Educate Yourself

Week in Review
For the week 7/9/2007 - 7/13/2007
Brian Trumbore
President/Editor, StocksandNews.com

"Since America began military operations in Iraq, the conflict there has gone through four major phases. The first phase was the liberation of Iraq from Saddam Hussein. The second phase was the return of sovereignty to the Iraqi people and the holding of free elections. The third phase was the tragic escalation of sectarian violence, sparked by the bombing of the golden mosque in Samarra.

"We've entered a fourth phase, deploying reinforcements and launching new operations to help Iraqis bring security to their people."

"It seems like just weeks ago, because it was, that Congress approved funding for the war in Iraq and instructed Gen. David H. Petraeus to report back on the war's progress in September. Now, for reasons having more to do with American politics than with Iraqi reality, September isn't soon enough. Senate Majority Leader Harry M. Reid says he wants a vote in the next week or two 'to truly change our Iraq strategy,' by which he means starting to withdraw U.S. troops. Sen. Hillary Rodham Clinton, the leading Democratic candidate for president, urged President Bush on Tuesday 'to begin ending the war?today.' Increasing numbers of Republicans agree. But many of them seem reluctant to confront the likely consequences of a U.S. troop withdrawal?

"Advocates of withdrawal would like to believe that Afghanistan is now a central front in the war on terror but that Iraq is not; believing that doesn't make it so. They would like to minimize the chances of disaster following a U.S. withdrawal: of full- blown civil war, conflicts spreading beyond Iraq's borders, or genocide. They would have us believe that someone or something will ride to the rescue: the United Nations, an Islamic peacekeeping force, an invigorated diplomatic process. They like to say that by withdrawing U.S. troops, they will 'end the war.'

"Conditions in Iraq today are terrible, but they could become 'way, way worse,' as the U.S. ambassador to Iraq, Ryan C. Crocker, a career Foreign Service officer, recently told the New York Times. If American men and women were dying in July in a clearly futile cause, it would indeed be immoral to wait until September to order their retreat. But given the risks of withdrawal, the calculus cannot be so simple. The generals who have devised a new strategy believe they are making fitful progress in calming Baghdad, training the Iraqi army and encouraging anti-al-Qaeda coalitions. Before Congress begins managing rotation schedules and ordering withdrawals, it should at least give those generals the months they asked for to see whether their strategy can offer some new hope."

"(Getting) out has at least four advantages. First, no more Americans will be dying while refereeing a civil war. Second, the fear of an all-out civil war, as we do prepare to leave, may be the last best hope for getting the Iraqis to reach an 11th-hour political agreement. Third, as the civil war in Iraq plays out, it could, painfully, force the realignment of communities on the ground that may create a more stable foundation upon which to build a federal settlement.

"Fourth, we will restore our deterrence with Iran. Tehran will no longer be able to bleed us through its proxies in Iraq, and we will be much freer to hit Iran - should we ever need to - once we're out. Moreover, Iran will by default inherit management of the mess in southern Iraq, which, in time, will be an enormous problem for Tehran.

"For all these reasons, I prefer setting a withdrawal date, but accompanying it with a last-ditch UN-led - not U.S. - diplomatic effort to get the Iraqi parties to resolve their political differences. If they can, then any withdrawal can be postponed. If they can't - even with a gun to their heads about to go off - then staying is truly pointless and leaving by a set date is the only option?.

"We need to determine - now, today - whether this is a fight that can be resolved or a riot that we need to build a wall around and wait until it exhausts itself."

"What is going on in Iraq is a war. For three years, America pursued a strategy that put the war in the background and the political process in the foreground. The idea was that political progress would have positive consequences on the battlefield - that free elections would choke off the insurgency's oxygen?.

"But it turned out to be a disaster?We were so solicitous of Iraqi political needs that we neglected our own military needs?.

"Now we're putting security and military needs first. And just as we are doing so, we're hearing complaints from people who criticized the ineffectiveness of the war effort three years ago - complaints that we are not doing enough on the political front!

"And so it goes with the elite American opposition to Iraq, whose elasticity is matched only by its disingenuousness."

Well, I could argue that while I agree with much of what Mr. Podhoretz is saying, it's also disingenuous in not recognizing the profound issues when discussing Iraq's political vacuum and the poor prospects for real consensus.

"Until this week I thought we were entering the last stages of the Iraq war. Roughly 40% to 60% of Republican senators have privately given up on the war. Senior GOP officials have told President Bush that they are unwilling to see their party destroyed by this issue.

"I figured that sometime between now and September the White House would be so isolated that it would have to launch withdrawal plans.

"But ending a war is as complicated as starting one. In order to wind up the Iraq conflict there has to be some general agreement about how to do it. We're nowhere close to that. In fact, the U.S. is now entering a phase you might call the Endgame Deadlock.

"In this phase everybody argues bitterly over how to get out of Iraq, but amid the discord nobody can do anything about it. This phase - and with it, the war - could go on for a while."

In the latest USA Today / Gallup survey, President Bush has an overall approval rating of 29%, and, coincidentally, seven in 10 want all troops out by April, which is the deadline of the House legislation that was passed along party lines on Thursday.

But as has been the case throughout, the people often show they are conflicted as 55% still want to at least give Petraeus a chance until September before looking for a new strategy.

There are two things I worry about, however. As Republican Senator Lindsey Graham said, "The bad news is the Maliki government is paralyzed." The other is the state of the U.S. military.

I wrote in this space on 3/10/07 how I had gone to see Senator John McCain, where as part of his presentation he discussed the 'surge.' That evening, McCain told the gathering of supporters that it was pitiful that the world's best military can't get five brigades to Iraq before June. I wrote, "Of course we're stretched way too thin these days and we need to expand the Army in particular, as McCain himself advocates."

I couldn't help but note this last fact because all of President Bush's staunchest supporters this week said, 'Gen. Petraeus has only had the full complement of troops for about three or four weeks. How can you judge the effectiveness of the surge?'

I look at this, on the other hand, and think what a shame it is that it took so long. Can you imagine during World War II what would have happened if in various theaters our generals, years into a conflict, took over four months to move 20,000-30,000 troops?!

Can you believe that today, 2007, we are told, 'Oh, you can't just move that many. It's not that easy.'? Can you imagine what would happen if the United States faced another military conflict, like next year? We are one assassination away (read Egypt, Jordan or Lebanon) from all-out war in the Middle East, let alone we can't for a minute let down our guard on the Korean peninsula. And looking further out, you have the growing potential of Russia and China to create mischief.

The military is broken, as experts such as Ret. Gen. Barry McCaffrey have long pointed out. For now, though, it's already July 14. The debate in Congress is part of our political process, but Gen. Petraeus will get his hearing in September. Then it's Katy bar the door.

In November 1982, I received my first job on the Street and seeing as how the bull market commenced in August of that year, I view myself as a bull market baby. But aside from the Nasdaq Bubble of 1999-2000, in the almost 25 years since then I have seen few dumber days than this past Thursday when the Dow Jones, in chalking up a new all-time high, registered its largest point gain since Oct. 2002, up 283, with the S&P 500 hitting a new record as well.

Now don't get me wrong. I'm not 'short' the market and most of my own remaining equity holdings rallied a bit, too, but just what the heck was there to cheer this week?

The large retailers reported on Thursday and the numbers were mixed, at best. I'll grant you, Wal-Mart is very important in the grand scheme of things and they beat on expectations for June same-store sales, up a whopping (dripping sarcasm alert) 2.4%. Others, such as Macy's, were down like amounts. And overall June retail sales were off 0.9%, far worse than expected.

Yes, we did have another large merger, Thursday; that being Rio Tinto's acquisition of Alcan for a nice premium, thus combining the best in aluminum from Australia and Canada. But that was it. Like whoopty-damn-do.

So here's the real deal. The problems in the housing sector and mortgage market continue to worsen, even as I read one report that said the rally in stocks was due in part because "the credit market showed signs of stabilizing." Of course two days earlier people were talking of it "seizing up."

Ian Shepherdson of High Frequency Economics had a piece in Barron's addressing housing and today's environment that homebuilder D.R. Horton noted this week would "remain challenging."

"The key problem now is not the level of nominal mortgage rates, which are not particularly high by the standards of the past decade. Instead, buyers are backing off because the real mortgage rate has rocketed and continues to rise. At the peak of the boom, people essentially were being paid to buy a home. The average 30-year fixed mortgage rate in 2005 was a tax- deductible 5.9%. The Office of Federal Housing Enterprise Oversight says that home prices rose 10.7% that year.

"As long as buyers expected prices to keep rising, the implied mortgage rate - home-price increase minus mortgage-interest rate - was minus 4.8%....

"But recently, the average 30-year mortgage rate was 6.5%, so with home prices up just 3%, real mortgage rates are now 3.5%. And with most potential buyers well aware of the huge excess supply of homes, there's no reason to expect prices to rebound soon. A reasonable person might expect them to fall further, boosting the real mortgage rate more so.

That's just one issue. This week also saw the ratings agencies scrambling to play catch up in downgrading $billions in subprime mortgages and related collateralized debt obligations (CDOs). By most estimates, there is about $800 billion in mortgages backed by subprime loans and another $1 trillion in CDOs. Anywhere from $100 billion to $200 billion is ultimately at risk, according to the same experts, and should panic selling ensue for a variety of reasons, the latter number could be low. And as a New York hedge fund manager told Barron's, with regards to the ratings agencies, "I would expect a lot of holders of these CDOs to sue the credit companies for handing out triple- A ratings to paper that turns out to be toxic waste."

"Far greater troubles await the subprime market in the next two years, when homeowners will face increases of as much as 50% in their monthly payments after their two-year teaser rates expire and convert to materially higher floating interest rates. The period will see some $800 billion in subprime loans reset, according to Deutsche Bank.

"For many subprime borrowers, default will be the only viable option, as tighter lending standards slam the refinancing window shut for them. Dwindling or negative equity in homes means they won't be able to roll into 30-year fixed mortgages, even assuming that they handle the higher monthly payments. Foreclosures are expected to surge?. [Ed. note: Nationwide, foreclosures in the 1st half of the year set a new record, up 56% from a year earlier.]

"The coming crisis in subprime CDOs is reminiscent of the S&L collapse of the early 1990s; both involved imprudent lending and will be enormously costly. The bill for the earlier fiasco totaled more than $150 billion.

"This time around the burden will fall on global investors, not the U.S. taxpayer. But the repercussions are apt to be felt on Main Street as well as Wall."

Jonathan Laing's final point on global investors is an important one. Whether in London or elsewhere, all hedge funds and their pension brethren were investing in this garbage, with damage, particularly in the former, dependent on the amount of leverage employed.

But just as the leaders of our Iraq war strategy have largely been in a state of denial for the past four years, so are many of the hedge funds and investment banks, let alone the Street's shills that people outlets such as CNBC.

I get a kick out of those who say the damage from the bursting of the housing bubble will be limited. This isn't Black Monday, Oct. 1987; a financial accident resulting from program trading and a lack of coordinated activity among central bankers.

This time the same central banks had a coordinated policy of whipping up the frenzy by keeping interest rates artificially low for years, thereby creating a bubble in the chief asset most Americans, Brits, Spaniards, and Aussies have?their home. Now, good luck finding someone (read banks) to bail you out.

So the next time NBC national news rushes CNBC's Maria Bartiromo or Jim Cramer to gush about the new highs in the market, certainly feel free to treat yourself to a premium lager, if your portfolio is positioned to profit. But also step back and look at the Big Picture. Sometimes the market rallies for good, solid, fundamental reasons. This week wasn't one of them.

--Stocks indeed rose for a third straight week with the Dow Jones up 2.2% to the new benchmark, 13907. The S&P 500 is also at a new high, 1552, up 1.4%, and Nasdaq rose 1.5% to 2707.

On the earnings front, Dow component Alcoa's were alright, but it's swept up in the takeover game, having pulled its own bid for Alcan, while on Friday, General Electric reported earnings that were in line. Next week things really begin to heat up and if earnings do in fact knock the cover off the ball, I will lay off the doom and gloom. Scout's promise.

Just as importantly, next week we get readings on inflation as well as Chairman Bernanke's semi-annual testimony to Congress on the state of the economy, at which point he is going to be grilled on the subprime mess.

Mr. Bernanke, in a speech to economists this week, addressed the issue of how the Fed determines what the real inflation picture is when coming up with its decisions on interest rates.

"Increases in energy prices affect overall inflation in the short run because energy products such as gasoline are part of the consumer's basket, and because energy costs loom large in the production of some goods and services. However, a one-off change in energy prices can translate into persistent inflation only if it leads to higher expected inflation and a consequent 'wage-price spiral.' ?

"Notably, the sharp increases in energy prices over the past few years have not led either to persistent inflation or to a recession, in contrast to the U.S. experience of the 1970s [and the oil price shocks of that era]."

In other words, Bernanke was saying 'Don't bother us' when it comes to the debate over the use of 'core' inflation rates vs. the everyday items we all have to deal with.

The International Energy Agency was in the news on multiple fronts this week, warning that OPEC needs to increase production in the second half of the year in order to prevent prices from skyrocketing with the ongoing pickup in demand for oil. OPEC, in turn, continues to blame geopolitical instability, such as in Nigeria, U.S. refinery issues and speculation in the futures markets for the $70+ price per barrel that we've become accustomed to. OPEC is still responsible for about 40% of global output and remains a key swing producer. The IEA also warned that China's oil consumption will increase a further 6% in 2008.

Earlier, the IEA offered that world oil demand will rise faster than earlier forecast through 2012; this as production continues to lag. Global output is expected to reach 96mm barrels a day by that time, up from the current 86mm level.

If you believe the global economy is going to continue to rock and roll, especially in Asia, there is no way around the fact the oil industry needs to pick up the pace of spending on exploration and development, but of course that entails long-term projects that can often take a decade or more to reach fruition.

In the same vein, the IEA says Russian oil production could stall out by 2012, which isn't good considering the nation is responsible for about 12% of the world's crude these days. At least Russian energy giant Gazprom, recognizing it needed help in developing a major project, Shtokman, gave French major Total a 25% stake in the field located in the Barents Sea.

--China's June trade surplus hit a record $26.9 billion. Exports were up 27% year over year, while imports rose 14%. Of course this gives Washington and the EU further ammunition to rattle the cage.

"The cheap yuan, together with America's voracious spending, are the main causes of the enormous imbalances that have developed in global trade and financial flows. It is certainly worth reminding China that artificially holding down the price of its currency and building an economy only on exports is also not in its long-term economic interest. Its growth must be rebalanced to rely more on the consumption of its own citizens.

"Starting a trade war, though, is not likely to change Beijing's mind. And it will make it harder to persuade and pressure China to become a more responsible exporter and a more responsible international player."

The Times blasted Barack Obama and Hillary Clinton for hopping "on the misguided bandwagon of those seeking to penalize China for manipulating its currency."

--Glancing at the Sydney Morning Herald to check out the weather (and any shark attack stories?.to be honest), I saw this headline of note:

"The high cost of living and easy access to credit have led to the highest number of bankruptcies in NSW (New South Wales) since records began more than 20 years ago?

" Some say Australia's prosperity and booming economy is great for everyone, but certainly the figures reflect another side to the story,' said a bankruptcy attorney."

Aussies are also now using credit cards at record levels. Yes, sports fans, this is all part of the global story of mine. And it begins with a real estate bubble of mammoth proportions.

--Margin debt hit a new record. As Chris Mayer of Agora Financial wrote, "A fellow at the blackjack table taking out a $10,000 advance so he can double down is a 'degenerate gambler'; on Wall Street, in today's parlance, he's called an 'investor.'"

--As an example of how many were blindsided by the subprime debacle, GE is looking to sell its three-year-old mortgage unit that specialized in the stuff, telling employees, "The mortgage industry has greatly changed since the purchase of WMC." Yup, so it has.

--John Mackey, co-founder and CEO of Whole Foods Market is in a heap of trouble for posting comments on stock-market forums that among other things bashed competitor Wild Oats, even as he geared up to make an offer for the company. But Mackey didn't sign his name. Nope, he used an anagram of his wife's name, Deborah. What a jerk. As David Kesmodel and John R. Wilke broke in the Wall Street Journal:

"For about eight years until last August, the company confirms, Mr. Mackey posted numerous messages on Yahoo Finance stock forums as Rahodeb."

This all came to light as part of a Federal Trade Commission lawsuit seeking to block the Wild Oats takeover on antitrust grounds.

March 28, 2006, Mackey wrote: "Whole Foods says they will open 25 stores in OATS territories in the next 2 years?The writing is on the wall. The end game is now underway for OATS?Whole Foods is systematically destroying their viability as a business?market by market, city by city."

April 11, 2006: "Whole Foods has a hugely successful business model by all objective financial measurements there are. OATS does not." [USA Today]

There were tons of them, as Mackey sought not only to boost the share price in Whole Foods, but also to drive down the price of Wild Oats to make it cheaper for him to acquire. In other words, without proper disclosure this was nothing but outright fraud, though with a good attorney who knows how it will all play out.

--As Congress debates how much hedge fund managers and private equity partners should be taxed, Blackstone Group is working the system to avoid paying taxes on $3.7 billion as part of the sale of their stake in the management firm. Nothing illegal, just the firm's use of 'good will,' a term for the value of intangible assets. The deductions must be spread out over 15 years, so, while Blackstone is paying $553 million initially in taxes, it will get that amount back and another $200 million over time. And that, friends, is how the rich get richer.

--I just glanced at Motorola's dismal earnings outlook, particularly for its cellphone division, and didn't see anything about a topic I broached last week; that being they may have a real PR problem on their hands with the story out of China that batteries manufactured under their name (albeit probably fake), have been exploding.

--Sears' earnings warning for its quarter ending Aug. 4 wasn't a surprise. CEO Aylwin Lewis said in a statement, "our recent performance underscores our ongoing need to become more relevant to consumers." I have a Sears store about 15 minutes from my home and I don't think I've ever consciously thought of shopping there. In fact, in 30 years I remember walking in once and they didn't have what I needed.

--You have to be a CNBC junkie to remember the clips of former Broadcom CEO and co-founder Henry Nicholas III during the Bubble. He always looked like he had just emerged from a weightlifting session. In the mold of Oracle's Larry Ellison, Nicholas also didn't come across as a real likeable fellow.

So on Friday, the Journal reported that a former personal assistant and bodyguard to billionaire Nicholas is alleging in a suit filed in Los Angeles Superior Court "that he was forced to indulge in illegal narcotics with his boss, whom he portrays as leading a raucous lifestyle that included spiking clients' drinks and offering prostitutes to customers." Kenji Kato also alleges a girlfriend of Nicholas's supplied him with heroin. She denies the claims, as does Nicholas through his attorney. But the reason why this all became public is because it's part of the backdating of options investigation into Nicholas and the company. Many are wondering what the personal stuff has to do with the SEC's case?.but we love it!

"The richest 5% of the nation's population saw its average household wealth soar 40% (adjusted for inflation) from 1990 to 2005, according to census data. That contrasts with a 7.3% increase for middle-income families."

Which is why the super high-end segment of the real estate market in the Los Angeles area, for example, continues to confound some of us. Haddad notes that David Beckham, Amazon's Jeff Bezos, and Tom Cruise all bought Beverly Hills and Bel-Air properties for between $22 million and $35 million. Kind of messes up the averages, you know.

--Speaking of high-end Beverly Hills real estate, Ms. Haddad also had the story of the 1920s-era mansion of William Randolph Hearst and Marion Davies that was put on the market Monday for $165 million, making it the nation's most expensive residential listing. It's spread over 6.5 acres north of Sunset Boulevard and includes three swimming pools, 29 bedrooms, a state-of-the-art movie theater and a disco. It's actually four houses, an apartment and a cottage for the security staff. The seller is attorney-investor Leonard Ross, who bought the property in 1976. A property in Montana's Big Sky country is on the market for $155 million and Saudi Prince Bandar's spread in Aspen is going for $135 million. So far, however, no U.S. home sale has broken the $100 million mark. By the way, the Hearst estate was used in the film "The Godfather," including for the severed horse's head scene.

--Ben Edwards III, a former CEO of A.G. Edwards Inc., said he is not happy with the merger between his family's firm and Wachovia Corp. But I liked his comment on mergers in general, which he believes are often driven by CEOs with nothing better to do.

"If you do a good job and have competent people in charge?you sit there as the highest-paid person in the company and do nothing. So [CEOs try to] acquire or diversity or do other big things."

--Last Sunday's New York Times broke the story that while Bear Stearns was having major issues with its hedge funds, CEO James Cayne was choppering from Manhattan to play golf at his club in New Jersey. Over a 9-day period, he played both Thursdays and Fridays, four rounds. But as his staff notes, he is in constant contact with the office. Well I believe that. This also means he's a most irritating chap to play with. [Then on Friday, CNBC reported that Cayne is being investigated by this very golf club for cheating, as in posting higher scores to raise his handicap before a 4th of July tournament that he evidently won.]

--And former newspaper magnate Conrad Black was finally found guilty on three counts of mail and wire fraud in connection with the looting of Hollinger International to the tune of $7 million. While the verdict will be appealed, Lord Black (he picked up one of those tidy titles they hand out across the pond) faces 35 years in prison.

Iran: The evidence is irrefutable at this point that al Qaeda is using Iran as a base for operations in Iraq. And on the suspected nuclear weapons development front, the U.S., Britain, France, Germany, Russia and China are to meet to discuss a new sanctions package within the framework of the UN Security Council. But in the case of these last two, Iran has become China's third-largest supplier of oil after Saudi Arabia and Angola (who knew?), while Russia not only has business interests on the nuclear plant development side, but it's in no mood to help the U.S. these days.

Instead, Iran is playing games with the International Atomic Energy Agency, it would appear, as a way of softening action in the UN. On Friday, Tehran said it would allow IAEA inspectors into key facilities, but the mullahs are making no indication they will stop enriching uranium.

North Korea: Six-party talks are slated to resume in Beijing on July 18, while International Atomic Energy Agency inspectors are due to assist in shutting down the Yongbyon nuclear facility at the same time. But before you go crazy and break out the good stuff, remember this is but a first step in getting North Korea to fully abandon its nuclear weapons program, including telling us where the existing nukes are. In the meantime, South Korea, ever the appeaser, sent the first shipment of fuel oil under the February agreement.

But Kim Jong il is also now seeking military talks with the United States, a first, for the express purpose of discussing the security situation on the Korean peninsula, amid hopes of ending the armistice that has been in place since the end of the Korean War in 1953. Who knows what's going on in Lil' Kim's head? At least some have finally caught on to the fact that the man is ill.

We could see some interesting, and encouraging, headlines over the coming weeks and months. The White House desperately needs to hop on any good news these days. Just remember my adage, "wait 24 hours." In other words, keep the champagne on ice. But if you insist on being optimistic, there is a slight chance we have another Libya type situation on our hands.

China: Last week I noted that Beijing had sentenced another high-ranking official at the equivalent of their Food & Drug Administration to death and commented "None of this due process garbage, I say." Well, about three days later the guy was indeed executed. That's quick. Aside from the high-profile U.S. cases of tainted pet food and toothpaste that the man was responsible for, even if indirectly, I didn't realize that 93 Panamanians had died recently from poisoned cough syrup made in China as well.

The government is in a rush to clean things up before the 2008 Olympics and towards that end China's state television has been showing undercover raids on food plants, while officials are being amazingly candid.

Sun Xiande, head of a food safety department, said the country's credibility in international markets is at stake.

"Especially in the countryside, the food safety situation is not optimistic. Hidden threats will gradually emerge and diseases will likely gradually occur due to the harmful ingredients in food?.Food safety accidents or events will not only affect the healthy development of the entire [food] industry, but also possibly affect the local economy and social stability." [Financial Times]

"The situation remains quite severe and it is extremely difficult to achieve the goals [of the latest five-year plan]?

"Government at all levels must fully understand the arduousness and urgency of delivering on targets of reducing energy waste and emissions of pollutants?and must endeavor to make concrete progress."

"The overdevelopment of industries with high energy consumption and heavy pollution must be resolutely checked and those illegal incentives encouraging their expansion must be corrected." [Xinhua News Agency]

But the problems have become simply overwhelming. I was reading in the South China Morning Post of an algae bloom on Chao Lake, the fifth-largest freshwater body in the country, where a Hitachi Construction Machinery factory along the shore was dumping "160 tons of acid waste into the lake every day," until authorities finally shut it down. Imagine how long it was doing this, and what an impossible task it is to clean it up. Now multiply it by the "342 enterprises in the industrial zone" there.

China is learning a painful lesson and if the Commies don't handle the crisis quickly, civil unrest is indeed going to be an increasing issue, as I wrote recently in my Black Diamond commentary of 6/16/07. After all, shoddy and tainted products are killing their own people, not just foreigners.

Lastly, it appears China is going to have to deal with Taiwan, in one form or another, as Taiwanese President Chen Shui-bian has vowed to press ahead with a referendum on whether the island should apply for UN membership under the name Taiwan; exactly what the Bush administration does not want at this time, or ever. The referendum could take place next March at the same time a successor to Chen (who's ineligible) is to be chosen. We are talking major fireworks.

The Balkans: When Presidents Bush and Putin got together in Kennebunkport, a summit that is proving to have been totally worthless, the issue of Kosovo and independence wasn't even broached. Now it appears the ethnic Albanians, who comprise 90% of the Serbian republic's population, are being screwed yet again as an agreement on Kosovo's future has been put off until next year. Russia has said it will not agree to any UN-brokered plan until both parties, Kosovo and Serbia, agree.

Well, that means there would never be agreement as Serbia is adamant about keeping Kosovo under its clutches. Kosovo's leaders have now threatened to declare independence unilaterally, which would immediately lead to violence.

Just a few weeks ago, President Bush received a heroes' welcome in Albania. I suspect if he were to return today, he'd be stoned.

Pakistan: The siege at the Red Mosque in Islamabad is over with at least 85 dead, including the leader of the militants that held the place. President Musharraf's handling of the crisis is being both praised and criticized and it is clear this is but the first of many clashes as the Taliban-inspired Islamists seek revenge and an overthrow of the government. Musharraf had appeased these forces for years, allowing the madrassas' to spread in an effort just to maintain stability, but instead the policy is coming home to roost.

Turkey: The big election is July 22 and polls show Prime Minister Erdogan's Islamist-leaning party with a commanding lead, thanks in no small part to 21 straight quarters of economic growth. But the generals, Kemalists/secularists, aren't happy and warn the Islamists better not push too hard in changing the nature of the country.

Canada: Prime Minister Stephen Harper announced that six to eight patrol ships will guard the waters of the Northwest Passage, which the United States claims is international territory. It's about oil, with Harper saying "Canada has a choice when it comes to defending our sovereignty over the Arctic. We either use it or lose it. And make no mistake, this government intends to use it."

Uh oh. I hear war drums! This is no small issue because the passage is becoming more navigable as the ice melts at an increasing rate. Aside from oil, there are fish and minerals to be plundered.

Britain: Speaking of war, at least of the cold variety, London's relations with Moscow continue to deteriorate to alarming levels as a result of the Kremlin's refusal to extradite the main suspect in the murder of Alexander Litvinenko. A spokesman for Prime Minister Gordon Brown said, "Russia is an important partner on many issues, and we continue to seek a constructive relationship with them, but given their refusal to cooperate on this matter, we need to carefully consider our range of cooperation going forward."

Indonesia: Australia is warning its citizens not to visit the country because of the terror threat, even with the arrest of the leader of the Jemaah Islamiah group. Speaking of Australia, its drought, at least in the critical New South Wales region (in terms of farming and population), has eased some due to the recent heavy rains.

Russia: Just a follow-up on my story of their winning bid for the 2014 Winter Olympics in Sochi. I noted the importance of Vladimir Putin's personal appeal at the deciding International Olympic Committee meeting, Putin having swayed the IOC to go with Sochi over South Korea's entry. Now the IOC is looking into banning personal lobbying such as this.

Mexico: Drug gangs have threatened to kill foreign journalists who cover the violence on the Mexican-Texas border. Some Texas newspapers have already pulled their reporters.

Dow Jones +2.2% [13907]
S&P 500 +1.4% [1552]
S&P MidCap +1.1%
Russell 2000 +0.4%
Nasdaq +1.5% [2707]

Dow Jones +11.6%
S&P 500 +9.5%
S&P MidCap +15.1%
Russell 2000 +8.6%
Nasdaq +12.1%

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

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