Educate Yourself

Week in Review
For the week 4/9/2007 - 4/13/2007
Brian Trumbore
President/Editor, StocksandNews.com

I've managed to keep up some despite missing almost two full days traveling, but I'll fill in any gaps next time. For now, suffice it to say I had a better week than Don Imus, the Rutgers women's basketball team, or New Jersey Gov. Jon Corzine. At least the Duke lacrosse players can begin to put their own lives back together.

Here in Asia, the news has been dominated by the summit meeting between Chinese Premier Wen Jiabao and Japanese Prime Minister Shinzo Abe, the first visit by a Chinese leader to Tokyo since 2000.

Mr. Wen's trip was hailed by some as a "turning point" in Sino- Japanese relations, even though little actual progress has been achieved in the three days and the oil-field dispute in the East China Sea threatens to foul any goodwill generated. China's CNOOC admitted it has been producing gas in a region claimed by Japan. Japan has proposed to jointly explore the oil and gas field but China is not likely to agree to this.

Premier Wen said at the opening banquet, "China-Japan ties are at a crucial point of inheriting the past and opening up the future. How the ties develop will have an important effect on the future of our two nations and Asia."

Then off camera, as reported in all the papers, Wen said "If we can handle the history issue well, it would be a good foundation for the development of bilateral ties. If not, it will become an impediment."

What it all comes down to is this. Prime Minister Abe's predecessor, Junichiro Koizumi, made annual visits to the Yasukuni war shrine, seen by both China and South Korea, in particular, as a symbol of Japan's militaristic past. Abe thus far has not gone there as prime minister, even though he was a frequent visitor before taking office. Abe is smart enough to stay away while still prime minister.

In a speech to the Japanese parliament, though, Wen also had tough words for those supporting Taiwan.

"We will strive with all our might to achieve peaceful resolution of the Taiwan issue, but we will never tolerate Taiwan independence. We hope that Japan can understand the highly sensitive nature of the Taiwan issue, abide by its pledges and handle (it) prudently."

Overall, Wen did receive high marks from both Japanese lawmakers and the people. I also have to add that Wen truly is a PR machine. He is known for jogging wherever he travels and on Thursday, after a run in a Tokyo park, he did some Tai Chi with the locals. A super photo op.

Breaking a recent up-down-up-down string, the major equity averages all registered solid gains for a second straight week on the heels of a tame producer price report on Friday (at least the core figure), some good earnings news from the likes of Merck and McDonald's, and more mergers and acquisitions, including a potential buyout by Blackstone Group of the largest student-loan provider, SLM Corp., or Sallie Mae.

But earlier the markets were spooked, worldwide it turned out, by release of the Federal Reserve's minutes from its March Open Market Committee meeting, wherein the Fed maintained its "predominant policy concern remains the risk that inflation will fail to moderate as expected."

You know my own feelings on the topic; any inflation blip we are experiencing, including in terms of rising energy and food prices, is not a concern longer term as the economic slowdown takes hold. And while I admit food inflation may be a bit more ingrained for a variety of reasons, the Fed would be nuts to hike interest rates just because you and I are paying 20 cents more for a box of cereal. Again, this economy would flip in a nanosecond if Chairman Ben Bernanke and crew ignore common sense and raise the funds rate.

But I imagine some of you are thinking, is the economy really slowing? You'd have a point, especially if you take a quick spin around the world. The International Monetary Fund's latest forecast is for growth in China of 10% in 2007 and 9.5% in '08, Asia's emerging markets at 8.4% this year, India's at the same clip?even Europe is now chugging along at a pace that meets or exceeds the United States' tepid 2.2% forecast for '07. It's time to face facts, sports fans. The U.S. is important, just not as much so as it used to be because the rest of the world is catching up ?and some would say at lightspeed.

Of course one big financial accident, or terror attack that stops international travel in its tracks, or a conflict over Iran's nuclear program, or the spread of avian flu?you get the picture. But even I have to concede that doesn't mean you 'short' today's market, necessarily. Just make sure every now and then that you have replenished your supply of water, beer and Chex Mix.

Here in the good old U.S. of A., it does need to be noted, after all, that consumer confidence continues to slide and a Bloomberg/L.A. Times poll revealed that 6 in 10 of us now see a recession within a year; not normally the background for continued brisk spending on the consumer front.

And let's face it; housing is still a big issue. Even the National Association of Realtors, the ultimate shills for the sector, had to admit existing home sales for 2007 will decline 2%, while home prices will also fall for the first time since the NAR began monitoring them in the 60s. D.R. Horton, the nation's largest homebuilder, wasn't exactly singing a merry tune the other day either when its chairman conceded "the spring selling season has not gotten off to its usual strong start." [Probably because, nationwide, we appear to be transitioning back into winter? especially if you're a Cleveland Indians baseball fan.] D.R. Horton added its cancellation rate for the quarter was a still whopping 32%.

There are also increasing signs the subprime mortgage debacle is spreading up the chain. American Home Mortgage Investment Corp. drastically slashed its earnings forecast for the full year because it saw signs of problems well beyond subprime. And remember a few weeks ago when I noted that the states are beginning to feel it in decreasing revenues? The New York Times ran a piece on Sunday addressing this very issue. As one researcher noted, aside from declining sales and real estate transfer taxes due to the housing slump, it would also be foolish to "underestimate the effect that the inability to extract equity from homes is going to have." For example, in Florida, 16% of new car purchases in 2006 were made thru home equity loans. In California it was 30%!

So what's the real bottom line? If stock prices are in the long run determined as much by earnings as anything else, don't look for them to continue to bail out equities much longer. We're beginning to hold onto our wallets, after all.

--The Dow Jones picked up 0.4% to 12612, the S&P 500 added 0.6% to 1452, and Nasdaq tacked on 0.8% to 2524. All three are now once again closing in on multi-year highs and February's case of indigestion is but a fleeting memory.

Despite the solid reading on core producer prices, unchanged, rates were little changed on the week because of the Fed's warning.

--The U.S. filed two complaints with the World Trade Organization concerning China and its piracy and counterfeiting of movies, music and books. China says it is doing all it can to crack down and it has to be noted some small strides have been made. Sometimes you also have to look at the real world and ask yourself just how much can government do?

For example, the Motion Pictures Association of America says that an average movie can be downloaded 1.7 million times within 48 hours after it's released online. The MPAA places its losses in China at $2.7 billion, but with 45 million in the country now having broadband access, it's hard to stop. At the same time, guess who is number 2 behind China in terms of piracy? Try France?$1.5 billion.

Meanwhile, Beijing has begun announcing some cuts in subsidies for various export industries in response to the U.S. action to levy tariffs on coated paper from China. In other words, if cooler heads prevail a trade war can be averted.

--Venezuela's Hugo Chavez and Cuba's Fidel Castro have been ganging up on President Bush over the issue of ethanol, so I present some recent thoughts by the hardly left-wing Economist.

"It is not often that this newspaper finds itself in agreement with Fidel Castro?.But when he roused himself from his sickbed to write an article criticizing George Bush's unhealthy enthusiasm for ethanol, he had a point?.America's use of corn to make ethanol biofuel, which can then be blended with petrol to reduce the country's dependence on foreign oil, has already driven up the price of corn. As more land is used to grow corn rather than other food crops, such as soy, their prices also rise. And since corn is used as animal feed, the price of meat goes up, too. The food supply, in other words, is being diverted to feed America's hungry cars."

"(Ethanol) is just about the only alternative-energy initiative that has broad political support. Farmers love it because it provides a new source of subsidy. Hawks love it because it offers the possibility that America may wean itself off Middle Eastern oil. The automotive industry loves it, because it reckons that switching to a green fuel will take the global-warming heat off cars. The oil industry loves it because the use of ethanol as a fuel additive means it is business as usual, at least for the time being. Politicians love it because by subsidizing it they can please all those constituencies. Taxpayers seem not to have noticed that they are footing the bill."

--China has another oil dispute, this one with Vietnam, which Beijing accused of piping gas from the disputed Spratly Islands in the South China Sea; islands also claimed by Taiwan, Brunei, Malaysia and the Philippines.

We need a world conference on islands. "OK, you guys get these two rocks and everything underneath it. China, pay attention. You get these three?and nothing more."

--Oil traders will be closely following the elections commencing this weekend in Nigeria, the first civilian-to-civilian change in government here. Violence has been breaking out as I write.

--Chipmaker Advanced Micro Devices warned its sales for the first quarter will be a full 20% below the company's own projections due to the price war in the semiconductor sector. But investors didn't slam the stock because AMD also announced a massive cost-cutting effort.

--Citigroup finally announced its formal plans after weeks of conjecture; 17,000 will be laid off, or about 5% of the global work force. The news was met by the Street with a yawn.

--Ray Irani, CEO of Occidental Petroleum Corp., took home cash and prizes of $416 million in 2006; $270 million of which was from exercising stock options. Why his salary, bonus and further stock rewards were a miserly $53 million, we learned.

[I spent some time talking with my Chinese host this week about the divide between the rich and poor, both in the U.S. and in China. It's far worse in China.]

--And just what was I doing in China? I have been investing in a biodiesel company and I thought I needed to kick the tires before plowing any more of my precious assets into it. So I contacted the CFO, a Wharton grad and China native, said I'd like to come out, and he couldn't have been more accommodating. It was a tremendous experience for me, even if the actual visit at the plant was a quick one. It was also kind of funny that I had biodiesel all over the soles of my shoes and when I stepped foot back in the airport afterwards, I forgot this and almost fell flat on my butt. So I shuffled around thereafter. People don't bother you if you're shuffling, incidentally.

But you know I refuse to mention individual company names I'm investing in for a variety of reasons. It's good for all of us that way. But just as in the carbon fiber holding of mine, I've offered enough clues so you can figure it out if you really want to. The biodiesel stock is traded on Nasdaq, though daily volume is anemic so if you ever decide to invest in it, place limits!

Over the coming weeks and months I'm likely to say quite a bit more on this topic, but for now this particular company uses vegetable oil and cooking waste in its process, both of which are evidently in abundance in China. The potential is there, but like in everything else it's also about the execution and I have some issues on that front. Enough said, except that on the labor front you have to picture the average worker at the plant earns about 1/15th what he would make in the U.S.

--Want some good news on the real estate front? The median price of a home sold in Southern California rose 4.6% in March over a year earlier to $505,000. Want the bad news? Actual sales were down 32%. And on the price front, they fell 5% in San Diego County, just as my friend Josh P. predicted. In fact, he told me this to the number, so it's premium beer for the kid.

--I was reading a piece in Crain's New York Business and I found this pretty incredible.

"Late last month, (Blackstone Group) agreed to sell another 10 buildings that it acquired from Equity Office Properties Trust, bringing its total proceeds to $25 billion. The Manhattan-based firm paid Chicago real estate magnate Sam Zell $23 billion in cash for 540 commercial properties two months ago, and it assumed $16 billion in debt?.

"Based on the average price Blackstone paid for the properties, the return on its investment is an astounding 400%-plus in just eight weeks."

That's tremendous, but if the market is so strong, why not hold on for larger gains down the road? Aside from paring back its real estate exposure before going public in its upcoming IPO, one has to wonder whether or not the new buyers were suckers?

--You've gotta love World Bank president Paul Wolfowitz's chutzpah. He's apologized for giving his girlfriend hefty pay raises that saw her make more than Secretary of State Condoleezza Rice, but employees at the World Bank are in revolt and Wolfie will be history in short order.

--Finally, despite all the doom and gloom in the world, it's clear to me that Nestle, in acquiring Novartis's Gerber baby-food unit, is betting that Planet Earth will indeed survive. Or am I making too much of this?

"Bells were rung at all schools throughout the country to mark the 'Great National Nuclear Feast.'

"In Tehran province, the bell at a girl's elementary school in northern Tehran was rung by Minister of Education Mahmoud Farshidi on the occasion.

"The Iranian students celebrated the nuclear success of Iranian scientists in pursuing peaceful nuclear energy.

"Chanting slogans such as 'Nuclear energy is an inalienable right of the Iranian nation,' 'No country has the right to deprive Iran of its indisputable right,' and 'The Iranian nation is in need of nuclear fuel cycle,' the students voiced their support for the undeniable right of the Iranian people in pursuance of peaceful nuclear technology."

I have to admit, when I was in elementary school I was chanting "Let's Go Mets," but then times change.

President Mahmoud Ahmadinejad addressed his people and the world. "Today we have announced a national day of nuclear technology. In the past year, with continuous efforts, Iran has succeeded in the nuclear fuel cycle development to attain production at an industrial level. With great pride I announce, as of today, our dear country Iran is among the countries of the world that produces an industrial level of nuclear fuel."

Now what this is all supposed to mean is Iran would have us believe they have installed the magic number of 3,000 centrifuges, enough to spin out bomb grade material. Whether or not they have actually attained this level, however, is subject to much debate. If true, it would mean Iran could have enough material for a nuclear device in as little as a year, though most so-called experts are still saying 3-5 years and don't believe Iran's claims. Regardless, we are one step closer to an 'irreversible' drive by Iran for its long-sought weapon and intelligence services around the world really have no clue what they are dealing with at this point.

[Separately, I had a bit of a discussion with a family member at the dinner table on Easter over the actions of the 15 British sailors and Marines taken hostage by Iran. I maintain we still don't know all the facts, but I'm now convinced they were indeed lightly armed and perhaps no match for the Iranians had they chosen to fight?.not that I'm saying this is what they should have done given their murky rules of engagement.

But then we learn the 15 were permitted by Britain's Ministry of Defense (MOD) to sell their stories, with the lone female, Faye Turney making a reported $300,000. Another sailor, who was getting about half what Faye did, said "I am worth it because I'm one of two that didn't crack." Families of victims killed or injured termed the MOD's authorization "inappropriate" and "undignified." It also turns out that despite Tony Blair's denials, the White House did indeed play a key role in getting an Iranian diplomat released from custody in Iraq, which in turn helped lead to Tehran's "gift to the British people."]

Iraq: Moqtada al-Sadr had been keeping a low profile as the surge began early in the year, but now he is urging his militia to fight back just as a suicide attack inside the Green Zone took the life of an Iraqi parliament member in a bombing that not only could have been far worse, but also points out the fragility of the government overall.

The United States also has its hands full with Turkey and its designs on Kurdish terrorists using Iraq as a safe haven for launching attacks on Turkey's military. Prime Minister Erdogan is under increasing pressure from his people to fight back and invade the border areas, while Washington is urging him to back off. Relations between the U.S. and Turkey are at an all-time low and threaten to split wide open over this issue. Turkey is in its rights to go after the Kurds, just as we were in going after al- Qaeda in Afghanistan following 9/11.

Afghanistan: The violence is picking up as at least 11 NATO soldiers, including 8 Canadians, died in various attacks this week. The number of Canadians who have given their lives in Afghanistan is now 53 and the people are rapidly turning against the mission. This is one American who notes the Canadian military's courage and heroic response.

North Korea: Appeasement, that's what it is. The U.S. allowed North Korea to sell arms to the Ethiopian Army because it was thought Ethiopia could help stabilize Somalia. [Now human rights groups say Ethiopia is committing atrocities.] And then the Bush administration gave in on the issue of North Korea and the disputed $25 million sitting in a Macau bank. As of this writing, though, the funds still haven't been transferred, though the U.S. is saying it is not to blame.

I do give the White House credit for sending Bill Richardson over to at least talk to the commies, but the fact is North Korea has not met the deadline, today, for shutting down its nuclear facility at Yongbyon per the Feb. 13 agreement.

The following isn't a partisan statement, but why trust President Bush at all on this issue? Former U.N. ambassador John Bolton, who has become quite the critic of his former boss, said it's nothing more than retreat, "an image of surrender that is going to be hard to erase." Returning the money to entities that committed fraud (as in counterfeiting U.S. currency) "will have a debilitating effect on bringing sanctions against Iran and other rogue states. It is a terrible symbol."

Algeria: In a worrisome development for North Africa as a whole, an al-Qaeda linked group bombed the prime minister's office and a police station, killing 33 at last count. A third bomb was found before it could go off.

And remember how I said Casablanca was a dangerous place when I was over there recently? Four suicide bombers died in one day in the city this week?three blew themselves up (one perhaps accidentally) and a fourth was shot before he could set off his bomb belt. Police are frantically looking for up to ten more; shades of the horrific carnage inflicted on Casablanca in 2003 when 13 blew themselves up and about 40 innocents.

India: The nuclear deal between Delhi and Washington is teetering on the verge of collapse and this time it's not the White House's fault. India insists on its ability to continue testing its nuclear weapons when the agreement was supposed to help stop the spread of nukes in the region, a point further made when India test-fired a missile yesterday that was capable of carrying a nuke to Beijing and Shanghai. The administration is also upset at what it sees as increased cooperation on a number of issues between Iran and India. This is a huge disappointment to yours truly, who touted the nuclear technology transfer between our two nations as a real watershed moment.

Lebanon: The war of words is heating up again. Hizbullah leader Sheik Nasrallah declared his forces will keep their weapons (as if there was any doubt) until Lebanon's army is capable of defending the country. Walid Jumblatt, the senior member of the ruling coalition, described Nasrallah as "the president of the republic of Hizbullah."

Ukraine: Pro-Russia Prime Minister Yanukovich has reportedly been paying $millions in bribes to members of parliament to get them to switch allegiances in his battle with Pro-West President Yushchenko. This crisis could easily spin out of control as Yushchenko continues to call for new elections on May 27.

France: A week from Sunday, the first round in France's presidential election will take place. Two will then enter a runoff slated for May 6, but it would appear only Nicolas Sarkozy is a lock for one of those spots. Sarkozy is also pouncing on the Algeria bombings, correctly saying that France is the real target down the road.

Russia: There is a report out that exiled oligarch Boris Berezovsky is planning a "bloody revolution" to oust Vladimir Putin. If I were a neighbor of Berezovsky's in London, I think I'd move over the weekend, know what I'm sayin'?

Hong Kong: It's been ten years since Britain handed over the city to China and by now the people here were supposed to have had universal suffrage. Instead, on March 25, only 800, mainly businesspeople with ties to the mainland, voted for chief executive. China is now saying perhaps by 2017 it will give Hong Kong residents the right to vote on its leaders, though even then they would be choosing from a list of candidates handpicked by Beijing.

So I once again ask my friends in Taiwan. Is this what you want? If you give into China, as the majority on the island appears to favor, you will no longer have your freedom. While some would say, what's so bad about that? Hong Kong appears to still be doing pretty well, just understand there is a lot of tension below the surface.

One sidebar. There is a bit of a controversy in Hong Kong over the recent sale of fake diamond necklaces to tourists. Undercover officers broke the case. And, yes, the 'gems' proved to be cubic zirconium. Which is why I am announcing a new policy for the loved ones; no more jewelry from my travels. I never had a clue what I was purchasing in the first place.

Dow Jones +0.4% [12612]
S&P 500 +0.6% [1452]
S&P MidCap +0.7%
Russell 2000 +0.7%
Nasdaq +0.8% [2491]

BUYandHOLD does not offer or provide any investment advice or opinion regarding the nature, potential, value, suitability or profitability of any particular security, portfolio of securities, transaction or investment strategy. Any investment decisions you make will be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance, and liquidity needs. The securities mentioned above are being used for illustrative purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy. The securities markets are subject to the risks of fluctuating prices and the uncertainty of rates of return and yields inherent in investing. Past performance is no guarantee of future results. The opinions expressed above are not necessarily those of BUYandHOLD, Freedom Investments, its officers, directors or any of its affiliates.

The BUYandHOLD website contains links to third-party websites on the Internet. BUYandHOLD provides these links to these websites only as a convenience to users of the website. Links on the BUYandHOLD website are not endorsements by BUYandHOLD or Freedom Investments, implied or express, of the linked sites or any products, services or links in such sites; and no information in such sites has been endorsed or approved by BUYandHOLD. Linked sites are not under the control of BUYandHOLD or Freedom Investments, and we are not responsible for the contents of any linked site or any link contained in a linked site. No information contained in the BUYandHOLD website or accessed through any linked site, or any link contained in a linked site, constitutes a recommendation by BUYandHOLD or Freedom Investments to buy, sell or hold any security, financial product or instrument. Information accessed through linked sites is not, nor should be construed as, an offer or a solicitation of an offer, to buy or sell securities by BUYandHOLD or Freedom Investments. BUYandHOLD does not offer or provide any investment advice or opinion regarding the nature, potential, value, suitability or profitability of any particular security, portfolio of securities, transaction or investment strategy, and any investment decisions you make will be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance, and liquidity needs.