Week in Review 
For the week 8/27/2007 - 8/31/2007
Brian Trumbore
President/Editor, StocksandNews.com

And Now the Real Fun Begins?.

Welcome to September. I hope you had a chance to recharge the batteries this summer because the next 30 days, let alone the rest of the year, promise fireworks on a number of fronts. Globally, it's all about Iraq and Iran, though one can't ignore the elections slated for two other hot spots this month, Pakistan and Lebanon (if they indeed come off as slated).

And when it comes to Wall Street, we'll soon learn the full impact of the credit crunch as the players return from the Hamptons to deal with the $300 billion or so backlog in financing for previously announced deals, let alone Sept. 18 and the Federal Reserve's next move on interest rates.

It was really quite comical, though, to see Fed Chairman Ben Bernanke admit that for all his brainpower he lacked, shall we say, common sense when dealing with the housing bubble since he took over for Alan Greenspan. Until this week, not one pronouncement of his has proved to be on the mark; not that being correct would have changed the Big Picture, however.

We have gone from 'zero contagion,' as Bernanke once put it, to "global financial losses (triggered by the mortgage crisis) have far exceeded even the most pessimistic projections of credit losses on those loans," which is what the chairman said on Friday.

So now he's beginning to understand and at the bankers' shindig in Jackson Hole this week Bernanke added, "Developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy." Then the markets roared with approval when he said the Fed "stands ready to take additional actions" to boost liquidity, and "will act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets." Why the Fed has to lower rates come September, mused traders?it just has to.

The Fed released its minutes from its August 7 meeting this week as well and the contrasts are stark. Just three short weeks ago, this brain trust offered that it was looking for "continued moderate growth," while "the upside risks to inflation remain the most significant policy concern." And just three weeks ago, the Fed was sanguine on the mortgage market and credit availability.

Now, Bernanke has been forced to admit, as he did on Friday, that the housing downturn "has been sharp," and "further declines in homebuilding are likely."

"Obviously, if current conditions persist in mortgage markets, the demand for homes could weaken further, with possible implications for the broader economy. We are following these developments closely."

But Bernanke was also forced to admit that any changes the Fed makes to the key funds rate could have minimal short-term impact.

Of course?.because it's already too late!!!!

You may have noticed I have said little about my own thoughts on actual levels of interest rates all year, except to note emphatically from the first day of January that the Fed would not raise rates once in 2007; this at a time when the Street was divided 50/50 on such a proposition.

The reason why I have said little on the topic, though, is because at this point in time the Fed is largely irrelevant. The die was cast long ago. No one can dispute contagion is spreading and I reiterate, this is global, sports fans. It's just unfolding at different rates of speed depending on where you are.

Economist Robert Shiller, in an op-ed for the New York Times, Aug. 26, on market psychology.

"Classical economics cannot explain this (current boom cycle), because underlying these booms is popular reaction to the price increases themselves. Rising prices encourage investors to expect more price increases, and their optimism feeds back into even more increases, again and again in a vicious circle. As the boom continues, there is less fear of borrowing heavily, or of lending heavily. In this situation, lower lending standards seem perfectly appropriate - and even a fair way to permit everyone to prosper.

"Booms cannot go on forever. Downward price feedback sets in. That is when balance sheets become impaired and widening credit problems start to show up.

"The puzzle is why this speculative cycle has occurred recently in so much of the world. What do all these countries share that drives them to speculative booms?....

"As we all try to adjust to a rapidly growing and increasingly capitalist world, we have been trying to discover who we are and how we fit into it. This has meant an enormous change in values.

"Many people feel that they have discovered their true inner genius as investors and have relished the new self-expression and excitement. Investors across the world have been thinking that they are winners - not recognizing that much of their success is only a result of a boom. Declines in asset prices endanger this very self-esteem.

"That is why it is so hard to turn around investor attitudes once a downward psychology sets in. The Fed and other central bankers do not have lithium or Prozac in their bag of remedies, and so cannot control it."

I hope the above sounds familiar. It should, by god.

Professor Shiller and his associates came out with their latest reading on real estate values in 20 major U.S. markets and in the second quarter, prices declined 3.2% year over year.

We also learned this week that inventories hit a 15-year high and, obviously, there is no recovery in housing until we significantly work off what is already sitting there, unoccupied.

Speaking of which, David Streitfeld had a piece in the Los Angeles Times on the problems being created in some areas these days.

"If the foreclosure trend continues on its current pace, experts warn, communities will need to act decisively to avoid blight."

Here's a nightmarish example.

"In (a) Los Angeles cul-de-sac, this one off Coldwater Canyon Drive near Beverly Hills, (there is a) mansion in question that was bought by a man in early 2005 for $1.4 million. By last fall he was gone and the property was in foreclosure.

"HSBC, a major lender that was carrying the biggest note on the house, asked Leo Nordine, a real estate agent who specializes in foreclosures, to represent it for sale.

"Nordine went to check out the property and realized that people were living there. He left them a polite letter on the kitchen counter. There was no response to that letter, nor to follow-ups that he mailed.

"Neighbors, who asked that their names not be used because they were worried about their safety, said the occupants were a group of men apparently in their 20s and 30s. The men take the trash out every week, but that was the only good thing the neighbors had to say.

"Nordine said that HSBC was pursuing a formal eviction but that it would probably take many months."

As a senior officer with the LAPD said, "If you know what you're doing, you can get six months in a place with a kick-ass view." Squatters move in, change the locks, and turn on the electricity. It's just that simple, as Ross Perot would say.

So you read stories like this and it's easy to be underwhelmed by President Bush's solution to the crisis. At least it wasn't a pure bailout, as presented, though I want to invoke my "24-hour" rule to gather the facts. For now, let's just say if Bush had been asked by a reporter on Friday to explain his administration's plan, it would have been the most embarrassing moment of his presidency and on par with the South Carolina girl's performance in the Miss Teen USA pageant.

Of course real estate is just one component of the global picture these days. The number one concern of economists used to be terrorism, in terms of a potential impact on the economy. But today it's the level of debt; as in leverage of all kinds, whether it is margin debt, or the household and mortgage variety. Some analysts have been waiting for a rise in credit card defaults as well as a harbinger of tough times down the road, and that's now happening, too, up 30% over a year ago for the first half of '07.

Lastly, as alluded to above, the first order of business when Wall Street's kingpins return on Tuesday is the state of pending leveraged buyouts such as First Data, Alltel, Harrah's Entertainment and Sallie Mae. They may get done, but at what price vs. the initial offer? Home Depot, for instance, was forced to accept $1.8 billion less for its supply business ($10.3 billion to $8.5 billion), while Lone Star Funds said, yes, it would buy Accredited Home Lenders, but not for its initial price of $15 a share. Try $8.50.

Yes, it's September and the start of a new school year. What will we all learn this go around?

Street Bytes

--For all the market's gyrations this last week of summer, the major indices finished mixed, with the Dow Jones losing 21 points, 0.2%, to finish at 13357, while the S&P 500 lost 0.4% and Nasdaq gained 0.8%.

--U.S. Treasury Yields

6-mo. 4.22% 2-yr. 4.14% 10-yr. 4.53% 30-yr. 4.82%

I have to admit, it's virtually impossible to explain in a line or two exactly why bonds have been trading the way they have the past month or so. On one hand you can break it down to 'flight to safety' on the short end, which can reverse the next day as money flows back into stocks or there is favorable news on the commercial paper front; while the long end of the curve has traded mostly on inflation expectations. Then you have the Fed and the bond market's conviction, or lack thereof, that Bernanke will lower rates. But there are so many other factors, including the yen-carry trade, that have been moving bonds. For this week I'll stick with the line that Treasuries rallied on Bernanke and a good reading on core inflation from the Fed's leading indicator of same.

Ed Hyman, the top-rated economist on the Street, predicts the Fed funds rate will eventually hit 4% from its current 5.25% level, and that because of lower interest rates we will have a "better economy next year." But then he adds, not before we have a quarter or two of 1.0-1.5% growth. I respectfully disagree that 2008 will be better.

--Oil prices rallied back to the $74 level ($73.94) on the strength of a deteriorating inventory picture for crude in the face of still strong global demand, especially from Asia. At the same time there remain serious supply issues from the likes of Venezuela, Iran, Iraq and Mexico, to cite a few key players. And after a break at the gas pump, gasoline futures are edging back up so a return to $3.00 as a national average could be in order, especially if the Weather Channel goes back into hurricane mode.

--There was a time when I'd write something like, 'How can you invest heavily in emerging markets when there is no transparency?' But today, the simple fact is our own markets have become an embarrassment. And for those who are fawning all over new French President Nicolas Sarkozy, understand this week he asked his finance minister to prepare a proposal for stricter disclosure rules on global market participants, i.e., the United States, before the next Group of 7 finance ministers' meeting in October. In other words, there are some who are tired of the U.S. exporting financial garbage because American regulators aren't alerting investors to the risks; as in the regulators had no control over the ratings agencies in the case of the mortgage securities' debacle.

--Speaking of transparency, of course the biggest culprits are the investment banks. Goldman Sachs, Lehman, Bear Stearns and Morgan Stanley wrapped up their quarters this week. Merrill Lynch, J.P. Morgan Chase and Citigroup are on a Sept. 30 fiscal quarter. What will they reveal, given that few if any individuals at the firms have a clue what the value is of their derivative positions, for starters?

--Saudi Arabia is establishing a separate, 35,000-strong security force to protect its oil infrastructure. Already 5,000 in number, the new recruits are "being heavily vetted," according to the Financial Times, as you'd expect when you're talking about access to more than 80 oil and gas fields and 11,000 miles of pipeline.

--The London property market has been insane, up 50% the past two years in the pricier neighborhoods, thanks to the riches being generated in the financial services arena there. But as the profits dry up, pop goes the bubble. [Ditto New York City.]

--Here in the U.S., a survey by the Mortgage Bankers Association found that speculators accounted for between 21% and 32% of the defaults on prime-quality home loans in Arizona, California, Florida and Nevada. Add this growing source of homes to others being foreclosed upon and you have an inventory level that impedes any hoped for recovery.

--When I posted last week's piece, I didn't have time to comment on Saturday's Journal story on the condo market. Suffice it to say, not only are buyers attempting to get out of their contracts in droves (or merely walking away), but developers are defaulting on huge construction loans, which in turn creates big problems for the banks that specialize in that area of the market.

--In a terrific accounting of Countrywide Financial, the Times' Gretchen Morgenson notes that CEO Angelo Mozilo "has not bought a share (of his own stock) since 1987," while reaping over $400 million selling CFC options he has been granted since the company went public in 1984. Mozilo sold $129 million in stock during the last 12 months. Meanwhile, 46% of the loans Countrywide holds on its books were made in California.

--Altria is finally spinning off its international tobacco unit from the Phillip Morris division, while U.S. sales decline. The new Phillip Morris International will boast seven of the top 20 global cigarette brands and a 15 percent global market share. Anyone who has traveled overseas is amazed how much everyone still smokes.

--I noted with interest the opening of the $2.4 billion Venetian Macau Resort, the largest casino in the world. But as I wrote when I visited the territory last April, this is a classic boom/bust scenario, with Macau's own second-quarter GDP soaring 31.9%!

--Talk about a fire sale, Acer, the Taiwan-based personal computer maker, picked up Gateway for all of $710 million. The move also enables Acer to acquire Packard Bell of Europe, because Gateway had the first right of refusal for it. Back in Nov. 1999, Gateway shares traded above $80. Acer picked it up for $1.90.

--Separately, Acer competitor Dell released its second-quarter earnings and sales rose 4% as it continues its comeback efforts. However, customer complaints are also still rising by some accounts. I know I myself purchased my last Dell after all the issues I've had with them.

--Management consultant Henry S. Givray had the following thoughts on today's CEOs in an op-ed for Business Week.

"Blackstone Group CEO Stephen Schwarzman is only the latest high-profile poster boy in the furor over executive pay, reminding us that some of today's corner office occupants have very different motivations and values from other Americans. His 'I'm worth every penny' jeering and other public comments make his narrow self-focus clear, relegating him to the gang of often piratical business executives who, sadly, have dominated the headlines in recent years.

"Thanks to the lot of them and Enron, WorldCom, and other corporate scandals, the image of the corporate CEO has taken a pounding. While Americans generally strive for and celebrate achievement and success, they are increasingly sickened by the narcissism, greed, and other 'me first' antics of such CEOs. Whether it is the imperious version (think Robert Nardelli or Hank Greenberg) or the self-dealing version (think Dennis Kozlowski or Jeffrey Skilling), much of the general public now believes CEOs are in the game only for themselves. The good of their employees, their customers, their communities, and even their investors are merely ancillary issues for them."

--The World Health Organization is warning that new infectious diseases are emerging at an "unprecedented rate." As in the case of financial accounting, when it comes to the dangers on the health front it's all about transparency. And just this week in the Congo, an Ebola-like hemorrhagic fever has killed at least 103 of 217 who became sick after attending funerals of two village chiefs.

--Related to the above, and back to the 'blight' story in the L.A. Times, there is a health issue connected to foreclosures. As in standing water in abandoned swimming pools! Seriously, this creates a breeding ground for West Nile Virus, which is relatively new to California and has already killed seven. Don't worry, I'm not about to over-hype this, but it's an interesting sidelight.

--We note the passing of Arthur Jones, inventor of the Nautilus fitness machines that transformed an entire industry. But goodness gracious; I had no idea what a wild man he was?six wives and a love of exotic animals such as crocodiles that he kept at his farm. So I'm thinking, wife #s 1-5 must have all said, "It's me or the croc!" Guess it was the croc.

--My portfolio: I haven't been doing anything except continuing to buy small amounts of my China biodiesel play. Overall, I'm still near my 80% cash, 20% equities recommendation.

--Check out my "Wall Street History" column for a look back on Florida real estate???..before the Great Depression.

Foreign Affairs

Iraq: Congress begins its hearings this coming week and soon General David Petraeus will give his long-awaited assessment on the surge. To a large extent the debate is all about the '08 presidential election, more than progress on the ground.

But there were a few developments this past week that bear watching; such as Shia leader Moqtada al-Sadr's call for up to a six-month suspension of activities for his Mahdi Army while he "rehabilitates the force." It is far from clear just what he means by this. In Karbala the other day, Shia militias battled each other resulting in over 50 killed, while it's also known that the Mahdi Army has infiltrated all levels of Iraq's government in order to hurt the Sunnis, who in turn are not about to accept any diminution of their once vaunted status.

Or is Sadr in trouble? By rehabilitating his army, as he puts it, is he saying the rogue elements in his militia are a serious threat to his authority?

Meanwhile, Prime Minister Maliki once again blasted Washington politicians, this time Democratic Senators Carl Levin and Hillary Clinton.

"Iraq is a sovereign country, and we will not allow anyone to talk about it as if it belongs to this country or that," this after both Levin and Clinton called for his ouster.

Iran: The United States is all set to go before the UN Security Council over the coming weeks and call for a third round of economic sanctions against the mullahs but, once again, the situation is muddied by the UN's own International Atomic Energy Agency, which this week praised Iran for taking "significant steps" in explaining Tehran's past actions on the nuclear front. The IAEA did admit, however, that Iran was continuing to defy the Security Council in enriching uranium, but it added both enrichment and the building of a plutonium- producing reactor was proceeding at a slower than expected pace.

To which Iran said, 'See! Look how cooperative we are!' Then various officials warned the United States and its allies not to push for another round of sanctions, suggesting that Iran would stop cooperating with the IAEA were this to be the case.

On the issue of Iran's role in Iraq, such as their support for the militias and the export of bombs to the theater that are killing Americans, Iranian President Ahmadinejad said, "Soon, we will see a huge power vacuum in the region. Of course, we are prepared to fill the gap, with the help of neighbors and regional friends like Saudi Arabia, and with the help of the Iraqi nation."

President Bush countered that Tehran's pursuit of nuclear weapons threatened to put the Middle East "under the shadow of a nuclear holocaust."

And in his first major foreign policy speech, French President Sarkozy weighed in, saying that if Iran insists on proceeding with its nuclear efforts, then the alternative would be "catastrophic: an Iranian bomb or the bombing of Iran." Sarkozy said Iran's pursuit is "the most serious" issue confronting world order today.

Pakistan: To say the political situation here is in a state of flux would be an understatement. As you know, Pervez Musharraf is both president and head of the military. But for months, Musharraf has been negotiating with exiled former prime minister Benazir Bhutto for her return. Early in the week, it was reported that Bhutto and Musharraf had reached an agreement, whereby Musharraf would step down as army chief but could serve another term as president if elected, while at the same time Bhutto would be allowed to run for parliament, thereby bringing her back into government.

But by week's end, Musharraf's people were saying no deal had been cut, even though Musharraf's greatly weakened political status argues for him to take the offer.

Because?another former prime minister in exile, Nawaz Sharif, who Musharraf deposed in 1999, has been cleared by the Supreme Court to return and Sharif said he will do so to run for president. Musharraf has hinted he would re-arrest Sharif, who had been convicted on charges of corruption. One thing is for sure, it will be interesting to see this whole situation play out ?but from a distance because there is bound to be a ton of election-related violence over the coming weeks.

Meanwhile, India accused elements of Pakistan's security service, the ISI, of planting the bombs in Hyderabad that killed 40, and the Taliban captured at least 100 Pakistani soldiers near the Afghan border, though it appears they will be released after tribal elders said, 'You know, this might not be a smart move.'

Turkey: As expected, Abdullah Gul won the vote for the presidency and Gul, a devout Muslim, approved a Cabinet that contained a mix of Islamist and secular figures. One fellow, British-educated Mehmet Simsek, had been working at Merrill Lynch and now becomes economy minister.

But Turkey's military chief, General Yasar Buyukanit, warned again that "insidious forces" are at work and that the Islamists seek to undermine Turkey's secular tradition. He added, Turkey's military would not "stand by."

Lebanon: Elections are to be held in September for a new president but the pro- and anti-Syrian camps remain deeply split. Michael Young, editor-in-chief of the Daily Star in Lebanon, had the following commentary.

"Half of politics is being there; the other half is knowing what to do once you are there. Many of the better-known figures of the Future movement, including Saad Hariri [Rafik Hariri's son], have neither been in Lebanon in recent weeks nor have they been particularly adept at advancing their agenda when they are. It's dawning on a number of groups in the majority that the Hariri camp may be the strongest yet also the most vulnerable component in the March 14 [anti-Syria] coalition."

The issue is that similar to the Iraqi parliament taking August off amidst a crisis, Lebanon's key players took one too, even as the Army was continuing its fight against terrorists at the refugee camp outside Tripoli. The nation's infrastructure is also still struggling to recover from last summer's war and the economy is sinking. Through this, Saad Hariri has been laying low at the Hotel de Paris in Monaco, partly out of fear that if he returns to his country, he'll be assassinated. Without a display of true personal courage, though, Hizbullah, Iran and Syria will emerge the winners this fall.

China: Five ministers were replaced ahead of October's Communist Party meeting, including the finance minister who had been at the helm since 2003. Rumors are that Jin Renqing and the others were wrapped up in corruption, as well as having a mistress or two which is increasingly frowned upon in the corridors of central power here.

In other issues, China was accused of hacking into German government ministries, including Angela Merkel's Chancellery. The magazine Der Spiegel laid it out in detailed form. China issued a denial.

And on the matter of Taiwan and its plan for a referendum next March on applying for UN membership under its own name, U.S. Deputy Secretary of State John Negroponte was pushed by China to issue a statement: "We oppose the notion of that kind of a referendum because we see that as a step towards a declaration of independence of Taiwan, towards an alteration of the status quo."

On the pollution front, many in Hong Kong's investment community are leaving to go to Singapore, "at least partly because of concerns by staff about their children's health," according to the South China Morning Post. But one banker told the paper, "Hedge fund bosses want to move to Singapore for their children's sake, but their younger single staff want to stay in Hong Kong to party."

[For a depressing summary of China's environmental issues, read my current edition of "Hot Spots."]

South Korea: The Afghan government blasted Seoul for negotiating with the Taliban in a deal that freed 19 Christian missionaries. The commerce minister said "We fear that this decision could become a precedent. The Taliban will continue trying to take hostages to attain their aims." After initially killing two of 23 taken (two others were released early on), the Taliban emerges with greater political legitimacy, according to some experts, as the hostage crisis lent them a political dimension for their movement.

North Korea: The eldest son of Kim Jong-il, Kim Jong-nam, is said to be the frontrunner to replace his father. The kid is based in Macau but has evidently made a number of trips to Pyongyang, as well as Beijing, recently.

But get this, the United States, Japan and Australia are holding their first-ever summit next week to discuss North Korea's nuclear ambitions and China's military build-up. The three are meeting on the sidelines of the Apec summit in Sydney. "First- ever." Yes, years ago I broached the idea of a supra-alliance between the U.S., Japan, Australia, India and Britain. Now if we could just get the Indian parliament on our side, we'd be all set.

Russia: Investigators have charged four individuals in the death of journalist Anna Politkovskaya, including former and serving members of the security service and Interior Ministry. But Russia's prosecutor general said "We reached the conclusion that the only people who could be interested in the removal of Politkovskaya are those outside the territory of the Russian Federation." Yuri Chaika said it was all about destabilizing the country.

Now while it is mildly encouraging that for the first time in 13 murders of journalists, the Kremlin has attempted to solve a case, it is a total crock that Politkovskaya's murder was orchestrated by outsiders; including oligarch-in-exile Boris Berezovsky, as President Vladimir Putin intimated this week. Berezovsky did call for an overthrow of Putin, though, in an op-ed for the London Times the other day.

---

Pray for the men and women of our armed forces.

God bless America.

---

Gold closed at $681
Oil, $73.94

Returns for the week 8/27-8/31

Dow Jones -0.2% [13357]
S&P 500 -0.4% [1473]
S&P MidCap -0.2%
Russell 2000 -0.8%
Nasdaq +0.8% [2596]

Returns for the period 1/1/07-8/31/07

Dow Jones +7.2%
S&P 500 +3.9%
S&P MidCap +7.3%
Russell 2000 +0.7%
Nasdaq +7.5%

Bulls 41.7
Bears 37.4 [unchanged?Source: Chartcraft / Investors Intelligence]

Have a great holiday. 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.