Week in Review 
For the week 8/20/2007 - 8/24/2007
Brian Trumbore
President/Editor, StocksandNews.com

Seeee youuuuu?.in Sep-temm-berrr?.

These days it seems it's all about 'buying time.' In Iraq, President Bush and General David Petraeus are attempting to buy time until the Iraqi government gets its act together. In Iran, the mullahs are buying time in their ongoing efforts to develop nuclear weapons while skirting further UN sanctions. And in the U.S. financial markets, the Federal Reserve by its recent actions is looking to buy enough time to allow the markets to regain their composure in the midst of dangerous crosscurrents.

This week I find it necessary to lead off with Iraq. With CNBC on all day, it strikes me how not one analyst who comes on the air ever talks about geopolitics when forecasting the market's direction. Granted, over long stretches Wall Street has often ignored the hot spots, and perhaps for good reason, but when you hear strategists talk about everyone on the Street returning from vacation come September and with a now critical Fed meeting lined up for Sept. 18, it's kind of funny that the number one issue when it comes to political discussion, Iraq, is also coming to a head next month, yet no one gives a damn.

It wasn't a good week for President Bush on this front, that's for sure, as a key Republican senator, John Warner, called for a symbolic troop withdrawal by Christmas to send a message to the Iraqi government that the U.S. commitment isn't open-ended. While Warner is only talking 5,000 soldiers, he is an influential figure on Capitol Hill and his call definitely goes against what President Bush and General Petraeus are calling for in letting the surge continue in order to buy more time.

But it all comes down to the performance of the Iraqi government itself and there is nothing of a positive nature the administration can point to on this front. Nothing. In fact, this week I believe it got much worse thanks to President Bush's not so veiled criticism of Iraqi Prime Minister Maliki that was echoed by other U.S. officials, including Ambassador Ryan Crocker. What was most worrisome here was that Maliki turned around and warned the United States that Iraq "can find friends elsewhere," i.e., Iran and Syria. "No one has the right to place timetables on the Iraqi government. It was elected by our people," he said.

Bush backtracked some the next day but the damage was done. If Maliki isn't replaced by the parliament, I am beginning to believe the prime minister could really stab us in the back in his dealings with his neighbors, more so than he's already undoubtedly done. Maliki doesn't have a leg to stand on, but that's not the issue. He needs to go, but can he be counted on to go quietly?

As for Bush, Warner's opinion isn't his only problem. Outgoing chairman of the Joint Chiefs of Staff, Gen. Peter Pace, is reportedly going to advise President Bush to reduce the level of U.S. forces by half in 2008; the Joint Chiefs' prime concern these days, it would seem, being the inability of the United States to respond to other threats due to the overly stretched Iraqi commitment.

On the ground it was another distressing week as a 2nd provincial governor was killed in the south amidst a battle between Shiite factions for control; this as Britain prepares to leave the region in what the U.S. is warning UK officials will be a "humiliating" retreat.

But then you had President Bush's speech to the Veterans of Foreign Wars, wherein he invoked Vietnam as a reason why the U.S. must stay the course in Iraq or risk a similar bloodbath.

Even many of the Democratic presidential candidates recognize the dangers if and when the U.S. leaves, but Bush's stretching of history, especially that of Cambodia during the Vietnam era, was appalling. I couldn't agree more with historian Robert Dallek who said that the slaughter committed by the Khmer Rouge "was a consequence of our having gone into Cambodia and destabilized that country." Iraq analyst Anthony Cordesman added, "(We) got a history lesson that would have embarrassed a first year undergraduate." [New York Times / Financial Times]

I also can't help but note another comment of the president's, where he cited that since the surge began, 1,500 al-Qaeda operatives had been killed or captured every month since January. Quite a change from when former Secretary of Defense Donald Rumsfeld and Vice President Cheney were talking of being down to a few "dead-enders," don't you think?

No doubt, Iraq has become a central front in the war on terror; but part of the debate, as it is in analyzing Bush's speech this week, is about cause and effect.

But in looking at the coming congressional clash in September, columnist George Will broke it down in his op-ed this week.

"When Gen. David Petraeus delivers his report on the war, his D.C. audience will include two important factions. Perhaps nothing he can responsibly say will sway either, so September will reinforce animosities.

"One faction - essentially, congressional Democrats - is heavily invested in the belief, fervently held by the party's base of donors and activists, that prolonging U.S. involvement can have no benefit commensurate with the costs. The war, this faction says, is lost because even its repeatedly and radically revised objective - a stable society under a tolerable regime - is beyond America's military capability and nation-building competence, and is politically impossible given the limits of American patience.

"The other faction, equal in anger and certitude, argues, not for the first time (remember Iraqi voters' purple fingers, the Iraqi constitution, the capture of Saddam, the killing of Zarqawi, etc.), that the tide has turned. How febrile is this faction? Recently it became euphoric because of a New York Times column by two Brookings Institution scholars, who reported:

" 'We are finally getting somewhere' ('at least in military terms'), the troops' 'morale is high,' 'civilian fatality rates are down roughly a third since the surge began' and there's 'the potential to produce not necessarily 'victory' but 'sustainable stability.'

"But the scholars also said:

" 'The situation in Iraq remains grave,' fatalities 'remain very high,' 'the dependability of Iraqi security forces over the long term remains a question mark,' 'the Iraqi National Police' are 'mostly a disaster,' 'Iraqi politicians of all stripes continue to dawdle and maneuver for position,' it is unclear how much longer we can 'wear down our forces in this mission' or how much longer Americans should 'keep fighting and dying to build a new Iraq while Iraqi leaders fail to do their part,' and 'once we begin to downsize?Iraqi security forces may splinter along ethnic and religious lines.'"

Back to buying time, another example is Iran. President Mahmoud Ahmadinejad must be an adherent of former North Carolina basketball coach Dean Smith and his 'four corners offense,' a stall tactic that Ahmadinejad is working to perfection thus far. Their nuclear weapons program has continued unimpeded, save perhaps some defective spare parts, for years now. The first two rounds of UN sanctions, while effective in their own way, still haven't forced Iran to back down and now the U.S. is pinning its hopes on a renewed diplomatic effort in the Security Council early September.

But as the Washington Post editorialized the other day in discussing troubling signs coming out of Europe:

"What's puzzling are the murmurs of disapproval from European diplomats and others who say they favor using diplomacy and economic pressure, rather than military action, to rein in Iran. So far, the diplomacy and sanctions haven't been working: Iran has been unresponsive to extensive European deal-making efforts and hasn't taken up a year-old U.S. offer of across-the-board negotiations in exchange for stopping its uranium enrichment. The sanctions have been too weak to cause the regime serious discomfort, and tougher measures are being blocked in the UN Security Council by China and Russia."

All this while the level of Iranian-sponsored bomb attacks on U.S. troops in Iraq soars.

Now I understand at this point why Wall Street and most Americans have closed off Iraq as an issue impacting their personal well-being. Our leader in the White House, after all, never asked us to sacrifice in any shape or form. But when Iran tests its first nuclear missile, that will be a wake-up call of cataclysmic proportions.

Wall Street

"It's true that some panics pass without consequence. But there are times - think October 1929 - when the tremors on Wall Street anticipate a more widespread economic storm. Given the tremendous run-up of debt in recent years, there's a good chance that today's credit crunch will turn out to be more than just a wisp of cloud in an otherwise blue sky."

--Market historian Edward Chancellor, Washington Post, 8/19/07

Continuing:

"There are times?when credit booms have more profound consequences. Research suggests that severe financial crises tend to follow the rapid expansion of credit. The longer the credit boom endures, the more severe the hangover. Furthermore, because real estate is not liquid and the process of foreclosing on defaulted mortgage loans is time-consuming (as well as politically problematic), the economic downturns that follow property booms tend to be deeper and to last longer."

And this:

"There's a good chance that the current panic will give way to a full-blown economic crisis. That's because the credit boom has been going on for five frenetic years and virtually everyone has become involved, either directly or indirectly. An increasing number of businesses, from motorcycle retailers to cellphone operators, are finding their sales affected by the subprime debacle?.Household spending continues to exceed income by a large margin. If credit stops flowing to consumers, the economy is bound to suffer."

There was some absurd talk on the airwaves concerning the market this week. Then again there is every week, especially if you're like me and you actually take a stand. Anything to the contrary thus becomes absurd, even as others are saying the same of you! It takes two sides to make a market, as they say.

But I loved how the markets stabilized this week, thankfully, and suddenly the chorus cried out, 'The worst is over. Long live the bull market. The heck with facts.'

And there was another mantra, especially among some CNBC anchors. 'How can anyone predict the next recession?' I can?.I've said for quite a while now it's 2008. There! I've said it again. [Apologies to Bobby Vinton.]

Edward Chancellor addressed some of the issues I've been concerned with on the real estate front, but I liked a note I received from Josh P., an internal memo from a managing partner at a well-known investment shop (that includes private- equity and hedge fund operations).

"Last week, I spent some time in the 'Inland Empire' of California on a due diligence trip to survey the actual damage. As many of you already know, 55% of all subprime loans were made in California and Florida. The inland empire of California can be described as the central valley that extends from the southern part of the state all the way to the northern part, at least one-hour inland from the coast. Let me start by saying it is MUCH WORSE than even I thought it could be. I met with various mortgage lenders, originators, economists, and capital markets professionals. The overriding theme that I got from them was that 'Everyone committed fraud and everyone is responsible for the problem.' They told me that they believe that 90% of all subprime loans contained some kind of fraud. Either borrowers lied about their incomes or mortgage brokers fudged numbers on the applications to make them pass muster. They also said that of the borrower frauds, 50% of applicants overstated their incomes by MORE THAN 50%!!! As Charles Kindleberger so aptly put it in his book 'Manias, Panics, and Crashes':

" 'The implosion of an asset price bubble always leads to the discovery of frauds and swindles. The supply of corruption increases much like the supply of credit. Soon after a recession appears (and) in the absence of more credit, the fraud sprouts from the woodwork like mushrooms in a soggy forest.'

"In California today, home prices are down between 25%-40% in the central valley. From San Bernardino to Stockton, they are in free-fall and their physical condition is actually worse than their price decline. The borrowers are locked out of the financing market and there is no logical buyer for these homes outside of the original borrower. The foreclosure wave will hit these neighborhoods like the Asian Tsunami."

In an interview for the Financial Times, chief economist John Lipsky of the IMF said that "the market crisis had three main components: first, a repricing of credit risk; second, a testing of the newer parts of the asset-backed securities market - in particular collateralized debt obligations and collateralized loan obligations (derivatives backed by pools of credits) that have not yet been tested under strain; third, increased fear of counterparty risk, caused by inadequate transparency on the part of banks as to the extent of their true contingent liabilities."

" 'Lack of transparency can create doubts that translate into market volatility. We are finding that in some cases regulated financial institutions are carrying off-balance-sheet risks that have indirect implications for those institutions."

Ah yes, pricing and transparency. A number of you passed on a piece by Jonathan Weil of Bloomberg (Trader George of Strategic Energy Research gets first credit) that we all found remarkable.

"There's the kind of earnings investors can take to the bank. And then there's the kind the bank can show to investors.

"Word to Wells Fargo & Co. investors: Beware the second kind."

Mr. Weil notes that in reporting net income of $2.28 billion for the second quarter, there was a footnote citing "Level 3" gains. "Without these, the financial-services company's earnings would have declined."

Weil: "So what are Level 3 gains? Pretty much whatever companies want them to be."

It all has to do with the Financial Accounting Standards Board, which last year approved a hierarchy for measuring "fair values" of assets and liabilities.

"Under Statement 157, (Level 3) means fair value is measured using 'unobservable inputs.' While companies can't actually see the changes in the fair values of their assets and liabilities, they're allowed to book them through earnings anyway, based on their own subjective assumptions. Call this mark-to-make- believe."

Brilliant, Mr. Weil. Jonathan quotes Jack Ciesielski, publisher of the Analyst's Accounting Observer research service in Baltimore.

"If you see a big chunk of earnings coming from revaluations involving Level 3 inputs, your antennae should go up. It's akin to voodoo."

Ah yes?how does the song go?

That old black magic has me in its spell, that old black magic that you weave so well.

Nice job, Wells Fargo.

But before I wrap this segment up, some quick thoughts on my Iowa trip last week; specifically, my conversations with farmers at the State Fair last Saturday. What an opportunity, though I'm sure I was the only one among 90,000-100,000 there that day that saw it this way?.as in I was the only one walking around the swine and cattle exhibition areas interviewing farmers.

First, not that I'm saying anything you didn't already know, but has there ever been any doubt who the best people in America are, excepting of course those serving in our military, many of whom come from farm country themselves?

Back over 8 years ago, I hooked up with an Oklahoma Panhandle farm family and cut a deal with Eugene and Karolee. I'll help you if you help me. Their end of the bargain was to allow me to call and visit them so I could keep in touch with the farm community in my own way. I've been out to see them twice and we exchange letters and calls a few times a year. Eugene always asks, "You keeping up on your learning of the business?"

Well here's what I've learned recently. Iowa, thanks to ethanol and high corn prices, has been experiencing a boom. Land prices are soaring and income is solid, even for the classic family farm.

But in my discussions last week, I was most interested whether or not they understood the impact of the credit crunch on their businesses, which you all know are as highly leveraged as any in America. Most of them seem to. That new high-tech equipment doesn't come cheap, to cite one example, and no matter how solid your banking relationships are, banks can only do so much if the crisis lingers, and/or the harvest doesn't come in as expected. [Which is why I saw the Midwest flooding and thought, oh no?that's hundreds of thousands of acres ruined.] Bottom line, America's farmers are always overextended?it's the nature of the business.

So, overall, what is your editor still focused on? Summarizing:

Housing is the #1 asset for most individuals and its suffering, plus in the case of a large portion of America subject to resets, the bulk of which don't hit until next January through May. We're just getting started, in other words. Defaults and foreclosures will continue to rise and it is a certainty consumer spending will suffer.

Housing has also been a key driver of economic growth, some 40% plus of it the past five years or so when looking at all related industries, and you've noticed the layoff notices, particularly in the mortgage origination and securitization arenas, are piling up. [Lehman Brothers, Accredited Home Lenders, Capital One, SunTrust and HSBC; to name a few.]

And I get a kick out of every expert who still fails to bring up a point I've made from day one. Whenever we find a bottom in the real estate market, then it's stagnation city! Real estate values will not, repeat, not, just suddenly zip back up. As I wrote in forecasting 2007 last December, to have what had been your piggybank lo these many years just stagnate, while all your other costs are rising, incidentally, most importantly your property taxes, does not make for a happy consumer.

The other big issue remains affordability. Housing today, even with recent declines in most major markets, is still not affordable for many and now your credit window is closed in terms of accommodating bankers.

You've learned one thing here at StocksandNews. I don't swing to and fro with every little movement in equity prices like a chimp in an old-style zoo with nothing but a tire to play with. We have experienced one of the great bubbles in the history of mankind, around the world, and the whole unwinding, deleveraging process is merely in its infancy.

Street Bytes

--It was a solid bounceback week as the markets took comfort in better economic news, such as Friday's reports on July durable goods and housing starts, as well as a semblance of order in the cash/commercial paper market after Monday's uncertainty on the Treasury front. The Dow Jones regained 2.3% to close at 13378, while the S&P 500 added the same and Nasdaq rose 2.8% to 2576. [No, the housing figure was not representative of a long- term trend.]

But the market is now saying it expects the Fed to cut interest rates in September. If the Fed doesn't, however, more tears will be shed.

--U.S. Treasury Yields

6-mo. 4.31% 2-yr. 4.30% 10-yr. 4.62% 30-yr. 4.89%

Talk about chaos, that was the situation early on with one- and three-month Treasury Bills. The yield on the one-month hit 1.30% and 2.50% for three-months as everyone panicked like it was 1987 as the commercial paper market seized up; particularly money market funds holding the lower-rated crapola, as Archie Bunker would have said. [Archie and Edith put 20% down, by the way.] But by week's end, things were largely back to normal?or at least the normal of about ten days earlier.

Former Federal Reserve Board member Wayne Angell weighed in for a Journal op-ed.

"The FOMC (Federal Reserve Open Market Committee) has? misread monetary policy as erring on the side of ease, while being over confident that employment growth would produce an orderly end to the house price correction. The FOMC did not want to be deterred from its hawkish stance on inflation by an end to the housing boom. Somehow the FOMC failed to recognize that its forecast of a smooth correction of house prices did not match up with reality.

"The problem is far more than a subprime loan freeze up. The FOMC must lower the target Fed funds rate sufficiently to reduce the yield on Treasuries."

In other words, as Angell goes on to say, this tinkering with the discount window doesn't cut it.

--For the record, foreclosures are up 93% nationwide over the past year. Overall loan delinquencies, including on mortgages, are at their highest level since 1990. Saturday's Wall Street Journal talks about all the condo projects going under as people walk away from their contracts.

--Bank of America infused Countrywide Financial with $2 billion in cash, after which an appreciative Countrywide CEO Angelo Mozilo said "I don't see a light here?confidence has to return (before we hit a bottom)." Housing will have a negative impact on psyches and will eventually lead us into recession, he added. What was comical is that CFC shares traded as high as $26 (still off from their recent high of $45), but after everyone digested the news the stock closed at $21.

--PIMCO's Bill Gross was ridiculed for his idea that the federal government should bail out an estimated two million homeowners. I received as much e-mail on this when it first hit as any other topic of the past few years. Needless to say, 100% thought he was nuts. I've worked with him, however, and I know where he's coming from???.but goodness gracious this was indeed an incredibly stupid idea.

--Iran's sacked oil minister warned of an energy crisis in his nation, not that we didn't already know this. Domestic consumption, despite recent restrictions, continues to cut into future revenues, with Iran having to import gasoline because it doesn't have the refinery capacity.

But what's significant is that even the Iranian parliament's research center is now issuing warnings. "It seems that for at least the next ten years there will not be any extra gas for export." [Agence France Presse]

Two reasons to care about this: 1) With Iran being OPEC's 2nd- biggest producer, this obviously impacts the global supply/demand picture, and, 2) Voices of dissent are becoming more numerous in Iran. [At the same time the government is increasingly cracking down on them.]

--For a CAT 5 hurricane, Dean was an incredibly responsible storm in opting to skirt major population bases as well as the critical Cantarell oil field in the Gulf of Mexico (Bay of Campeche). It's easy to forget the U.S. imports more oil from Mexico than from the Saudis and Cantarell accounts for a full 60% of Mexico's production. [Cantarell's overall production also continues to decline for you Peak Oil adherents.]

--The subprime mortgage mess spread to three of Asia's biggest banks, including the Bank of China which reported a $11.25 billion exposure to the sector. Analysts had no clue it was anywhere near this level.

--Bloomberg News had another piece on Spain's housing bubble, a topic I've written of for years. The overbuilding that has taken place is unbelievable and all manner of investors and banks are beginning to pay the price, let alone homeowners.

But wait, there's more! Foreclosures in Britain are at an 8-year high, up 30% over the past 12 months. Personal bankruptcies are also at an all-time level, "spurred largely by a crushing increase in mortgage debt." [International Herald Tribune]

Yup, it's a global bubble, sports fans.

--You want some good news?even if it's from Germany? Since reunification 18 years ago, the German government has spent about $2.6 trillion on the former East Germany for infrastructure projects and items such as unemployment benefits and pensions. Well now for the first time the government's budget is in the black.

--And back to China, shares on the Hong Kong exchange rocketed higher after the mainland government said individual investors could begin to trade directly in Hong Kong-listed securities. Heretofore, Beijing has been concerned about capital flows across the border but with foreign exchange reserves in excess of $1.3 trillion, with a 't', this isn't too big of an issue?to say the least.

--Japan shut its largest nuclear power plant indefinitely following the recent earthquake and now the country faces electricity shortages, especially during heatwaves like the one it has been experiencing. Some utilities have been asking large industrial customers to cut back for the first time in 17 years.

--Despite Wall Street's problems, bonuses will still be huge according to Options Group, a consulting firm. They are estimating they will drop by only 5 percent from last year's record levels. Then again, this assumes you still have a job. Suddenly, executive search firms are receiving a lot of resumes from the hedge fund crowd, as well as private-equity firms that have begun cutting back.

--Here's a business item from The Weekly Standard, an article by Eli Lehrer on Florida's looming insurance crisis.

Analyst J. Robert McClure notes that as the state hopes to skirt a major catastrophe on the hurricane front this year, "Our insurance situation is like one of those kitchen timers you wind up. In a while, it's going to ring, and Florida will be in quite a mess."

As Lehrer writes, "The state has basically offered lower property insurance rates to residents, by assuming enormous financial risks itself. If a truly major storm happens, the legislature has authorized the sale of nearly $30 billion in bonds to cover its exposure. Any way you slice it, that's almost three times as large as the $11 billion California issue that stands as history's largest municipal debt sale. That's where the risk of bankruptcy comes in: If it can't raise enough money through the sale of bonds to pay for hurricane damages, the state won't be able to pay the claims it's on the hook for."

And while Lehrer wrote this for the August 20/August 27 issue of TWS, he didn't have a chance to take into account the impact of the credit crisis on such an offering as well.

--According to the IRS, the average income in 2005 was $55,238, still nearly 1 percent less than in 2000, after adjusting for inflation. This is a little deceiving, as nearly half of Americans reported incomes of less than $30,000 and two-thirds make less than $50,000. The divide between the haves and have- nots continues to widen, whether some Republicans want to admit it or not.

--Monster Worldwide finally admitted cyber thieves stole data on at least 1.3 million job seekers, though it insists the data was on a single rogue server and contained just names, addresses, phone numbers and e-mail addresses.

--Toy maker Mattel sued adult entertainer China Barbie for using their doll's name on her pornographic website. [Don't go there ?.you'll pick up a virus!]

--Barron's cover story for its Aug. 20 issue featured CNBC's Jim Cramer and how his stock picks have underperformed, not that you didn't already know this. He's too easy a target, frankly, and I won't waste any space on him. EXCEPT?I was surprised Barron's, or other criticisms recently, didn't mention that in early June, Jim was pounding the table on buying Countrywide Financial July 45 calls! [The stock was around $38 at this point.] A slight miss?as we say in the trade.

--This will make you feel old?the Big Mac sandwich turned 40. "Two all-beef patties, special sauce, lettuce, cheese, pickles, onions on a sesame-seed bun."

Foreign Affairs

Pakistan: The Supreme Court ruled that former prime minister Nawaz Sharif can return home after years in exile, a big blow to President Musharraf who overthrew Sharif in 1999. Sharif said he would do so immediately to seek office in upcoming elections. But the Court's ruling could hurt another former prime minister, Benazir Bhutto, who was seeking a power-sharing arrangement with Musharraf. Sharif will be viewed more favorably because he has never held secret talks with the increasingly unpopular Musharraf, as opposed to Bhutto's efforts.

Turkey: Islamist Foreign Minister Abdullah Gul will become president in the third round of voting that takes place on August 28, it would appear. Prime Minister Erdogan has called on the military to stay out of politics.

Russia: After resuming long range bomber flights the other day, Britain was forced to scramble its fighter jets to shadow a Russian bomber heading for the UK. Earlier, Russia claims it flew over (or near) the U.S. base on Guam where it engaged American fighter jets in an exchange of pleasantries. Of course this is all part of President Vladimir Putin's plan to reassert Russian hegemony. An editorial in the current issue of Defense News best summed it up.

"The longer Vladimir Putin stays in office, the faster Russia appears to be sliding back to its Soviet ways.

"The process of increasingly resorting to bombast, militarist bullying, occasional outright fabrications and even assassination has been under way for the past several years. Over the past several weeks, the transformation has been completed.

"First, Russia surreptitiously and outrageously claimed the entire North Pole as its own, pledging to exploit its natural resources, then Putin said Russian bombers would resume regular patrols abandoned 15 years ago.

"If the stakes weren't so serious, all this posturing would be laughable.

"Russians say the moves aim to boost the popularity of Putin's political party with voters who regard such antics as signs of Moscow's growing strength rather than its foolishness.

"Perhaps, but Putin's party is riding high and his heir Sergei Ivanov leads for the top job.

"Rather, as Russia grows wealthier on its oil and gas riches, it painfully recalls how in post-Cold War poverty it was ignored by the West - and Washington in particular.

"From Russia's perspective, since 2001 the United States and NATO have been on its historic turf, allowing Putin to exploit Russians' suspicion of outsiders. So when the Czech Republic and Poland decided to host missile defense sites against future Iranian missile attack, Moscow saw a threat serious enough to break a successful post-Cold War arms control accord.

"It's much harder to ignore a country when its bombers are constantly trying to penetrate your airspace or shadow your military exercises, or worse, cut off your gas supplies or crash your Internet grid.

"Former Soviet republics with the temerity to disobey Russia have felt Moscow's sting as a warning to others. During a dispute over pricing, Ukraine spent a few days in the middle of winter without gas, sending chills across a Western Europe that in the peaceful 1990s grew dependent on Russian energy. The message; obey or spend some nights in the cold.

"Then there was the mysterious and gruesome radioactive death of a former KGB agent in London, and earlier this year there was the two-week devastation of Estonia's computer networks. Russia has denied complicity in both incidents, but Western governments say the evidence is overwhelming.

"In an increasingly global economy where Russian money resides in American and British banks and its oil and human and resource capital flow worldwide, such hamfisted tactics are dangerous?.

"It's (likely) that Moscow's change in tone goes beyond saber- rattling. After the Cold War, Russia saw its influence hit rock bottom. If you can't get attention as a partner, then perhaps you can do so as a consistent irritant. If Russia grows more open, democratic and globally constructive, no problem. But if, as appears sadly the case, it seeks more attention as a spoiler, then the global community has no choice but to increasingly isolate a nation that has yet to recover from a millennium of serfdom and totalitarianism. The choice is the Kremlin's."

The above analysis is yet another reason why I think 2008 is going to be quite a year, friends.

China: I just received my September/October issue of Foreign Affairs and haven't had a chance to read it, but with all I've written on the pollution issue in China, I see that Elizabeth Economy has written a big essay for the journal titled "China's Coming Environmental Crash."

Here is her opening comment:

"China's environmental problems are mounting. Water pollution and water scarcity are burdening the economy, rising levels of air pollution are endangering the health of millions of Chinese, and much of the country's land is rapidly turning into desert. China has become a world leader in air and water pollution and land degradation and a top contributor to some of the world's most vexing global environmental problems, such as the illegal timber trade, marine pollution, and climate change. As China's pollution woes increase, so, too, do the risks to its economy, public health, social stability, and international reputation. As Pan Yue, a vice minister of China's State Environmental Protection Administration warned in 2005, 'The (economic) miracle will end soon because the environment can no longer keep pace.'"

Canada: President Bush and Canadian Prime Minister Stephen Harper failed to agree on the status of the Northwest Passage when they got together this week. The U.S. contends it is an "international passageway," while Canada says, 'No way, it's ours.' The territory is still too cold for me, frankly. It's kind of like my 60 degree rule for golf.

---

Pray for the men and women of our armed forces.

God bless America.

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Gold closed at $677
Oil, $71.13

Returns for the week 8/20-8/24

Dow Jones +2.3% [13378]
S&P 500 +2.3% [1479]
S&P MidCap +3.1%
Russell 2000 +1.6%
Nasdaq +2.8%

Returns for the period 1/1/07-8/24/07

Dow Jones +7.3%
S&P 500 +4.3%
S&P MidCap +7.5%
Russell 2000 +1.4%
Nasdaq +6.7%

Bulls 40.6
Bears 37.4 [Source: Chartcraft / Investors Intelligence?was 53.9/18.0 just four weeks earlier?the indicator has actually been working pretty well lately.]

Have a great week. I appreciate your support.

Brian Trumbore

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