Week in Review 
For the week 11/12/2007 - 11/16/2007
Brian Trumbore
President/Editor, StocksandNews.com

Wall Street

Recognizing I may have missed a few issues, being far from home base, this was another week where banks and brokerages of all stripes attempted to convince the rest of us they had a handle on the mortgage securities crisis, while a few titans of Wall Street exhibited unusual candor.

The writedowns continued, with Bear Stearns coming clean on $1.2 billion and Barclay's $2.7 billion, among those weighing in, while you also had the following:

Wells Fargo's CEO said the housing sector was undergoing its worst decline since the Great Depression.

HSBC said problems in bad debts were spreading to other segments of the economy outside housing and the mortgage business.

Blackrock's Laurence Fink said "Many institutions don't understand what the credit crunch is going to do to earnings and their balance sheet."

Blackstone President Tony James added, "The mortgage black hole is, I think, worse than anyone saw. Deeper, darker, scarier. [The banks] are now looking at new reserves and my sense?is they don't have a clear picture of how this will play out and confidence is low." [Blackstone CEO Stephen Schwarzman, though, is still worth about $5.5 billion and paying $400 for a crab claw. And it better be fresh!]

So it should be no surprise that the likes of UBS could be facing further carnage in the fourth quarter on into next year. [UBS is rumored to be writing down $7 billion in Q4.]

Plus, as in the case of Bear Stearns, the lawsuits are beginning to pile up with Bear accused by the state of Massachusetts of self- dealing, at the expense of its clients, in the two hedge funds that blew up a while back.

Even Rupert Murdoch chimed in this week, saying the subprime crisis will continue to rock the world economy, with "quite a few more shocks, particularly in Europe."

[The European Union's executive arm, the European Commission, this week issued a specific warning about the housing sector in those countries that have seen the fastest growth; Spain, Ireland, the UK, and France. Sound familiar? While declines have been orderly thus far, the EC fears something far more volatile, "the historical experience suggests that major housing downturns have also had a substantial macroeconomic impact."]

But wait?there's more! You also had the distressing issue of Bank of America, Legg Mason and others admitting to shoring up their money market funds, to the tune of at least a collective $500 million, to replace some structured investment vehicles (SIVs) that were in the portfolios and have since defaulted. Any firm letting a money market fund "break a buck," the sacred $1.00 net asset value, would spell the kiss of death for that brokerage or fund family.

And we all await to see what Wall Street and its banking brethren scattered around the country are going to do with their Level 3 assets under new accounting rules?the "mark-to-make believe sort."

Goldman Sachs, for example, has 6.9 percent of its $1.05 trillion in assets that fall into this category, though to be fair to Goldman, its CEO, Lloyd Blankfein, reassured investors that the investment giant's subprime exposure is manageable and that, in fact, they have continued to make money playing the other side of the trade.

But there's another issue out there, a rather serious one, and that is emerging inflation?around the world. It's about rapidly rising fuel and food costs, particularly, of the kind that most severely and immediately impact the developing world. Whether you're talking Indonesia, Vietnam, China, Nigeria, or Latin America, those governments that have been heavily subsidizing some of these costs can do so for only so long before it severely impacts their own budgets, with the result being price increases on a people already stretched to the max. Last weekend in one western Chinese city, for example, three people were killed in a stampede for low-priced cooking oil after the retailer Carrefour offered a 20 percent discount on the product.

China is ground zero, it would seem, as inflation hit 6.5 percent in October, with food prices up 17.9 percent over the past year. The government hopes it's a temporary shock due to issues such as pig disease that have led to a surge in price for a staple of the Chinese diet. But on the fuel front, Beijing has to keep weighing the impact of further increases on natural gas and gasoline (including diesel). For now in the case of the former, the increase is only at the commercial level, but soon will have to be passed onto an increasingly restive population.

[China also continues to deal with a speculative boom of mammoth proportions as capital spending, despite the government's efforts to rein it in, soared another 26.9 percent in October. This time, you can blame the real estate bubble as much as factory and road construction projects. Property prices rose 8 percent in the third quarter in China's 70 largest cities, just over Q2 levels.]

So when will the global slowdown hit? It already is, at varying rates of speed. In the 13-nation eurozone, for instance, while the figure on third quarter growth, up 0.7 percent, was better than expected and an increase from the second quarter's 0.3% rise, everyone knows this is backwards looking and the pace of future growth will be far slower.

The 27 nations using the euro currency also face an inflation rate far above that normally acceptable for the European Central Bank.

Back in the U.S., there are obviously signs of inflation all over the place, with but one everyday example being another 6.9 percent hike by UPS for its standard air packages in 2008, equaling 2007's increase. Blame higher fuel costs here. [Rival FedEx is blaming higher fuel costs for a significantly reduced earnings forecast.]

Is it any wonder then that retail sales in the U.S. are punk? I'll spare you further doom and gloom, though. It's nearing happy hour in Moscow.

Street Bytes

--The major averages advanced, mildly, while small and mid-cap issues declined again. For the week the Dow Jones added 1.0 percent to 13176, while the S&P 500 and Nasdaq each added 0.4 percent to close at 1458 and 2657, respectively. As in the above FedEx situation, earnings news was mixed at best, though Wal- Mart provided a big lift on Tuesday with its own improved forecast as it appears ready to gobble up the competition this Christmas and beyond as we all seek low prices.

--U.S. Treasury Yields

6-mo. 3.56% 2-yr. 3.34% 10-yr. 4.17% 30-yr. 4.54%

Bonds rallied again on the feeling that the slowing economy has to trump any inflation fears when it comes to future Federal Reserve decisions on interest rates. That said, one Fed governor, Kroszner, says further rate cuts aren't necessary.

--The International Energy Agency reduced its fourth quarter outlook for global demand, as well as 2008's, with $90+ oil finally starting to bite, per the above. OPEC is showing no signs of increasing production further, despite the pleas of non- producing nations, and there is a question just how much OPEC can increase output, anyway. They next meet Dec. 5.

--The Energy Information Agency estimates that crude oil revenues for OPEC nations will reach $658 billion this year, up 9 percent from 2006, and rise another 16 percent to over $760 billion in 2008. Since 1998, oil income is up five-fold. Of course the issue of the day is where do these petrodollars flow? Into which currencies, stocks and bonds, as the sovereign wealth funds seek high-profile acquisitions that will present all manner of issues for governments such as the United States.

--There is much talk of Brazil's new oil and natural gas finds, but just as in the case of a recent Gulf of Mexico discovery, these are at least five years from adding to global output and not worth any more ink until then. Plus in both instances there are immense challenges to get drop one.

--Related to the above, the Financial Times reports that the Big Five international oil companies, ExxonMobil, BP, Chevron, Royal Dutch Shell and ConocoPhillips have reduced spending on exploration and development between 1998 and 2006, despite the incentive of significantly higher prices. 56 percent of their operating cash flow has been used for share buybacks and dividends. In a report by the James A. Baker III Institute for Public Policy, the authors conclude "The oil majors are not replacing reserves and, therefore, are seemingly slowly liquidating their long-term asset base."

--Amid all the doom and gloom, Wall Street is still poised to record its second-most profitable year after a record performance in 2006, as noted by the Herald Tribune's Christine Harper, which some say means once all the garbage on the books is written off, the Street's giants will soar yet again. Point taken, I just feel the overall global economy will have something to say about this.

However, an announcement by UBS that its investment bankers and traders would have their cash compensation capped at $750,000 for 2007 is bumming out a lot of folks. Better to have cash in the hand than stock, they say, the latter which will now make up an increasing portion of their bonuses. As a consultant told the Wall Street Journal, it's about conserving corporate cash in these uncertain times. But those who pay out more cash, such as Goldman Sachs, it would appear, will continue to have the pick of the best talent.

--And in keeping with the above, the Times' Gretchen Morgenson quotes Northern Trust's Paul Kasriel, whose own research shows that "profits from the financial sector now account for 31 percent of total U.S. corporate earnings - up from 20 percent in 1990 and 8 percent in 1950." Or as Morgenson adds, "Profits from this country's financial engineers now far exceed those generated by mechanical engineers."

Overall, Kasriel, a noted bear, says "What (I know) is that we have never had a more highly leveraged economy than we have today. We have never had a more highly leveraged household sector and we have never had a more highly leveraged housing sector than we have today."

In other words, don't rely on business spending to make up for the slack when the consumer tightens their belt.

--It shouldn't come as any great surprise that the foreclosure rate, as measured in large metropolitan areas, is by far the highest in California, Florida and Ohio. In Stockton, Calif., fully 1 in 31 households is going through the process; a staggering figure when you think about the knock-on effects throughout an entire neighborhood when the first property goes down.

--Shares in Fannie Mae hit a 10-year low at one point on Friday as the mortgage king said it was announcing a new accounting change that some analysts believe allows Fannie to hide bad loans.

--Japan's GDP for the third quarter came in positive, up 0.6 percent, meaning it avoided two straight negative quarters, the classic definition of recession. I said the other week that Japan was already in recession, so I stand corrected. But Japan is not about to boom.

--What a mess in South Korea over the largest conglomerate, Samsung. President Roh's government is now engulfed in the corruption scandal and his top anticorruption chief faces allegations of accepting bribes himself from Samsung. So you might say the fellow was ill-suited for the job. Roh is only in office another few months as he staggers to the finish, which is why he is so desperate to cut deals with North Korea to secure some kind of legacy.

--Maybe I'm imagining things, but it seems to me the language used on the global warming front is changing per my long-held belief that it is really a global war on pollution rather than warming. It makes it easier to identify and not one right-thinking individual can disagree.

Case in point, China, part XXVI.

The South China Morning Post reports that a record 30.5 billion tons of industrial, farming and human waste were dumped into the Yangtze River last year. As a scientist described it, coupled with the increasingly catastrophic Three Gorges dam project, the waste in the Yangtze is creating a "giant toilet bowl" of trapped sewerage.

--The most dangerous strain of bird flu was found on a poultry farm in Britain, and probably entered the country via the Netherlands.

--Shares in E*Trade nose-dived after a Citigroup analyst essentially told customers of the online brokerage firm to take their assets out because E*Trade faced bankruptcy due to problems in an investment portfolio loaded with bad mortgages. The company denied bankruptcy was imminent.

--John Thain, Mr. Personality, is leaving the New York Stock Exchange for Merrill Lynch. So today is Nov. 17, but we learn that Thain is being paid a 'bonus' of $15 million this year by Merrill. That's $15 million to learn his way around headquarters, as in find out where the coffee is, the toner for the copy machine?that sort of thing.

--Over at Citigroup, ousted CEO Chuck Prince will still receive a $12.5 million bonus for 2007, which has to upset investment bankers to no end as they see their own bonuses potentially reduced there.

--Larry Page, co-founder of Google and worth $20 billion, is getting married, which means both mega-billionaires are now off the market; Page's partner Sergey Brin having tied the knot six months earlier. So, girls, you're just going to have to focus your attention elsewhere. Sorry to break this to you.

--Speaking of the rich and famous, Saudi Prince Alwaleed became the first individual to purchase one of Airbus' A380 Flying Wieners for an estimated $300 million, because he can.

--Remember Mikhail Khodorkovsky, the former Yukos chairman? Oct. 25 was the mid-point of his 8-year prison sentence and he was eligible to be released, but instead he received a "reprimand" over a violation of prison rules. Do you think it had anything to do with the coming election?

--Thanks to growing commerce between Russia and Finland, as well as with Latvia, the border crossings are so jammed it can take a truck 48-72 hours to get through. Talk about a nightmare, and it's not like you're waiting in line with, say, a bunch of American truckers, if you catch my drift.

--Russia's economy has been growing about 7 percent a year since 1999, thanks to oil, but you've all heard the stories about its declining population, now 144 million as of 2006 and down from 149 million in 1992. The life expectancy for a Russian male remains an unbelievable 59. [And it just struck me?you really don't see any elderly gentlemen walking the streets of Moscow.]

Unemployment is 5.7 percent, but as in everywhere else in the world the gap between rich and poor is widening. With the decline in population, though, that means Russia has a real need for migrant workers. I didn't realize Russia is home to the 2nd- largest number of migrants in the world next to the U.S., anywhere from 5 to 10 million, according to various estimates I saw. Of course you've also heard about violence against these same foreigners.

--Later today I'm walking up to Pushkin Square to take in what is supposed to be the world's most popular McDonald's franchise. Janet Adamy of the Wall Street Journal once did a piece I saved notes from (actually, I forgot to write down if this is recent or not) that each Russian outlet serves 850,000 diners annually, twice the rate of other markets for the chain.

The first one opened here in January 1990, the Pushkin Square location, and you all remember those pictures. 5,000 lined up before the doors even opened. It's not easy opening a McDonald's here, or any franchise for that matter. For one thing it's difficult to find good suppliers, so McDonald's built their own plant in country.

You also have to deal with the bureaucracy. Opening a single store can take up to 200 signatures from local officials, and then you have the issue of skyrocketing real estate prices.

Foreign Affairs

Pakistan: I started writing weeks ago, long before President Musharraf declared his state of emergency, that it was almost fruitless to write of this spot because the story changed literally every 24 hours. But at least for today, Musharraf said he will hold parliamentary elections by Jan. 9, while Benazir Bhutto is attempting to gain support of all the opposition groups for a true coalition to confront Musharraf and force him out of office.

For his part, Musharraf has vowed he will step down as army chief by the end of November to concentrate on the presidency, while he also installed a new interim, caretaker government to sit around and drink tea until the vote for the next parliament takes place.

Iran: The International Atomic Energy Agency issued its latest report on Tehran's cooperation, or lack thereof, on its nuclear program and IAEA chief Mohamed ElBaradei conceded Iran does indeed have 3,000 centrifuges, enough for industrial-sized production of enriched uranium, though it is also currently operating the centrifuges at far less power than required to attain enough weapons-grade material for a bomb.

So it's back to the Group of Six; the United States, Britain, France, Germany, Russia and China to see if a new round of sanctions, what would be the third, can be hammered out, though it goes without saying that any discussions should initially center around the fact Iran has refused to suspend its operations per past UN demands!

Earlier, France's Nicolas Sarkozy and Germany's Angela Merkel had agreed further sanctions were required (a big move by Merkel, who faces pressure from German companies doing business with Iran), but Russia and China continue to maintain further sanctions are not the way to resolve the dispute. They all meet this coming week in what could be make or break negotiations.

As for the threat to use force against Iran, Admiral William Fallon, head of Central Command which has oversight of the Middle East, said a strike on Iran was not "in the offing."

"None of this is helped by the continuing stories that just keep going around and around that any day there will be another war, which is just not where we want to go," he told the Financial Times.

"That said, we have to make sure that there is no mistake on the part of the Iranians about our resolve in tending to business in the region. There has to be some combination of strength and willingness to engage. How to come up with the right combination of that is the real trick."

Iraq: The Washington Post reported that senior U.S. military commanders are furious with the Iraqi government's inability to get things done on critical issues, now that some semblance of security has been established in large parts of the country. But who is spearheading the reconstruction effort for the Iraqis? Ahmad Chalabi. Yeah, him. The SOB just won't go away.

As for the funding of the war effort in the U.S. Congress, while I'm not totally up on this week's debate, and while I in no way condone the Democrats' efforts to cut it, I also am not in favor of issuing the president a blank check. Every single American should be sickened by the massive fraud that has taken place in Iraq and it's time for the president to not only acknowledge it, but appoint someone of impeccable credentials to very publicly put a stop to it. There are scores who should be locked up for life?some of the worst scum on the face of the earth.

Israel: Hamas killed seven at a rally in Gaza commemorating the 3rd anniversary of Yassir Arafat's death. Some 250,000 of Arafat's Fatah disciples showed their support for their former leader, at which point Hamas opened fire.

But for the first time, Palestinian President Mahmoud Abbas called for the overthrow of Gaza's Hamas rulers. "We have to bring down this bunch, which took over Gaza with armed force and is abusing the sufferings and pains of our people."

As for the scheduled peace talks between Israel and the Palestinians in Annapolis, it's pretty hard to see much being accomplished when a rather important player, Israeli Prime Minister Ehud Olmert, faces a series of criminal investigations into corruption allegations going back to the time before he became prime minister. 55 percent of the people believe Olmert should be removed from office.

Lebanon: Sheikh Nasrallah of Hizbullah said no power could force his government to give up his arms, labeling those in the democracy coalition "thieves and murderers." Lebanon, though, needs to come up with a president, and soon, because under the constitution, if no one has been selected by Nov. 24, Prime Minister Siniora takes over, and for the pro-Syrian factions, such as Hizbullah, this could be a call for civil war.

Georgia: President Mikhail Saakashvili's move to defuse the crisis here by calling for early elections on Jan. 5 is already a farce as the international community understands they will not be free and fair. For starters, the opposition is fractured, with three or four candidates likely to split the vote, which was Saakashvili's reason for opting for the de facto referendum now. And while he is attempting to appease the West by lifting the state of emergency, the Bush administration, for one, looks exceedingly foolish for backing a man who used force against his own people. [For the record, I originally fell for this guy, too.]

And in the Kremlin, Vladimir Putin points to the chaos and says, 'See, this is what happens when you back the West?instability.'

Germany: Chancellor Angela Merkel faces a real crisis as her top coalition partner and key deputy resigned. While Merkel is still popular among the people, it is now virtually impossible for her to overhaul the welfare state as she had planned. [And both Germany and France have been dealing with crippling transport strikes.]

Denmark: Right-winger Anders Fogh Rasmussen's coalition won a third team. Rasmussen smartly called for an early vote because he saw that the economy, currently very strong and with just 3.1 percent unemployment, would weaken by the time an election was mandated under the constitution. Rasmussen is yet another advocating a tough approach on immigration.

[Spain is also dealing with an increasingly anti-immigrant movement, a la just about everywhere else in Europe, as the government seeks to ban a march on Saturday by a far-right party, the National Alliance, whose manifesto is to defend "our country, Spain, our blood and our race."]

Venezuela: At a meeting of Latin American leaders, which included Spain, President Hugo Chavez was ranting and raving about former Spanish Prime Minister Jose Maria Aznar, at which point King Juan Carlos told Chavez to "shut up." The rest of the world cheered, while politicians of all stripes in Spain defended their king because of a pretty simple principle. Regardless of your beliefs, you don't allow another head of state to disrespect one of your own.

Burma: Democracy advocate Aung San Suu Kyi, who has been under house arrest for 12 of the past 18 years, said she is now "very optimistic" real change is going to take place after the military's violent crackdown on Buddhist monks and anti- government protesters. Let's hope she's right.

Russia: And now a few thoughts. It hasn't been quite as exciting, politically, as I had hoped this week because Moscow Mayor Yury Luzhkov (along with President Putin) is controlling the size of any demonstrations in opposition to Putin and the United Russia party that the president decided to lead into the Dec. 2 parliamentary elections.

But a funny thing happened on the way to a landslide. Food inflation, just as in my opening Wall Street discussion, wherein the pensioners (over age 60) are most unhappy, according to the only poll tracking popularity, and have allowed United Russia to slump to 50 percent approval, way down from just a few weeks ago. Putin's own popularity remains somewhere over 70 percent, it would seem, but United Russia likes to portray itself as a major force behind everything good that happens in the country and now inflation is running close to 10 percent. It's a real political hot potato, as over the past year milk is up 16.5 percent, butter up 20 percent, and vegetable oil up 17 percent.

Along these lines, I saw a story the day I arrived where a gas explosion killed three in Moscow and the residents had been complaining of the smell of gas for days before. That's awful. With such blatant incompetence, endemic throughout the country, Putin has to know the people can turn on a dime.

So it was that this week Putin criticized United Russia, for lacking any clear political ideology and attracting "all kinds of crooks," saying he only chose the party because there were no other options.

But Putin also said, in reference to the Constitution limiting him to two terms:

"If the people vote for United Russia, whose list I lead, it means that they trust me and, in turn, means that I will have the moral right to hold those in the Duma and the Cabinet responsible for the implementation of the objectives that have been identified so far."

Meaning what? When asked at a meeting with workers this week about his plans upon leaving office, he replied:

"In what form will I do this? I will refrain for now from providing a direct answer. But various possibilities exist."

Doesn't sound like he's leaving.

And watch next week to see if Mayor Luzhkov allows an opposition rally that has been rumored. There could be an evil reason for doing so?as in it would give Putin's youth groups - the Nashi, Young Guard and Young Russia - a chance to flex their muscles. When I arrived Sunday, I learned later there was a training exercise in a park here, where the youth were told how to help the police with crowd control, as well as to acclimate outsiders to the layout of central Moscow. The opposition, by the way, has its own youth brigades, but as the papers put it, they are confined to chat rooms.

Former Secretary of State Henry Kissinger was in town last weekend and had these thoughts on the U.S. and Russia in a speech he gave at the U.S. ambassador's residence, as reported in the Moscow Times.

While the United States swings between isolationism and assertiveness, "the belief that we have the right to improve everybody abroad," Russia's problem was its obsession with security. "No country can have absolute security," Kissinger said, because "absolute security for one country means absolute insecurity for other countries."

Or Kissinger could have said Russia is perennially insecure and paranoid.

As for Putin, don't put it past him to drum up a 'state of emergency,' either over Georgia because of its restive provinces where Russia is a supporter of the insurgencies, or, believe it or not, Estonia, because of an energy issue.

But as it stands now, he will become prime minister, after United Russia wins a substantial majority, which is still a certainty, and then perform the essential duties of president (controlling the armed forces and security apparatus, as well as the security council), without amending the constitution. Current Prime Minister Viktor Zubkov, 66, could then receive Putin's blessing for the March presidential vote and serve a brief period of time before a "health crisis" forces him out, whereupon Putin goes back to being president. The constitution only says a president can't serve more than two consecutive terms. Thus, if Zubkov, or another handpicked candidate, leaves office, a new election would have to be called within three months at which point Putin wins in a landslide?with the youth patrols riding shotgun.

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Pray for the men and women of our armed forces.

God bless America.

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Gold closed at $787
Oil, $93.84

Returns for the week 11/12-11/16

Dow Jones +1.0% [13176]
S&P 500 +0.4% [1458]
S&P MidCap -1.1%
Russell 2000 -0.4%
Nasdaq +0.4% [2657]

Returns for the period 1/1/07-11/16/07

Dow Jones +5.7%
S&P 500 +2.9%
S&P MidCap +5.9%
Russell 2000 -2.3%
Nasdaq +9.2%

Bulls 51.1
Bears 26.7 [Source: Chartcraft / Investors Intelligence]

Have a great week. I appreciate your support.

Brian Trumbore

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