Educate Yourself

Week in Review
For the week 5/14/2007 - 5/18/2007
Brian Trumbore
President/Editor, StocksandNews.com

Iraq: Here's where we stand today. Democrats in the Senate failed miserably on an attempt to cut off funding come March 31, 2008, as they continue to be split between the irrational musings of Majority Leader Harry Reid, and the rational, don't hurt the troops position of Sen. Carl Levin who is against any cut off at this point.

The Republican position is that the "surge" must be given time to succeed, certainly at least until Commanding General David Petraeus' report to Congress in September.

But there have to be benchmarks of some kind that the U.S. presses the Iraqi government on, as even President Bush now concedes, though some prominent neocons continue to have their heads in the sand. Like one chief architect of the war, Frederick Kagan, who offered this the other day.

"Sunnis aren't fighting because of the (lack of a) hydrocarbon law. They're fighting because they still think they should be in control of the country."

That may be so, Mr. Kagan, but you can not have a viable, secure Iraq without rules governing the divvying up of what amounts to over 80% of the nation's revenues and unless the average Iraqi has some kind of economic stake, there will never be an Iraq from which America can then exit with honor. That's just a fact.

Of course for months now, all sides, including the White House, have gotten nowhere in getting the parliament to sit down and hash out a final oil-revenue sharing plan and the more time that passes, the more each side wonders if it will ever get a fair shake.

What's more, now the violence has spread to a key area that has been relatively peaceful, Kirkuk, near the border of Kurdistan. Lt. Col. Michael Browder, who is stationed there, told USA Today's Rick Jervis this week that tensions are so high in Kirkuk, one bomb with mass casualties might be enough to unleash another massive bloodletting. "Everybody's right on the envelope," he said. Iraq's constitution says that Kirkuk's residents must vote by end of 2007 on whether to join Kurdistan or remain under Baghdad's control, but Prime Minister al-Maliki has refused to set a date for it, further angering the majority Kurds there.

But back to the surge, and a potential withdrawal down the road, Brent Scowcroft, one of the chief critics of the 2003 invasion, told the Financial Times:

"The costs of staying are visible; the costs of getting out are almost never discussed. If we get out before Iraq is stable, the entire Middle East region might start to resemble Iraq today. Getting out is not a solution."

According to General Scowcroft, the U.S. should only leave when the region can deal with the problem. And the key to that was a solution to the Arab-Israeli conflict. "I don't think anything would release the energies of moderates in the region than to make progress on the Palestinian issue. The general outlines of a deal are fairly obvious. I think we need to be relaxed about what comes out for the moment. If we could make some real progress on the Palestinian problem we can change the psychology."

Hold that thought?.which has to do with my title for this week's review up above.

Historian and neocon Victor Davis Hanson argues that should the United States just withdraw from Iraq:

"The promotion of Middle East democracy would, of course, be a dead letter. Instead, we would go back to past policies of 'realist' appeasement. Prior to 9/11, we dealt with antagonists with missile strikes that lost no Americans and had little effect on terrorists. Did such conduct increase the likelihood of our being attacked at home in 2001? After pulling out of Iraq, would a reversion to these policies ensure another 9/11?

"As America withdrew in defeat from Iraq, leaders in Pakistan, Kuwait, Saudi Arabia, and the other Gulf sheikdoms would face critical choices. Should they trust an untrustworthy United States that once promised it would never abandon Iraqis and their new democracy? Or should these leaders instead ask America to keep at arm's length as they make arrangements of convenience with victorious neighboring terrorists and other enemies of the U.S.? Our commercial, financial, and military responsibilities well beyond the Middle East are built on a trust that, likewise, would be irreparably harmed by our flight from the few thousand insurgents of Iraq." [The American, May/June 2007]

Another neocon, Max Boot, wrote a number of pieces following his latest trip to Iraq. From a Wall Street Journal op-ed:

"If we're going to be successful in Iraq, we're going to have to make a long-term commitment. That doesn't mean 170,000 U.S. combat troops stationed there for 10 years, but it does mean a substantial force - tens of thousands of soldiers - will be needed for many years to come. If we're planning to start withdrawing in September 2007 - or even September 2008 - we might as well run up the white flag now and let the great Iraqi civil war unfold in all its horror?.

"It's still possible to stave off catastrophic defeat in Iraq. But the only way to do it is to give Gen. Petraeus and his troops more time - at least another year - to try to change the dynamics on the ground. The surge strategy may be a long shot but every alternative is even worse."

But in a column for the May 21, 2007 issue of The Weekly Standard, Mr. Boot addresses a topic near and dear to my heart. The generals.

"Accountability should extend far beyond information operations, of course. There needs to be a much greater effort to promote good commanders and weed out bad ones. Imagine how poorly the Union would have fared in the Civil War if Lincoln had not cashiered McClellan, Pope, Hooker, Burnside, and numerous other ineffectual generals, while promoting Sherman, Grant, and Sheridan. President Bush has singularly failed to hold his commanders accountable. Lieutenant Colonel Paul Yingling, a veteran of two combat tours in Iraq, rightly complains in the new issue of Armed Forces Journal that, 'As matters stand now, a private who loses a rifle suffers far greater consequences than a general who loses a war.' Yingling isn't the only one upset by this. I've talked to many serving soldiers who are still fuming over the Medals of Freedom given to General Tommy Franks, Ambassador L. Paul Bremer III, and CIA Director George Tenet - well-intentioned men all, but their medals were seen as a reward for failure?.

"Failed commanders ought to be fired or pushed aside, following the example of Major General Lloyd Fredendall, who was relieved after the debacle at Kasserine Pass in 1943 and replaced by George S. Patton Jr. Equally important, those who prove their mettle on the battlefield should be quickly promoted."

But now President Bush, who says he reads history but must be getting it from the back of a cereal box, has appointed a "war czar," Gen. Douglas E. Lute.

Retired Lt. Col. Ralph Peters wrote in the New York Post that Lute was hired "after five retired four-stars turned down the job." Peters then writes:

"The fundamental issue is this: How much authority will the war czar have? If the usual pattern prevails, the feudal domains on the Potomac will nod politely when he speaks, but ignore him when their parochial interests are threatened.

"Will he be able to order the State Department to send its cowering personnel to fill the empty slots they've left in Iraq? I guarantee you that the answer is 'no.'

"Will he be able to command the intelligence agencies to refocus their in-house priorities to better support our troops? Nope.

"Will he be able to shift Pentagon resources to support the wars we face instead of the fantasy wars we'd like to fight someday? Not a chance. The services know how to defend their toy boxes, and the Capitol Hill porkmeisters would knock out any teeth his office might have.

"Will he at least be able to persuade the Department of Agriculture to send enough experts to Iraq to make a difference? Not if the Aggies ain't in the mood to plant date palms.

"And the elephant-with-dysentery on the White House South Lawn is, of course, the spectacularly corrupt and incompetent private-sector involvement in Iraq. Will the American people's war czar be able to force corporate carpetbaggers to fulfill the contracts for which they've received billions?

"Will he have the authority to regulate and discipline the private security firms whose thugs have done so much to undermine our relations with the average Iraqi?

"Unless the administration just had a revelation on the road between Baghdad and Karbala, Gen. Lute not only won't have any sticks to wield, he won't have any carrots.

"In Washington, if you can't fire people, prosecute them or take away their money, you're a joke."

Iran: We've crossed the point of no return. According to inspectors with the International Atomic Energy Agency, Iran has now begun enriching uranium on a far larger scale than before, and sooner than most experts believed possible. What this means is that Iran appears to have mastered the technology, and that to take massive military action, while perhaps setting back the program, won't end it.

Within one month, inspectors believe Iran will have 3,000 centrifuges spinning away, producing bomb grade material at a sufficient level to have a nuclear weapon within two years. What a great job of leadership on the part of the White House.

I do have to say one thing this week, though, about Iranian President Mahmoud Ahmadinejad and his threat that the United States faces "severe" reprisals if we were to attack his country. The U.S. will be able to protect the tankers in the Gulf, of this I'm sure. But I also haven't seen anything the past few days on the proposed gasoline price hike for Iranian citizens that I said could be a major flashpoint. As for this column, we're closer to the meaning of the title at the very top. But first?.

Israel: Arab leaders are besides themselves. 'How the heck can we help you, Palestinians, if you insist on killing each other?' Aside from the fact you basically have civil war in Gaza between Hamas and Fatah, the situation is so out of control, Hamas mistakenly ambushed a vehicle carrying its own people, killing five; this after executing six Fatah guards. Hamas is also hell- bent on dragging Israel into the conflict as it fires salvo after salvo of their rockets into Israel, begging the Israelis to retaliate.

So is there any real hope? Is Brent Scowcroft (and the likes of Tony Blair) correct in thinking the only way to reach any kind of peace in Iraq is by achieving a breakthrough in the Israeli- Palestinian conflict?

I'm giving you a homework assignment. If you haven't already read my "Hott Spotts" column of 5/17/07, please do so.

Dr. Edward Luttwak is senior adviser at the Center for Strategic and International Studies and he has written what I consider to be as important a piece on foreign affairs as any I've read over the years?in the same vein as Samuel Huntington's "The Clash of Civilizations?" essay that he wrote for Foreign Affairs back in 1993.

When I was at Wake Forest University, Dr. Luttwak delivered a lecture and the other day I asked him if my memory was accurate, seeing as this was back in 1978 or 79. He was kind enough to reply and reminded me that there was someone else with him that day, Brent Scowcroft; a fact I had totally forgotten.

Following is just the opening and conclusion of Luttwak's piece. I've read it a few times and haven't reached any conclusions of my own, as yet, given the realities on the ground today, but it certainly gives you all something to think about when you go for a jog, or whatever you do to clear the head?before filling it back up.

"Why are Middle East experts so unfailingly wrong? The lesson of history is that men never learn from history, but Middle East experts, like the rest of us, should at least learn from their past mistakes. Instead, they just keep repeating them. The first mistake is 'five minutes to midnight' catastrophism. The late King Hussein of Jordan was the undisputed master of this genre. Wearing his gravest aspect, he would warn us that with patience finally exhausted the Arab-Israeli conflict was about to explode, that all past conflicts would be dwarfed by what was about to happen unless, unless?And then came the remedy - usually something rather tame when compared with the immense catastrophe predicted, such as resuming this or that stalled negotiation, or getting an American envoy to the scene to make the usual promises to the Palestinians and apply the usual preferences on Israel. We read versions of the standard King Hussein speech in countless newspaper columns, hear identical invocations in the grindingly repetitive radio and television appearances of the usual Middle East experts, and are now faced with Hussein's son Abdullah periodically repeating his father's speech almost verbatim.

"What actually happens at each of these 'moments of truth' - and we may be approaching another one - is nothing much; only the same old cynical conflict which always restarts when peace is about to break out, and always dampens down when the violence becomes intense enough. The ease of filming and reporting out of safe and comfortable Israeli hotels inflates the media coverage of every minor affray. But humanitarians should note that the dead from Jewish-Palestinian fighting since 1921 amount to fewer than 100,000 - about as many as are killed in a season of conflict in Darfur?.

"The Middle East was once the world's most advanced region, but these days its biggest industries are extravagant consumption and the venting of resentment. According to the United Nations' 2004 Arab Human Development Report, the region boasts the second lowest adult literacy rate in the world (after sub-Saharan Africa) at just 63 percent. Its dependence on oil means that manufactured goods account for just 17 percent of exports, compared to a global average of 78 percent. Moreover, despite its oil wealth, the entire Middle East generated under 4 percent of global GDP in 2006 - less than Germany.

"Unless compelled by immediate danger, we should therefore focus on the old and new lands of creation in Europe and America, in India and East Asia - places where hard-working populations are looking ahead instead of dreaming of the past."

Ironically, on Thursday, Jordan's King Abdullah did just what Luttwak wrote of in the beginning of his essay, issue another warning that we face catastrophe, in an interview with the London Times. According to Abdullah, the world is losing its last hope of making peace in the Middle East.

"We have a finite amount of time. Physically there may not be a chance for a future Palestinian state," he said. "This is why the urgency is now. Is the situation ideal? Far from it. But we have our backs against the wall and I believe that time is running out."

Last week I mused that it would be a bad sign if there were no announced deals on Monday. I needn't have worried. While I don't consider the DaimlerChrysler - Cerberus Capital transaction the kind I was referring to?one that excites the senses, there were countless others, including Friday's $6 billion acquisition by Microsoft of online advertising firm aQuantive at an 80% premium. If that isn't the sign of a bubble, at least in the mergers and acquisitions game, I don't know what is. The online ad game is so incredibly overrated, but if it keeps people employed, happy and spending at the malls, that's a good thing.

Of course I'm really just jealous that none of the companies I've owned over the past ten years, at least, has ever been approached by a suitor. Served a suit, perhaps?but no suitors.

It's really fascinating. The U.S. economy is tepid, at best, but with practically half of most large caps' revenues generated overseas, and with the rest of the world, save Zimbabwe, cookin', once again Wall Street's expectations are ratcheting higher, and all the geopolitical issues I harp on every week don't mean a lick.

It also doesn't seem to matter that oil has stubbornly held the $60 level, threatening to go much higher, despite the fact we receive a lot of crude from Nigeria and, let's just say, this nation, loosely defined, is a true basket case. For starters, it's Christians vs. Muslims?like one of those Spy vs. Spy comic strips from MAD magazine.

But aside from the merger/buyout game, and global growth, investors were heartened by a tame consumer price index reading for April, up 0.2% ex-everything you and I use?.and only up 2.3% year over year. Now about once a quarter, I feel obligated to restate my position on this front.

Yes, we all know the government feeds us a bunch of garbage when it comes to inflation. I, for one, am most upset at how quickly the price of my beer is rising. Just like with gasoline prices, or cigarettes, I've decided that when Coors Light hits $23 a six-pack, I'm quitting. [$45 for Pilsner Urquell.]

But in dealing with the markets, and the reaction in the stock and bond pits, the only thing that matters to the Federal Reserve is their own cooked up numbers and if the core reading for the CPI, or any of their other favored barometers, is 2.3%, that isn't anything to worry about. Thus I've consistently maintained there is no inflation, the Fed is not hiking this year, and that's all you need to know. As for your own personal situation, and figuring out how to eat and fuel up the car, I can't help you. I'm down to three meals of gruel a day, myself. [In one of my better moves, Quaker Instant Oatmeal was on sale a few months ago and I bought a zillion boxes of the stuff. Granted, I maxed out all my credit cards to make the purchase, but I'll just keep rolling them over until one of my stocks is taken out.]

Believe it or not, each week I try to avoid bringing up real estate, but for the archives I do have to note that housing starts for April were up 2.5%, a mild positive, but building permits (future starts) were down 9%, the worst such figure in 17 years. The median price across the country was also down, 1.8%, in the Jan.-Mar. period, the third such quarterly decline in a row. And an index of homebuilder confidence hit a new low.

But fear not, for Federal Reserve Chairman Ben Bernanke said "the financial system will absorb the losses from the subprime mortgage problems without serious problems."

Of course just a little while ago he was acting as if subprime would create zero problems, but who am I to argue with a man whose intelligence dwarfs all mortals'?

On a different topic, junk?junk bonds, that is?I have to note the comment of one of the great fixed income managers, Loomis Sayles' Dan Fuss, who is quoted in Bloomberg News thusly when analyzing credit spreads.

"I haven't felt this nervous about a market ever," in looking at high-yield, high-risk securities that are exhibiting clear signs of being in a bubble.

Junk bond expert Martin Fridson adds "The downside is likely to be very severe." Thomas Lee, of private-equity fame, notes "Defaults are almost non-existent today and we know that doesn't hold forever. When the economy goes bad, defaults will spike up from 1 percent into the 9 percent level. If that happens then the financing part grinds to a halt" for LBOs.

Barclays Capital notes that "more than half of the junk bonds sold this year were used to pay for leveraged buyouts and mergers and acquisitions."

But I do just want to finish this segment on the climate change, environmental topic. One of my two solar power holdings held a conference call on Monday and the CEO said there is no doubt, "Going green has now become a way of life." From an economic/market standpoint, it's irreversible.

Each week you have new players climbing onboard, whether it is from the corporate standpoint or with the views of world leaders. The other day, new French President Nicolas Sarkozy reiterated at his inauguration that dealing with climate change is a top priority for him, especially in his dealings with the U.S. Michael Bloomberg hosted a conference of mayors representing some of the world's largest cities. Coupled with a new effort by former President Bill Clinton, this coalition has vowed to modernize, and boost the energy efficiency of, aging office buildings. I've written recently of how every new office building going up today is gunning for the green label.

This is mostly all for the good, and it will not adversely impact the economy. Just make sure, especially in the realm of solar power, that you aren't getting swept up in the bubble of every Tom, Dick and Harry suddenly manufacturing panels, or you may end up with one that acts more like a magnifying glass.

--The Dow Jones and S&P 500 registered their 7th consecutive weekly gains, though Nasdaq's losing streak is now two. In fact the divergence between large and small cap stocks is growing; kind of a reversal of the action we saw in the last throes of the 1999-2000 bubble. The Dow hit its 24th record of the year on Friday, closing at 13556, while the S&P 500 is within just five points of its all-time mark of 1527 set back on March 24, 2000. Mergers, buyouts, massive share buybacks, and continued confidence in the markets by the likes of Warren Buffett and new heavyweight Eddie Lampert all added to the frothy heads on the beer mugs of investors from Main Street to Wall Street.

Finally, we may have something to talk about. Bonds sunk, yields rose, for two reasons. While the inflation news was tame, the feeling du jour in the bond pits is that the Fed won't be lowering interest rates anytime soon. And there has clearly been some selling from overseas as central banks diversify their cash hoards. China, for one, supposedly is handing Blackstone Group $3 billion to mess around with?but outside the U.S. We'll see what happens this coming week, but it's possible we may break out of the 4.50%-4.80% trading range we've had on the 10-year since mid-October, forcing yours truly to turn up the sound on CNBC for the bond report.

--Europe continues to outperform the U.S., with the Eurozone reporting growth of 3.1% in the first quarter, vs. our 1.3%. How many of you thought we'd be saying this just about one year ago? And Japan's first quarter GDP came in at a solid 2.4% annualized rate?good for it.

--Repsol YPF, the Spanish-Argentine oil giant, announced it is having major problems replacing its reserves, a not uncommon thing for Western energy companies these days. As Keith Johnson reported in the Journal, "Many of the best untapped oil reserves are in politically closed or unstable nations [in Repsol's case, Bolivia and Venezuela], while the cost of developing new projects is soaring amid a flurry of oil-field activity."

--It's really amazing to think that back in 1998, Daimler-Benz acquired Chrysler in a "merger of equals" for $35 billion, and now, nine years later, sold it to private-equity firm Cerberus Capital Management for $7.4 billion. But, of this amount, Cerberus is investing $5 billion in the new Chrysler and a little over $1 billion in Chrysler's financial arm, meaning DaimlerChrysler is really only receiving about $1.5 billion, as well as retaining a 20% stake in what will be called Chrysler Holding LLC, though, importantly, Cerberus is now responsible for about $18 billion in pension liabilities.

--Retail sales in China rose a stupendous 15.5% in April, matching the pace for the first four months of the year. China's economic planning agency expected sales growth of 12% for all of 2007. Meanwhile, every stock strategist on the globe says the Shanghai market is out of control and it's just a matter of time before the bubble bursts.

--Barron's Jim McTague: "Not only is Russia's (recent) behavior making it too risky for most investors, it's making it undeserving of investment." Hear hear.

--I've been all over the water crisis in Australia and this week NBC News finally caught on to it with a report from there. Madelene Pearson also filed some of the following on Tuesday for Bloomberg News.

"Dead trees and dry fountains are becoming features of Australia's urban landscape as restrictions limit the use of city water outdoors. Reservoir levels have ebbed to as little as a fifth of capacity in six of the country's eight regional capitals amid a drought that has lasted a decade in some areas?.

"Relief may take at least five years, said David Jones, head of climate analysis at the Bureau of Meteorology's National Climate Centre in Melbourne.

"Reservoir levels in Melbourne have fallen to 30 percent of capacity, government figures show. They are at 19 percent in Brisbane, less than 23 percent in Perth and 38 percent in Sydney."

--Kimberley A. Strassel, editorial board member for the Wall Street Journal, on ethanol:

"Corn ethanol seemed unstoppable, but a remarkable thing happened on the road from Des Moines. Just as the smart people warned, the government's decision to play energy market God and forcibly divert huge amounts of corn stocks into ethanol has played havoc with key sectors of the economy. Corn prices have nearly doubled, which means livestock owners can't afford to feed their animals, and food and drink manufacturers are struggling to buy corn and corn syrup. Environmentalists are sour over new stresses on farmland; international aid groups are moaning that the U.S. is cutting back its charitable food giving, and many of these folks are taking out their anger on Congress."

--Tyco International agreed to pay a record $3 billion to settle various class-action suits related to the accounting fraud perpetrated by former CEO Dennis Kozlowski and CFO Mark Swartz, both now sitting in jail and bouncing a tennis ball off the wall. The settlement proceeds go to those who bought Tyco securities from Dec. 13, 1999 through June 7, 2002; meaning, since no one has kept records from that far back, it all goes to the lawyers!

--Former Fed chairman Alan "Mr. Bubble" Greenspan has signed on with PIMCO to act as a resident scholar and advisor, even though PIMCO leader Bill Gross has often disparaged the "maestro" in the past. My guess is PIMCO is doing this more to keep Greenspan from attaching his name to one of their competitors, rather than actually wanting to listen to the guy.

--The Journal reported that at a recent San Diego auction of foreclosed homes, the houses and condos typically sold for about 30% below the previous sale or appraisal prices. And I can't help but add a comment from Michael Farrell, CEO of Annaly Capital Management, a REIT. "The country is going through a real estate depression. It just hasn't played out yet." [Barron's]

--One real estate market remains hot, thanks to Wall Street, and that's New York City where the median sales price of an apartment rose 20% in the first quarter to $450,000. The average price was actually $745,000; $1.1 million in Manhattan alone.

--Former Goldman Sachs CEO John Whitehead, now 85, blasted his old employer for the exorbitant pay packages being thrown around, including the $54 million that current CEO Lloyd Blankfein pocketed for '06. Whitehead believes Wall Street is about to drown in its own excess, pointing his finger particularly at hedge funds. Of course today's arrogant Wall Street kingpins reply, "Oh, shut up, old man."

--Like Dow Kim. The co-head of global markets and investment banking at Merrill Lynch wasn't satisfied with cash and prizes of $37 million last year and has opted to start his own hedge fund.

--Fair Isaac, a fraud-detection specialist, conducted a study on click fraud and concluded 10% to 15% of advertising traffic is suspicious, or "pathological," as they phrase it. This topic has died down recently, for some reason, but even the 10% to 15% estimate is no doubt far too conservative.

--Good ol' Lucent, or rather Alcatel-Lucent. It was revealed this week that a compact disc containing Social Security numbers and other personal data on as many as 200,000 current and former employees has been missing for at least two weeks. The disc was in the hands of a third-party vendor, Hewitt Associates, and not password protected, if you can imagine that. Seeing as I have to dump some toxic waste there today (as part of a company sponsored recycling program), I'll hold off on criticizing them. But if I were them, I'd look at the geese on their lawn as a prime suspect?.speaking of toxic waste.

--Josh P. passed along an article on the Port of San Diego, which it turns out specializes in accepting wind turbines; very expensive equipment requiring careful handling that evidently San Diego specializes in. But did you know the average longshoreman here, of which there are about 400, now earns $100,000, not including health care and other benefits? Boy, if you felt there was any job security whatsoever, why go to college? Plus, now you can snap up a distressed condo in the area for half price.

--My portfolio: This week's piece is running long so I'm going to hold off on commentary this time?.but I promise some extensive thoughts involving my China biodiesel position and the solar energy sector next review. For now, I know some of you have bought into the biodiesel story (you're good detectives) and recognize the earnings were released this week. Just know nothing has changed in terms of my own holding, even though the market reacted unenthusiastically.

--Finally, we note the passing of William Becker, co-founder of Motel 6, who died at the age of 85. Becker and his partner Paul Greene were Santa Barbara contractors when Becker was inspired by a month long, cross-country car trip in the summer of 1960. "Staying in motels across the country, you paid a high price and got poor lodging conditions," Becker's son recalled. "He thought, 'Why not build a nice motel offering clean rooms at a budget price?'"

Becker and Greene were initially going to charge $4 a room per night, but settled on $6, the rate that inspired the name. And because they already had experience in building low-cost tract homes, they used their own crews and equipment, thus saving about 50% in initial construction costs. By 1967, Motel 6 had 31 locations in California and four other western states and boasted an occupancy rate of 89%.

Russia: There is no doubt relations between Russia and the West are at their lowest level since the collapse of the Soviet Union and this week tensions ratcheted up further. For starters, Russia continues to beat up on little Estonia for the latter's removal of the Soviet war memorial. Russia has drastically cut the supply of oil and gas to Estonia, while the Kremlin is clearly responsible for a massive, coordinated cyber assault on Estonian government and business Web sites; raising the question whether such a move can be construed as an act of war. Russia also continues to square off against Poland with the ongoing embargo of Polish farm exports. And for some reason, the Kremlin has decided to resurrect a dead issue, that being a money-laundering case involving the Bank of New York. Russia is suing BoNY for $22.5 billion, alleging collaboration in tax evasion, even though the case was settled in U.S. courts in 2005 with the bank agreeing to pay a $14 million fine.

Meanwhile, Secretary of State Condoleezza Rice was in Moscow, meeting with President Putin and a number of other officials in an attempt to soften the rhetoric of the past few months. But on the issue of the missile shield, Rice refused to back down. "The United States needs to be able to move forward to use technology to defend itself and we're going to do that. I don't think that anyone expects the United States to permit somehow a veto on American security interests."

Foreign Minister Sergei Lavrov, however, said his government will not back down on its opposition to the shield, and, furthermore, continues to object to the UN/U.S. proposal for Kosovo's independence; with Moscow preferring Kosovo remain part of Serbia.

But perhaps the most important item on the week, especially longer term, was the announcement that Russia will build a new pipeline to import natural gas from Turkmenistan, via Kazahkstan; a major slap in the face to a U.S.-backed plan that would have bypassed Russian territory. In other words, as this gas is largely destined for Europe, Russia has yet another tool in the energy security battles of the future. The real bastard in this deal is actually Kazakhstan, in the humble opinion of your scribe. U.S. and other western companies have spent $billions on projects here and the Russia-Turkmenistan deal couldn't work without Kazakh cooperation.

Kremlinologist Leon Aron had some of the following thoughts on Russia in general, including the upcoming election process, in an op-ed for the Wall Street Journal.

"There are no lame ducks in Putin's Russia - only dead ones. Thus, the appointment of the successor must be withheld for as long as possible, to prevent those passed over from coalescing and perhaps even reaching out to the pro-democracy opposition. Such an alliance would be the Kremlin's worst nightmare; a potentially escalating popular movement for unmanaged, free and fair elections, akin to the Ukrainian 'Orange Revolution' of 2004-05. The succession games may last well into this fall, and one could do worse, investment-wise, than betting a modest amount in rubles, steadily appreciating against the dollar, that neither of the current front-runners, First Deputy Prime Ministers Dmitry Medvedev and Sergei Ivanov, will get the nod."

I disagree with Aron's conclusion and still say it's Ivanov, assuming Putin doesn't declare a "crisis" that only he can deal with and stay in power himself. But on the energy issue, Aron observes:

"The hydrocarbon windfall has done nothing to increase life expectancy, which at 65 years is still below that of China or India. Russia also is a world leader in industrial, aviation and traffic accidents. Crime is rising; over the past six years, there has been a 10% increase in the number of murders and a 73% rise in drug-related crimes?.

"Nor is the Russian state capable of providing broad and effective protection in a more immediate sense. While Chechnya is for now 'pacified' by the former Islamic guerillas who switched sides, the multi-ethnic North Caucasus is virtually ungovernable, especially its largest 'autonomous republic,' Dagestan. The conventional armed forces are utterly incapable of dealing with new threats. A dysfunctional relic of the tsarist and Soviet past, for today's conscripts the Russian army is a combination of a prison and torture chamber?.

"The prospect of several unfolding in concert is troubling. In combination with falling oil prices, they may cause a political equivalent of a 'perfect storm.' Yet with the deliberate weakening of the mediating institutions of democracy, the center of political gravity in Putin's Russia has shifted to the very top, making the Kremlin responsible for anything that goes wrong anywhere in the country.

"Everything that the Russian authorities do in the next 12 months will be informed by this sense of vulnerability, and aimed at making sure that vagaries of succession are not multiplied or even made unmanageable by the corrupt state's obsessive quest for control in pursuit of an ever greater share of the country's oil wealth."

North Korea: The issue of the $25 million in the Macau bank is supposedly near a final resolution and the foreign ministry said it would start shutting down the nuclear facility at Yongbyon per the Feb. 13 agreement, though Pyongyang is already over a month late on meeting the April 14 deadline for ceasing all weapons activity there. As former U.S. ambassador to the UN John Bolton wrote in the Journal on Friday:

"It is entirely possible?that Yongbyon is now a hulk, well past its useful life span, and that the North agreed, in effect, to shut down a wreck. Even if Yongbyon is not in such parlous condition, it may be that the North has extracted all the plutonium possible from the fuel rods it has, and that Yongbyon therefore offers it nothing more. Here, the omissions in the Feb. 13 agreement become significant. The deal says nothing about the plutonium, perhaps weaponized perhaps not, that North Korea has already reprocessed."

But on a different topic, I noted with interest the two trains that crossed the DMZ between North and South Korea this week, the first such effort in 56 years. I was at the border station just a year ago, where I wrote at the time that Seoul was building a huge resort on its side of the line. There's nothing wrong with a little confidence building measure.

Afghanistan: I have to admit, I've totally ignored all the claims that this or that terror leader has been killed here or in Iraq, with the exception of Zarqawi. For starters, I bet if you researched all the initial claims made by various officials, including the U.S., NATO and both the Iraqi and Afghan governments, over half would later prove to be false. It's one of the reasons why my motto has always been "wait 24 hours."

Having said that, there is no doubt that the killing of Taliban leader Mullah Dadullah is significant. Congratulations to those responsible for sending this dirtball straight to hell.

Pakistan: It's more than a bit unsettling what is going on here, seeing as Pakistan has a significant cache of nukes and Islamic Fundamentalists people the security services. This week over 40 died in the worst political violence in years as the controversy over the suspension of Supreme Court Chief Justice Iftikhar Chaudhry boiled over. President Pervez Musharraf accused Chaudhry back in March of abuse of power and nepotism, but his supporters, legions of lawyers, argue otherwise.

Colombia: Since I have long supported President Alvaro Uribe, it's only fair I present the other side. Former paramilitary warlord Salvatore Mancuso accused the defense minister and vice president of plotting with militants in the 1990s to destabilize the government of Ernesto Samper at the time. What makes it worse is that it also came to light that the current government has been running an illegal wiretap operation and Uribe forced 12 generals in the national police to resign over the disclosure. Uribe, though, expressed confidence in the two officials.

Zimbabwe: This is absurd. By a 26-21 vote, the UN Commission on Sustainable Development handed the rotating chairmanship to Zimbabwe. And in case you were thinking of summering in Harare, inflation is now running at 3,700 percent and some say it's headed to 15,000. According to the London Times, "A single brick now costs what ten years ago would have bought a mansion in the capital's upmarket areas. This week the cost of postage stamps went up 600 percent." See, Zimbabweans should have bought that 'forever' stamp the U.S. post office is now offering.

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