Week in Review 
For the week 7/16/2007 - 7/20/2007
Brian Trumbore
President/Editor, StocksandNews.com

Wall Street?.Housing Debacle, Part XXVI

There are basically two schools of thought out there. The first says that the problems in the domestic housing sector will be contained and that the U.S. consumer will keep spending, even as their number one asset shrivels up, while the second says that housing and all the pieces of paper attached to it is far from bottoming and that eventually this will impact the health of the overall economy.

It's pretty funny how Federal Reserve Chairman Ben Bernanke, a bright guy with a lot of brainpower, just a few weeks ago was saying that the problems in housing would indeed be contained. But this week in his semi-annual congressional testimony he was far less sanguine, saying that housing "could get worse before it gets better," and that conditions in the subprime mortgage market "have deteriorated significantly." As the line from Meatloaf's "Paradise By The Dashboard Light" goes, "What's it gonna be, boy?"

Well, you certainly know where I've stood on this topic, consistency being one of my virtues, I'd like to think, so I'll let others do the talking first today; such as Freddie Mac CEO Richard Syron, who knows a thing or two about mortgages. In predicting the subprime crisis would deepen, Syron said in an interview with Bloomberg that "Unfortunately I don't think we have hit bottom. I think things are going to get worse," though Syron adds the crisis doesn't threaten "the stability of our financial system."

But noted fixed income manager Robert Rodriguez, who has been all over the mortgage debacle, told U.S. News & World Report, "We're set up for a storm that could be much larger than Long-Term Capital," referring to 1998's meltdown. "The elements are all there. The tinder is there. The question is: What will be the match to set it off?"

Of course the answer is contained in the subprime market itself and the $1.8 trillion in paper that was issued, including collateralized debt obligations, or CDOs. Fed Chairman Bernanke, when asked by a senator to quantify the potential losses, said $50-$100 billion. But he doesn't have a clue. In fact I can guarantee all he was doing was parroting a story he saw in Bloomberg or the Wall Street Journal. I've passed along that number, too, as well as another one that said the losses would be up to $200 billion. Of course I don't have a clue either what the actual number will be; except for the archives I'll say it exceeds $200 billion when all is said and written off.

We already know of $1.5 billion being wiped out in the two Bear Stearns hedge funds specializing in this crapola (the actual total is far higher, though as yet incalculable), as Archie Bunker would have opined, and the contagion has spread to London and Sydney as hedge funds are beginning to report large losses there due to investments in our mortgage paper.

But Bear Stearns added that part of the problem in their offerings was losses in AA and AAA securities, as well. In other words, yes, the problem is far from contained and we're beginning to see emerging signs of a true credit crunch, as the likes of Washington Mutual, for example, slam the door on some of their more generous, and egregious, lending practices.

And it's not just mortgages. Josh P. passed along a Bloomberg story I had missed that sums up the issue in the loan market, as in:

"Goldman Sachs, JP Morgan Chase and the rest of Wall Street are stuck with at least $11 billion of loans and bonds they can't readily sell.

"The banks have had to dig into their own pockets to finance parts of at least five leveraged buyouts over the past month because of the worst bear market in high-yield debt in more than two years.?

"Bankers, who just a few months ago boasted that demand for high-yield assets was so great that they would have no problem raising debt for a $100 billion LBO, are now paying for their overconfidence. The cost of tying up their own capital may curb earnings and stem the flood of LBOs, which generated a record $8.4 billion in fees during the first half of 2007, according to Brad Hintz, the former chief financial officer at New York-based Lehman Brothers?.

" 'The private equity firms, being very tough negotiators, are unlikely to let the banks off the hook,' said Martin Fridson," a leading expert in the high-yield sector.

The bottom line is there are a ton of highly-leveraged deals out there that have yet to close and are relying on investors of all shapes and sizes to step up. Will they?

But back to real estate, the CEO of KB Home said on Thursday that he didn't expect the U.S. home market to bottom until the end of next year, 2008, and that he didn't envision any real price increases until well into 2009. You can take this to the bank. If Jeffrey Mezger is correct, as I believe he is, we have serious problems. It's comments like Mezger's that reaffirm my outlook of last December that it's not 2007 when the market and the economy crater, but rather '08.

Street Bytes

--Stocks had their first losing week in four as the Dow Jones closed at 14000 on Thursday, but then fell 149 points on Friday amidst poor earnings from Caterpillar and Google, as well as further worries in the credit markets. So for the week the Dow lost 0.4% to finish at 13851. The S&P 500 declined 1.2% and Nasdaq fell 0.7%.

All manner of earnings were reported this week and thus far they have generally been solid, but far from spectacular. IBM, Schlumberger, Honeywell, and SAP were among the better performers, at least when their report cards were released, but Microsoft was ho-hum (no one gives a damn about Vista, sports fans), while in the case of the investment banks, sure, the likes of Citigroup and Merrill Lynch beat expectations, but their story is about coming quarters, more so than any other industry these days. What is their true exposure to the mortgage debacle, for example? And if the problems in the credit arena spill over into the acquisition game, as is already happening, how does this impact the banks' earnings when it's been their bread and butter, along with fixed income trading? Plus a lot of their own capital is tied up in various investments, whether it's private-equity or hedge funds, so the second half of the year could be quite volatile. In their defense, however, the investment banks are far more diversified than before, it's just that most of them have also been taking on far more risk.

--U.S. Treasury Yields

6-mo. 5.04% 2-yr. 4.77% 10-yr. 4.96% 30-yr. 5.06%

If you doubted there were any serious problems in the credit markets, all you had to do was look at the huge flight-to-safety rally in U.S. Treasuries. The 10-year is now back below 5.00% as fund and risk managers bail out of their lower-rated paper and seek shelter from the rapidly gathering storm. Or think "Ghost of Christmas Present" and the emaciated children clinging to his robe. [Then again, that's a poor analogy because the managers getting beaten up have been socking away gigantic bonuses the past few years?but maybe we'll revisit this one in '08.]

Anyway, there was some inflation news this week and it contributed in some small measure to the rally as both the producer and consumer price reports for June met or beat expectations. I'm not arguing about the real world in terms of price pressures this week; for now the PPI was down 0.2% and the CPI up 0.2%. As I've said ad nauseam all year, the Fed is not raising rates, nor do I believe they are about to lower them, though that could change in another month or two depending on the speed of the unraveling mortgage crisis.

--Mr. Bernanke did admit this week he was concerned with rising energy prices; but on a related topic, if you are in the "peak oil" camp, the one that believes we are close to seeing a top in the production of crude, perhaps in just a few years, you can't help but note that 27 of the 51 oil-producing nations listed in BP's Statistical Review of World Energy reported output declines in 2006.

William Rees-Mogg / London Times

"Oil ruled the 20th century; the shortage of oil will the 21st?.

"The oil peak debate?is a complex issue, and there are some grounds for questioning the most pessimistic forecasts, including the likely development of the Canadian tar sands, and the success of American enhanced oil recovery techniques. Past forecasts of oil depletion have often proved wrong, and the present forecasts are uncertain?.

"The five-year view taken by the [International Energy Agency, that 'Oil looks extremely tight in five years' time'] is itself a central forecast. Some analysts think that the peak oil moment has already been reached; some still think that it will not come until 2020 - which is itself only 12 years away. Market trends and the statistics both support the IEA's view that consumption is accelerating and supplies falling faster than expected. Of course, if the 'crunch' point is only five years away for oil, and closer for natural gas, it has, for practical purposes, already arrived?.

"The world is coming to the end of the age of oil, which produced its own technology, its balance of power, its own economy, its pattern of society. It does not greatly matter whether the oil supply has peaked already or is going to peak in five or 12 years' time. There is a huge adjustment to be made. There will be some benefits, including higher efficiencies and perhaps a better approach to global warming. But nothing will take us back towards the innocent expectation of indefinite expansion of the first months of the new millennium."

--China's economy grew at a staggering 11.9% rate in the second quarter, after rising 11.1% in the first. In response to fears of overheating, the government raised interest rates a fifth time in 15 months. As you would expect, inflation is rising here, 4.4% in June due primarily to rising food prices.

China has now passed Germany as the third-biggest national economy at $2.9 trillion (or slightly higher), trailing only the U.S. ($13.2 trillion) and Japan ($4.4 trillion). But, the 27-nation European Union is really #1 with a collective $14.5 trillion.

--For all the talk of tainted food coming into the United States, the fact is the Food and Drug Administration is able to examine less than 1% of all imported products. For example, the FDA never inspected the melamine-contaminated pet food from China.

For its part, China currently exports $2.3 billion in agricultural products to the U.S., its third-largest export for seafood, in particular, after South Korea and Japan.

The food-safety concerns are leading to heightened trade tensions, with China suspending imports of several major U.S. meat processors this week, including the world's largest, Tyson Foods. China's food safety organization also accused Tyson of importing contaminated poultry containing salmonella.

--The surge in the production of biofuels, such as that derived from corn, wheat and soybeans, is of major concern to the World Food Program, the UN's agency in fighting famine.

--I meant to note the declining federal budget deficit last week, but from a different angle. While many are crowing it could drop to $200 billion by the end of fiscal 2007 (9/30), which would be just 1.5% of GDP, consider something you seldom hear, if ever, when Bush administration officials step forward to trumpet the improving picture. You know how much Exxon Mobil paid in income taxes in 2006? Try $27.9 billion. In the first quarter of '07, Exxon paid the government another $7 billion.

I bring this up because while there is much talk among Bush partisans about surging corporate tax receipts, and the impact of tax cuts, consider how much of the improvement in the budget picture is due not to administration policy as much as to soaring oil, and the resultant taxes on same.

Look, I'm a big supporter of tax cuts, but the fact is revenues are actually below what the Bush administration projected they would be at this point in time when they issued their projections years ago. Of concern going forward is the fact Medicaid and Medicare expenses are already beginning to soar, as forecast, due in no small part to dreadful actions in Congress.

So take away Evil Big Oil and the deficit picture would be far drearier. And I shouldn't have to add that any deficits, of course, add to the "national debt" and it is this that foreigners have largely been servicing in one form or another, much to our benefit thus far, though this is beginning to change.

[By the way, in total taxes, Exxon paid $100 billion in '06. I just wish they would bring back the Tigerino and Tigerama games. Remember those?]

--Real Estate tidbit: Home sales in June for the critical six-county Southern California market were the worst in 14 years, but the median price was still up 2.4%....however, the price was down in 2/3s of the zip codes?ergo, it helps when the Beckhams come to L.A. to put down roots.

--In issuing its earnings report, Merrill Lynch said its subprime mortgage positions were "appropriately marked." Ha!

--This is classic?from Ryan J. Donmoyer and Alison Fitzgerald of Bloomberg.

"The Robin Hood Foundation is a behemoth of New York philanthropy, where hedge-fund luminaries like Paul Tudor Jones II throw glittering parties featuring performances by the Who, the Rolling Stones and Beyonce to raise hundreds of millions of dollars to fight poverty in the city.

"Now one of the charity's projects - a rainy-day fund that has grown to $144.5 million from $20 million in less than a decade - is drawing scrutiny from lawmakers in Washington. Their main concern: About half the money is invested in hedge funds run by Robin Hood donors or board members, who have been paid the industry standard fee of 2 percent of assets and 20 percent of profit for managing the donations.

" 'I don't remember Robin Hood keeping two and 20 as his cut,' says Senator Charles Grassley of Iowa."

There's nothing illegal about this, of course, and in some cases the returns have been great; but it's also just another huge conflict of interest. It's self-dealing.

--General Motors passed Toyota Motor Corp. in global sales for the second quarter of 2007, but remained #2 for the first half of the year. GM sold 2.41 million vehicles worldwide to Toyota's 2.37 million in Q2. GM is doing particularly well in Latin America and Asia.

--Shares in Google plummeted 7% at the open Friday following release of its earnings, which while up 28% for the second quarter, represented the slowest growth rate by far since becoming a public company in August 2004. What's interesting is that Google now employs a staggering 13,800, up 74 percent in one year, which, as you can imagine, cuts into profits at least on a short-term basis. But there are also concerns that in listing "content acquisition costs" in its quarterly breakdown for the first time, it's a sign that Google is anteing up large sums to avoid copyright issues, particularly at its YouTube.com division; Google having acquired YouTube for $1.76 billion last fall.

--This one surprised me. While the Gulf Coast of Mississippi has 40 percent fewer hotel rooms and far fewer slot machines than it did before Hurricane Katrina, as Gary Rivlin of the New York Times reports, casino revenues are soaring. The same is true of New Orleans, even though the population has shrunk about 40% and tourism is down. But it's kind of sad, really. As Rivlin notes:

"The casinos in this region are generating more revenue - from significantly fewer players - in large part because of the extra money that many area residents have in their pockets and fewer alternatives on where to spend it."

There's been a huge infusion of cash, federal money, and even dishwashers are making $8.50 an hour due to a shortage of labor. But then many of these folks just gamble it away.

--The newspaper industry continues to suffer on the advertising front with little reason for optimism. The Los Angeles Times, for example, reported its revenue is off 10 percent, and while online revenue is rising rapidly, it can't begin to make up for the shortfall. Overall, online revenue in the industry increased 22 percent in the first quarter of '07, but online represented just 5 percent of the $49.3 billion in total newspaper ad revenue for all of 2006.

--Related to the above, Emily Steel of the Journal reports:

"In a development that could threaten the explosive growth of online advertising, hackers have started to exploit security holes in the online-advertising chain to slip viruses into ads. Just going to a site that shows such an ad can infect a user's computer."

While this is a very small problem today, it is growing rapidly, and "80% of malicious computer code on the Internet is found in online ads."

--The Financial Times reported that the options backdating probe is being impacted by changes in the U.S. Attorney's office in San Francisco. "Several key lawyers at the top of the office, including Kevin Ryan, the U.S. Attorney?have left, causing uncertainty and slowing some of the probes."

Ryan was one of those sacked by the White House, but what the FT report doesn't discuss is another angle. The firing of Kevin Ryan impacted the investigation of Barry Bonds as a whole new grand jury had to take up the case with the change in leadership at the San Francisco office. So thank you, President Bush, for screwing this one up as well.

--If all you read was the editorial page of the Wall Street Journal, you'd get the impression that America's corporate leaders can do absolutely no wrong. When the post-Bubble fraud cases first emerged, for example, it was as if the Journal initially defended every single one of the dirtballs. And so this week I got a kick out of the Journal's vigorous defense of Whole Foods CEO John Mackey and his blogging on the Internet, anonymously. To me, in disparaging competitor Wild Oats in an attempt to drive down its share price, just weeks before he made a move to acquire the company, it's fraud. Not because of what he said, which is no more than you or I would do in columns such as this or on a blog, but because John Mackey was CEO, that's why, and this wasn't disclosed.

--The Times' Louis Uchitelle had a story on the nation's elite, the wealthiest in a "New Gilded Age"; men like the cocky Sandy Weill, former CEO at Citigroup, or Leo J. Hindery Jr., the latter saying, "I think there are people, including myself at certain times in my career, who because of their uniqueness warrant whatever the market will bear."

To which former Federal Reserve Board chairman Paul Volcker responded: "I don't see a relationship between the extremes of income now and the performance of the economy," in challenging the contentions of the very rich that they are, more than others, the driving force of a robust economy, as Uchitelle writes.

"The great fortunes today are largely a result of a long bull market in stocks, Mr. Volcker said. Without rising stock prices, stock options would not have become a major source of riches for financiers and chief executives. Stock prices rise for a lot of reasons, Mr. Volcker said, including ones that have nothing to do with the actions of these people.

" 'The market did not go up because businessmen got so much smarter,' he said, adding that the 1950s and 1960s, which the new tycoons denigrate as bureaucratic and uninspiring, 'were very good economic times and no one was making what they are making now.'"

--When I was in the mutual fund business, I was intimately involved in the roll-out of "C" or level-load shares that levied a higher 12b-1 fee than had been the norm; the 12b-1 being earmarked for marketing and distribution. [Frankly, I, along with my compatriots at Thomson Funds (later PIMCO), were the pioneers.]

In return for not charging a client an upfront sales charge, though, the annual operating expenses were higher, like by 1% on an equity fund. In return, most if not all of this was then passed on to the financial adviser for providing support services to the client.

Every week the past few months I've been meaning to comment on this issue, now that the 12b-1 charge is under fire from the SEC, but every time I start to, something else takes precedence.

Let me just say that I totally support the industry in its effort to maintain it. 0.75% to 1.00% compensation for an adviser on equity funds, and generally lower on fixed income ones, is fair when considering the services that they can provide. In almost all cases, they deserve it.

Of course there are also good and bad advisers, and as a client you can't be afraid to ask questions about the investments he or she is putting you into. The issue, though, often comes down to disclosure and the fund industry needs to make sure, as much as possible, that clients understand the charges. Separately, I just want to reiterate that if you're buying a fixed income offering, especially in today's low interest rate environment, be very careful with the fees.

--Back to food safety, for the second time in less than a year, the Easy Bake oven has been recalled. Now there are reports of children receiving second- and third-degree burns when their hands or fingers get caught in them. My own recommendation is not to bake farm-raised catfish from China in the product.

--My portfolio: I haven't been doing anything. Still hanging out with a lot of cash, which earns 4.70% in my money market account and isn't subject to the subprime mess. But out of nowhere, one of my two solar energy plays rose 50% this week, so I may be treating myself to premium lager this weekend. At least it helps offset my China biodiesel play which has been dead in the vegetable and palm oil waste used to manufacture the stuff, though I still believe in the story. [I also find myself following the weather in Fuzhou to make sure it hasn't floated away in flooding or been slammed by a typhoon.]

Foreign Affairs

Iraq: It was a week in which some of the key players in Baghdad were on a video-conference with members of Congress. At one point Ambassador Ryan Crocker said, "If there is one word I would use to sum up the atmosphere in Iraq - on the streets, in the countryside, in the neighborhoods and at the national level - that would be fear."

The top two generals in Iraq, Petraeus and Odierno, offered that the update to come on Sept. 15 will be but a report card, with Odierno saying he needed until November "to judge whether the strategy is working."

This wasn't what Congress wanted to hear, from both parties, but earlier Senate Democrats gave in on attempts to force a troop withdrawal and the debate will resume in earnest in two months.

I caught "Meet the Press" last Sunday and I've seldom seen a more heated argument than the one between Republican Senator Lindsey Graham (SC) and Democratic Senator Jim Webb (VA). Webb acted like he was spoiling for a fistfight.

It's been an ugly time, and perhaps Gerard Baker summed it up best, at least for those of us still supporting the effort, in an op-ed for the New York Post.

"Democracy, Winston Churchill famously observed, is the worst form of government ever devised - except for all the others. Well, he was right about the first part.

"In America these days, democracy is living down to its reputation - producing sticking-plaster solutions to epochal challenges, indulging the worst populist instincts of its voters, throwing up demagogic leaders worthy of the job and rejecting those of true courage. [Ed. see John McCain]

"The most depressing spectacle is unfolding over Iraq. Washington has reached the stage where vital national interests - and the security of much of the world - are being determined almost entirely by immediate, panicky political considerations. Americans want their troops home."

Baker goes on to write that prevailing sentiment must be resisted. But it's not easy to do so when reports are released that show al- Qaeda has reestablished its base of operations, and that Northwest Pakistan's "safe haven has become more secure," leading to an assessment that there remains a "persistent and evolving terrorist threat."

Yet when it comes to Iraq, specifically, al-Qaeda is responsible for just 15% of the attacks, though obviously many of the highest-profile ones, while a study of foreigners who have been captured by the U.S. there reveals 45% of them are from Saudi Arabia, with 50% of these entering as suicide bombers. [15% are from Syria and Lebanon.]

Iran: Writing in an op-ed for the Wall Street Journal, Nir Boms, of the Center for Freedom in the Middle East, notes:

"While the world focuses on Iran's centrifuges, the regime in Tehran appears to be in the midst of one of its most ferocious crackdowns on dissent in years. The government has focused on labor leaders, universities, the press, women's rights advocates, a former nuclear negotiator, Iranian-Americans and even civil servants who demanded higher salaries. Iran's cruel treatment of its own citizens is yet another sign that it can't be trusted to respect the welfare of other nations?.

"The world appears to be not watching. Yet a country brazen enough to kidnap, torture and liquidate its own people, is an unlikely partner for a new world order."

This week President Ahmadinejad traveled to Damascus for meetings with his partner, Syrian President Assad, whereupon Ahmadinejad said the summer would see "victories for the region's peoples, and with consequent defeat for the region's enemies." Also in attendance was Hizbullah leader Sheikh Hassan Nasrallah, so the gathering resembled the cast of characters from the board game "Clue."

Pakistan: Nearly 300 have died in violence the past ten days, including the attack on the Red Mosque, as the Taliban, al- Qaeda, and other extremist elements attempt to topple the government of Pervez Musharraf. The Fundamentalists promised revenge for the mosque assault and they are carrying through on those threats; but not just in targeting Pakistani troops in the tribal regions bordering Afghanistan, but in other parts of the country, too. With the situation in such a state of flux, the Bush administration has to be considering more aggressive action inside Pakistan, especially if it finds al-Qaeda's leadership on the move from their safe havens as a result of Musharraf launching a full assault on North Waziristan and the Northwest Frontier Province. [Not that this is likely.]

The lesson Musharraf has learned is that when you play with fire you often get burned. In this instance, it was his ill-fated truce with the tribal leaders from last year that backfired in a big way.

[One sidelight to the chaos is that Chinese workers here have been increasingly targeted and it will be interesting to see what Beijing does, if anything.]

But on Friday another element was introduced as the nation's Supreme Court reinstated Chief Justice Chaudhry. It was Musharraf's suspension of him that precipitated massive protests last March. The vote for reinstatement was 10-3, and as Chaudhry's chief counsel said afterwards, "It will have a positive impact on the independence of the judiciary, for the strengthening of institutions and for democracy. It's a big blow to the Musharraf regime. It's a big blow to dictatorship."

In other words, Musharraf will be getting it from all sides and the nightmare scenario of the nukes falling into the wrong hands is an increasing possibility.

North Korea: There was some real progress on the denuclearization front as Kim Jong il shut down the Yongbyon nuclear reactor complex. But as important as this step is, it's but the first in a long line of ones and by week's end there was disappointment all around when a timetable for succeeding actions failed to materialize.

Remember, Pyongyang doesn't receive 950,000 tons of much- needed fuel oil (50,000 was delivered with the shutdown at Yongbyon) and other aid until it declares and disables all of its nuclear facilities?with verification the obvious big issue.

But in the agreements to date, there is nothing about the actual nukes that North Korea is said to have in its possession, an estimated 5-12, nor is there any language on the missiles that could deliver them. Kim will no doubt use his nukes as major bargaining chips. So it would behoove U.S. envoy Christopher Hill to keep from getting too excited, as he did earlier in the week when he looked like a kid on Christmas morning. That's what some of us find disturbing; the Bush administration's clear objective of enhancing its legacy, but at what cost?

Israel: There is a surge in activity on this front in terms of searching for some kind of peace agreement. Tony Blair, the new envoy for the quartet (U.S., EU, Russia and the UN) is setting up shop in the region while there is discussion about a series of talks in New York come September.

Meanwhile, in offering major aid to the Palestinian government of Mahmoud Abbas, some $270 million including for training of Palestinian security forces, President Bush urged Abbas to prove the Palestinians could be a "partner not a danger" for Israel by arresting terrorists and confiscating weapons. Fat chance of that beyond a few cosmetic measures. Israel did release some 250 Palestinian prisoners as an act of good will.

But the New York Post's John Podhoretz observed:

"Right now, America is raining (money) on the Palestinian government solely because it's kinda-sorta acting a little bit like it's maybe possibly giving up on terror?.

"(But) in the first place, we have no reason to expect that a single cent of that money is going to go anywhere helpful or do anything good.

"President Bush may believe Abbas has it in him to be the Gandhi of Ramallah and the Martin Luther King Jr. of Hebron - but Abbas was also Yasser Arafat's trusted aide, and one thing about Arafat and his trusted aides is that they were and are a bunch of shameless, slimy, monstrous thieves.

"The history of Western aid to Palestinians is an unending and repugnant tale of graft, theft and pilferage."

Russia: The UK expelled four Russian diplomats for the Kremlin's failure to extradite Andre Lugovoi to stand trial in the murder of Alexander Litvinenko. Moscow then booted four British diplomats in a classic tit-for-tat move. Russia also reminded Britain that it has filed 21 extradition requests, but as a spokesman for President Vladimir Putin said, "not a single suspect has been" returned.

Well, the Kremlin's claim is laughable, especially after Scotland Yard foiled an assassination plot on former Russian mogul Boris Berezovsky, exiled in London, and one of those Moscow had asked to be extradited. Berezovsky was told to leave the country five days before the plot was to be carried out and the suspect was then returned to Russia. Berezovsky directly blamed Putin, this after Boris had said that Putin was responsible for Litvinenko's poisoning.

For his part, Putin said the situation between the two governments was nothing more than a "mini-crisis" and "everything will be alright." But you can't ignore the facts and Scotland Yard will continue to reveal them.

Earlier, Putin suspended the 1990 treaty on conventional armed forces in Europe, which had been intended to balance troop levels between Soviet-led Warsaw Pact nations and NATO. Putin said he was making the move "due to exceptional circumstances, in relation to the treaty's content, that affect the security of the Russian Federation and require immediate measures," citing eastward expansion of NATO and the placement of an anti-missile defense system in former Soviet states.

But with all this going on, Putin's popularity remains sky high at home, amidst renewed rumors that he will find a way to stay in power come next year. Just 8 months before the presidential election, 80% of Russians believe life has improved under Vladimir, and a like amount agree with Putin's foreign policy. He receives a 90% approval rating on his handling of the economy, while a full 50% believe he will remain in power.

Boris Nemtsov, opposition leader in Russia:

"It is disgusting to watch the 'Vremya' nightly news on Channel One, which reminds me of the broadcasts during the Brezhnev era. It is appalling how all of the famous journalists who disagreed with the Kremlin were fired. It is disgusting that the St. Petersburg clan in the Kremlin controls billions of dollars in wealth. It is offensive that the level of corruption is now twice what it was under Boris Yeltsin, which has earned Russia shamefully low marks in international corruption ratings every year.

"It is reprehensible that police beat people with truncheons, not because they are guilty of crimes, but because they have taken to the streets to demand justice. It is offensive that Putin's portrait hangs in every public office?.

"It is offensive that under Putin the state has taken on the role of plunderer and racketeer, with an appetite that grows with each successive conquest?.

"It would be reasonable to ask if only the authorities are to blame for all this. The answer is no, because it all happened with our approval, outright support, or, at the very least, our tacit complicity. The majority is either tired of thinking, is unable to think, has grown out of practice of thinking, or else simply doesn't care. And as long as the majority is content with the status quo, the chances are slim that conditions will improve in any way." [Moscow Times]

Japan: Prime Minister Shinzo Abe's popularity had fallen to its worst rating, 25%, when the earthquake hit, thus giving him a chance to exhibit leadership in a crisis. It's too early to tell if he'll be successful, but one thing is for sure, Japan's nuclear energy industry once again showed its true colors; as in it is a most deceitful bunch.

In the case of the earthquake's aftermath, the Kashiwazaki Kariwa nuclear plant, the world's largest by power output, leaked about 1,200 liters of radioactive water, which was then flushed into the sea, per the safety plan.

But officials were slow to notify the public and then we learned that the fire that hit the facility spewed further radioactive material into the atmosphere. Then, Japan's nuclear safety agency said it found further leaks; all pointing out that the plant wasn't built to withstand a powerful earthquake. So this shouldn't give anyone a warm, fuzzy feeling about all the other facilities scattered about the country.

Turkey: Sunday is the big parliamentary election and the ruling Islamists, the AK Party, should increase their percentage of the vote, though it's not clear what the composition of the legislative body will be in the end. The free market policies of Prime Minister Erdogan and his followers have worked and the Islamists have the support of the middle class, it would appear. But 2/3s is needed to make any changes to the constitution, such as reversing decades of secular thought, and it's not likely the AK Party will reach that level. Much more next week, including the generals' reaction and the potential for a major incursion into Iraq to go after the Kurdish terrorists.

China: The Paris-based Organization for Economic Cooperation and Development estimated that 20 million people a year will fall ill with respiratory diseases in China over the coming years amidst its widespread environmental degradation.

Egypt: Charles K. passed along a story from Al Jazeera on Egypt's water crisis, which is little different from crises faced in so many parts of the world these days. The UN estimates that tens of thousands of people die each year in Egypt from water- borne diseases or dehydration, as the country's latest drought rages on. And just as in China, the people are beginning to protest the government's inability to help them.

One opposition member of parliament said, "How can a country that has the Nile River suffer like this? A glass of clean water is a basic right of all citizens."

Or, as I like to say, clean air and water are basic rights. And when it comes to developing countries, clean water and roads are the first two steps to real progress, not the acts of the "philanthropists" running around Africa, for example, trying to supply kids with computers. At least Bill Gates and Jimmy Carter, for their part, focus on health measures, while an increasing percentage of the world's assets are going to have to be directed at the water issue, and soon.

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Pray for the men and women of our armed forces. I admire Sec. of Defense Robert Gates for his emotional tribute the other day to a fallen soldier. I need to get back down to Arlington to pay my own respects.

God bless America.

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Gold closed at $684
Oil, $75.57?the highest weekly close since one year ago.

Returns for the week 7/16-7/20

Dow Jones -0.4% [13851]
S&P 500 -1.2% [1534]
S&P MidCap -1.3%
Russell 2000 -2.3%
Nasdaq -0.7% [2687]

Returns for the period 1/1/07-7/20/07

Dow Jones +11.1%
S&P 500 +8.2%
S&P MidCap +13.6%
Russell 2000 +6.2%
Nasdaq +11.3%

Bulls 52.3
Bears 19.3 [Source: Chartcraft / Investors Intelligence]

Have a great week. I appreciate your support.

Brian Trumbore

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