Week in Review 
For the week 4/30/2007 - 5/4/2007
Brian Trumbore
President/Editor, StocksandNews.com

Wall Street

"In the battle of Iraq, the United States and our Allies have prevailed."

--President George W. Bush, May 1, 2003

Not quite. But the stock market has done nothing but go up. In fact the S&P 500 was 916 on 5/1/03 and now resides above 1500 for a gain of over 60%. You'll have to excuse me for being perhaps a bit facetious, but it's not as if the American people were asked to sacrifice, so why shouldn't we have partied?! It's basically what our president asked us to do, anyway. As for the rest of the world, they've had little stake in the war themselves so no wonder they have been celebrating too in terms of market returns.

This week stocks rallied for a fifth consecutive time as all the major averages either hit new all-time highs or six-year plus ones, and you can say this about virtually every index across the globe as well. Yes, it's about excess cash, yen, yuan, euro, pounds, you name it?.those investing in the markets (some would say gambling) have loads of it. And of course the last thing these same folks want to talk about is the increasing divide between the haves and the have nots, whether you're in Dubai, Shanghai, Moscow, London or New York. Some day, though, there will be an event that puts us all back closer to balance, a global regression to the mean, if you will. Maybe it's next year. Maybe it's not for another decade. But these boom times won't last forever.

Of course if you've been speculating in real estate the past three years or so you already know this. I'm on record as saying we are in the fifth inning of the real estate debacle so I noted with interest when Merrill Lynch chief economist David Rosenberg told CNBC on Monday he saw it as just "the 2nd or 3rd." I would normally defer to Mr. Rosenberg's guidance, he being far smarter, but Rosenberg didn't say anything about what I've been bringing up.

It's not as important to know what inning we're in as it is to know we are going to extra frames! Whenever we hit bottom, that doesn't then mean the game is over and it's back to the races. Instead we're going to stagnate and it will end up feeling like one of those famous New York Mets 1-0, 23- or 24-inning affairs that they used to hold on a regular basis in their early years. It also means the impact will grind away at the consumers' psyche as their #1 asset continues to tread water, at best. After all, sports fans, you've received some terrific advice on the real estate front in this space, even if I was a little early.

Here in Chicago, I was driving in from the airport on Tuesday and it was one apartment/condo tower after another with "For Sale" or "For Rent" signs, including one that read "Buy a condo, get a car!"

We're also beginning to see more foreclosure data and it's not pretty. In Clark County, Nevada (which encompasses Las Vegas), for example, 1 in every 30 homes began the process toward foreclosure last year. Of course these are largely the flippers and speculators.

In San Diego County, Josh P. passed along his usual great info (unless you're the subject of it), such as the story of a model K. Hovnanian development in downtown San Diego that was completed between 2004-05, during the height of the bubble there. Today, 52 of 383 units are either in foreclosure or on sale. Josh, who lives in this general area, also noted that he is incredulous when his neighbors still tell him they can't lose money on their homes.

[Friday, Hovnanian warned its earnings would be miserable and that it was taking an additional $15 to $20 million in charges for further forfeit of land deposits, another issue that continues to bite developers in the butt.]

I also have to note that the Wall Street Journal ran an editorial this week on the property tax topic I noted the other day, or rather the burgeoning property tax revolt. As J.P. and others have observed, we're now in a situation in some parts of the country where the actual market value of a home is lower than the assessed value. As for city and municipal finances, the gravy train is over.

But wait?there's more?like the issue of derivatives and all those mortgage-backed securities out there; the ones that haven't been stress-tested, as we say.

Cerberus Capital Management, one of the private-equity guys, paid up last November for a share of GMAC Financial Services, a division of General Motors, with GM retaining a large holding itself. This week, just a little over five months later, GMAC reported a loss of over $305 million. But they would have turned a handsome profit were it not for the fact that they lost $910 million because of their subprime mortgage exposure; this after the unit had made a profit of $200 million a year earlier. Now if that doesn't tell you how quickly the real estate market has turned, I don't know what will.

And on the issue of those derivatives based on bonds backed by subprime mortgages, some investors are learning, in the words of Scott Simon of PIMCO, "It looks like a great trade but it isn't a profit if you can't get out. Investors had a na?ve belief in liquidity thinking just because you buy it, you can sell it."

In other words, you can drive a truck through some of the spreads on these instruments these days, and in this kind of market you'll have lots of victims, whether it's GMAC or the just dumped hedge fund unit at UBS that was supposed to make a killing in this stuff. Incredibly, the ratings agencies, such as Moody's and S&P, who were behind in their analyses of the sector, have finally been playing catch up and bonds that were rated "investment grade" just last fall are now being reduced to "junk" status.

But I imagine many of you are saying about now, yeah, we understand the real estate sector is slumping but the rest of the economy is doing fine so why should I panic? You have a point, only I'd remind everyone that this isn't like the bubble bursting on Nasdaq in March 2000; a sudden, violent crash.

The unwinding of the real estate bubble is taking its own sweet time in finding its way into the mindset of the consumer, but this week you had one of the first admissions by the auto sector that the housing slump is impacting sales there. Some executives said the figures [Ford down 13%, GM off 9.5%, and even Toyota down 4%] were a "direct result" of the slump.

Lastly, I want to switch gears a bit and pound the table yet again on another favorite topic of mine, the lack of water in many critical parts of the world.

On Friday, the New York Times' Thomas Friedman finally got around to addressing the issues Australia faces, though his column was an incredibly weak one and didn't begin to provide the information that any Aussie schoolchild could give the rest of us.

I've long noted Australia was Ground Zero on the climate change front and if you want to be scared out of your wits, check out the words of Tim Flannery, "Australian of the Year" for his pioneering environmental work. Flannery says his country's drought will only get worse.

Mr. Flannery said the drought meant two of Australia's largest cities, Brisbane and Adelaide - home to a combined total of almost three million people - would run out of water by year's end unless the so-called 'Big Dry' ended, as reported by Agence France-Presse.

"We could see a catastrophic situation developing by the end of the year. It's become a huge issue," he told AFP.

"Even a year ago this would have been unthinkable. I think it's the most extreme and the most dangerous situation arising from climate change facing any country in the world right now.

"We have a situation where, if there are no flows in the Murray- Darling (river system), Adelaide, a city of one million people, has only 40 days worth of water left in storage. If we don't get any rain, this year Adelaide and Brisbane may be facing diabolical problems."

AFP adds: "The impact on rural communities has been devastating. Many farmers have been forced off the land and counseling services have reported unusually high levels of suicide."

Researchers even warn the koala bear could be driven to extinction within a decade and the million-plus feral camel population is causing quite a stir because it has been rampaging through villages looking for water.

A few weeks ago I described similar situations in China as well, and even here in America, there is an undercurrent that is troubling.

While some of us praise the benefits of ethanol (I'm not one of them, that's for sure), consider the fact the production of it consumes massive quantities of water. And the water table in some parts of the Midwest is going down so quickly that according to the High Plains Journal, many a Nebraska farmer doesn't know if they'll be farming even 10 years from now. Forget the production of corn for ethanol, there won't be enough water to support any kind of farming. [To give you an example of what we could be facing, Australia, the second largest exporter of wheat next to the U.S., saw its wheat crop decline 60% in 2006-07 from a year earlier. 60% in one year!]

Of course many parts of the U.S., like in New Jersey, have ample water so maybe folks there will begin knocking down their condos to grow wheat. Then the banks will be going around, scratching their heads, thinking, "Goodness gracious, I thought there was a house in that spot where we had a loan out and now all I see is farm land!"

Street Bytes

The Dow Jones is in the midst of its best streak since the middle of 1955, if you can believe that?up 23 of 26 days. No doubt there was some solid economic news this week, even if the above has you wondering if the world is ending in November (or Nov. 2008), but personal income for the latest period was up 0.7% and various national indices on manufacturing and the service sector came in better than expected and far from flashing recession signals. But Friday's employment report (88,000 new non-farm jobs added in April) was less than exciting and, overall, it was just last week that word came in the economy grew at a tepid 1.3% pace in the first quarter.

What continues to move the market, however, is the aforementioned liquidity, the merger / takeover / private-equity game, and respectable earnings.

For the week the Dow Jones tacked on another 1.1% to close at a record 13264, while the S&P 500, at 1505, is now just 22 points from its all time mark. Nasdaq, up 0.6%, sits at 2572. All three are up 6% on the year.

--U.S. Treasury Yields

6-mo. 5.01% 2-yr. 4.67% 10-yr. 4.64% 30-yr. 4.81%

The new buzzword is "agflation," inflation in the agriculture sector such as we've seen in corn prices and the carry on effect straight to the grocer's shelf. Gasoline prices are also going through the roof. But overall the core indicators of inflation remain tame and the chief economists at Merrill Lynch, Goldman Sachs and UBS have banded together to urge the Federal Reserve not to play around with interest rates, or at least consider lowering them. Inflation is not an issue, period. More importantly, all three say the housing slump could yet drive the economy into recession and that should be the Fed's preeminent concern at this point. Needless to say, I agree.

--Chinese authorities detained the head of one of the companies accused of selling contaminated wheat gluten as the U.S. FDA steps up its own investigation. Imported feed containing the metal melamine has now been reported as being used in some feed for chickens and hogs in six states, though it's unclear if any entered the market as yet. [It is not deemed a threat to humans.] Regardless, former FDA commissioner David Kessler said the food safety program "is broken." As noted weeks ago in this space, it's worse than that in China.

--It was media week on Wall Street as Fox's Rupert Murdoch made an unsolicited bid for Dow Jones, parent of the Wall Street Journal and other properties. But the ruling Bancroft family spurred the $60 offer for now, which is nuts. Then on Friday, Thomson of Canada said it was going after Reuters and Reuters, the sexy leftist, said, "Take me! I'm yours!" A combined Thomson-Reuters would rival Bloomberg in the financial news dissemination market.

--British Petroleum CEO Lord Browne, at the helm since 1995, resigned after he was unable to prevent details of his private life from being released. Browne also lied to a court about his relationship with partner Jeff Chevalier as stories surfaced Browne may have been using company funds in caring for him. It doesn't appear to this scribe that what Browne is alleged to have done was anything egregious, but more importantly BP has suffered under his watch the past few years, including gross mismanagement at the Texas City refinery that led to scores dead when the lack of maintenance caught up with it.

--A significant meeting was held in Saudi Arabia this week involving both Middle Eastern oil producers and Asian consumers of crude with demand continuing to soar in Asia and the likes of China, Japan and South Korea needing to secure the supply to meet it. In turn, Western oil partners are finding it increasingly difficult to access new supply of their own for a variety of reasons, mostly political. But, lest one think the United States is in immediate danger of losing key sources to meet its own demands, remember that the likes of China, Japan and South Korea can not guarantee the safety of Saudi and other Gulf states' crude like the American military can and that is not likely to change for at least another decade until China greatly increases the abilities of its nascent blue water navy. Of more import in the short term for the U.S. is our relationship with Venezuela and Russia, as well as the rapidly declining fields in Mexico.

--Vacation home sales rose 4.7% in 2006, but sales for investment (flippers/speculators) plunged 28.9%. 2nd-home sales account for 36% of all existing- and new-home purchases.

--The Dolan family of Cablevision fame (including ownership of Madison Square Garden) is taking the company private.

--It would appear Microsoft is not going after Yahoo, despite a Friday news story that sparked a rally in Yahoo shares.

--The U.S. Supreme Court gave businesses new protections from patent suits, siding with the likes of Cisco Systems and Microsoft. Bottom line, in one of two rulings the justices unanimously said too much power has been granted developers of trivial technological improvements. As Justice Kennedy wrote for the court, "Granting patent protection to advances that would occur in the ordinary course without real innovation retards progress."

--A Credit Suisse Group investment banker was charged with insider trading for allegedly leaking details on nine mergers, including the $32 billion buyout of Texas utility TXU. Hafiz Naseem, 37 and a Pakistani citizen, was believed to be tipping off a trader/banker in Pakistan who then earned $7.5 million by acting on the advance knowledge.

--In a highly important item for those of you who travel and may on occasion use a hotel business center or Internet cafe, the FBI is warning that the computers are increasingly being targeted by gangs employing keystroke-logging programs that in turn capture your password for online brokerage accounts. Of course it can also be dangerous to check your online account in airports or other locations that employ WiFi.

--Finally, we note the passing of Warren Avis, 92, the founder of Avis Rent A Car, the nation's first rental business to be located at airports.

Avis was a decorated bomber pilot in World War II when he formed his company in 1946 at two locations in Miami and Ypsilanti, Mich., utilizing just two employees and 200 cars. He got the idea when he was a pilot and couldn't find ground transportation once he arrived at airports.

Avis became the world's largest rental system until it was overtaken by Hertz, though he sold his interest in the business for $8 million in 1954.

Someone always has to be first?and more often than not these ideas still originate here in the good old U.S. of A.

Foreign Affairs

Iraq: The administration now wants to wait until September before weighing whether or not progress has been made with the surge, while Democrats have largely agreed to attempt to compromise on the war-funding bill after failing to override the president's veto.

[I thought it wouldn't come to this; that the Democrats would follow the lead of Sen. Carl Levin and compromise at the beginning instead of sending a bill to Bush that they knew would be thrown back in their face.]

But now Senators Hillary Clinton and Robert Byrd have proposed that the initial authority to invade Iraq, granted President Bush five years ago, be repealed. Interesting scheme, I must say, but it would get bogged down in a debate over the constitution.

The president says timetables are a "prescription for chaos and confusion" yet the fact remains the Iraqi government has woefully underperformed, while being given every chance to succeed. Republicans and Democrats will end up agreeing on a series of non-binding benchmarks at the end of the day.

What does remain clear is that Sunnis are ready to quit the government, both Kurds and Sunnis are now complaining about the oil revenue-sharing legislation approved by the Cabinet in February, and there are stories that Prime Minister Maliki has been dismissing senior officers who were aggressively combating Shiite militias. Add to that the story that the Iraqis are not maintaining (and/or looting) the projects that the U.S. has spent $billions on and it's easy to just throw up your arms and say "It's yours."

But wait until the American people see that the Iraqi parliament is about to take a two-month recess! That's the word from the foreign minister, as told to CNN's Wolf Blitzer last Sunday. I may have missed it, but I'm surprised this hasn't been splashed across every one of our newspapers. Should this turn out to be the case, if I were General David Petraeus I'd march into the Oval Office and give the president a piece of my mind.

And since I have been highly critical of the abysmal performance by America's generals since 2003, I can't help but note President Bush's unbelievable comment the other day when addressing the issue of who should be responsible for war policy.

"The question is, 'Who ought to make that decision? The Congress or the commanders?' And as you know, my position is clear - I'm the commander guy."

Oh brother.

After my critique of last week, however, I read a story by Thomas Wagner of the Associated Press concerning Lt. Col. Paul Yingling, an active duty officer and deputy commander of the 3rd Armored Cavalry Regiment, who had some of the following to say in an article he wrote for the Armed Forces Journal, which is published by Army Times.

"For reasons that are not yet clear, America's general officer corps underestimated the strength of the enemy, overestimated the capabilities of Iraq's government and security forces, and failed to provide Congress with an accurate assessment of security conditions in Iraq.

"In 2007, Iraq's grave and deteriorating condition offers diminishing hope for an American victory and portends an even wider and more destructive regional war?

"The intellectual and moral failures common to America's general officer corps in Vietnam and Iraq constitute a crisis in American generalship," said Yingling, who has served two tours in Iraq as well as the Gulf War.

"Given the lack of troop strength [until the surge], not even the most brilliant general could have devised the ways necessary to stabilize post-Saddam Iraq."

And on the issue of reform and the process for selecting and promoting generals, Yingling said:

"We still have time to select as our generals those who possess the intelligence to visualize future conflicts and the moral courage to advise civilian policy makers on the preparations needed for our security."

Israel: Prime Minister Ehud Olmert is under intense pressure to resign, as called for by foreign minister Tzipi Livni and about 150,000 Israelis protesting in the streets on Thursday.

Olmert was blasted in a report by a government commission, appointed by Olmert himself, for "severe failures" in the opening days of last summer's war against Lebanon and Hizbullah. The commission, led by retired judge Eliyahu Winograd, blamed Olmert for a failure to exercise "judgment, responsibility and prudence." The report also lambasted defense minister Amir Peretz and the chief of staff at the time, Lt. Gen. Dan Halutz, who resigned a while back. Both Olmert and Peretz vowed to stay on, however.

Among the report's findings:

"In making the decision to go to war, the government did not consider the whole range of options, including that of continuing the policy of 'containment,' or combining political and diplomatic moves with military strikes below the 'escalation level,' or military preparations without immediate military action - so as to maintain for Israel the full range of responses to the abduction. This failure reflects in strategic thinking?

"The prime minister made up his mind hastily, despite the fact that no detailed military plan was submitted to him and without asking for one."

You know you're in trouble when Hizbullah's Sheikh Nasrallah praises the findings.

But what gets me is that in all the editorials back here in the U.S., at least the mainstream ones I read, not one mentioned the role of President Bush. As I've noted many a time since the start of the Israeli-Hizbullah conflict, it was criminal that Bush didn't pick up the phone and call Olmert once throughout the war. The United States also lost, big, by letting this go on.

[And in line with the above, Secretary of State Condoleezza Rice held talks with her Syrian counterpart on cooperation in preventing jihadists from crossing the border into Iraq. One wonders, though, just what she is saying on the critical issue of the tribunal to look into the assassination of Lebanon's Rafik Hariri. Will President Bashir Assad ever be brought to justice? No. Can Lebanon succeed without first having the tribunal? No.]

Russia: In a big blow to the Bush administration's plans for a missile shield in Europe, a congressional committee has blocked funding for the project; this after Georgia announced it would be interested in having some components of the radar system based on its soil, which only ticked off Russia further.

But the big story on the week was the removal of a Soviet war memorial in Estonia, a statue of a soldier designed to honor the heroism of those who defeated the Nazis. After rioting in Tallinn and other Estonian cities by ethnic Russians (who make up about 25% of the population here), Estonia was forced to close its consulate in Moscow and pull its ambassador as it came under threat from various extremist groups. The Kremlin called the removal of the statue "blasphemous and inhuman."

Not today, but under a President Sergei Ivanov in 2009 or 2010, an incident like this could be the tripwire in a future conflict with NATO.

Turkey: The Constitutional Court annulled last Friday's parliamentary vote for president (which fell short) due to the fact there was no quorum. The military put increasing pressure on the ruling Islamic party (AKP) to mend its ways, quick, and Prime Minister Erdogan called for new elections in July, thus speeding up the process with a vote having been previously scheduled for November. Erdogan also vowed to change the constitution to allow for the election of president (the head of state) by popular vote.

Meanwhile, Turkey threatened it would cut off the United States' supply route to Iraq if the U.S. Congress proceeded with a resolution labeling the conflict with the Armenians back in 1915 as genocide. [60% of U.S. supplies pass through Turkey.]

Saudi Arabia: There are still a lot of questions surrounding the highly publicized breakup of various terror cells in the kingdom. According to the Interior Ministry, 172 were arrested, with 120 coming from two cells and the other 52 from five others. The thing is the arrests supposedly occurred months ago, even as initial reports said they were all made on April 27 and that $32 million was captured along with the arms cache when it was closer to $5 million. The government claims the cells were acting independently.

But in reading through the Saudi papers to try and get a handle on this, I thought the following passage from an editorial in Arab News was slightly encouraging.

"It is high time that the government and the Saudi people took back the reins of the religious and ideological discourse that has been hijacked by extremists who preach their hateful 'Takfiri' thought through which they think they can decide who is a true Muslim or not. More activities must be introduced to keep our youth gainfully engaged such as better education, training, extracurricular activities, and jobs so that they do not even have the chance to become idle and thus fall easy prey to those actively plotting against our security and well-being?.

"(A) more basic form of vigilance is needed in speaking out against twisted ideologies that say it is OK to kill other Saudis and foreigners just because one disagrees with them. This intolerance is mistakenly allowed to grow among us because we naively believe that it will not be used against us in acts of bloody murder.

"Saudis of all ages and all walks of life have to stand up and speak out against these terrorists and their acts of violence. The truth is that this cancer is here among us and if we don't do anything to vanquish it now, it will eventually eat us all up."

Afghanistan: We have a real problem here with the continued incidences of civilian deaths as a result of U.S. and NATO airstrikes and other action against suspected Taliban. President Karzai is livid as it obviously makes it all the more hard for him to maintain stability in his own government.

Pakistan: In yet another reminder of just how fragile the leadership is here, the Interior Minister, seen as an ally of the U.S., was targeted for assassination but emerged largely unscathed in a suicide bombing that otherwise claimed 27 lives.

Venezuela: President Hugo Chavez took control of four large oil projects, most involving Western ownership by the likes of Exxon Mobil, Conoco Phillips, and Chevron. These companies and others will maintain some interest but the state will have ultimate control. Related to the above story on the Saudi-Asia meeting, China is also stepping up its efforts to secure crude from Venezuela, with Chavez needing private investment to get more out of the ground, but loath to get it from the U.S.

The dictator was busy this week, too, as he pulled out of the IMF and World Bank because of their Washington connections (though this was largely symbolic?Venezuela having long paid off its debts), and Chavez threatened to nationalize his nation's banks.

France: Segolene Royal attempted to take down Nicolas Sarkozy in their final debate, a tense affair lasting 2 ? hours, but Sarkozy stayed calm and courteous. The result is he now has a 7-9 point lead going into Sunday's runoff.

Britain: Prime Minister Tony Blair said he would be leaving office in weeks, probably at the end of June. Meanwhile, the country is in an uproar over the findings released in the case of five convicted bombers tied to the 7/7 attack. It seems authorities knew of the 7/7 ringleader, Mohammad Sidique Khan, one year before but blame lack of resources for their inability to tie the clues together. Those just convicted were planning on blowing up a shopping mall or nightclub with a fertilizer bomb.

China: A Labour Day march turned violent in Macau, the worst mass violence "in decades," as natives are increasingly upset over their low wages and seeing mainlanders flooding in to take the construction jobs.

Japan: As expected, Prime Minister Shinzo Abe called for a "bold review" of his nation's pacifist constitution, meaning the removal of post-World War II restrictions on the military's activities. He also wants to "instill confidence and pride among Japan's children." For the first time, a majority of the people desire to see the constitution amended.

Zimbabwe: Inflation is now running over 2,200%.

Caribbean: The Wall Street Journal had a story on Friday on the crime wave sweeping the entire region, fueled by the drug trade. As reported by Joel Millman, "The social and economic costs are growing and are compounded with each generation, feeding further cycles of violence." Jamaica, for one, is emerging as the murder capital of the region, "while the Caribbean?now ranks as the world's most crime-ridden area, excluding places torn by civil war," according to the World Bank. 48% of Caribbean adolescent girls also say they have been raped.

The result is less direct foreign investment, down 9% last year alone. The only growth industry, aside from the unpredictable tourism trade, is personal security.

It's all about rampant narcotics trafficking as the Caribbean serves as the way-station for drugs going from Latin America to the U.S. and points beyond.

Ergo, if you travel in the region, keep your eyes wide open.

Deadlines: Let's see?both North Korea and Iran continue to thumb their noses at the international community as resolutions and agreements designed to dismantle their weapons programs expire with nary a peep from those imposing them.

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Pray for the men and women of our armed forces.

God bless America.

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Gold closed at $689
Oil, $61.93?biggest drop in four months

Returns for the week 4/30-5/4

Dow Jones +1.1% [13264]
S&P 500 +0.8% [1505]
S&P MidCap +0.7%
Russell 2000 +0.4%
Nasdaq +0.6% [2572]

Returns for the period 1/1/07-5/4/07

Dow Jones +6.4%
S&P 500 +6.2%
S&P MidCap +10.9%
Russell 2000 +5.7%
Nasdaq +6.5%

Bulls 51.7
Bears 24.7 [Source: Chartcraft / Investors Intelligence]

Have a great week. I appreciate your support.

Brian Trumbore

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.