]

"I don't sell stocks because they've gone up a lot. I sell stocks when something fundamental has changed and/or my thesis is wrong or no longer valid.

"Back in the day when I was still learning to invest, I would often sell things quickly. I'd get a 40% gain and be out. But then what? You pay taxes. Then you have to find another idea, which may not be as good. Worthy investment ideas are relative rarities. It's not like changing your socks.

"Oftentimes, the stocks I sold would go up a lot more. Slowly, I learned to hold on longer. I became more a follower of Marty Whitman's 'sit-on-your-ass' investing style. Then I started making really big gains in the stock market."

The great thing about this game, even as the hedge funds and institutions have increasingly turned it into a casino, is that you are always learning. Sometimes it's painful, no doubt, which is why in these uncertain times I opt to hold a large cash position. I just sleep better. Investing is also certainly mentally stimulating, albeit it's not for everyone.

Bonds basically gave up the gains from the prior week on the heels of the stronger than expected jobs figure. But I reached a decision on Friday as I was watching CNBC's Rick Santelli for the umpteenth time talk about the same things over and over again. Don't get me wrong, Santelli is the best the network has to offer; it just hit me that until we break out of what has been an incredibly narrow trading range for bonds, I'm turning off the sound because it is nothing but noise. And for those new readers (who thankfully replace those who have died or left me?.I do often wonder about people I haven't heard from in some time), the Fed is not raising interest rates in 2007. If they were to do this, it would be suicide for the financial markets and if you thought the subprime debacle was bad, wait 'til you see what would happen next. Ben Bernanke knows this.

--Alert?original research: As I've mentioned from time to time, I have various market indicators handwritten on spread sheets going back to March 1990 and when I noticed in Barron's last weekend that the trailing 12 months price/earnings multiple on the S&P 500 had dipped below 17, I was curious as to when that had last occurred. Try the week ending 11/10/95, when the Dow Jones was 4870. A year later it was 6300 and a month after that it hit 6600 as Alan Greenspan gave his ill-timed irrational exuberance speech. Ergo, if you're a bull, just another arrow in your quiver?even though earnings are in a decelerating mode.

[Sorry, folks. I mean it. It's all handwritten; don't ask for it on disc. And being a creature of habit, for the last 17 years I have written down the weekly close of Sydney's Dow Jones equivalent. As I'm logging it in I'm thinking, now why is it that I do this?]

--We're going to look back on the Bush years and think it's been one lost opportunity after another?8 years with nothing to show for it but tax cuts. And while I favored these, and continue to do so (except the cut on dividends), it will be 8 long years when the Republicans couldn't advance one step the implementation of a flat tax, which is what is truly needed. When you think about even an issue like this, it's yet another reason why George W. Bush will go down in history as one of the worst.

And when it comes to Latin America, if I hear one more time from an administration lackey that the White House was distracted by 9/11 and that's why it paid the region little heed, I think I'll scream. There was absolutely zero reason to ignore the continent like the president did.

But now, over six years in, Bush is finally doing what he should have been all along; aggressively pursuing a positive agenda in Latin America. Only one problem. Because he dickered and dithered for so long, we now have as many enemies down there as friends, and the free trade agreements that this administration did put forward are in some jeopardy.

[And can someone please tell me why Commerce Secretary Carlos Gutierrez, a Cuban-American born in Havana, isn't with the president, at least as of Friday when Bush was in Brazil? Gutierrez has been the most misused cabinet official in recent memory. I told you from the day he was nominated he should be living in Latin America because of his roots. He has extensive prior experience in Mexico. But I guess it made too much sense.]

At least the agreement between the U.S. and Brazil on promoting ethanol use throughout Latin America and the Caribbean appears to be a good one. I'm not a proponent of the stuff, but the Brazilians have shown the technology can work for them and that's a good thing. As for the cries from the U.S. corn-belt that any help for Brazil could lead to an increase in imports of cheap foreign ethanol?good! You'll just have to go back to growing something else; something that we can eat, for crissakes. Iowa Republican Sen. Charles Grassley wonders why we would allow Brazil to escape the tariff on imported ethanol. [Though the 54 cents per gallon levy wasn't part of Friday's deal.] Because that's free trade, Senator. Maybe we are a dying breed, but some of your fellow Republicans still believe in it.

--Fed Chairman Bernanke said in a speech that Fannie Mae and Freddie Mac should restrict their business "almost exclusively" to promoting affordable housing.

"The size and the potentially rapid growth of (government- sponsored enterprises like Fannie and Freddie) raise substantial systemic risk concerns."

If the mortgage giants met Bernanke's standards, it would require a drastic reduction in the companies' portfolios, dominated by regular mortgages and mortgage-backed securities. Only 30% of the current holdings are related to affordable housing, according to regulators. But there isn't likely to be any immediate upheaval due to various issues in Congress.

--China is ending 30 years of tax breaks for foreign companies and will now equalize the rates paid by local and overseas enterprises, which seems fair to me. Chinese companies have long complained they faced discrimination over their foreign competitors and now there will be a single 25% tax rate on all, versus the current system of Chinese companies being taxed at up to a 33% rate while foreign enterprises have been paying as little as 15%. [Financial Times]

--For the first time, China is now producing more passenger cars than the U.S. Consider this?back in 1997 China's car output was just 5.4% of ours. And for those looking for $40 oil anytime soon, at least for now these cars are running on gasoline.

--While shares in the major investment banks rallied after taking a drubbing the previous week, there is increasing talk among insiders at the likes of Goldman Sachs, Merrill Lynch and Morgan Stanley that their own firms are barely more creditworthy than junk bonds. This is due to the huge exposures they have to the credit-default swaps market and the exposure to housing.

"These guys have made a lot of money securitizing mortgages over the years in a mortgage boom time," Richard Hoffman, a bond analyst with CreditSights told Bloomberg News. "The question now is what is the exposure to credit risk and what are the potential revenue headwinds if they're not able to keep that securitization machine humming along."

My point, as it's always been, is the banks often don't even know who's holding the other side of the trade! CreditSights also notes that a firm like Bear Stearns has 13% of its "tangible" equity tied up in non-investment grade mortgage securities. Goldman, Morgan Stanley and Merrill don't disclose such a figure.

--Global semiconductor sales rose 9.2% in January over a year earlier, driven by business in Asia and Europe. But it was unchanged in the Americas; an example of which was contained in yet another earnings warning from Advanced Micro Devices, blaming weaker than expected demand for computers. AMD also said its gross margins dipped to 40% in the fourth quarter, compared with 57% a year earlier due to sliding prices. Yikes. Can you say layoffs?

--In a huge blow to Vonage, the Internet telephony company, a federal court ruled it infringed on three of Verizon's patents and now must cough up $58 million in damages plus royalties. That's a lot of money for this outfit.

--The Wall Street Journal had a story on the large amount of backdating of options that took place in the days after 9/11. For example, "At KLA-Tencor Corp., at least 11 top executives purportedly were awarded options on Oct. 2, 2001, at the very bottom of a sharp dip in the semiconductor-equipment maker's stock. But in a recent filing KLA said those options were among some that were improperly backdated, suggesting in a securities filing they weren't actually awarded until weeks later. The post- 9/11 backdating increased KLA insiders' potential profit on the options by more than $12 million." It's enough to make you sick, or as former SEC chairman Harvey Pitt put it, it was "offensive" for companies to capitalize on the market panic caused by 9/11. The terror attacks "created many pressures, difficulties and dislocations," Pitt told the Journal. "The one thing it cannot be used to justify is the fraudulent backdating of documents."

And in a separate Journal story, Research in Motion, makers of the BlackBerry, said "all options granted before late February 2002 and approximately 321 grants made between that time and August 2006 were improperly accounted for." Earnings will be reduced some $250 million, but Wall Street hasn't been punishing the share prices of these companies. It's also increasingly apparent few executives at these houses of fraud will pay the ultimate price ?.a few months in a cell with Bubba.

--Billionaire Mark Cuban is going after Google, demanding it hand over the names of those illegally uploading movie clips from Cuban's Magnolia Pictures film company. It was Cuban who was the first to say any potential YouTube buyer would have to be a "moron" because of the potential legal liabilities inherent with its business. Here's hoping Cuban cleans up.

--Of course Cuban isn't the only one going after Google these days. Microsoft attacked it for its "cavalier" approach to copyrights in Google's alleged exploitation of books, music, films and television programs without permission.

--Emerging market fund flows suffered their worst week ever following the Feb. 27 sell-off; $8.9 billion in outflows. That was more than one-third of the record $22.4 billion of net buying in these funds in 2006, according to EmergingPortfolio.com.

--More evidence of a slump in housing. The sale price on Wilt Chamberlain's old home in Bel-Air (Los Angeles), now occupied by some television writers, has been reduced from $11.5 million to $10.5 million. A lot of history in that place, if you catch my drift.

--Follow-up on my Quiznos comment of last week. Leah K. reports that her local one in New Jersey is also dying. Zero customers at peak hours.

--Sheila H. attended a charity event in New York City and someone paid $110,000 for a football signed by former Giants running back Tiki Barber. $110,000! Aside from the fact I can't imagine why anyone would want the disingenuous Barber's signature, no matter what the cause, as Sheila said it's just another example of all the funny money out there today.

--Bill Gates remains atop the Forbes list of billionaires for a 13th straight year at $56 billion, with Warren Buffett hot on his tail at $52 billion. But what's interesting is that there are 150 more billionaires this year than last, up to a total of 946 worldwide. Their assets also increased a staggering 35%, collectively, to $3.5 trillion. Forbes' editor in chief Steve Forbes said "This boom goes beyond commodities. One of the things that has facilitated it globally, bringing hundreds of millions of people into the global economy, is of course technology?.This is the richest year in human history."

Forbes himself can be so full of it, sometimes. On Friday he was on Kudlow's program, with the two of them going on about free markets and such, and Forbes, thinking we all are morons, tried to convince the listeners that Russia was a free market and free economy and that crony capitalism creates new innovations and businesses. Ah, Mr. Forbes? Is Gazprom innovating? And aren't some of Russia's billionaires outright crooks and thieves? The only one who tried to do good, Mikhail Khodorkovsky, is in one of Putin's prisons.

Iran: Let's see, it's hard to keep the UN Security Council resolutions and six-party agreements straight when it comes to Iran and North Korea, but it seems to me that Tehran's 60-day window to cease with its uranium enrichment program ended weeks ago, didn't it? So why does it continue to defy the UN? Because Russia and China aren't more forcefully coming down on Iran, that's why. The U.S. needs their help and isn't getting it.

This week the International Atomic Energy Agency at least suspended 23 technical aid programs it had with Iran, and now the rest of us await the latest sanctions regime out of the Security Council.

I in turn have been arguing for engagement with President Ahmadinejad's rivals; recognizing that we have wasted the past few years while Iran's nuclear program proceeds apace. My point today is that the Iranian people need to see the U.S. negotiating with major figures, in and out of government, just not the president. End run the increasingly unpopular Ahmadinejad, in other words. So I was surprised to see the following in a Journal op-ed by neocon Michael Ledeen.

"Regime change in Iran does not require an invasion, or even the sort of bombing so many are now advocating in order to thwart the mullahs' program to build atomic bombs. The issue is the regime, not its instruments; thousands of Americans have already been killed and wounded by Iran's terror army. We should assault the mullahs with our most potent weapons, which are primarily political. The recent sanctions against Iran are welcome, but support for freedom is the key to regime change in Tehran.

"The mullahs know their doom will come from their own people, which is why they have embarked on a new wave of mass repression, with a spate of public hangings in the Kurdish, Balouch and Ahwaz areas, a wave of arrests of pro-democracy leaders in Tehran and Isfahan (the most famous face of the Iranian resistance, Ahmad Batebi, reportedly suffered a stroke in the mullahs' torture chambers, and is now in a coma)?.

"A free Iran would deliver a devastating global blow to the terrorists, and would no doubt change the calculus - and perhaps the regime - of Syria. Under those happy circumstances, we might muster the will to insist that the Saudis shut down the Wahhabi schools and mosques, which constitute an assembly line of fanatics all over the world.

"It's an ambitious strategy, but we are an ambitious people. We are engaged in a global war, and while we have done well in many respects, we have thus far refused to recognize the real nature of the fight."

Ledeen was one of the chief architects of the war against Saddam and it's good to see him take such a stance. And if we play our cards right, remember this coming May 22; the day the Iranian government will finally raise the price of gasoline, fixed for the past three years at 9 cents a liter. As I've been writing, Iran's domestic consumption of oil has been skyrocketing and it's not only depriving the Treasury of potentially more export dollars, it's costing the treasury dearly in increased subsidies. The mullahs must bring down consumption and raising the price is Econ. 101.

But the people aren't going to be happy. The economy isn't doing well to begin with and they have long viewed cheap oil as a birth-right. Look for major protests, possibly bloody ones, if the government follows through. The U.S. can benefit; but if you knew this wouldn't you be talking to the opposition today, as I've advocated?

China: Prime Minister Wen Jiabao gave his annual address and pledged his country would combat pollution in a more aggressive way as well as become more energy-efficient.

"We must make conserving energy, decreasing energy consumption, protecting the environment and using land intensively the breakthrough point and main fulcrum for changing the pattern of economic growth."

But at the same time, Wen emphasized nothing is more important than maintaining the current boom.

[China's pollution is going to become an increasing issue in the United States. The latest research report from the National Academy of Sciences notes that pollution from Asia is disrupting weather patterns along the West Coast. As Robert Lee Hotz wrote in the Los Angeles Times, "Carried on prevailing winds, the industrial outpouring of dust, sulfur, carbon grit and trace metals from booming Asian economies is having an intercontinental cloud-seeding effect, the researchers reported ?.The study is the first large-scale analysis to draw a link between Asian air pollution and the changing Pacific weather patterns."]

Meanwhile, China's space agency announced it expects to be able to land a man on the moon within 15 years. We better get back there first, or they'll suck out all the minerals before we have a chance to even test them. Actually, while a senior official denied it was doing so, look for China's third manned spaceflight to occur during the Olympic Games next year in Beijing.

For its part, the U.S. State Department's annual report on human rights slammed China yet again for endemic corruption, discrimination against women and minorities, Internet censorship, and lax legal standards. It also said that the number of practitioners of the Falun Gong spiritual movement estimated to have died in custody is anywhere from a few hundred to a few thousand.

But let's turn the discussion to defense spending and China's plans for its military, shall we? Prime Minister Wen didn't mention in his speech that the defense budget was increasing 18% (at least the formal figure?the informal one is far higher, like anywhere from 2 to 4 Xs). Officials say the increase is for modernization and to deter Taiwan's push for independence. A National People's Congress spokesman said "Deterring Taiwan's independence and maintaining peace in the Taiwan Strait remains the most pressing task, (because China expects) to see Taiwan continuing its push for de jure independence this year."

You have to get a kick out of that. Taiwan obviously isn't about to invade anyone nor launch a blockade of the shipping lanes. So what the heck do you mean, sir, when you say "maintaining peace in the Taiwan Strait"?

No doubt, however, the issue of Taiwan is a huge one. I had the opportunity to ask Sen. John McCain on Thursday the following, but for various reasons passed, the least of which being Dr. Henry Kissinger, a big McCain supporter and seated in front, would have been giving me the evil eye.

"Senator, Taiwan's President Chen Shui-bian is once again calling for independence. While the chances are virtually nil the parliament and the people would approve steps to change the constitution, it's already enough to rile China. Suppose China then launches a volley of missiles to take out Taiwan's key military installations, then attempts to sue for peace?and one China. What does the United States do?"

Of course today we would do absolutely nothing. We are in no position to, after all, which is why the current military buildup on the island of Guam is critical over the coming years. China must see we have a viable counter to Chinese aggression.

China's Foreign Minister Li Zhaoxing said anyone wanting to split Taiwan from the mainland was a "criminal," this as Chen said in a speech on Sunday, "Taiwan should be independent." The top general, Guo Boxiong, said the People's Liberation Army would "effectively perform our glorious mission of safeguarding national sovereignty and territorial integrity in accordance with the will of the motherland and the wishes of the people," Xinhua News Agency reported. [South China Morning Post]

What does all this mean and what should you be watching for? When the day comes that China's economy cracks, rising unrest on the mainland will force the government to whip out the only card it has?the nationalism card, and an immediate ratcheting up of tensions with Taiwan. Let's just hope this doesn't happen for quite some time, but that is defying the laws of economics.

I also need to close this discussion with further sobering thoughts from Mark Helprin, senior fellow at the Claremont Institute, who authored a scary op-ed for the Washington Post. Helprin writes that we need to forget about North Korea.

"The Asian nuclear power of which we must take account is not North Korea but China?.

"In altering their position relative to that of the United States, the Chinese have received generous assistance from the past two American presidents, who have accomplished first a carefree diminution of our orders of battle and then the incompetent deployment of what was left, in a campaign analogous to losing a protracted struggle with Portugal. China advances and we decline because, among other things, its vision is disciplined and clear, while ours is burdened by fear, decadence and officials who understand neither Chinese grand strategy nor its nuclear component.

"This has led the United States unwittingly to encourage China to move toward nuclear parity. In the next five years, as we reduce our arsenal from 10,000 strategic warheads to 1,700, China's MIRV'd silo-based missiles and imminent generations of MIRV'd mobile and sea-based ICBMs will easily allow a breakout from warhead numbers now variously estimated to range from 80 to 1,800.

"Once, the vast imbalance (in 1987, 500:1) might have discouraged China from such augmentation, but no longer. Our reductions and their growth provide fewer targets for more missiles and will create the possibility and therefore the temptation, however remote, of a first strike. As we have cut the stable sea-based leg of our nuclear deterrent from 37 ballistic missile submarines to 14, China works to build its own and a fleet that can provide protected bastions at sea as well as hunt down the small number of American boats on station."

Lovely, isn't it? But wait?there's more. The Chinese have always possessed a deterrent. Now, however, they have other options.

"They know that every facet of America's economy, military and society depends on individual and networked electronic devices. Were these to fail all at once and irreparably, the nation would seize up, perhaps for years.

"Faced with victory, or with loss, they might choose to - and who would venture to guarantee that they would not? - detonate half a dozen high-megatonnage nuclear charges in the mesosphere, in an electro-magnetic pulse (EMP) strike perhaps not even in American airspace, cooking almost every circuit and semiconductor, rendering the American government blind, deaf and dumber than it is already and the country unable to resist the inroads that would surely follow.

"Though we would undoubtedly respond in kind, China is not as technically dependent as we are. Nor, given China's sufficiency for a counterstrike, could we deter an EMP attack with the prospect of massive retaliation, especially because an EMP strike, with no immediate casualties, would seem as peaceful as snow in still air."

In other words, the United States must immediately redesign its essential systems and network to build in redundancies, as well as continue to deploy and enhance our missile defense system. Helprin writes of how Washington is ignoring the explicit warnings from the congressionally chartered EMP commission:

"In regard to war and the sometimes counterintuitive actions for avoiding it, we are no longer either confident or clearsighted. What a pity to have come so far to find that our rivals and enemies all over the world can run rings around us because half of our politicians have lost their intelligence and the other half have lost their nerve."

Russia: Another reporter was murdered, the 14th since Vladimir Putin took office. This fellow, who had been investigating Russian arms sales to Syria and Iran, supposedly fell out a fifth story window, but considering the fact he had just returned from the store with a big bag of groceries and there was no note, it wasn't suicide. Not one of the now 14 cases has ever resulted in a conviction.

And there is the strange case of Paul Joyal, an American expert on the KGB, who was shot outside his Maryland home. Four days earlier he had appeared on NBC's "Dateline" program, saying that "a message has been communicated to anyone who wants to speak out against the Kremlin: 'If you do, no matter who you are, where you are, we will find you, and we will silence you - in the most horrible way possible."

What's strange is that witnesses saw two black men fleeing the scene, so it was immediately dismissed as being a coincidence. But of course the KGB could easily have employed others.

Separately, Putin's thugs were at work in St. Petersburg last Saturday as more than 100 were arrested, part of a group led by opposition leader, and former chess champion, Garry Kasparov. It was one of the largest protests in recent years. Kasparov was not one of those taken in but I would only buy drinks in a can and thoroughly wash off the top before using if I were him.

And I do have to note something I wrote in this space just two weeks ago, 2/24, concerning the appointment of 30-year-old Ramzan Kadyrov by Putin to be the new president of Chechnya.

"He is an absolutely horrible, vile, disgusting thug that's a walking human rights nightmare?This, comrades, is the face of today's Russia."

"This week Vladimir Putin delivered another clear message about the kind of state Russia is becoming. He did so by nominating as the new president of the republic of Chechnya a man named Ramzan Kadyrov - an unspeakably savage and corrupt warlord?.

"Mr. Kadyrov has already been pursuing this agenda for some time. He and his 'kadyrovtsy' are feared throughout the shattered republic: They are known for grisly acts of torture, extortion, kidnapping, rape and murder. The heads of slain rebels are displayed in some villages as a warning against crossing the new leader?.

"By installing him, Mr. Putin is telling the world that Russia has become a place where the most sadistic criminals can be political leaders, where the murder of opponents is openly sanctioned and where the only qualification that matters is loyalty to Mr. Putin. Luckily, perhaps, for the Russian president, George W. Bush and the other leaders of the Group of Seven democracies, who continue to treat Mr. Putin as a strategic partner, are doing their best to ignore that message."

Afghanistan: It's getting lost in the other news of the day, but the two incidents here within 24 hours that resulted in a large number of civilian deaths are most unfortunate when you are trying to win over the hearts and minds and prevent al Qaeda and Taliban types from exploiting it on the Internet. I recognize coalition forces were only retaliating for assaults on their bases and troops, it just points out how much further we have to go here before we can declare victory. It's also increasingly difficult to protect President Hamid Karzai from being assassinated.

North Korea: Deputy Secretary of State John Negroponte refuted assertions Kim Jong-il and his Orcs aren't enriching uranium. He said he has "no doubt" they are. Negroponte, in meetings with South Korean officials, also reiterated that the North must come clean and fully disclose all activities within the 60-day window that commenced with the signing of the six-party agreement back on Feb. 13, let alone shut down the facility at Yongbyon.

Meanwhile, bilateral talks between Japan and North Korea aimed at normalizing relations were shelved. No reason given that I can see.

Japan: Prime Minister Shinzo Abe continues to suck up to the right-wingers he desperately needs for support and their denial that hundreds of thousands of women under Japanese occupation during World War II were sex slaves. As I've noted often in the past, this is an explosive issue for South Korea and China and Abe is going against a 1993 apology over the "comfort women" made by a prominent cabinet secretary. A leading conservative who rejects the '93 apology said "For the honor of the former Japanese military, we have to counter criticism which is based on a misunderstanding." Abe said, "None of the evidence confirmed coercion in the narrow sense - coercion like the hunting of comfort women, with officials rushing into houses to drag women out, like kidnapping them." This is pitiful and a big disappointment to those of us who have been defending Japan.

Lebanon: There are some solid signs of a reconciliation between the Sunnis and the Shiites as Saad Hariri, leader of Lebanon's Sunni March 14 coalition, met with Shia Parliament speaker Nabih Berri in an attempt to end the political crisis that is destroying Lebanon's economy. Ironically, Iranian President Ahmadinejad and Saudi King Abdullah may have had something to do with it through their supposed promise to encourage peace in the country. [Ahmadinejad representing the Shia, Abdullah the Sunni.]

But it's all extremely complicated and for the Sunnis, as well as the U.S., it's still all about the UN-mandated tribunal to bring those responsible for Rafik Hariri's assassination in 2005 to justice.

Any agreement reached between the two main factions must also deal with Hizbullah. But here it appears the West caught a break with the apparent defection of a top Iranian general to the U.S., the first senior Iranian official to defect since the revolution 27 years ago. Of particular interest to both the U.S. and Israel is knowledge of Hizbullah's operations in Lebanon and beyond. Ali Resa Asgari, according to the former head of Israel's Mossad, was said to have taken his family with him so that they couldn't be pressured. [London Times]

Turkey: Jackson Diehl of the Washington Post commented on a nonbinding congressional resolution on Armenia and the Ottoman Empire, one that could have huge ramifications for relations between the United States and Turkey. It's about the alleged "genocide" that took place. I've reported on this before and noted how Turkish Foreign Minister Abdullah Gul has been lobbying Washington against it. But as Diehl points out, this is all about "constituent pandering, far-flung history and front-line foreign policy. And that's just on the American side; in Turkey there is the painful struggle of a deeply nationalist society to come to terms with its past, and in the process become more of the Western democracy it wants to be."

"Imagine the 435 members of the House, many of whom still don't know the difference between Iraqi Shiites and Sunnis, solemnly weighing whether (Congressman and sponsor) Schiff's version of events 92 years ago in northeastern Turkey deserves congressional endorsement. But the consequences of passage could be deadly serious: To begin with, Turkey's powerful military has been hinting that U.S. access to the Incirlik air base, which plays a key role in the wars in Iraq and Afghanistan, could be restricted. Gul warned that a nationalist tidal wave could sweep Turkey and force the government to downgrade its cooperation with the United States, which needs Turkey's help this year to stabilize Iraq and contain Iran."

There were atrocities that qualify for genocide, of course, and Turkey's political class needs to come to terms with this, just as Japan's needs to; but Congress has no business interjecting itself in this issue.

France: Things are heating up big time in the presidential race here. Suddenly, Francois Bayrou, a 55-year-old mentored by former President Valery Giscard d'Estaing and the leader of a center-right party, has polled at 24% in the latest survey vs. 26% for Nicolas Sarkozy and 25% for leftist Segolene Royal. The top two in the April 22 vote then go on to a run-off May 6. Bayrou's whole pitch is that "the French people want a president who brings them together, rather than one who divides them; a president who reassures them rather than one who worries them," he said in an interview with the International Herald Tribune. But with just about a month to go, 45% of the people are still undecided.

Czech Republic: Only 6% of the people here are strongly in favor of having the U.S. place parts of the anti-missile system on its soil. Not surprising, but also not helpful if you are the leaders of governments that want it.

Denmark: Anarchists (read 'dirtballs') from all over northern Europe descended on Copenhagen over the past week, sparking the worst violence seen here in 10 years. It all began when a police anti-terror squad evicted squatters (read another version of 'dirtballs') from a downtown building that for years had been used as a 'cultural center for anarchists.' In a two-day period, over 400 were arrested with numerous injuries.

I have a solution; the perfect sting operation. Promote a huge free concert, appealing to the dirtball element, round 'em all up, chopper them out to the North Sea, and dump them.

Zimbabwe: As I wrote a few weeks ago there is finally hope here that two-time StocksandNews "Dirtball of the Year" Robert Mugabe is about to be deposed. His ruling party is breaking apart as officials have seen their own business interests go up in flames with the rest of the economy. It would be like one of Congress's more corrupt officials having seen his ill-gotten gains go from $4 million to $69.95. At some point you'd get upset.

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