Week in Review 
For the week 7/23/2007 - 7/27/2007
Brian Trumbore
President/Editor, StocksandNews.com

Wall Street?gloom, despair, and agony on me?

It's been said that the bonobo, a member of the chimpanzee family, is our closest relative, but according to a story from this week, the bonobo, which hails from the Congo, is not quite as smart as he has been given credit for. But after some of what I heard the past few days on Wall Street, I respectfully submit man may be more than a bit overrated himself.

How else to describe the wit and wisdom of Treasury Secretary Henry Paulson who once again said the subprime mortgage crisis doesn't "pose any threat to the overall economy"; this as the markets swooned on fears there is indeed a strong chance the contagion will spread. Paulson wasn't alone, of course, as countless other White House officials and their shills on the Street parrot the party line in their best Alfred E. Neuman imitation, "What, me worry?"

But let's get something straight up front. I have to reiterate that last December, in terms of stock market performance, I said we would finish about flat for 2007. I did not see a recession, either. I just envisioned an ongoing debacle in housing, at very best stagnation, and since real estate doesn't impact the consumers' psyche overnight, we were going to move through '07 as prelude to the real damage in 2008. I have seen nothing yet to dissuade me from this forecast.

Having said that, I try hard not to get too revved up over any single week, let alone a day, and so let's just start out with the facts, even as stocks experienced their worst drubbing in years.

Homebuilders D.R. Horton, Beazer, Ryland, Pulte, MDC, and WCI all reported dreadful results for the second quarter, with massive write-offs (including on land holdings, as I've so often warned about), while revenues were down an almost uniform 30- 40% over year earlier levels.

Then there was the largest mortgage bank in the land, Countrywide Financial, which startled the Street in releasing an absolutely dreadful earnings report, missing expectations by a mile while CEO Angelo Mozilo said "we are experiencing home price depreciation like never before" as he then compared the current environment to that of the Great Depression. Mozilo joined the chorus saying he saw no pickup until 2009 at the earliest.

But in thinking back to Secretary Paulson's sunny forecast and how there would be no contagion from the subprime flu, Angelo Mozilo couldn't have been more clear in opposition.

To wit?many of Countrywide's prime borrowers, not just subprime, are having serious issues and an increasing number of these are defaulting on their home equity loans, which many were using as a second mortgage?after building a home theater and buying a Beemer, of course. It was this comment of Mozilo's that really gave the Street gas.

And in dealing with contagion, you had the likes of USG, a building products giant, say that "(Housing) is burdened by an excess supply of new and existing unsold homes" as the company echoed the sentiments of its homebuilding partners in adding this is a "multi-year downturn." For its part, DuPont blamed housing for some of its own problems, as in falling demand for paint.

Of course with companies like USG, let alone a Ryland, job losses are also mounting. USG announced it has laid off 1,100 the last 12 months.

Speaking of employment, housing accounts for 20% of Florida's job market, roughly double the national average, and the depression in the condo arena, statewide, will eventually do a real number on the labor front. A Bloomberg piece described the gory details in the Miami area, where 20,000 new units under construction join 22,900 existing condos for sale. Economist Mark Zandi expects prices to plummet 30%.

Across the country it isn't any better. Foreclosures in California are up 800% over the past year, some 17,400 in the second quarter (9,500 in Southern California). But these numbers are actually lower than what they could be because the state's economy is still strong. Nonetheless, the mortgage resets are beginning to sweep the region and this is simply going to exacerbate the crisis. Plus, housing inventory in California is now at a 12.6 months supply, vs. about 8 months nationally.

As for existing and new home sales for the month of June, both came in at rates well below expectations, while falsely claiming the median price for each category was roughly flat over a year ago when even a bonobo would know this is a bunch of malarkey. [Hank Paulson is a different story.]

OK, but where is the spillover, Mr. Editor, aside from some cursory evidence with the likes of USG and DuPont? It's in the credit markets. The problem that started with hedge funds investing in mortgage pools that were sliced and diced by Wall Street's investment banks has spread to the collateralized loan and junk bond markets, which, together, have helped fuel the leveraged buyout / private-equity boom that in turn has supported the stock market and share prices.

This has led to what everyone is calling a repricing of risk and it is having a severe impact on many of the buyouts that garnered attention even just a few months ago. Will they in fact be financed? KKR, for example, pulled the financing on the UK's largest drugstore chain, while Cerberus Capital's deal with Chrysler Group is up in the air as $12 billion in proposed debt was postponed. Even UK football giant Manchester United couldn't find funding at the right price for a plan to decrease its debt load, and late Friday, Cadbury Schweppes announced it was delaying sale of its U.S. division.

Spillover? Seems to me much of the above is the very definition of the term.

But what of the consumer, who is, as we all know, 2/3s of the U.S. economy? The grinding news on the housing front, and now Wall Street's jitters, will, over time, lead to reduced consumption?period. I know I'm repeating myself for the umpteeth time, but it just takes awhile for most Americans to realize their number one asset is not only going down in value, even if by just a few percentage points, but that it's not about to then bounce back once we've hit bottom. Stagnation will be just as bad, psychologically, as another downdraft. That's why I keep pointing to 2008.

And I can't help but note once more a point I didn't hear one expert make this week, at least on the segments I caught on CNBC or in print; that being this is a global contagion due to real estate! It is a global housing bubble, whether you are talking Spain, Britain, Russia, or Australia. Each nation is in various stages, some still topping, others starting to rollover, but it's happening.

What's the central issue? Aside from easy credit?affordability. I get a kick out of real estate shills in this country, such as Barbara Corcoran, who said on NBC's "Today" show, Thursday, that this was a perfect time to buy a home. How can she make such a statement?! In 9 out of 10 cases, even with still low interest rates, assuming they qualify, most folks have no business owning some of the homes they purchased, and obviously the foreclosure data bears this out.

It isn't just adjustable rate mortgages and resets that caught people unaware. It's about simple common sense. I apologize if I touched a nerve with this last statement, but it's why even some of the mega-rich will get theirs when all is said and done.

Two final points. On Friday, the first estimate of second quarter GDP was released and it was up a solid 3.4%, as the first quarter's final revision showed growth of just 0.6%; the latter having first been pegged at 1.3%, incidentally. If you want, average the two and you get 2.0%, which in most cases would be alright.

But the second quarter figure was largely about inventory rebuilding, while the rate of consumer spending for the April - June period was only up 1.3%. There is also a real debate on business, or capital spending. The GDP report said it was strong, but the cap-spending portion of June durable goods was down. Guess which side of the fence I'm on?

Lastly, what this past week helped prove is how many have been living in a state of denial. Homebuilders kept building, hedge funds kept lapping up the collateralized debt obligations based off of subprime mortgages, private-equity types kept going to the leveraged buyout well, raping the companies in the process (more on this below), and, this is global.

But we're going to have good weeks and bad in the coming months. It won't be all straight down, especially since Wall Street's investment banks have little clue as to what is really on their books. It takes time to sort it all out after all.

We do have one thing to be thankful for, though. The terrorists in London weren't expert bombmakers. Trust me, if those two vehicles had gone off the other week much of the above wouldn't have made the cutting-room floor.

Street Bytes

--Depending on the index, it was the worst week for U.S. stocks in 4-5 years with the Dow Jones losing 586 points, 4.2%, to close at 13265. The S&P 500 plummeted 4.9%, its worst showing since Sept. 2002, to finish at 1458, while Nasdaq declined 4.7% to 2562. Additionally, the Russell 2000 index of small cap stocks is now down 1.2% for the year after a 7.0% drubbing.

As noted above, it was all about the debt crisis, but there were a slew of earnings reports as well and once again the picture was decidedly mixed. Among those earning rave reviews, at least for a few hours, were Merck, Amazon, Apple, 3M and Chevron, while those disappointing included Texas Instruments, DuPont, American Express, and Exxon Mobil. [Exxon paid another $7.4 billion in income taxes, by the way.]

--U.S. Treasury Yields

6-mo. 4.93% 2-yr. 4.50% 10-yr. 4.76% 30-yr. 4.93%

Flight-to-safety talk dominated and yields plunged across the board. Of course some might say that with the 10-year Treasury having fallen from 5.30% to 4.76% in a matter of weeks, it makes mortgages more attractive and helps cushion real estate's fall. Maybe so, if your credit is exceptional; otherwise it has zero impact at this point.

--On Tuesday, the Wall Street Journal had a good little piece on Amazon and how the stock was overvalued ahead of its earnings release after the close that day and around 3:45 p.m., I called my friend Dave to say how I kind of wish I had bought 'puts' on the stock. It just made too much sense. Alas, since I seldom go 'short' I didn't act and thank god for that. Like everyone else I would have been crushed as Amazon beat expectations handily, ending up 24%, $16, on Wednesday.

Now I love Amazon and have used it quite a bit over the past few years, but the stock is back to being ridiculously overvalued. Take the high estimate of $1.32 in earnings for 2008, for example. Amazon is trading well north of 60 times next year's projections.

--Meanwhile, Apple once again handily beat estimates and the stock recovered from an early week swoon on news sales of the iPhone may not have been as brisk as once thought. But the company said it sold 270,000 in its first two days, better than consensus of 200,000, yet others said Apple would sell 500,000. In actuality, Apple continues to kick butt with the iMac, let alone the iPod, and Apple's multiple is at least reasonable, baring recession.

--Ford reported its first profit in two years, while acknowledging it is doing all it can to rid itself of its Jaguar and Land Rover units. Ford's revenue rose 5% amidst improvement in its North American operations, though as noted above, auto sales, industry wide, are not about to recover in earnest with the ongoing issues in housing.

--I told you so?that when the Chinese government bought into The Blackstone Group and its IPO it reminded me of when the Japanese were aggressive buyers in the late 1980s of all things U.S., such as Rockefeller Center and Pebble Beach Golf Club, right at the top. China bought into Blackstone at $31 a share and just a few weeks later, the price is around $24 for a cool loss of 22%. For this the Chinese got out of the safety of U.S. Treasuries and other government paper in an attempt to diversify. At which point I can only comment, cash is not trash.

--Meanwhile, the China Development Bank said it would acquire a stake in the banking giant expected to emerge from Barclays Bank's takeover of Dutch lender ABN Amro, a combination that would create the 6th-largest in the world. CDB is looking to eventually have a 7.7% stake.

--I must say, the timing of Countrywide Financial CEO Angelo Mozilo's stock-selling isn't exactly the best in terms of positive P.R. Depending on how you look at it, Mozilo has cashed out of about $190 million in options over the past 18 months. Now he did found the company, and he is 68 years old, and he should be able to do with it what he wants, but, first, the options awards going back years were obscene and, second, his regular compensation has been equally so.

--Speaking of obscene, I've certainly written my fair share over the years about the arrogance displayed by our nation's elite, particularly on the corporate and investment front. This week, PIMCO's Bill Gross weighed in as part of his August review (pimco.com), including on the issue of "when is enough, enough?"

"(When) the fruits of society's labor become maldistributed, when the rich get richer and the middle and lower classes struggle to keep their heads above water as is clearly the case today, then the system ultimately breaks down; boats do not rise equally with the tide; the center cannot hold.

"Of course the wealthy fire back in cloying self-justification, stressing their charitable and philanthropic pursuits, suggesting that they can more efficiently redistribute wealth than can the society that provided the basis for their riches in the first place. Perhaps. But with exceptions (and plaudits) for the Gates and Buffets of the mega-rich, the inefficiencies of wealth redistribution by the Forbes 400 mega-rich and their wannabes are perhaps as egregious and wasteful as any government agency, if not more. Trust funds for the kids, inheritances for the grandkids, multiple vacation homes, private planes, multi-million dollar birthday bashes and ego-rich donations to local art museums and concert halls are but a few of the ways that rich people waste money - and I must admit, I am guilty of at least one of these on this admittedly short list of sins. I have, however, avoided the last one. When millions of people are dying from AIDS and malaria in Africa, it is hard to justify the umpteenth society gala held for the benefit of a performing arts center or an art museum. A thirty million dollar gift for a concert hall is not philanthropy, it is a Napoleonic coronation."

You hear that, Sandy Weill? Don't invite Mr. Gross to your next soiree.

--Related to the above, finally the SEC is stepping up its investigation into the stock-option backdating scandal, filing civil and criminal charges against a number of executives on Wednesday, including the former CEO of KLA-Tencor semiconductor equipment firm, Kenneth Schroeder. All this dirtball did was backdate options to himself worth millions of dollars from 1999 to 2002 and once, for good measure, in 2005. He did so even after corporate counsel advised him that the practice was improper. Such massive fraud in China would be punishable by death.

--Ah, but look here. Former Qwest Communications CEO Joseph "Jersey Boy" Nacchio was sentenced to six years in federal prison for the $millions he gained in illegal stock sales.

--Ianthe Jeanne Dugan of the Journal had a piece on how private- equity firms such as Blackstone divvy up the spoils.

"To complete their $4.3 billion Travelport purchase, Blackstone and Technology Crossover Ventures, a Palo Alto, Calif.-based venture-capital firm that now owns 11%, invested $1 billion and borrowed the rest. That debt landed on Travelport's balance sheet. In March, Travelport borrowed another $1.1 billion and paid it out as a dividend to the two firms, returning all their money in just seven months.

" 'This is likely one of the quickest returns of invested capital for a private-equity deal of its size,' Travelport's new chief financial officer said in a May conference call with analysts."

This is also 'rape and pillage.'

--Starbucks increased the price of its coffee an average 9 cents per beverage, citing the soaring cost of milk, up nearly 70% the past year. What happens if you drink it black?

--In another item on the inflation front, Rutgers raised its tuition and other costs 7.8%, but did not restore some 800 classes or any of the hundreds of job cuts.

--And?my property taxes rose 7%. I now pay $10,500 on a freakin' townhouse. Which is a reminder of another important topic related to today's real estate scene. Your taxes are going up, even though your property's value is in most cases going down?let alone the fact your town/city is about to reassess your home and hike taxes further. Stick that in your model, Bernanke.

--Pacific Gas & Electric, Northern California's largest utility, announced a major solar power initiative spread over nine square miles of the Mojave Desert. The recipient of the contract is Solel Solar Systems, an Israeli company that will employ troughlike arrays of mirrors, using a technology first adapted in the 1980s. When completed in 2011 or 2012, the project should power hundreds of thousands of homes.

--Big merger in the oil and gas drilling space as Transocean and GlobalSantaFe are hooking up. The combined operation will have 146 platforms stretching from the North Sea to the Caspian to the Gulf of Mexico. So since this is yet another industry where economies of scale matter, the question is, is this deal just the beginning of another wave of merger activity? Doubtful now.

--Another sign of the apocalypse, from the Financial Times:

"Fine wines are becoming increasingly unaffordable for traditional wine collectors as new buyers flush with cash from Russia and China and wealthy Londoners with big City bonuses to invest push prices to record highs."

We're talking Chateau Lafite Rothschild 1996 that had been selling for about $8,500 per case is now up to $14,300! I'll pass.

--U.S. sales of "Harry Potter and the Deathly Hallows" hit 8.3 million, the fastest-selling book in history. Another 2.7 million were sold in Britain in the first 24 hours.

Foreign Affairs

Iraq: Molly Hennessy-Fiske of the Los Angeles Times described Thursday's Iraqi parliament session. Only half showed up, the speaker was absent, no votes were taken, no legislation passed, and all this as parliament prepares to adjourn this weekend for its August recess. Earlier, the largest Sunni bloc, comprising 44 of the 275 seats, said it was suspending its participation.

And Iran and the United States held further talks about security in Iraq, though afterwards U.S. Ambassador Ryan Crocker said "Iran has stepped up its support for paramilitary groups in Iraq" since the first round of discussions were held, witness the increasing lethality of attacks as Iran trains the insurgents. At the same time, the Washington Post reports that Crocker is pressuring the White House to grant more Iraqis visas; those that are employed by our government. And here's a startling statistic. The U.S. has accepted four times more Iranians into this country than Iraqis the past nine months. It is estimated that over 100,000 Iraqis are being targeted for collaborating with U.S. or foreign reconstruction groups.

Lastly, Iraq's national soccer team beat Vietnam in the quarterfinals of the Asian Cup tournament, so the people hit the streets to shoot off their guns in celebration. At least three were killed by stray bullets.

Then the Iraqis upset South Korea in the semifinals, and amidst this celebration two suicide bombers killed 50 amidst the cheering throngs. What a sick place.

Turkey: The ruling Islamist AKP won 47% of the popular vote in Sunday's parliamentary election, giving it 340 of 550 seats, with another 27 needed to reach the 67% threshold necessary to change the constitution. But finding those last few seats won't be easy as the main opposition parties are not about to join a coalition with Prime Minister Erdogan. Ironically, the Kurds, having gained enough for some seats in parliament for the first time in years may just do so, but this will all shake out shortly.

The biggest immediate issue is whether Abdullah Gul, currently the foreign minister, will seek the presidency again, a post that historically has been held by a figure aligned with the generals. But Gul's wife wears a headscarf and you'll recall earlier this year when Gul wanted the office there were massive protests because of his Islamist leanings.

Some say the generals are preparing for a coup. I'm sure they always have such plans in their hip pockets, given Turkey's modern history, but for now, here is the opinion of Ralph Peters from his perch at the New York Post.

"Following the pattern Muslim parties had employed successfully elsewhere, the AKP played down its devotion to punitive Islam and delivered the services the people in Turkey's urban slums or in parched Anatolian villages had always been promised, but never got.

"Many early supporters of the AKP weren't voting for a government of mullahs, but for a party that brought electricity, clean drinking-water and rudimentary sewage systems to their neighborhoods - while cracking down on crime.

"To be fair, the AKP leadership really did clean up some aspects of government and has presided over the healthiest economic expansion in Turkey's post-Ottoman history - the party saw that businessmen could be turned into vital allies, so it opened the door to entrepreneurs shut out by the oligarchs tied to the corrupt, old parties?.

"But for all of the AKP's practical successes, the party is an Islamist party. It fully intends to destroy Turkey's secular laws. The party has suffered setbacks when it acted prematurely, either when fanatics sought to impose Sharia law on adulterers, or when the party tried to ram through the selection of a suspiciously devout president. [Ed. Abdullah Gul] Overall, though, the AKP has pursued a successful policy of creeping Islamization - instead of being murdered at high noon, Ataturk's constitution is suffering the death of a thousand cuts?.

"Turkey has fallen in love with a sanitized dream of past glory and an airbrushed version of Islam. On Sunday, it voted for the headscarf and the veil. Polls show that most Turks don't want Sharia law, but the balloting opened the barn door for the serpent."

Afghanistan: The Taliban killed one German and a South Korean hostage as part of its demands that South Korea (with 200 non- combatants) and Germany (3,000 troops) exit the country. Nine NATO soldiers were killed this week, including four Americans.

Lebanon: The U.S. Congress still hasn't released aid to the Lebanese Army for fighting the terrorists at the refugee camp near Tripoli. Over 110 Lebanese soldiers have died in the effort to destroy the Fatah al-Islam zealots, yet all Washington has done is supply ammunition.

The Lebanese need heavy arms. They're being outgunned. Just remember this next time you see President Bush or Condoleezza Rice talking of our support for the Siniora government.

As for Hizbullah, Sheikh Hassan Nasrallah told Al Jazeera that his militia had the power to strike Israel anywhere, having rebuilt its missile capability. The Israeli military believes Hizbullah has relocated its force from more rural areas to populated ones, making it harder to target.

On the issue of Syria and Lebanon, though, the Wall Street Journal's Bret Stephens points out that one of the true scandals these days is the fact Syria now occupies 177 square miles of Lebanon, which a new survey for the UN Security Council affirms. Syria, in essence, has been encroaching on Lebanese territory for the past three decades

And then there is a piece by Riad Kahwaji for Defense News in the July 23, 2007 issue that addresses Syria's recent actions.

"Syria is readying for potential war, whether offensively, as part of an attempt to retake the Golan Heights, or defensively, if ally Iran should be attacked over its nuclear program.

"In early June, Syrian President Bashar Assad banned many Syrians who work in Lebanon from leaving the country to go to their daily jobs. Syrian analysts say this indicates that Assad may want to call up reserves within hours if war breaks out."

Assad has removed all checkpoints into villages in the Syrian part of the Golan demilitarized zone in an effort to get people to move into the villages.

"Syrian analysts see this as an attempt by Assad to build up the civilian population and infrastructure in the disputed area, allowing the launch of a resistance movement and guerrilla attacks on the Israeli forces that occupy part of the Golan."

On July 17, during ceremonies recognizing the start of his second seven-year term, Assad said:

"The current year will be fateful and the remaining months [of this year] will determine the destiny and future of the region and maybe the world."

As Riad Kahwaji notes, "This was taken as a hint that (Assad's) efforts to retake the Golan Heights might turn violent."

India: While details were not forthcoming, the U.S. and India reportedly completed negotiations on a nuclear cooperation deal. The agreement would allow India access to U.S. nuclear fuel and equipment for the first time, even though it doesn't permit inspection of all of India's existing facilities, including those manufacturing nuclear weapons, and an inspection regime needs to be signed off on by the International Atomic Energy Agency as well as the 45-nation Nuclear Suppliers Group. Additionally, the U.S. Congress must sign off. All of this calls into question efforts to rein in Iran's own nuclear program. Unlike India, Iran is a member of the nuclear Non-Proliferation Treaty, and for its part Tehran is saying it is complying with its mandates. [Of course it isn't, but Iran will use the double-standard to its benefit.] Pakistan will also rail the India-U.S. agreement greatly strengthens its chief rival in the region.

Russia: Charles K. passed along a note that in recent days there was a meeting in Moscow between a U.S. group led by Henry Kissinger, George Schultz and Robert Rubin, and a Russian delegation headed by former Prime Minister Yevgeny Primakov and current Foreign Minister Sergei Lavrov. President Vladimir Putin was evidently in attendance. The purpose was to discuss some of the issues that have been plaguing U.S.-Russian relations the past few years. Kind of bizarre this didn't receive more press, I'll admit, and I'm not exactly thrilled Kissinger is involved.

In the meantime, Putin continued to spar with Britain and his new counterpart, Gordon Brown, over the extradition of former KGB agent Andrei Lugovoi, wanted in the murder of fellow ex- spy Alexander Litvinenko. Britain's foreign secretary suggested that Russia change its constitution to allow the handover of Lugovoi, while Putin said, Britain is forgetting it "has not been a colonial power for a long time." Gordon Brown countered, "We cannot stand by when a British citizen is assassinated on our streets, when we identify the culprit and we do not get the cooperation from Russian authorities."

Well, this isn't about to go nuclear, but it is a rather serious diplomatic crisis, especially seeing as Putin's Russia is a member of the G-8. But then on Wednesday, addressing a gathering of senior military and security officers, Putin said:

"The situation in the world and internal political interests require the Foreign Intelligence Service to permanently increase its capabilities, primarily in the field of information and analytical support for the country's leadership?.(as well as) all-around strengthening of our military forces."

So of course the U.S. and Britain are Putin's primary targets and when you see something like this you can't help but ask yourself, 'Is this the face of someone who is about to give up the presidency?' Doesn't seem that way.

North Korea: Pyongyang's chief delegate to military discussions with Seoul said "We don't need these fruitless talks any more" and walked out. The main dispute is over the sea border, which has been in question since the end of the Korean War. The waters are important because they contain rich fishing grounds.

Japan: Prime Minister Shinzo Abe may not survive his nation's parliamentary elections.

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Pray for the men and women of our armed forces.

God bless America.

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Gold closed at $672
Oil, $77.02

Returns for the week 7/23-7/27

Dow Jones -4.2% [13265]
S&P 500 -4.9% [1458]
S&P MidCap -6.1%
Russell 2000 -7.0%
Nasdaq -4.7% [2562]

Returns for the period 1/1/07-7/27/07

Dow Jones +6.4%
S&P 500 +2.9%
S&P MidCap +6.8%
Russell 2000 -1.2% [yup?negative for the year]
Nasdaq +6.1%

Bulls 53.9
Bears 18.0 [Source: Chartcraft / Investors Intelligence? reminder, contrarian indicator, plus there is about a 10-day lag from the newsletter writers' forecasts to the time I post this.]

Have a great week. I appreciate your support.

Brian Trumbore

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