Educate Yourself

Week in Review
For the week 1/14/2008 - 1/18/2008
Brian Trumbore
President/Editor, StocksandNews.com

Let's start with the carnage. Following are the declines from the highs, based on Friday's closing prices.

A 'correction' is defined as a 10% drop from the highs, while a 'bear market' is commonly defined as a 20% decline, so you can see that small caps have already experienced a bear.

But for now I have to get a few things off my chest before delving into this week's market specifics. For you relatively new readers, including the past few years, your editor was selected No. 1 for "economic commentary" for the period 1998-2000 by Online Investor magazine. [I'll send you the reprint?I have thousands of them.] I sometimes forget this myself, and sad to say the publication went under in 2002, if I remember correctly.

I bring this up because for the past 1 ? years in particular, you'd be hard-pressed to find anyone who has called this market and economy better than I have. Oh, sure, you can find dramatic doom and gloomers like David Tice (who I respect), or even Marc Faber that have been consistent bears, but I specifically pinpointed recession as occurring in 2008, while at the same time not going crazy with my equity forecasts, as in if 2007 ended 8 trading days into '08, it would have been scary just how right I was last year in my 'plus' or 'minus' 3 percent forecast for the three major indexes.

So this year, if we assume we get the recession I've been writing of, as measured either the standard way, two negative quarters of growth in a row, or by the NBER down the road in their far more complicated calculation, I have also said stocks would decline 3% to 5%. As you know we are already well below those figures, so with this kind of start to 2008, you might be wondering if I'm worried on being grossly off my forecast. Nope. Stocks do not move in lockstep with the economy.

I'm not into yelling "CRASH" (though I did just that, correctly, for the Star-Ledger and my own readers in the spring of 2000), on the hope that I can one day look back and say, 'See, I nailed that one.' This is what happens to the likes of Tice and Faber. Or to cite perhaps a more famous example, how many of you know Joe Granville is still alive? [I read his stuff at least once a month, but only hard-core newsletter readers really know of him these days. He's now 82, by the way.]

My point being you know me well enough by now that I don't change my positions unless I see a reason to, and as my whole thesis these past few years has been built around a global real estate bubble (as opposed to Marc Faber or Jim Rogers' global commodity boom thesis, with only Faber more recently adding real estate) I'm not about to change now.

Simply put, for the umpteenth time, the credit crisis we keep hearing about, a very real one, is the direct result of the housing boom and until the latter plays out more fully, which will be years because not all markets around the world have truly rolled over yet, it's tough seeing a successful solution to the problems that currently face us.

A loyal reader, Scott P., commented on the Federal Reserve and my position since mid last year that it was "irrelevant" and I feel compelled to spell out one more time what I mean. [Both Scott and I aren't Bernanke fans, to say the least.]

The real estate bubble in the U.S. popped and there is little the Fed can do to lessen the damage. What it can do is at least try to prevent us from going from recession to Depression, assuming at the same time Congress doesn't do anything stupid like the Smoot-Hawley Act of 1930. In other words aggressive lowering of interest rates, but even here some of us can point to the example of Japan which for over a decade was mired in recession despite zero interest rates. What then happened in Japan's case? Real estate values still kept going down, down, down.

But I was talking to Trader George the other day and those of us in this game are always taught to think, "What can go wrong?" Not just bad stuff, like on the geopolitical front, but "What can happen to change my opinion?" In terms of my own forecast, "What would turn me bullish?"

I thought of this in reading the news from IBM and GE, for example, who would have you believe all is hunky-dory, and indeed their earnings reports and outlooks were solid. Others, particularly on the tech side, such as SAP, Oracle and Sun Micro, have issued generally positive forecasts based in large part on continuing growth overseas.

So, again, I question myself, "Am I missing something?" and the answer keeps coming back, "No." I see the global economy slowing, and in some cases hard. I see a UK with retail sales for Christmas that were as horrid as here in the United States and with a real estate market that is also softening rapidly.

I see nations such as Ireland and Spain that are screeching to a halt, while Japan by some measurements is heading back into reverse.

I see gigantic real estate bubbles in Russia and China, and am floored, as I was this week, to see an article on China saying the real estate boom is just getting started. Earth to earthlings. China's real estate market has already peaked. Russia, and here it's necessary to just talk about the only two parts that matter, Moscow and St. Petersburg, is in a bubble of enormous proportions.

Remember, it comes down to one word?affordability. It doesn't matter where in the world you live, the fact is while the 'middle class' is growing by tens of millions a month, according to some, the growth has come at a cost?gigantic personal debt loads. Trust me; America isn't the only place where you could buy a home with little or no money down and then parlay that into other lines of credit.

So that's what's been on my mind these days. If you want to play this game and throw your opinions out into the Webosphere for all eternity (and believe me, it sticks?I know), then you have to constantly go through a reexamination of the facts or you're just some simple buffoon, crying wolf, waiting to be acknowledged for your five minutes of fame.

One other thought. There is an amazing consensus that the first half of the year will be poor and the second half great. Talk about way too easy. It's going to be far more difficult than that and it's not about clarity over the election. Just think Pakistan and Iran, for starters; though after three weeks score one for the consensus.

OK, the facts. IBM did indeed beat expectations with its fourth quarter report, citing rising overseas demand with earnings being helped in no small part by a weak dollar. Business software giant SAP also had good things to say about its prospects and the aforementioned GE is trying to convince us the global economy will be solid all of 2008. Meanwhile, J.P. Morgan chimed in with solid results, thus proving that not all banks are created equal. That's most of the good?now the bad.

Citigroup cut its dividend, announced a slew of layoffs, and has now written down $22 billion in mortgage-related investments and bad loans. Citi has also been forced to seek $12.5 billion in cash from the likes of Kuwait, Singapore, Prince Alwaleed and former chairman Sandy Weill; the latter the man responsible for much of the carnage in the first place.

Merrill Lynch?step forward. It was forced to get another $6.6 billion cash infusion from Korea, Kuwait, and even New Jersey's pension fund (which also invested in Citigroup). Merrill wrote down an additional $14 billion in mortgage-related losses, on top of $8 billion from the previous quarter. Included in Merrill's tally was $1.9 billion from a basically defunct bond insurer ACA Capital. More on this business later.

Washington Mutual wrote down $1.6 billion, while warning of consumer credit issues, thus joining the likes of Citigroup, J.P. Morgan and Wells Fargo in this regard; all making statements such as "We remain extremely cautious on 2008" (JPM) or "we see a challenging consumer sector" (WFC). Coupled with last week's similar news from AT&T and American Express, you can easily see that the real estate issue, and the negative wealth effect, is hitting consumer credit and auto loans, just as some of us long expected. Those who originally said the effects of a popped housing bubble would be limited, like Bernanke and Paulson, look like idiots.

And in case you were wondering just how much the banks have written off related to real estate, it's now over $105 billion.

But?this week there was one overriding issue, even worse than the likes of Citigroup and Merrill; that being the bond insurers, companies like the aforementioned ACA Capital, Ambac and MBIA. This is a complicated arena, but to oversimplify, these boys provide the insurance so that municipalities, for one, can issue bonds in the first place. They are also heavily involved in the mortgage-backed securities business, particularly in insuring CDOs, or collateralized debt obligations. Often it's the Ambacs of the world that are pledging to cover losses on CDOs tied to the housing market, but since housing is going to hell in a handbasket, the mortgage pools, sliced and diced as they were, are worth nowhere near what they were when first set up so you have all these tranches (classes of CDOs and other derivatives) that are floating around out there with little or no value; along with credit default swaps speculating on the ability of a company or municipality to repay its debt. The problem is now there is no market for the instruments so establishing a value is next to impossible, which is why the likes of Merrill Lynch and Citigroup are finally biting the bullet and writing much of it off. To finish this thought, the bulls say, however, eventually some of these bonds and derivatives have value and that's how, possibly, down the road you could see an earnings surprise or two.

Anyway, the bond insurers exist only if they can keep their AAA-rating and, as in the case of ACA, the losses were so huge on the pools they were insuring that they lost it, and once you do the business is over. Friday, Fitch lowered Ambac to AA so it is on life support. S&P and Moody's are sure to follow.

Think about this. MBIA was trading at $76 on 1/29/07 and today is $8. Ambac hit $96 as recently as 5/18/07 and is now $6. MBIA just one week ago raised $1 billion in capital to keep its AAA-rating, but had to cough up a 14% interest rate to do so. [And the bondholders then suffered an immediate hit of 30 cents on the dollar by last count.] With its plunging share price, Ambac doesn't exactly have the best story in town for anyone looking to throw good money after bad either.

If MBIA and Ambac were to go the route of ACA, then that would mean further massive writedowns at the banks, for starters. It would also mean that municipalities would be scrambling big time because no one is going to buy a sewer bond, backed by some kind of tax, if the bonds aren't insured. [Or the city would have to pay an exorbitant interest rate to satisfy investors, costs rise, workers are laid off, etc.] In other words, a critical industry that no one paid attention to in the past is on the verge of collapse.

As I write, though, there are a number of bailout plans being floated, including one by CNBC's Jim Cramer, and everyone is standing around, waiting for Warren Buffett and/or the government to come riding to the rescue, Mr. Buffett having already expressed an interest in the business.

Sorry the above is so dense, but it's not easy. I also recognize I'm glossing over some important tangential topics, such as 'counterparty risk,' but I've said a lot about that in the past.

A few other big topic items. On the real estate front, housing starts were down 14% in December, while building permits were off 8%; putrid, and far worse than expected in both cases.

And did you wonder about all the capital infusions? It's up to $59 billion as of Wednesday, according to Bloomberg. Do you want a good example of balance sheet destruction? Try Merrill Lynch. In their press release they said the book value had declined over the past year from $41.35 to $29.37, so I was curious and looked up the third quarter figure, $39.75. Over $10 in three months. That's what writedowns will do for you and the solution, more cash, only hurts existing shareholders in terms of dilution. Of course the alternative is bankruptcy.

Lastly, Ben Bernanke strode before Congress and declared that he remained bullish on overseas prospects and exports, but the U.S. would see "below trend growth in 2008 and 2009." Doh! Not exactly what the Street wanted to hear, though no one should have been surprised as someone must have grabbed Clueless Ben by the lapels before his appearance and said, "Listen up?you're no longer living in Princeton, where fantasy never intrudes with reality. We're in deep trouble. Begin admitting that. Now go forth and spread the word." Well, he didn't necessarily say the sky is falling, but he came as close to doing so as we can expect.

--In case you were vacationing in the Caribbean and wanted to know what was happenin' to the ol' portfolio, try the worst week since July 2002 for the S&P 500, down 5.4%. The Dow Jones and Nasdaq both lost 4%. The technical damage done to the indexes has been severe. But what can we look forward to? A ton of earnings releases and probably more detail on an economic stimulus package.

As for the rumored stimulus idea of an $800 rebate check, I remember writing of the $300 rebate we received in 2001 that I would spend it on premium beer. But $800 presents a whole different world of possibilities. Like premium beer and a night in New York. Or premium beer and a roundtrip to Paris, though in this instance I'd have to turn right around because I wouldn't have anything left over for coffee, let alone an overnight stay.

Or, and I've discussed this with a few friends, I could get married and qualify for a $1,600 check! The only issue here would be that I'd have to get to the mailbox first. But I'm pretty good at keeping schedules and tipping the mailman, so that shouldn't be a problem. Of course for this ruse to work, I'd have to marry someone who doesn't read the newspaper or watch the news. Since that isn't likely to happen, I'm back to Plan A and what to do with the $800, which more likely than not would really go towards paying my heating bills.

The core producer price and consumer price indexes came in at 2.0% and 2.4%, respectively, for 2007, but food inflation is up 5%, as you are all undoubtedly aware. Bonds rallied big again as the Street keeps waiting for Bernanke to cut 50 basis points (1/2 percent), but for whatever reason he appears to be insistent on waiting until the Jan. 30 meeting. [Fed funds futures are betting on a 75 bp cut.]

--Unrest over the issue of inflation is gradually spreading. This week's target was Indonesia due to record soybean prices; soybeans being a staple food. The bean price is being impacted by bad harvests in Argentina and Brazil, rising demand in China, and, of course, U.S. ethanol as our farmers replace soybeans with corn. The corn-based ethanol debacle will go down in the history books as one of our nation's big mistakes.

--For a 14th consecutive year, Hong Kong was ranked as the world's freest economy, according to the annual Heritage Foundation/Wall Street Journal survey that grades countries on a combination of factors including property rights protection, tax rates, government intervention in the economy, monetary, fiscal and trade policy, and business freedom. No. 2 is Singapore, No. 3 Ireland, No. 4 Australia and No. 5 the United States.

--On top of all the problems that the big investment banks face is an ongoing SEC investigation into 'front-running' by the likes of Merrill Lynch. It's just another name for insider trading as the firms act on nonpublic information to place their own orders ahead of client tickets. It's also why I say again that while we might be No. 5 in economic freedom, our capital markets are a freakin' joke.

"Merrill had a risk committee. It just didn't function. So now when we have a weekly meeting, the head of fixed income and equities show up. I show up, and the risk heads show up."

This is unbelievable. The members of the committee made $millions a year and didn't even do something simple like attend a meeting on the very risks they were taking. And this was tolerated.

--The Journal had a story that epitomized some of the issues in today's real estate market. Developer Bruce Eichner defaulted on a $760 million construction loan for a twin-tower casino in Las Vegas after failing to get refinancing. The $760mm figure is part of an overall $3 billion project called Cosmopolitan Resort Casino that is to include 2,184 'condo hotel' units, which is proving to be a very shaky segment of the market nationwide.

Overall, $35 billion of new construction is planned or under way in Vegas, with another 40,000 hotel rooms slated to come online by 2012. CRASH!

--Shares in Merck and Schering-Plough plunged as a clinical trial on their joint cholesterol drug effort, Zetia, not only failed to slow the accumulation of plaque in the arteries, but also may have contributed to plaque formation. The result was "shocking," in the words of renowned cardiologist Dr. Steven Nissen. "This is as bad a result for the drug as anybody could have feared."

Even more disconcerting was the fact the two companies delayed release of the results. In the case of Schering, 70% of its earnings are said to depend on Zetia and another pill that contains it, Vytorin.

--General Motors CEO Rick Wagoner urged shareholders to be patient as he outlined a "significant" profit outlook over the next two to three years, owing to ongoing cost-cutting initiatives and strong growth overseas. I believe him, but at the same time if you are in the recession camp and see '08 as another miserable year, particularly in the U.S., I imagine you can be patient; though I'm personally putting GM on my watch list for down the road.

--Boeing announced yet another delay in rolling out its 787 Dreamliner jet, the third by my count, meaning it will be impossible for the aircraft manufacturer to meet its goal of delivering over 100 of the planes by Dec. 2009. The big issue is shortages of parts at the supplier end.

Meanwhile, competitor Airbus warned that the latest global boom in aircraft orders was over, expecting the pace to fall 50% in 2008. It's as if by 2010 to 2012, everyone who wanted a new jet will have ordered one. Or another way to look at it is if I'm a worker at Boeing or Airbus, I'm saving for a rainy day.

[By the way, it's very possible the Boeing 777 crash on Thursday at Heathrow (which thanks to the skill of the pilot and co-pilot resulted in zero fatalities) may have been the result of the engines sucking in a flock of Canada geese, which are known to frequent the reservoirs near the airport. All the more reason to destroy the geese, worldwide. Sorry PETA. Just remember I'm for saving the whale!]

--Former Brocade Communications Systems CEO Gregory Reyes (no relation to Mets shortstop Jose), was sentenced to 21 months and ordered to pay $15 million for backdating options in the first such case to go to trial that resulted in a conviction. This is good news, even though his defenders say 'no harm, no foul' since the company didn't actually lose money.

--Job losses: Citigroup is letting another 4,200 go (with many more to follow), Bank of America announced 650 layoffs in investment banking, Lehman is slashing 1,300 mortgage-related jobs, home-lender IndyMac is cutting 2,400 positions (on top of 1,600 announced last year), and Applied Materials is handing out pink slips to 1,000.

And then there is Sprint, which on Friday announced it was cutting 4,000 jobs as the 3rd largest U.S. mobile carrier continues to bleed subscribers and warned of a seriously large charge ahead to cover "goodwill impairment."

--Do you want some good news? Net foreign-capital inflows into the U.S. jumped 63% in November to $149.9 billion, reaching their highest level since January 2006. Back in August, during the first stage of the credit crisis, $150 million flowed out.

The government is estimating there will be more than 2.3 billion trips by commuters criss-crossing the country over the Chinese New Year holiday season. 22 million are expected to fly, up 10% from last year.

China's longest river, the nasty, polluted Yangtze, is at its lowest level in 142 years in some areas due to the drought.

But the government's Ministry of Agriculture says a crackdown on illicit practices has significantly improved the quality of the farmed fish industry. Regulators claim over 30,000 inspectors have canvassed the country, looking for the use of banned ingredients or antibiotics that are known to cause cancer. At least the ministry admits pollution and water quality are among the biggest issues facing China, let alone the fish industry.

And wouldn't you know, but in a separate report, "Serious heavy-metal contamination has been found in vegetables from the Pearl River Delta and in the soil they grow in," according to the South China Morning Post and Guangzhou Daily. But authorities say the problem really isn't that serious because you can wash off the metals before eating, though I'm really not into buying lettuce that has "lead levels 37.5% above acceptable limits," know what I'm sayin'?

Lastly, the World Health Organization said the H5N1 bird flu virus may sometimes stick to surfaces or get kicked up in fertilizer dust to infect people, a rather worrisome development, especially for China.

--Apple Inc. announced it has sold 4 million iPhones since introduction, but shares in the company tanked as investors were underwhelmed by what they heard at Macworld and new product introductions, such as an $1,800 laptop that fits in your wallet but has zero features most use.

--Research at Cal Tech has shown that a person's enjoyment of wine can be heightened if they are simply told it is a more expensive brand. In a test of 21 volunteers, the researchers were able to pass off a $90 bottle of Cabernet Sauvignon as a $10 bottle and presented a $5 bottle as one worth $45. Which reminded me of a recent party where Trader George surreptitiously placed a jug of Almaden on the table at this otherwise ritzy affair, while we stood around watching to see who would drink it. But you better know the hosts before you try this yourself and it needs to be pointed out that Trader George is a professional

--My portfolio: Sometimes you just have to laugh. Remember how I said the first week of the year was one of my best ever? It's all gone and I no longer needn't worry about being out of balance with my 80% cash / 20% stocks recommendation, which looks pretty good today, doesn't it? My solar play started the year at $8, went to $16.80, and is now down to $7.50. [I'm still way ahead, though.] Yes, of course I wish I had sold but the story is only going to get better, longer term, and I can afford to be patient. I tried to sell some around $16 but the market moved faster than my fingers could hit the keyboard and after that I just walked away. That's the great thing about this business. You're always learning. But the key is to be in a position where you aren't crying at night. These days, that's where the cash comes in.

--Lastly, and in yet another example of the still unwinding real estate bubble, comedian Eddie Murphy has dropped the price on his Englewood estate, appropriately named "Bubble Hill," from $30 million to just $19.5 million. [After stopping at $22 million.] I'm a buyer of the seven-bedroom mansion, complete with recording studio and bowling alley, when it hits $195,000.

[It also needs to be noted that Murphy's pseudo-marriage to Tracey Edmonds appears to have lasted a whopping two weeks.]

Iraq: There was some major movement on one of President Bush's benchmarks the past week, that being the Shia-led government's acknowledgement, finally, that some of Saddam's former Baathist party officials should be admitted to the government to bring about some political reconciliation.

But the devil is always in the details and, for starters, Prime Minister Maliki is not about to let in more than a handful of very low-level officials. As the Washington Post editorialized:

"Some former members of Saddam Hussein's party would be given pensions and other chances at state jobs. Yet, taken literally, the law would exclude many Sunnis from Iraq's army and security forces, including thousands who are now serving or seeking to enroll - a huge step in the wrong direction."

You can say the same about efforts to share the oil wealth. From time to time you hear of a breakthrough, but on closer inspection it's a sham. In this regard, start with the Kurds. They already have their de facto independence and they're not about to divvy up the spoils.

Speaking of oil, the positive is that while production has been mired around 2 million barrels per day, the projection for 2008 is 2.2 million. However, before you start dancing the huka, understand this is still below pre-war levels of about 2.4mmbd.

Lastly, Iraq's defense minister said his security forces would not be in a position to take full responsibility for internal security until 2012, nor be able to defend the borders until at least 2018. On Friday, violence involving the Shiite cult Soldiers of Heaven killed at least 50 and now Moqtada al-Sadr is threatening to break his truce.

Middle East?President Bush's trip: I can't blame Bush for going to the region as he did. Better to talk to the players up close and personal than by other means, but the mission has already proven to be an unmitigated failure due to the immediate surge in violence between the Israelis and Palestinians. The tit- for-tat was never more evident as Hamas lobbed at least 100 missiles and mortars over the border and Israel responded by killing 29 Palestinians, mostly militants, in three days. And just three weeks into 2008, my prediction for the two leaders involved seems virtually destined to become true.

Recall I said that Israeli Prime Minister Ehud Olmert would be forced out by right-wingers upset over his overtures to his Palestinian counterpart, Mahmoud Abbas, and talk of turning over territory. Olmert's governing coalition is now falling apart, even before the release of what promises to be a scathing report on the conduct of the Lebanese war of '06. [He is down to just 67 seats out of 120 in the Knesset, with further defections likely.]

As for Abbas, I said he would be "taken out." On Thursday, he said he is considering resigning unless Israel immediately stops its military operations, that on Friday included reinstituting a blockade of Gaza, meaning badly needed supplies can't get in. Gaza, controlled by Hamas, is a pure hell-hole and humanitarian disaster.

For his part, President Bush seems to believe that Abbas could contain Hamas until a peace deal was reached. Right.

The rest of Bush's trip was taken up by talk of Iran and the threat it posed to our allies. In his major speech in Abu Dhabi, the president said "Iran today is the world's leading state sponsor of terror. Iran's actions threaten the security of nations everywhere."

Iran does indeed pose a threat to Israel, but following is a different opinion, from an editorial in Lebanon's Daily Star.

"U.S. President George W. Bush used his speech in Abu Dhabi on Sunday to reiterate many of the same accusations about Iran that we have heard him throw around since his first weeks in office seven years ago. Back then, Iran's president was Mohammad Khatami, a reform-minded leader whose efforts to promote inter-cultural understanding earned him the recognition of international institutions such as the United Nations, which acted on his suggestion to proclaim 2001 the Year of Dialogue Among Civilizations. The ensuing election of Khatami's hard- line successor, Mahmoud Ahmadinejad, has made Bush's talk of the Iranian 'threat' an easier sell, but Arab audiences still seem less worried today about the possibly nefarious aims of the Islamic Republic than they are about the U.S. president's proven track record of stirring up chaos and instability in the region."

And from a different part of the world, an editorial in the South China Morning Post [Hong Kong].

"The 9/11 terrorist attacks on the United States have defined the administration of George W. Bush, for the worse and for too long. Evidence of that can be seen in the consequence of its adoption of unilateralist policies abroad and in its sacrifice of American values, both supposedly justified as part of the so- called 'war on terror.'?.

"Mr. Bush is a weakened leader who is also part of the problem, and not just because he is a lame-duck president. His political capital remains depleted by a disastrous record in the region, starting with the invasion and tragic occupation of Iraq that squandered international support and sympathy generated by 9/11. Suspicions that the Annapolis summit had a hidden agenda of isolating Iran may be unfounded, but his rallying call to Arab nations to confront what he called Iran's threat to world security fell a little flat after the International Atomic Energy Agency said Iran had agreed to answer outstanding questions about its nuclear programs within a month. This came after a U.S. intelligence report found that Iran had halted a nuclear-weapons drive in 2003."

Again, the above is just some of what the world believes when viewing U.S. actions. I myself remain convinced that Iran is proceeding rapidly to have a nuclear weapons capability and Israel will be forced to act preemptively this year. [Which is also why if I see oil tumble to $80 or below, I'm a buyer.]

What frustrates me, though, is that we should have been talking to Iran years ago. Now the horses are out of the barn, even if Ahmadinejad suffers a crippling defeat in upcoming parliamentary elections.

Finally, wrapping up President Bush's trip, he groveled at the feet of Saudi Arabia's rulers, asking for more oil to be pumped into the market to drive down prices, and when the princes acted like they didn't hear him, Bush said, 'How about if I sell you $20 billion of arms to combat Iran?' To which the Saudis whispered to each other, 'Sucker. Iran isn't about to attack Saudi Arabia. But we get the weapons anyway.'

Then Bush met for all of four hours with Egyptian dictator Hosni Mubarak, pleading for Egypt to stop the flow of weapons into Gaza, and Mubarak kissed him on both cheeks while winking to his aids.

Afghanistan: There are some that say if the Taliban is resorting to suicide bombing, it shows they're desperate; but on the other hand if the Taliban attacks Kabul's only luxury hotel and kills 8 in a suicide bomb attack and assault involving at least four of them, that's not exactly the "last throes of an insurgency" type of stuff.

This week Defense Secretary Robert Gates caught some flack when he told the Los Angeles Times, "I'm worried we're deploying [military advisers] that are not properly trained, and I'm worried we have some military forces that don't know how to do counter-insurgency operations;" referring specifically to operations in the south led primarily by Britain, Canada and the Netherlands.

Some in Europe were furious, especially the Dutch who summoned the U.S. Ambassador in The Hague to explain Gates' comments, while a British MP said "they were bloody outrageous." Patrick Mercer added, "I would beg the Americans to understand that we are their closest allies, and our men are bleeding and dying in large numbers."

The Pentagon said Gates "was not criticizing any specific country. But he did want to make it clear that he believes NATO as an alliance has not redirected its training quickly or effectively to deal with asymmetric threats."

"[It is a good thing that 3,200 Marines] rather than European soldiers will deploy in Helmand province this spring to head off any Taliban offensive. Defeating the Afghan insurgency will require the United States to take on a larger part of the fighting. Success will also require U.S. commanders to insist that a more coherent, nationwide counterinsurgency strategy be pursued - including aggressive training of the Afghan army and police, economic development that is centrally coordinated, and a focused attack on the opium business that supplies most of the Taliban's funding. If that means downgrading NATO's role or bruising the feelings of some allied governments, so be it."

Pakistan: I've been taking off on the Bhutto family, and not in the least bit concerned I could be offending anyone who may not have done their homework, so I have to now note the thoughts of Fatima Bhutto, Benazir's 25-year-old niece, who gave her first interview, post-assassination, to the London Times. There are some who feel that Fatima, not 19-yearr-old Bilawal, Benazir's son, is the rightful heir to the party throne, yet Fatima rejected her own claim to the Bhutto legacy and called for a new era based on platforms rather than personalities.

"That's the problem - it's a field that's held hostage by so few and it's become in a sense the family business, like an antique shop, where it's just 'So and So and Sons' and then grandsons and great grandsons?.

"The idea that it has to be a Bhutto, I think, is a dangerous one. It doesn't benefit Pakistan. It doesn't benefit a party that's supposed to be run on democratic lines and it doesn't benefit us as citizens if we think only about personalities and not about platforms."

Fatima has serious doubts about the will that supposedly named Bilawal as heir, a point I raised the other week as well.

Meanwhile, four weeks before the rescheduled parliamentary elections, former prime minister and opposition leader Nawaz Sharif blasted President Pervez Musharraf. "Musharraf has destroyed Pakistan. He is blindly following America's orders."

Remember, I've long written Sharif is no friend of the U.S. and Washington can not be pleased he could yet emerge as the new leader. He is aligned with the extremists.

China: Wendell Minnick of Defense News reported on the growing concern at the Pentagon over China's anti-ship ballistic missile program. As in here is one scenario.

"In March 2012, Washington responds to Chinese threats to invade Taiwan by sending two U.S. aircraft carrier groups toward the Taiwan Strait. Rhetoric out of Beijing and Washington escalates with threats and counterthreats, then open battle.

"On the second day, Taiwan and U.S. fighter aircraft engage Chinese aircraft over the strait in what one Taiwanese pilot describes as a hornet's nest from hell. On the third day, two dozen ASBMs sink the aircraft carriers and several Aegis- equipped destroyers and amphibious warfare ships, killing more than 18,000 U.S. sailors and Marines. In just under an hour, the Chinese inflict four times the losses of the Iraq war."

Mark Stokes, a former country director for China at the Defense Department and a former military attach? in Beijing, said a "question many friends in Taiwan have asked is whether or not the United States would intervene, should the PRC use force against Taiwan. As time goes on, it may become more of a question of could the U.S. intervene with sufficient alacrity before being handed a fait accompli."

Well I've asked that question for years and I have the answer. Of course the U.S. will abandon Taiwan, and that would be a tragedy on so many levels.

But?will China ever really need to take Taiwan by force? After all, the Kuomintang scored a decisive victory in parliamentary elections last weekend, a result seen as a vote of no-confidence for President Chen Shui-bian's independence agenda. The KMT picked up 51% of the vote, while Chen's DPP came in at only 37%. The size of the KMT's win gives it absolute control of the legislature (without getting into all the specifics, it's confusing).

Chen resigned as party chairman and the DPP has its work cut out for it ahead of the March 22 presidential election. And in repudiating Chen's hardline stance against Beijing, one has to wonder just how buddy-buddy the KMT will now get with the mainland. After all, the party advocates keeping the status quo as well as possible reunification. Who knows, after the Olympics China could just toss a few missiles in the waters off Taiwan and then sue for peace.

Remember a theme of mine since day one of "Week in Review." Businessmen do not operate in the interests of their own people and Taiwan is loaded with corrupt titans (most connected to the KMT), who would sell their nation out in a heartbeat if given the chance.

Russia / Britain: Employees at two British Council (cultural) offices in St. Petersburg and Yekaterinburg were harassed and questioned by the FSB (the former KGB), leading Foreign Secretary David Miliband to warn Russia that the intimidation is "completely unacceptable."

The situation goes back to the dispute over the murder of ex- KGB agent Alexander Litvinenko, who was poisoned in London. Britain has wanted Russia to extradite Andrei Lugovoy, a former KGB agent who is the leading suspect. Instead the Kremlin ordered British Council offices outside Moscow shut, but Britain refused, so the FSB began visiting employees at their homes and calling them into FSB headquarters. Finally, Britain gave in and closed the two bureaus.

As Russians are fond of saying, "If you want to be respected, it helps to be feared."

France: Yet another reason to "wait 24 hours." French President Nicolas Sarkozy, Wonder Boy, stumbled badly due to his relationship with model Carla Bruni (the man-eater), that we're told has resulted in marriage. But as Sarko's popularity has plummeted, along with a slowing economy, he has reassured his nation he is back to work. Basically he's been out of control. But you ain't seen nothing yet, sports fans. Wait until he takes over the EU leadership later this year.

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