Educate Yourself

Week in Review
For the week 10/15/2007 - 10/19/2007
Brian Trumbore
President/Editor, StocksandNews.com

It's flat out comical, and an outright embarrassment, how badly Federal Reserve Chairman Ben Bernanke and Treasury Secretary Hank Paulson missed the impact of the housing debacle. Now, though, they are backpedaling faster than a Tour de France champ whose sample came back positive. The two spoke this week.

Bernanke: "The further contraction in housing is likely to be a significant drag on growth in the current quarter and through early next year. However, it remains too early to assess the extent to which household and business spending will be affected by the weakness in housing and the tightening in credit conditions."

Paulson: "(Housing) is the most significant current risk to our economy?.The longer housing prices remain stagnant or fall, the greater the penalty to our future economic growth."

Bernanke [on the situation in the credit markets]: "(While improvement) increases the likelihood of achieving moderate growth with price stability, the ultimate implications of financial developments for the cost and availability of credit, and thus for the broader economy, remain uncertain."

No they aren't. To the contrary, it's all very certain, as in I'm certain we still have major problems ahead.

Look what we learned this week, sports fans. September housing starts in the U.S. were down 10% and building permits are at their lowest level since 1993. The six-county Southern California region saw actual sales collapse 48% in Sept., to their lowest level since 1988 (the first time such data was kept). Homebuilder D.R. Horton said its cancellation rate was 48% and it saw a drop in sales in the third quarter of 39%.

And many of you, such as Josh P. and Chris C., have correctly remarked that the discounts now being placed by the homebuilders on their properties are absolutely killing existing homeowners and so what you have is a snowballing effect in the sector. Business Week also had a good piece on this last week. For starters, existing homeowners can't refinance for a variety of reasons in the above example, and there are few home-equity loans being issued, this having been a leading driver of economic activity, when the applicant has negative equity.

But remember what I've been pounding home for years, as if you'd forget; it's global! It's been a global housing bubble!!! When the history books are written this fact will be recognized, even if it's taking time to do so today.

I've also said you can break it down further to one word, "affordability." So here was a headline in the Sydney Morning Herald this week:

In Australia, it takes a record 32% of income to purchase a home there these days. [It's higher in the U.S.]

Last week I wrote of the bubble in China property markets. Then last Thursday, Ariana Eunjung Cha had a story in the Washington Post titled:

Ms. Cha writes of Shenzhen, a city of 14 million, where there are now "vast swaths of empty apartments that just a few months ago were selling at record prices."

"A collapse in housing prices could have a harsh effect on the economy, given that 80 percent of urban homes are owned by private citizens. The value of housing loans awarded in China stands at nearly $450 billion so far this year.

"Yi Xianrong, a finance and banking researcher at the Chinese Academy of Social Sciences, a government-affiliated research institute, worries that China's subprime mortgage problem is worse than that in the United States because banking laws are still being written and a credit rating system doesn't exist.

" 'Both good and bad consumers can get into the real estate market. Many buyers are investors, using forged documents to get money from banks to speculate on the domestic real estate market,' Yi said."

Sound familiar? It should. Prices in Shenzhen, by the way, rose 17.6 percent in August from a year earlier. That's it, I'll bet. The top is in?.and we're going to see a landslide the likes of which are feared at the Three Gorges Dam these days. Do you think it will reverberate here? Of course it will.

On a related issue, Chairman Bernanke, in addressing future Fed moves on interest rates, said "The truth is that (the Fed) can hardly insulate investors from risk, even if it wished to do so. Developments over the past few months reinforce this point. Those who made bad investment decisions lost money."

In other words, no bailouts?..unless you are a big Wall Street bank and you have a friend in the Treasury Department.

And so it was that this week we learned of a little meeting that Hank Paulson had with Citigroup, JP Morgan Chase, and Bank of America, wherein the three will create a rescue fund, with Treasury's blessing, to revive the asset-backed commercial paper market. The fund, $80 billion or thereabouts, is to buy assets from off-balance-sheet structured investment vehicles called SIVs, which heretofore bought corporate bonds and mortgage paper. This is supposed to prevent round two of the credit debacle.

It's a bailout, or as noted economist Allan Meltzer of Carnegie Mellon University put it, "I've been surprised by the extent to which the administration has been willing to be involved in the markets. Nobody in government is ever as pure as their statements may lead you to believe," he told Bloomberg News. Ain't that the truth. Former Fed Chairman Alan Greenspan added in an interview published Friday, the 'superfund' could have "dire repercussions."

"At the time of this writing [Oct. 16], the conduit-to-be raises more questions than it answers. Banks such as Citibank - which is heavily involved - have substantial off-balance-sheet exposure to the asset-backed commercial paper market. And the SEC regulators are breathing down their necks to write down the assets in their structured investment vehicles. It may be true that, in some cases, good assets are being marked down because investors can't distinguish the good debt from the bad.

"But get this: The announced vehicle, dubbed the Master- Liquidity Enhancement Conduit, will only buy highly-rated paper, to ensure investor confidence. The trouble with this theory is that investor confidence has been shaken because people no longer feel they can trust the ratings. This in turn has resulted from the fact that much of the now-dubious debt was rated not on the value of the collateral, but on the strength of the bank (such as Citibank) that issued it."

As more than one observer has remarked the past few days, this is shades of Enron and at the end of the day, it's more or less about "fair value" accounting of assets and securities, both on the books and off. Fat chance you the investor will receive the truth. Transparency? Pshaw.

Meanwhile, Wall Street took it on the chin this week thanks in no small part to the likes of diversified manufacturers such as Eaton and United Technologies issuing dour outlooks for coming quarters, while on Friday, Caterpillar said many of the key U.S. industries it serves are already "in recession," including declining sales for both residential and commercial real estate. Recall, it was the previous week that another bellwether, Ryder Systems, the truck-leasing company, said "Economic conditions have softened considerably in more industries beyond those related to housing and construction." I'm no Bernanke or Hank Paulson, but it seems to me this spells trouble. My long-time forecast of recession in 2008 appears to be a lock.

--Stocks snapped a five-week winning streak as some rationality finally seeped in (or so some of us believe). Aside from concerns over the SIV-bailout, you had humongous writedowns from the likes of Citigroup, Bank of America and Wachovia, along with further dire pronouncements, such as in Washington Mutual's that the housing market is far worse than it initially thought. Even the likes of 3M and Schlumberger were smacked around at week's end on the heels of less than stellar earnings and/or forecasts.

For the week the Dow Jones plunged 4.1%, including a 366- point drubbing on Friday, to close at 13522, its worst week since late July. The S&P 500 lost 3.9% to 1500 and Nasdaq dropped 2.9% to 2725, even as some tech issues reported strong earnings.

But while oil hitting $90 this week (before closing at $88.60) finally had an impact, I'll continue to largely pooh-pooh this latest move in terms of ink in this space until I see gasoline futures trade above $2.30, which would then translate to $3.00 per gallon at the pump. [Today, the nationwide average is closer to $2.75.] Otherwise, I'm sorry if I can't get too worked up about it. But when we do get back to $3.00 plus gas, especially if it's during the Christmas shopping season, it obviously won't be good for retail sales and the impact will be greater than the last time we were at that level because overall economic conditions will have been softening more so than before.

The Fed meets Oct. 31 and it's clear after this week they will lower the funds rate at least another 25 basis points. Treasury yields plunged across the board on economic fears and a flight to safety out of stocks. Additionally, the Sept. consumer price index was tame?if you strip out everything we use.

Separately, in August, there were net capital outflows of U.S. market assets - including bonds, notes and equities - of $69 billion, vs. an inflow of $19.5 billion during July. The August outflow exceeded the previous record decline of $21 billion in March 1990 and is a result of the credit squeeze, as well as still growing concerns over the plight of the U.S. dollar which hit further lows. I think if Hank Paulson stood before an audience next week and said, "The official policy of this administration is that a strong currency is in our nation's best interests," he'd be laid out faster than you can say structured investment vehicle.

--Much was made Friday of the CNBC interview with hedge fund legend Julian Robertson and his view we were facing a "doozy of a recession." But I chose to focus instead on strategist Elaine Garzarelli's comments on the same network Friday morning, wherein Ms. Garzarelli, fresh off a trip to Europe, said every country there is slowing down. She was bullish on equities, though, owing to her long held belief that an accommodative Fed is good for stocks. But I hear 'slowing' and think earnings are about to plummet vs. expectations; not good for equities.

--Excellent piece in the New York Times by Alexei Barrionuevo on the coming energy crisis in South America, particularly for Brazil, Argentina and Chile, all of which are heavily dependent on natural gas and are now struggling to meet demand as their economies grow. The governments have failed to keep up with investment, while for its part Argentina has been regularly cutting the supply it sends to Chile in order to take care of itself.

--With the boom in the China stock market, this week PetroChina saw its market cap rise to about $450 billion at one point, or second-largest in the world to Exxon Mobil's $520 billion. It was pointed out to me by former full-service broker turned investment partner, David P., that another company, China Mobile, saw its market cap reach $400 billion this week. Bubble bubble.

--Pfizer, in deciding to pull its experimental insulin inhaler, took a $3 billion hit on the project, making it one of the costliest cancellations in history.

--Some of the issues faced by the likes of Medtronic in its heart device products are truly scary. The latest issue involves their defibrillator and an electrical "lead," or a wire that connects the heart to the device. The lead can fracture, leading the device to misread heart-rhythm data. This in turn can cause the defibrillator "to either deliver an unnecessary electrical jolt or fail to provide a life-saving one to a patient in need." [Barnaby Feder / New York Times] The product in question is the Sprint Fidelis.

--Google beat earnings expectations on revenue of $4.23 billion for the third quarter, but also added 2,130 employees during the period and now has over 15,900. In the search game, however, Google's share in the United States is up to 67%, with Yahoo trailing at 19% and MSN just 9%. Yet the question remains, will someone new come along in this category, just as they once did?

--EBay's earnings report was met with little enthusiasm as its U.S. auction business is slowing considerably. The company also took a $1.4 billion hit on its investment in Skype, the Internet calling service it acquired in 2005.

--Citigroup not only wrote off $3.55 billion in mortgage-related securities transactions, as well as leveraged loan costs, but also set aside another $2.2 billion to cover future losses in anticipating further troubles. CEO Chuck Prince is hanging by his thumbs.

--Congratulations to my good friends at Bank of New York Mellon for a fine earnings report. Yeah you?T.G. and M.S. [If I revealed any more, they'd have to shoot me.]

--Intel's revenues grew 15% in the third quarter, exceeding estimates, as global PC demand remains strong. Intel's margins also came in at a solid 57%, while its shares are up some 40% off its spring lows.

--Alas, success was nowhere to be found at Ericsson, the world's largest telecom equipment maker, as it issued a major profit warning and the stock plunged over 20%. Ericsson blamed a shortfall in contracts to expand and upgrade existing mobile networks in the U.S. and Western Europe.

--In a sudden reversal, coal-fired power plant proposals are being shelved left and right due to concerns over the environment as well as soaring construction costs. The U.S. Department of Energy's latest tally of pending coal plants shows eight projects have been canceled since May, and at least another eight have been scrapped with dozens facing new delays. Coal produces half the electricity consumed in the U.S., but it's also one of the larger sources of greenhouse gases. Plus, demand for skilled labor has led to cost increases of 40 percent in constructing the plants thanks to increased competition from the likes of China and India for qualified workers. [Matthew Brown / AP]

--Berkshire Hathaway's Warren Buffett said he was never interested in acquiring a large stake in Bear Stearns, refuting an earlier New York Times story. "All the news that's fit to print ?even if it's totally made up."

--While the IPO market remains busy, with 11 completed since Labor Day, analysts say the private-equity bubble has burst, possibly for good. Among the reasons, investors "Don't just want companies that rely on cost-cutting for improved returns. Investors want companies that are growing by selling new products and services, not those that have undergone 'financial engineering,'" as Kathleen Smith of Renaissance Capital told USA Today's Matt Krantz.

--Social Security benefits will rise just 2.3% in January, an adjustment based on consumer prices from July through September compared with the similar period in 2006. Of course this doesn't take into effect higher energy and food costs and is yet another Washington scam.

--Inflation Watch: Rising food prices are a big concern in Russia and the finance ministry now concedes inflation there could hit double digits this year, far in excess of the government's 8% target. [Phew?my visa arrived today. I'm heading to Moscow in three weeks.]

--My portfolio: I sold my China solar play (leaving me with a U.S.-based one in this space) after making a nice profit on it. Just thought it got a little ahead of itself, plus I wanted to raise some more cash. I'm solidly back to the 80% cash / 20% equities ratio I have long said will beat the S&P. [Should the China solar play correct significantly, though, I will probably get right back in.]

--In looking up some statistics for my "Wall Street History" column, I came across something I have seen nowhere else. The Dow Jones bottomed at the 776 level in Aug. 1982 before the great bull market took off, and a little over five years ago, Oct. 9, 2002, the S&P 500 hit its key bottom, also, amazingly, 776. [If you find this factoid anywhere else I will donate $100 to your favorite charity.]

But I thought you'd be curious what I was doing on Black Monday, Oct. 19, 1987. So now?the 'professional' life story of Brian Trumbore?short version.

After entering the work force as a clerk/typist at an insurance brokerage firm in New York City (very fun job, great people), Sept. 1980, I received my first big break when George Ross hired me to help him out in the tax shelter department at Thomson McKinnon Securities, Nov. '82, which is why I feel I'm a bull market baby; the historic bull run having commenced the preceding August. Seeing as I was friends with his son, Trader George, and knew Boss Ross since I was about 14, he was Mr. Ross to me.

I stayed with Mr. Ross until 2/85, got a job as a spice broker and went to India, then, not having burned any bridges, found myself right back at Thomson, 9/85, only this time in the real estate department.

But in February 1987, Thomson saw I was single and had no worldly possessions so they proceeded to move me six times in exactly two years, all regional positions?New York to Washington, to Philadelphia, back to New York, down to Raleigh, back to Philadelphia, and then a final return to New York, where I stayed until TMSI went bankrupt??.kerplunk!

But on Oct. 16, 1987, I had been told I was moving to the New York region and my first meeting with the managers was the following Monday, Oct. 19. So that morning I checked out of the Philly office as the market began to collapse, stopped off at my parent's house in New Jersey to catch up on the action in the early afternoon, though the radio reports were as good as television in those days, and then it was on up to Nanuet, NY, to meet my new region over dinner.

I mean to tell you, the last thing any of the branch managers wanted to do was see me after a 508-point decline. I'll never forget one, Jerry S., who was screaming at the regional director, "We should be back in our offices, calling the clients and holding their hands! What are we doing here?!" as he shot a look at me. I couldn't help but agree.

Well, the rest is history. I survived another 12 years in the industry, eventually ending up at Thomson Funds, the unit that had survived the bankruptcy of TMSI and later was acquired by PIMCO.

One last note on the above mentioned David P. When I started on Wall Street, Dave was a successful salesman in the telecom arena and a friend I had known since about sixth grade. We'd swap stories on our jobs and I'd say, "You have to change careers and get a job on Wall Street. You'll be a huge success."

So Dave left the phone biz and took a position on the Street as a broker, with his first day literally being Black Monday. As it turned out the timing was spectacular. Think about it. The market never looked back and most of his clients were very happy campers. Life is funny that way?.most of the time.

Iraq / Turkey: Turkey's parliament gave its approval for military action into Iraq to go after the Kurdish rebel group the PKK by a 507-19 vote, to give you a sense of the politics of the day in Ankara, but Prime Minister Erdogan, who is not a trigger-happy leader, said this in no means guarantees the Turks will do more than the current shelling of known or suspected bases across the border.

It was startling to see how quickly proponents of a House committee resolution condemning the 1915 killings of Armenians by Turkey as genocide backpedaled in their support, including House Speaker Nancy Pelosi. Republican Representative Wally Herger stated the common sense approach favored by most of us.

"We simply cannot allow the grievances of the past, as real as they may be, to in any way derail our efforts to prevent further atrocities for future history books." [New York Times]

But as I said last week, the problem is it's too late; the damage in U.S.-Turkey relations has been done.

Now I know there are those who are continually pointing to the fact that if Turkey is such a good ally, why didn't it allow a division of troops through the northern border at the start of the Iraq war, or, if they are such a good ally, why is the press in Turkey so vehemently anti-American.

Maybe so. But you deal in the here and now when working the diplomatic angle and, number one, our troops need the logistics that Turkey has been providing for the mission in Iraq. And look how incredibly patient Turkey has been on the whole issue of Kurds slipping across the border to kill Turkish military personnel and civilians.

"Turkish Jews' concerns [there are about 23,000 here] for their safety have been fanned by comments from Foreign Minister Ali Babacan that there's a perception in the country that Jews and Armenians "are now hand-in-hand trying to defame Turkey." Turkey's complaint: Its usual allies among pro-Israel U.S. lobbyists didn't work hard enough to block the [Armenian genocide] resolution."

As for the Kurds, there are 1.5 million across Iran, Iraq, Syria and Turkey, and the leader of the PKK has warned of massive attacks should Turkey go after them. The PKK says it seeks a semi-autonomous state, a la Scotland.

Lastly, two weeks ago I wrote of Iraq that "any unbiased observer has to agree the recent news has been better." Not victory, but at least the security situation has improved.

This week the Washington Post ran a front page story with the headline "Al-Qaeda in Iraq reported crippled."

"[The better tone] doesn't necessarily mean the war is being won. U.S. military commanders have said that no reduction in violence will be sustainable unless Iraqis reach political solutions - and there has been little progress on this front. Nevertheless, it's looking more and more as though those in and outside of Congress who last month were assailing Gen. Petraeus' credibility and insisting that there was no letup in Iraq's bloodshed were - to put it simply - wrong."

Iran: ?because right now we sure aren't finding it here. In a news conference, President Bush warned of "World War III" should Iran acquire the bomb, going so far as to say it would be enough cause for action if Tehran just acquired the "knowledge necessary to make a nuclear weapon," which was a bit absurd because they already have this; it's the implementation, as well as the enriching of uranium, that thus far has prevented a 'test' that would rock the world.

The week also saw Russian President Vladimir Putin travel to meet his Iranian counterpart Mahmoud Ahmadinejad, the first visit to Iran by a Russian leader since Stalin in 1943.

Putin announced Russia would complete the controversial nuclear plant at Bushehr, but in offering to enrich uranium for Iran (thus overcoming international objections to the current program), the mullahs have said no; because it would impinge on their sovereignty.

But in a meeting of the five nations that border the energy-rich Caspian Sea, Putin said "No Caspian nation should offer its territory to third powers for use of force or military aggression against any Caspian state," a clear reference to U.S. designs on the region, such as in Azerbaijan.

Ahmadinejad said, "The Caspian Sea is an inland sea and it only belongs to the Caspian states, therefore only they are entitled to have their ships and military forces here." [AP]

Putin continues to talk of his disagreement with the U.S., Britain, France and Germany in saying he still sees no "objective data" to prove Western claims that Iran is trying to construct nuclear weapons. Ergo, don't expect any help on the sanctions front.

Finally, back to my theme of the last two weeks that President Bush should have accepted an invitation to speak at Tehran University, former Iranian student leader Akbar Atri concluded the following in an op-ed for the Wall Street Journal, Monday.

[In discussing a debate in Congress over a $75 million pledge by the administration for democracy and human-rights assistance in Iran?.]

"American lawmakers and Iranian-Americans who would eliminate financial support for Iran's democrats need to understand the following: Supporting Iranian civil society and the nonviolent struggle toward democracy and human rights is likely the most cost-effective means to prevent a future conflict with Iran or an armed struggle within its borders. Democracy is difficult to achieve. But with its remarkably young, educated population, and a long-stifled yearning for the fruits of modernity and liberalism, Iran has many of the key ingredients for success.

"With some help from their American allies, Iranian democrats are brave enough and capable enough to achieve for their country what the likes of Mahatma Gandhi and Vaclav Havel achieved for theirs."

Pakistan: Last week I wrote how President Musharraf, waffling anew, did not want former prime minister Benazir Bhutto to return from exile. Well she did, and on her first day over 130 were killed in a suicide attack on her convoy. Bhutto was unharmed. Al-Qaeda / Taliban types have had it out for her so it's assumed they were responsible, though Bhutto herself is also blaming former army officers.

The parliamentary elections, slated for January, are still on as the government is saying all the right things, 'terrorism will be stopped, we will not surrender to it, etc.' but at the same time, I see this attack, and others that will follow, only further consolidating Musharraf's power yet again as he declares a state of emergency.

The New York Post's Ralph Peters, not a fan of Bhutto due to her disastrous two terms as prime minister with its "pestilential corruption," as he put it, added the following:

"The generally accepted line is that all civilian leaders are good, while military coups are always bad. Like most such generalities, it's often wrong?.

"This isn't to say that military regimes are good news. The point is that we need to stop being so intellectually lazy and self- righteous. We have to try to understand the dynamics at work in self-tormented, failing countries.

"After corruption, the greatest curse on 'developing' states has been charismatic leadership in the absence of robust institutions of government. We overlook the fact that, along with tribal and religious loyalties, the key factor in determining elections in the badlands beyond the West has been irresponsible flamboyance - the snake-oil salesman in the presidential palace?.

"Now Benazir Bhutto - one of the figures who did so much to destroy the fabric of society and the economy - is back in Pakistan. It appears that she and Musharraf have worked out a power-sharing arrangement. We may hope for the best, but we also need to be prepared for the worst: a new era of hyper- corruption, as Bhutto's grab-all gang replaces the relative moral rigor of the military in the public sphere.

"And let's not forget those nukes. The answer to the desperate needs of the people of countries such as Pakistan doesn't lie with demagogues. And it would be better if it didn't lie with military regimes, either. But the old rotation between the charlatans and the generals is likely to continue throughout our lifetimes.

"Given the inability of non-Western societies to build effective government institutions, it may be time to rethink our faith in the state itself as the answer to their needs."

China: The communists held their 17th Party Congress and President Hu Jintao gave the opening address, all 2 ? hours of it, wherein he touched on topics as diverse as the economy, corruption, the environment, defense, and Taiwan, among others. It's been quite a period since the last gathering of party leaders five years ago, as Hu noted.

"China is going through a wide-ranging transformation. This brings us unprecedented opportunities as well as unprecedented challenges. We must uphold the Party's role as the core of leadership in directing the overall situation and coordinating the efforts on all quarters."

In other words, don't look for any Ron Paul or Mike Huckabee type candidates anytime soon, let alone Rudy or Hillary. The commies aren't about to let go of power the rest of our lives, I imagine. [At least my lifetime.]

On some of the more critical issues, Hu said "Our economic growth is realized at an excessively high cost to resources and the environment" and China will "ensure the quality and safety of products." All well and good, but just words. Hu did acknowledge the growing chasm between rich and poor, which is the number one threat to the government's power (along with pollution). More than 318 million Chinese still exist on less than $2 a day, according to the World Bank, while at the same time you're hearing constant stories of the new billionaires in the country. It's a formula for disaster?and revolution.

Meanwhile, in Hong Kong, Chief Executive Donald Tsang inserted foot in mouth on a radio talk show when asked about the prospects for democracy there.

"People go to the extreme, and you have a cultural revolution, for instance, in China. When people take everything into their own hands, then you cannot govern the place."

When the host of the show asked Tsang if the 1966-76 Cultural Revolution could really be taken as an example of extreme democracy, Tsang responded: "What is it? People taking power into their own hands. Now, this is what it means by democracy, if you take it to the full swing. In other democracies, even if you have an elected person, then you overturn the policy?that's not necessarily conducive to efficient government." [South China Morning Post]

And then there is the issue of Taiwan, where President Chen Shui-bian snubbed a peace overture made by China's Hu, with Chen saying Taipei would never agree to a surrender treaty.

"Taiwan is our country, Taiwan is our motherland; therefore there is no such question if Taiwan is independent or not from the motherland," said Chen.

But wait?there's more! As in the Dalai Lama and his acceptance of a Congressional Gold Medal, presented to him by President Bush. The U.S. ambassador to China was summoned to hear a strong protest from the foreign ministry, as in 'stop interfering in China's internal affairs.' The appearance with the Dalai Lama represented the first time a sitting U.S. president had appeared in public with him, which infuriates China because Beijing accuses the Dalai Lama of being a dangerous figure agitating for Tibetan independence. He has not been back home since being forced to flee in 1959.

Lastly, I stumbled on the "McLaughlin Group" the other day and Pat Buchanan had the following commentary on China.

"We have an example of something relatively new - autocratic capitalism, which is working like a charm. China is growing this year at 12 percent in the first six months. It's been at 10 percent for the last 15 years. The hope is that as it grows and prospers, the middle class will grow, which always has produced political reform.

"But the problem is in China they have never known freedom. And there's another course they can go?and that is through ethnic chauvinism and economic nationalism and foreign policy nationalism of a nation that sees itself as having been humiliated.

"And the example of that kind of regime, frankly, is Germany in the 1930s. That is the fear it will go that way. The hope is that the middle class will grow and effect political reforms and make it much more like a western country. But we've got a long way to go for that."

Russia: What a stretch we've just gone through between the meetings Sec. of State Condoleezza Rice and Defense Secretary Robert Gates had with Russian President Putin, Putin's visit to Iran, and then Putin's annual call-in show.

Rice and Gates were treated rudely, to say the least, as Putin upbraided them for the U.S. anti-missile proposal, warning again that on this issue Russia could withdraw from the Intermediate- Range Nuclear Forces Treaty if the United States proceeded with its plans, which the Kremlin feels contain "a strong anti-Russian component." [10 missile interceptors in Poland and a tracking radar in Czech Republic is hardly a threat to Russia.]

Then Rice met with human rights activists and said, "I think there is too much concentration of power in the Kremlin. I have told the Russians that. Everybody has doubts about the full independence of the judiciary. There are also questions about the independence of the electronic media."

Then you have the issue of succession. One analyst, Gordon Hahn, wrote in an op-ed for the Moscow Times that he feels not only is current Prime Minister Viktor Zubkov going to be president, as hand-picked by Putin, but that Zubkov will only serve one year, after which then Prime Minister Putin will replace him in the presidency, citing "health reasons."

Meanwhile, Zubkov took advantage of a very important football (soccer) game this week as Russia came from behind to defeat England 2-1 and virtually clinch a spot in the next round of the European Championship, a huge deal.

The game was in Moscow (there was some violence before the contest between Russian hooligans and English fans), but Zubkov, in attendance, told the players beforehand:

"We won the Great Patriotic War and were first to fly into space and, therefore, you must win today, too. You must do everything you can," he said, cutting the air with his right hand, as reported by the Moscow Times, which added, "The meeting was highly reminiscent of Soviet times, when Communist bosses met athletes ahead of important games."

Back to Putin, in his annual three-hour session with the public via television (live questions and e-mails, all screened in advance), Vlad talked about developing a new nuclear missile, reiterated he was prepared to retaliate if the U.S. went through with its missile defense plans, but said little concerning who he will select to succeed him in March?.except he did compare himself to Franklin Delano Roosevelt.

"Roosevelt laid out his plan for the country's development for decades in advance," prompting criticism from the U.S. elite, Putin said. Rather curious of him to speak of our only four-term president, isn't it?

North Korea: A South Korean think tank said that due to the floods here, "The North's food inventory has almost hit the bottom, so unless there's an extraordinary measure to stabilize supply, there may be a situation next year similar to the late 1990s," a time when it is estimated 10 percent of the North's 22 million perished due to drought and mismanagement in the farm sector. All the more reason to cooperate on the nuclear front, you'd think.

Israel: Syria has begun dismantling the remainder of the target hit in the mysterious Sept. 6 attack that, according to various reports, was indeed on some kind of nuclear reactor in its infancy. The debate now is over whether it was necessary to take it out if, as some claim, Syria would have been years from producing spent nuclear fuel that eventually could be reprocessed into bomb-grade plutonium. But regardless, Syria did not come clean with the International Atomic Energy Agency, as mandated.

Separately, Prime Minister Ehud Olmert went to Moscow for a quick meeting with Putin. The following is from an editorial in Lebanon's Daily Star.

"Israel offered a free lesson to its Arab and Islamic neighbors on Thursday, launching a diplomatic offensive designed to gain Russian and Chinese acquiescence in new UN sanctions against Iran over that country's nuclear program. Immediately following Russian President Vladimir Putin's visit to Tehran for a summit of Caspian Sea littoral states, Israeli Prime Minister Ehud Olmert headed for Moscow, and Foreign Minister Tzipi Livni reportedly will travel to Beijing on Saturday. The gambits stand in stark contrast with the habitual inactivity of Arab regimes, and the effect of these very different levels of performance could not be more obvious: It is true that Israel derives tremendous benefit from the slavish backing it receives from the United States, but it supplements this by missing no opportunity to state its case to other nations around the world as well.

"All of this goes a long way toward explaining how it is that a country with less than 7 million people has managed consistently to outmaneuver 300 million Arabs and more than a billion Muslims."

France: President Nicolas Sarkozy is not only dealing with major labor unrest as he attempts to push through his economic reform agenda, but the people learned he had divorced his wife of 11 years, just six months after he took office, with all legalities having been taken care of in the past few weeks. Heck, the woman didn't even vote for him in the second round of elections, let alone constantly embarrass him by not showing up as his partner on countless occasions, including during his visit to meet Bush 41 and 43 in Kennebunkport.

Australia: Prime Minister John Howard finally called an election for Nov. 24, at which point he will likely lose his bid for a fifth term.

Cuba: He's alive! Fidel Castro made his first live appearance on the Cuban airwaves since falling ill 14 months ago. By all reports he seemed in good spirits, and, of course, Venezuelan President Hugo Chavez was at his side, with a video of the two showing them singing revolutionary songs. Very sweet.

Dow Jones -4.1% [13522]
S&P 500 -3.9% [1500]
S&P MidCap -3.7%
Russell 2000 -5.0%...yikes!
Nasdaq -2.9% [2725]

Bulls 62.0
Bears 19.6 [Source: Chartcraft / Investors Intelligence?just two months ago, 8/21/07, the ratio was 40.6 / 37.4. The bull reading of 62.0 is the highest since 12/31/04. Normally, a bull / bear spread of 35-40 is of concern. And, obviously, at least for this week the theory worked.]

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