Week in Review 
For the week 6/25/2007 - 6/29/2007
Brian Trumbore
President/Editor, StocksandNews.com

Wall Street?end of second quarter

I wrote the following on 12/30/06 about my outlook for 2007.

"So what of next year? Those who are trying to convince us housing has bottomed and that it's soon back off to the races are nuts. There is absolutely no way housing, at least as represented by prices, has a good 2007.

"Housing was in a bubble, period. Bubbles, witness Nasdaq in 1999/2000, don't just pop and then return to old prices. But I'll grant you the housing sector could just stagnate for all of 2007, though I believe instead we will see another leg down.

"Remember, it's still largely about affordability and not one of the optimist shills ever brings this up. Prices have only retreated slightly in the bigger bubble markets and, as represented by the huge percentage of first-time and new-home buyers who are taking out subprime mortgages the past 12-24 months, a large percentage of Americans are still stretching way beyond their means. And this is with historically low interest rates and a solid job market. I also need to add that while rates remain low, this recent tick up in yields (to a 6.20% level for a 30-year fixed) isn't helping matters.

"So in our three-legged stool; housing, the consumer, and capital (business) spending, housing remains a problem.

"And it will increasingly wear on (the consumer). This hasn't happened as quickly as I thought it would, nor has the market stagnated long enough for psychology to begin to wear thin. But at some point in 2007 reality will begin to hit Americans in the face; their leading asset has stopped appreciating, best case. The reverse wealth effect will then come into play.

"As for capital spending, I remain convinced this is to a large extent hostage to the geopolitical scene because business leaders are simply more in tune with what's happening around them. If Iran doesn't pursue its weapons program, for example, and if peace breaks out in the Middle East and oil drops below $50, well then that's a pretty positive scenario.

"But if as is more likely the case the Middle East flares anew, oil heads back over $70 and the global economy shudders, particularly in Asia, capital spending will dry up faster than you can say 'backdated options.'

"Bottom line, stocks will meander around the breakeven mark in '07, call it up or down 3% on the troika - the Dow, the S&P and Nasdaq - when the final bell for the year rings next December. But then all hell breaks loose in 2008."

You know, six months into '07 I don't know if I'd change a word of the above. In terms of housing prices, nationwide the median has stagnated more than taking a header in most markets, but in the biggest bubble ones such as in Florida and Arizona, prices are collapsing, as any sane analysis would reveal. I keep thinking back to my trip last fall in the Tucson area and all the unfinished condo and housing developments I drove through, wondering just how the developers would survive. Remember how Will Rogers famously said, "Buy land, they aren't making anymore of it"? Ha!

Talk to one of America's homebuilders these days and ask them how they feel about all the earth they were gobbling up for what is proving to be another unneeded project. More specifically, ask KB Home, which just wrote down a massive amount of its land holdings, or the biggest developer in America, Lennar. The CEO of the former said this week "We can't predict when conditions will improve," citing "tighter credit conditions" that have "exacerbated market dynamics," while Lennar's CEO said "we continue to see weak, and perhaps deteriorating market conditions."

The week also saw the figures on new- and existing-home sales for the month of May and while the median price had declined 0.9 and 2.1 percent, respectively, over the past 12 months, the more worrisome development was the continuing surge in inventories. You don't have to be Einstein to know that you can't have lasting improvement in the housing sector until you work off much of what's already on the market.

As for the mortgage debacle, as expressed in both the subprime sector and the hedge fund crisis at Bear Stearns, it's spreading, pure and simple. Late payments and defaults on the next rung up the ladder, "Alt-A's," are rising rapidly by most accounts, and on Thursday we learned that a London fund manager, Cambridge Place, was forced to close a $900 million listed vehicle because of its exposure to the U.S. subprime market.

And what of the likes of Bear Stearns and its hedge fund investors? I don't mean to be trite, but who the heck knows what the real story is? No one, after all, understands what the true value is for a large segment of the mortgage paper first originated by Wall Street as it sliced and diced mortgage pools like Ron Popeil handling his Ginsu knife set. At the end of the process what was left? As in Mr. Popeil's case, by the time he was finished slicing, you couldn't identify it? Gee, was that a potato?

So Wall Street, in its never-ending quest to market crap to the ill- advised and ignorant, said, "I'm recommending this security. It's a pool of mortgages, just like the one you have on your own home. And you'll earn 7%!"

"But what if some of the mortgages go into default?"
"Huh? Oh, no problem. It's a diversified pool."
"Oh, gee, thanks Mr. Baloney. Let's take down a few."

Now multiply the above by 1,000 for a hedge fund. And as we've discovered recently, when the securities struggle, and the market is illiquid, what value do you assign? The SEC is examining Bear Stearns over just this issue and restatements for its "High-Grade Structured Credit Strategies Enhanced Leveraged Fund." According to Business Week, the fund was down 6.5% for April, but a month later was suddenly off about 19%. Or, as Josh P., who is a managing director with a rather large financial outfit, put it, you have a situation where not only are the hedge funds and brokerage firms attempting to assign accurate values to its holdings, but the rating agencies "are playing a major game of 'CYA' as they are forced to downgrade a ton of the paper they once issued investment grade status to."

In his latest missive on pimco.com, Bill Gross wrote the ratings agencies, as represented by "Mr. Moody" and "Mr. Poor", were wooed by a floating brothel, "the makeup, those six-inch hooker heels, and a 'tramp stamp.'"

As your editor has himself opined throughout this growing crisis, Gross added that "Escalating delinquencies of course ultimately lead to escalating defaults?.The percentage will grow and grow like a weed in your backyard tomato patch?.And the U.S. economy? Consumption will be reduced, to say nothing of new home construction over the next 12-18 months."

Gross also surmises that as the scenario plays out the Federal Reserve will be forced to take out an insurance policy in the form of a rate cut or two. I don't disagree with this, seeing as I wrote in the beginning of the year that the Fed will not raise rates all of '07 because they know it would absolutely kill the economy. As it is, reset time is fast approaching and we'll see carnage on a scale of the best of "Braveheart." [Actually, those Capital One commercials with the medieval characters were quite prescient; Capital One having just announced a substantial number of layoffs this week.]

And so it goes. The subprime disaster isn't just important for its impact on the housing market and those holding mortgage- backed securities and all its derivations, but the damage spreads to banks, who are now furiously hiking credit standards, which impedes investment in other sectors of the economy, let alone eventually stopping in its tracks the financing of future buyouts and acquisitions.

Goldman Sachs CEO Lloyd Blankfein said, "We are organizing ourselves like the market is undervaluing risk." Blankfein continued that he is wary of a "sentiment shift" that "could unravel very quickly" the vast wealth that has been created by the takeover boom. [Wall Street Journal]

He ought to know, Wall Street being where it all started. Then again, some say it all began with the Federal Reserve and its incredibly overrated former chairman Alan Greenspan for holding interest rates artificially low in this country. Other central bankers did as well, however.

But when Mr. Blankfein speaks of a "sentiment shift," he could just as easily be talking about one of my hot spots, or the ever- present terror threat, such as the scare in London on Friday. Recall just a few weeks ago [WIR 5/12/07, 5/26/07] I wrote of how I was selling some of my equity holdings to raise cash because I was more concerned than ever about this summer. One attack on a major city we've proved we can deal with, I offered then, but two in a fairly short period of time would create a major problem, and yesterday we dodged at least two in London. Just last weekend, German authorities said they were on their highest state of alert since 9/11 as well.

So whether it's geopolitical or financial, there is plenty to worry about these days, and to those who might say stocks will simply climb a wall of worry, go see Dr. Melfi. She has a free slot on her calendar.

Street Bytes

--Stocks continued their recent pattern of one up week, one down, with this week's gains on the light side, just 0.4% for the Dow Jones, 0.1% for the S&P 500 and 0.6% for Nasdaq. Forget Apple and its iPhone, BlackBerry maker Research in Motion rose 20% on Friday on the strength of strong earnings and a 3- for-1 stock split.

For the second quarter, the Dow Jones rose 8.5%, the S&P 5.8%, and Nasdaq 7.5%.

--U.S. Treasury Yields

6-mo. 4.93% 2-yr. 4.87% 10-yr. 5.03% 30-yr. 5.12%

The Federal Reserve met for the first time in seven weeks and as expected left interest rates alone, saying the current outlook for inflation has "improved modestly" but there was still cause for concern. These guys are such wimps. Take a stand, for crying out loud. Inflation, as measured by the core readings they profess to follow, is and has been tame. If they want to turn around and focus on what you and I have to deal with every day, such as price hikes on beer and Chex Mix, then that's a different story. But I'll say for the last time (that is for this week), that they have to be smart enough to know they can't possibly raise rates because it could flip the housing market, and the rest of the economy, into recession faster than you can say Vince McMahon; just to throw a name out that is representative of another industry about to take a major header?the sport of professional wrestling. These guys beat their wives, for crying out loud! But I digress.

For the week yields fell, particularly with the 10-year Treasury, on tame inflation news as well as a flight to safety with rising concerns over both the mortgage situation and the terror threat.

--Energy bits:

OPEC president Mohammad al-Hamli warned U.S. lawmakers they were taking a "really dangerous step" in seeking legislation to sue the cartel. The Senate recently approved a plan that would enable the federal government to take legal action against OPEC for price manipulation. OPEC could simply stop selling us oil and there is no guarantee the crude shortfall could be made up elsewhere after losing what we receive from the likes of Venezuela, Nigeria and Saudi Arabia.

ExxonMobil said it was not concerned about its investment in Sakhalin-1 in Russia, this after BP ceded its 50 percent stake in another project there under pressure from the Kremlin. Gazprom is putting the heat on as ExxonMobil makes waves about selling gas to China.

Exxon is also involved in a dispute with Venezuela and President Hugo Chavez, along with ConocoPhillips, with both refusing to meet Venezuela's deadline to reach an agreement on ceding control of their major ventures, a sign the two companies will be exiting Venezuela while others, such as Chevron, BP and Total have agreed to a major reduction in their stakes. This continues a trend where in countries like Russia and Venezuela, oil assets will remain underdeveloped without the technology and expertise offered by the likes of Exxon at a time when it is increasingly difficult to find enough supply to meet demand. [See my latest "Wall Street History" piece?a speech by Royal Dutch Shell's CEO.]

Back to Russia, PricewaterhouseCoopers' Russian unit, clearly under pressure from the Kremlin, suddenly announced "it suspects former management of now-bankrupt oil giant Yukos may have provided inaccurate information to its auditors and thus Pricewaterhouse's financial reports on the company for the years 1994-2004 should no longer be relied upon," as reported by Gregory White in the Wall Street Journal.

This is an absolute disgrace. The Kremlin is pursuing yet another case against former Yukos CEO Mikhail Khodorkovsky, who has been in prison following a fraud and tax evasion conviction, but Pricewaterhouse "is fighting a court battle in Russia against tax authorities who have alleged that the auditor knowingly aided Yukos in what authorities charge was a massive tax-evasion scheme?.A PwC official said Sunday the decision to withdraw the Yukos audits wasn't related to the court case now under appeal." Right.

Meanwhile, a congressional report blasts hedge fund Amaranth and its former star trader Brian Hunter for its attempt to corner the natural gas market last year; an effort resulting in a huge price spike. Amaranth later suffered losses of $6 billion. Democratic Senator Carl Levin said the current commodity laws regulating such trades were "riddled with exemptions, exclusions and limitations that make it virtually impossible for regulators to police U.S. energy markets."

"I don't care whether they [Amaranth] lost all their money; they are gamblers. We do care when they take others over the cliff with them."

After repeated warnings from commodities and futures regulators, Amaranth continued to violate pre-set "position limits" and traded on new markets that didn't have the same regulatory scrutiny. In other words, the whole episode was a freakin' mess and obviously represented a prime example of how hedge funds can roil markets and hit the average American in the pocketbook.

--China bytes:

Well, sports fans, I told you to stay away from fish labeled "farm raised in China." Now the Food and Drug Administration blocked the sale of five such products from there, including catfish. I'm serious when I say that I will only eat fish ordered from sites such as conservationsalmon.com. I refuse to eat the farm-raised variety from anywhere, including the U.S. Of course we all have a problem when ordering from a restaurant, 90% of which lie about the species they serve, let alone where it's from. Chilean Sea Bass? Try Jersey Sea Robin.

Anyway, China has a host of other problems to deal with on the export side these days, as the government there races to correct real issues as well as simple perceptions. Chinese-made tires are being blamed for deaths in the U.S. [tread separation?and it's important to note these are replacement tires, not original equipment], on top of previous product complaints on items such as toothpaste, pet food, and toys. Beijing closed 180 food factories after an inspection crackdown.

On a totally different matter, China is establishing a $200 billion fund that will invest in assets around the world. That's $200 billion of its $1.2 trillion in foreign exchange reserves. The first such example of how this will work is China's $3 billion investment in Blackstone.

My first thought is this smacks of Japan and the late 1980s when the government began investing in projects such as the Pebble Beach Golf Club and U.S. office buildings, right at the top of the cycle for these assets. In the case of China, you could build the case that the time for diversification was at the global market bottom, Oct. 2002, not today. Heck, they are already down on their Blackstone investment in just one week.

So I say again, there are times when there is nothing wrong with simple cash, whether it is a money market account, CDs, or T'bills.

Lastly, due to soaring food prices in China, the government is ordering minimum wages be raised to help the poor cope.

--You know who will go down as an idiot? Treasury Secretary Henry Paulson, who recently said of the housing market, "I do believe we are at or near the bottom."

--Even though I'm on my condo board (I recently demoted myself from president to treasurer in a bit of self-imposed term limits), I couldn't gain permission from my neighbors to knock their homes down so I could plant some corn. It seems like we're the only ones in America who aren't these days, as the U.S. Dept. of Agriculture reported. 92.9 million acres of the stuff, specifically, and far more than estimated just three months ago. Of course it's all about ethanol, baby; the world's most overrated fuel.

--I was watching the local New Jersey weather radar late Thursday afternoon when word came out that all flights at LaGuardia Airport in New York City had been grounded. There was one little shower over Long Island at the time and a line of storms in Eastern Pennsylvania, still 60 miles away. In other words it was absurd, and further proof the U.S. air traffic control system in this country is broken.

And look at Northwest Airlines. They've been canceling hundreds of flights a day because they are short-staffed and can't find enough crews to meet demand. Plus now there's word staff at UAL are upset over their work conditions. And, of course, you have Continental, my airline of choice, that had the now infamous incident where they couldn't fix a toilet.

--Looks like my suspicions concerning Saudi Prince Bandar were well warranted. The U.S. Department of Justice has now launched a formal anti-corruption investigation into British defense contractor BAE Systems' compliance with the laws, "including the company's business concerning the Kingdom of Saudi Arabia." The U.S. government had earlier approved BAE's $4 billion takeover of Armor Holdings, and it's assumed that acquisition will proceed.

--EnCap, a North Carolina developer, was supposed to spearhead a $1 billion project in New Jersey's Meadowlands for two golf courses and a number of high-rise communities, but now it is facing huge financial issues in its attempt to avoid default. For starters, EnCap was responsible for cleaning up waste dumps and the associated costs are soaring. This is emblematic of the kinds of problems developers all over are facing, as one project suffers because of financial difficulties elsewhere in a real estate company's portfolio.

--Former HealthSouth Corp. founder and CEO Richard Scrushy was sentenced to seven years in prison for bribery, with former Democratic Alabama Gov. Don Siegelman also sentenced to seven years for their scheme to exchange a $500,000 contribution to a foundation established by Siegelman for a seat on the state hospital regulatory board. Scrushy, you'll recall, had been acquitted of all charges in the $2.7 billion accounting fraud at HealthSouth.

--When the Blackstone Group offering was first being discussed, I mentioned that investors should beware they would receive a K-1 tax form. Just a reminder to those thinking of investing in it now that it's trading. If you haven't had to deal with K-1s before, they are a royal pain in the butt because invariably they are issued late and often you have to file for an extension on your overall taxes.

Meanwhile, as Paul Tharp noted in the New York Post, a research report from Renaissance Capital warns investors in Blackstone that a global downturn could be particularly harmful because the firm's investments "are illiquid and difficult to value and exit."

--Apple Inc. is now the third-largest music retailer in the U.S. behind Wal-Mart and Best Buy, but ahead of Amazon.com.

--As of 2003, according to the national Restaurant Association (and the Wall Street Journal) there was one restaurant for every 664 people in the U.S. 30 years earlier there was one for very 1,029; the point being it's increasingly difficult for chains like Applebee's to differentiate themselves from the competition.

--Crain's New York Business published their annual report on CEO pay for the New York area and at the top of the list is not Goldman's Blankfein, at $54.3 million for 2006, but the incredibly overrated money manager Mario Gabelli, who raked in $58.6 million.

--Housing Collapse, Part XLV?The late Curt Gowdy initially listed his Palm Beach home for $27 million two years ago, but the property was just sold for $19.5 million. Mr. Gowdy could not be channeled for comment.

--Playboy Enterprises announced it is making a large investment in Macau. While I'm convinced the bubble will pop here in another year or two, Playboy will be well received. [Oh, you just don't know how much I want to add to this topic, but I don't want to lose my International Web Site Association license.]

Foreign Affairs

Iraq: By Friday morning, the death toll for this quarter was 329, the deadliest three month period since the war began in March 2003. And in a major blow to the efforts to stabilize Anbar province, four Sunni leaders, who had been cooperating with U.S. forces, were killed in Baghdad where they were holding a conference. Some U.S. generals also expressed doubts that any territory seized in the surge against the militants can be held due to the state of the Iraqi security forces that must then fill the breach.

But the big story on the week concerned the comments of Republican Senator Richard Lugar of Indiana. Like most Americans who follow Washington, regardless of party affiliation, I admire Lugar and when he speaks up on the foreign policy front it's always worth listening to. So this week he said some of the following on the war from the Senate floor.

"In my judgment, our course in Iraq has lost contact with our national security interests in the Middle East and beyond. Our continuing absorption with military activities in Iraq is limiting our diplomatic assertiveness there and elsewhere in the world. The prospects that the 'surge' strategy will succeed as originally envisioned by the president are very limited within the period framed by our domestic political debate. And the strident, polarized nature of that debate increases the risk that our involvement in Iraq will end in a poorly planned withdrawal that undercuts our interests in the Middle East?.

"I believe that the costs and risks of continuing down the current path outweigh the potential benefits that might be achieved by doing so?.I do not doubt the assessments of military commanders that there has been progress in security. But three factors - the political fragmentation in Iraq, the growing stress on our military and the constraints of our domestic political process - are converging to make it almost impossible for the United States to engineer a stable, multi-sectarian government in Iraq in a reasonable time.

"Few Iraqi leaders are willing to make sacrifices or expose themselves to risks on behalf of the type of unified Iraq that the Bush administration had envisioned. In contrast, many Iraqi leaders are deeply invested in sectarian or tribal agendas. Even if U.S. negotiators found a way to forge a political settlement among selected representatives of the major factions, these leaders have not shown the ability to control their members at the local level?.

"The president and some of his advisers may be tempted to pursue the surge strategy to the end of his administration, but such a course contains extreme risks for U.S. national security?.

"The president and his team must come to grips with the shortened political timeline in this country for military operations in Iraq. A course change should happen now, while there is still some possibility of constructing a sustainable bipartisan strategy."

Lugar calls for a downsizing and redeployment of troops to defensible locations in Iraq, such as in Kurd territory, as well as states like Kuwait; enough to enable us to "respond to terrorist threats, protect oil flows and help deter a regional war."

Iran: Back on 3/10/07 in this space, I warned of a coming crisis in Iran due to the government's imminent decision to hike the price of gasoline and ration it.

"Look for major protests, possibly bloody ones, if the government follows through. The U.S. can benefit; but if you knew this wouldn't you be talking to the opposition today, as I've advocated?"

Alas, we didn't, and yet after a lengthy delay (the rationing plan was originally to be put in place around May 22), the government sprung it on the people in the dead of night, Tuesday. Immediately, there were violent protests and clashes at filling stations which then spread to state-run banks and business centers.

But it's unclear just exactly what is transpiring around the country because the mullahs have cracked down on any media coverage. As I noted last week, however, any protests will be "brutally repressed."

There is a window of opportunity here, though it's nowhere near as big as it could have been even three months ago before the Iranian government accelerated progress with its nuclear program.

Iran imports 40% of its gasoline needs, despite its oil wealth, because its refineries can't keep up with booming demand. Heretofore, gasoline was heavily subsidized, which only exacerbated the problem.

But if the UN Security Council has the guts, it can target gas imports for increased sanctions. Iran's leadership would then be forced to cooperate on the nuclear weapons front or face the increasing wrath of the people.

However, as I keep noting, the clock is running and now we've learned the Bushehr nuclear plant, the one Russia helped build, is scheduled to go on line in October; this after Moscow and Tehran evidently solved a financial dispute. That means another potential facility for producing weapons-grade material.

Israel: Ex-prime minister Tony Blair is the new Middle East envoy representing the quartet?the U.S., UN, EU and Russia? at the peace table. The selection is being panned in some circles, notably Arab and Palestinian ones, because Blair is seen as too pro-Israel and Washington.

At the same time the West has opened up the money spigot for Palestinian President Mahmoud Abbas in a last attempt to support the moderate. The only problem is his Fatah party has never been able to mend its own corrupt/terrorist ways that often resemble those of Hamas.

Writing in the Wall Street Journal, Joshua Muravchik of the American Enterprise Institute commented on the axis of radicalism - Hamas, Hizbullah, Iran and Syria - and how it is "feeling its oats" these days.

"Today, this same dynamic is creating a moment of great danger. The radicals are becoming reckless, asserting themselves for little reason beyond the conviction that they can. They are very likely to overreach. It is not hard to imagine scenarios in which a single match - say a terrible terror attack from Gaza - could ignite a chain reaction. Israel could handle Hamas, Hizbullah and Syria, albeit with painful losses all around, but if Iran intervened rather than see its regional assets eliminated, could the U.S. stay out?

"With the Bush administration's policies having failed to pacify Iraq, it is natural that the public has lost patience and that the opposition party is hurling brickbats. But the demands of congressional Democrats that we throw in the towel in Iraq, their attempts to constrain the president's freedom to destroy Iran's nuclear weapons program, the proposal of the Baker-Hamilton commission that we appeal to Iran to help extricate us from Iraq - all of these may be read by the radicals as signs of our imminent collapse. In the name of peace, they are hastening the advent of the next war."

North Korea: Last Feb. 13, the Commies committed to shutting down their nuclear reactor at Yongbyon, suspected of being used in the nuclear weapons process, in exchange for 50,000 tons of fuel oil. This was to be accomplished by April 14. If Kim and his Orcs then agreed to disclose and shutdown their entire nuclear program, they would receive further fuel of 950,000 tons plus probable recognition by the United States.

So now the North has received the disputed $25 million from a Macau bank that was holding things up and Pyongyang is saying it is "committed" to scrapping its weapons program. Inspectors from the International Atomic Energy Agency are being allowed in for the first time since they were expelled in October 2002.

But as a number of folks have observed, the Bush administration has done nothing more than make one concession after another and there is zero reason to believe North Korea will totally come clean.

The Washington Post editorialized:

"Mr. Kim seems adept at exploiting American impatience for a breakthrough. During its last weeks the Clinton administration was drawn in by North Korean hints about a deal on its missile program, and it dispatched Secretary of State Madeleine Albright to Pyongyang for what became a grotesque propaganda windfall for Mr. Kim. The missile deal never came close to materializing.

"Given the threat posed by a loathsome dictatorship apparently armed with nuclear weapons, the Bush administration is right to explore whether Mr. Kim's promises of disarmament are serious this time. But it should stop making one-sided concessions to a regime that has, as yet, not shown it will do more than pocket them."

Editorial / Wall Street Journal

"Here?are the truly hard steps ahead on the road to full North Korean denuclearization: Where is the plutonium facility that built the fuel for the nuclear bomb North Korea exploded last October? Where are its plutonium stockpiles? Where is the enriched uranium program it said it had in 2001? And finally, the summit, where are the A-bombs it has already made, or where is irrefutable proof that it has never done so?"

A new round of six-party talks has yet to be set, even as South Korea resumed sending rice aid because it felt enough progress had already been made, which is ridiculous.

China: President Hu Jintao gave a major speech ahead of this year's Communist party congress that will rule on his control over the coming five years. Hu said any reforms must be carried out in the "correct direction" under the stewardship of the ruling party. "We must maintain the party leadership, empower the people and rule the country by law." In other words, "democracy" under communist rule.

Hu added: "We should develop [the country] for the people and by the people; and the fruits of our development should be shared by the people." Hu will seek to expand the electoral process for local officials somewhat.

On the environmental front, Hu and the leadership are continuing to struggle on balancing the pollution crisis with economic growth. According to a story in the South China Morning Post, by some measures, such as the average concentration of sulfur dioxide, air quality in Guangdong province (outside Hong Kong) has worsened by a staggering 11% in one year. In the booming industrial port of Shenzhen, try 42%!

And as the Journal reported, it appears the government is going to miss its air quality targets for Beijing and the 2008 Olympic Games.

Lebanon: The crisis in government continues as the Arab League failed to bring the feuding parties together during four days of talks in Beirut.

Editorial / Los Angeles Times

"While the hapless West stands by, a Syrian campaign to retake Lebanon is unfolding as crudely as the plot of Agatha Christie's 'And Then There Were None.'

"One by one, three anti-Syrian members of the Lebanese parliament have been murdered, reducing the majority of independent Prime Minister Fouad Siniora to a slim six seats. President Emile Lahoud, a puppet of Syria, and the pro-Syrian speaker, Nabih Berri, refuse to allow elections to be held to replace them?.

"Now the Cedar Revolution, which forced Syria to end its military occupation of Lebanon, is unraveling. U.S. Secretary of State Condoleezza Rice met with Siniora on Tuesday in Paris, but where is the U.S. or UN plan for free Lebanese elections? If the Lebanese parliament cannot meet in Beirut without the fear of Hizbullah- or Syrian-inspired violence, and if the United Nations cannot guarantee its safety, then let the parliament sit in exile - perhaps in New York."

Interesting idea. This comes as last weekend six UN peacekeepers were killed (three from Colombia, three from Spain) in southern Lebanon, victims of a car bomb that had the hallmarks of al Qaeda. Hizbullah strongly condemned the attack.

But at the same time, a UN Security Council report this week noted the flow of weapons to Hizbullah continues to pour across the Syrian border.

Russia: This weekend President Vladimir Putin meets with President Bush at Kennebunkport. Ignore any happy talk as the Kremlin is hellbent on creating mischief in its dealings with the West for the foreseeable future.

Venezuelan President Chavez, though, was in Russia this week, praising Putin's criticism of Washington, though Moscow kept Chavez's visit low-key ahead of the Kennebunkport summit. The two leaders discussed economic and military cooperation.

Lastly, on the Russian front, dozens of ultranationalists attacked 'black Russians' (those from the Caucasus and Central Asia) at two popular squares near the Kremlin in yet another sign of a growing fascist movement here. Trust me, this is not an overstatement. Law enforcement agencies normally just stand by when these incidents occur. As Alexander Brod, a human rights director in Moscow, told the Moscow Times, "One of Russia's most serious illnesses is xenophobia."

Britain: Enter Gordon Brown, the new prime minister. Aside from dealing with the terror threat, British citizens increasingly seek a withdrawal of their 5,500 troops from Iraq, as another three were killed in Basra this week, bringing the UK's death toll to 156.

Brown is also going to have to deal with the sudden decision to reopen the Lockerbie investigation, in response to new evidence suggesting the wrong man, al-Megrahi, may have been convicted. The Libyan has been serving a life sentence for his part in the bombing of Pan Am Flight 103 back in 1988. There is growing evidence (at least in some quarters) that the original premise, Syrian and Iranian culpability, rather than Libyan, may indeed have been correct. This could be a big time mess.

Greece: I was watching the awful forest fire footage from near Athens and the BBC commentator quoted a Greek official as saying "the arsonists are having a field day." That really sucks. You already have terrorists such as the Earth Liberation Front that have acted as arsonists in the U.S. Why wouldn't al Qaeda- types do something similar, only on a far broader scale?

Zimbabwe: President Robert Mugabe outlined a plan to transfer majority control of all remaining "public companies and other businesses" to black Zimbabweans, a move that will obviously deepen this nation's economic crisis. Then again, Zimbabwe is already dead.

Colombia: Eleven state legislators, kidnapped five years ago by rebel group FARC, were killed after a military attack on the jungle camp where they were being held. President Alvaro Uribe recently made some "good faith" gestures, such as freeing the highest ranking FARC prisoner, but the rebels just raised their demands before a prisoner/hostage exchange could be held as a first step toward true peace talks.

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Pray for the men and women of our armed forces.

God bless America.

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Gold closed at $650
Oil, $70.40?highest since Aug. '06

Returns for the week 6/25-6/29

Dow Jones +0.4% [13408]
S&P 500 +0.1% [1503]
S&P MidCap -0.1%
Russell 2000 -0.1%
Nasdaq +0.6% [2603]

Returns for the period 1/1/07-6/29/07

Dow Jones +7.6%
S&P 500 +6.0%
S&P MidCap +11.3%
Russell 2000 +5.8%
Nasdaq +7.8%

Bulls 53.8
Bears 20.4 [Source: Chartcraft / Investors Intelligence]

Have a great week. Happy Fourth!

Brian Trumbore

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