Week in Review 
For the week 1/21/2008 - 1/25/2008
Brian Trumbore
President/Editor, StocksandNews.com

Wall Street

Well that was a fun week, wasn't it? But what has really changed after the tumultuous behavior of the financial markets? I'd argue not much when focusing on the Big Picture, which is what I try and do around here. Absolutely nothing happened that would cause me to change my forecast?.nothing. The global slowdown story, particularly in the United States, is still very much intact and equities worldwide will struggle. But because of the volatility all this month, I'm forced to repeat one little passage from last week's review.

"I have (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."

And while I have never been one to overanalyze a single week, I could only sit back and grin at the pabulum heard on the airwaves.

I'm also not going to attempt to analyze whether the Federal Reserve acted to lower the short-term funds rate 75 basis points (0.75%) based on a global mini-crash in equities sparked by a rogue trader in France. We don't have the facts yet.

And I'm not going to spend much time on the House economic stimulus package, because it is just that, the House's, not the Senate's, let alone a compromise between the two. For now I'll just say this. My conservative friends who still refuse to believe that the middle class, let alone the lower one, is truly getting slammed in this current economic environment need to wake up and smell the coffee. Thus I'm not against providing some short- term relief for these folks, such as increased food stamp aid or extending unemployment benefits (neither of which is part of the House package). But there are consequences for even minimal action and I address those in a discussion on the federal budget deficit down below in 'Street Bytes.'

On the issue of providing relief to homeowners, thus far I don't like what I see because I have trouble picturing how it really helps those in need; items such as raising the limit on loans for Fannie and Freddie.

There was a telling study released this week concerning Long Island residents. As reported by Reid J. Epstein of Newsday, "Nearly three in four people here said they could not afford to purchase their own home at today's prices. About 78 percent said they would leave Long Island rather than purchase another house here. Just eight years ago, 62 percent of Long Island homes were worth less than $250,000. By 2006 that figure dropped to 4 percent, according to the index."

Affordability. I've said that was the key for years now, not just here but globally. What I see in raising loan limits with Fannie and Freddie is more individuals once again buying into homes they really can't afford and over time the cycle starts anew. Or as Dom Cecere, chief financial officer at L.A.-based KB Home said, raising the conforming-loan limit is "going to spur people to move up to a more expensive house, and that's going to get the new and used markets moving again." I rest my case. That's not exactly what we need at this time, Mr. Cecere.

President Bush on Tuesday announced the formation of a council to address financial literacy, which was laughable because it came from his mouth, but there is no doubt our nation could use some lessons on top of the hard ones already learned, and I'd suggest the president and Congress attend, too.

But as the equity markets were swooning early this week, primarily based on fears a U.S. recession would indeed impact the rest of the world (duh), Fed Chairman Ben Bernanke sprang into action as his band of merry bank governors slashed the key lending rate, citing "appreciable downside risks to growth remain." The problem was the timing. The move should have taken place ten days earlier when Bernanke first spoke of taking "substantive" action. It's kind of like fans watching a starting pitcher tire in the late innings of a baseball game and screaming at the television set, hoping the manager hears them, "Take the guy out!" and then having the manager sit on his hands while the starter proceeds to blow a 5-2 lead. But enough from me. What were others saying this week?

PIMCO's Bill Gross: "It's a sad testament to think the Fed has to cut interest rates eight days in front of a meeting to salvage the equity markets. The U.S. economy is in a rather sad state of affairs in that it depends on housing and stock prices to keep it going."

Morgan Stanley economist Stephen Roach, now in charge of Asian operations. "(The Fed is saying) we are there to clean up after bubbles first rather than to prevent the danger. It's a dangerous, reckless and irresponsible way to run the world's largest economy," adding:

"Will (the Fed's move) work?....The answer lies in the unique character of this recession. There are two triggers - a bursting of the U.S. housing bubble and a bursting of the credit bubble. I do not believe that aggressive Fed rate cuts will resolve the extreme imbalance between supply and demand in the U.S. property market that will be pushing housing prices lower for some time. Nor do I believe that recent Fed actions will restore the functioning of credit markets to their pre-crisis state. As a result, pressures are likely to remain intense on housing - and credit- dependent U.S. consumers - a sector that accounts for a record 72% of U.S. real GDP.

"In essence, the Fed is 'pushing on a string' here - unable to stop the recessionary dynamic now unfolding. But there will be consequences in the next recovery. Unfortunately, the U.S. central bank can't seem to break out of the market-friendly trap it fell into nearly a decade ago. Panicking over the possibility that yet another bubble is bursting, the Fed is once again injecting liquidity into an asset-dependent U.S. economy. That won't arrest the recessionary dynamic now unfolding but it could well set the stage for the next asset bubble in America's bubble-prone economy. Have we learned anything from the mess of the past seven years?" [Bloomberg, Financial Times]

Billionaire George Soros: "The current financial crisis was precipitated by a bubble in the U.S. housing market. In some ways it resembles other crises that have occurred since the end of the Second World War at intervals ranging from four to 10 years.

"However, there is a profound difference: the current crisis marks the end of an era of credit expansion based on the dollar as the international reserve currency. The periodic crises were part of a larger boom-bust process. The current crisis is the culmination of a super-boom that has lasted for more than 60 years."

I'm not a fan of Soros but you still have to respect his opinion and in his op-ed for the Financial Times he added:

"Although a recession in the developed world is now more or less inevitable, China, India and some of the oil-producing countries are in a very strong countertrend. So, the current financial crisis is less likely to cause a global recession than a radical realignment of the global economy, with a relative decline of the U.S. and the rise of China and other countries in the developing world.

"The danger is that the resulting political tensions, including U.S. protectionism, may disrupt the global economy and plunge the world into recession or worse."

Bingo.

Roger Lowenstein of the New York Times had a profile of Bernanke in the Sunday Magazine and in it former Fed chairman Paul Volcker comments: "Too many bubbles have been going on for too long. The Fed is not really in control of the situation."

But I've said that while the Fed is irrelevant in terms of preventing a real estate driven recession, I've also hastened to add the Fed can help prevent a recession from becoming a Depression. That's what I believe they've done with this week's action and a further anticipated cut in rates this coming week at their formal meeting. For those homeowners with ARMs pegged to the one-year Treasury or LIBOR, they have indeed caught a break, let alone those who are qualified to refinance to a more stable long-term rate, though regarding the latter the window could be fleeting.

Again, however, it's recession time, and not an ordinary one because of massive consumer debt loads, whether you are talking credit cards, auto or home equity loans. Regarding the latter, the exposure is an estimated $850 billion and the banks on the other side don't have the collateral, i.e., look for them to take higher and higher charges against these loans, as well as on their now declining commercial real estate investments.

And then there is the topic of counterparty risk. Richard Bookstaber, former risk manager at Morgan Stanley and Salomon Brothers, commented in a story for the Financial Times.

"Can we lay out the intricate web of counterparty risk for swaps and derivatives - who owes what to whom? At this point we cannot. And so we cannot map out how a failure in one segment of the financial market might propagate out to affect other segments." [The International Swaps and Derivatives Association says such fears are unfounded. I'll go with Bookstaber.]

Well, this all is going to take at least another 18-24 months to play out. We'll be experts on the mysteries of the deep before it's over.

Street Bytes

Following are the declines for the major market averages from their record or multi-year highs to the intraday lows on Wednesday.

Dow Jones -17.8% [11644?from 14164]
S&P 500 -18.8% [1270?from 1565]
Nasdaq -23.0% [2202?from 2859]
Russell 2000 -23.5% [654?from 855]

And to give you a sense of the extreme volatility, following are some ranges in trading on Wednesday alone for a few once high- flying stocks and indexes, along with their respective recent high.

Apple?($126-$139, Wed.) $202
Google?(519-548) 747
Research In Motion?(80-88) 137
Suntech?(46-49) 90
OSX (oil service index)?(235-255) 316
XOI (major integrated oils)?(1211-1291) 1581

Overall, the broad averages finished mixed, a minor victory after a sickening prior four weeks, with the Dow Jones and S&P 500 registering slight gains and the Nasdaq continuing its losing streak, now five. Overshadowed to a great extent were a slew of earnings reports, some good, some bad. On the plus side, Microsoft spoke positively of the future after exceeding expectations in the fourth quarter (yet after a solid rally its shares sold off). Honeywell, Texas Instruments, and Nokia were all positive as well. The negative stories involved significant further writedowns and earnings that missed expectations out of Bank of America and Wachovia, but after initially falling they rallied with the rest of the financial sector off the lows.

Apple, eBay and Motorola all disappointed in a big way; in Apple's case its tepid outlook was particularly surprising and the stock was taken out back and shot.

--U.S. Treasury Yields

6-mo. 2.36% 2-yr. 2.19% 10-yr. 3.56% 30-yr. 4.27%

Bonds rallied strongly, as you'd expect, on the heels of the Fed's decision to slash the funds rate, while anticipating a further ?- point cut come Wednesday.

Richard Koo, in an op-ed for the Financial Times.

"The echoes are eerie. Ben Bernanke's gradual change of tone during the past year and this week's massive cut in interest rates seems to parallel that of Japanese officials back in 1992. At that time, an initial period of denial was replaced by the shocking realization that the damage caused by the bursting of the bubble could take years to repair?.

"In Japan during the 1990s, it was corporations that rushed to pay down debt after the commercial real estate they had bought with borrowed funds lost 85% of its value. Their need to eliminate the debt overhang meant there was nobody left to borrow from the banks, even though interest rates were effectively zero, creating a significant shortfall in demand."

--The losses on Monday and Tuesday in some of the foreign markets were historic, such as Hong Kong's 9% drubbing on Tuesday and Sydney's 7%. Regarding the latter, Sydney went through its worst losing streak, 12 sessions, in 26 years. Even the Frankfurt DAX index dropped 7%, with London (5.5%), India (7%) and Brazil (6.5%) following suit. But then the reversals on Thursday were equally startling.

--The CEO of Pepsico said that food inflation will continue to be an issue for years to come, thanks to rising demand. Keith Bradsher of the New York Times had an extensive piece on the topic, singling out soaring prices for cooking oil, palm oil, and soybeans, a real issue for the developing world as these are staples. Last week I wrote of growing unrest in Indonesia due to price pressures with the beans.

--The nonpartisan Congressional Budget Office is projecting that even if the U.S. dodges recession, the federal budget deficit will rise to $219 billion for the fiscal year ending Sept. 30 from $163 billion for fiscal 2007. But that doesn't include an expected $30 billion supplemental for Iraq and Afghanistan (on top of those previously passed), along with the costs for the coming economic stimulus package.

In other words, by the time President Bush leaves office the debt could be back over $400 billion, obviously limiting his successor's agenda.

But here's what ticks me off about the debate over the deficit. The Wall Street Journal opined:

"We should remind readers that back in 2004 CBO projected a $286 billion deficit for 2008; by that yardstick, $219 billion is an improvement. Back then, the CBO also projected some $200 billion less in corporate and personal income taxes than we actually saw, due mostly to better-than-expected growth after the 2003 tax cuts."

No mention whatsoever of a topic I have broached over the past year in this space. Earth to my conservative and liberal friends, the significant growth in corporate taxes is largely due to the massive sums paid out by hated Big Oil!

WIR 10/13/07

"Just a reminder. In the first six months of 2007, Exxon Mobil and Chevron, combined, paid over $20 billion to the federal government. It was about $22 billion in the first half of 2006. My point being it's not just low tax rates and the entrepreneurial spirit of America, as Bush likes to tout. The facts speak of another rather large contributor that is always left out of the talking points, wouldn't you know."

And in all the above discussion, I haven't noted what would happen to the deficit if we truly have a recession. As in economists at the likes of Goldman and Merrill Lynch see one boosting the deficit by a further $140 billion plus. [Perhaps as high as $350 billion, depending on the severity.]

Lastly, it is the crime of the century that Americans pay $430 billion, and rising, for interest on the national debt. $430 billion. Why the citizens aren't storming the Capitol, I'll never know.

--31-year-old Societe General trader Jerome Kerviel is being blamed for the biggest fraud in investment banking history, some $7.2 billion. Kerviel worked on SocGen's equity derivatives desk, with the bank claiming to have invented the instruments. Evidently he was betting on rising equity markets and when they plunged he just kept betting more, covering his tracks by creating fictitious hedging positions using the employee accounts and passwords of others at the bank. SocGen immediately fired six superiors of Kerviel's.

But as of this writing, we are all still left shaking our heads as to how exactly this scumbag was able to elude internal controls.

--Jeroen van der Veer, Royal Dutch Shell's CEO, told employees in an email this week, "Shell estimates that after 2015 supplies of easy-to-access oil and gas will no longer keep up with demand." Mr. van der Veer is recommending more nuclear power and unconventional fossil fuels, such as Canada's oil sands. He also envisages a mad dash by nations to secure resources; "With policymakers viewing energy as 'a zero-sum game,' use of domestic coal and biofuels accelerates," as reported by the London Times.

--Gold soared anew as the world's second-largest producer, South Africa, was forced to halt production due to power shortages. Miners need power, number one, to provide ventilation. More on this situation in the 'Foreign Affairs' section, along with a related topic, coal shortages.

--China's fourth quarter GDP came in at 11.2%, slightly lower than the 11.5% rate in the third. For all of 2007, the growth rate was 11.4% as China accounted for 17% of total global activity, the same as the U.S.

--Japan's economy is clearly heading backwards as capital spending weakens. It doesn't help that the latest inflation indicator was higher than expected. Stagflation.

--Republicans obviously shouldn't feel real good about their prospects next fall, with 8 in 10 Americans believing the economy is in recession, according to the latest Bloomberg/L.A. Times survey. By a 51-29 margin, the same respondents believe Democrats can do a better job of handling the mess.

--Lennar, the second-biggest homebuilder in the U.S. by units sold, took a $1.86 billion writedown for land, inventory and goodwill, driven by a $740 million loss on 11,000 lots the company sold recently to Morgan Stanley. Lennar's land portfolio is now valued at $4.5 billion vs. $7.8 billion at this time last year, which is as good an indicator as any of the problems faced by the industry in general. And there are far more land sales to come.

--Josh P. reports that the median home price in San Diego County is off 18% from the high of Nov. 2005. California's unemployment rate is also up to 6.1%.

--Newer golf communities must be really taking it on the chin.

--Spain's real estate market is unraveling at lightspeed, though 'experts' are calling for prices to only decline 8% this year, which seems absurdly low given the bubble here was worse than in the U.S.

But Spain is also dealing with a tragic scam; that being how communities were illegally built near the sea, with corrupt builders in cahoots with local officials, only to have buyers discover later that the government could move in and literally bulldoze their home once it was found out the house was on protected land. This is happening to thousands of Brits, for example, who chose sunny Spain for a second home or for retirement. The London Times reported that in Marbella, an astounding 30,000 illegal homes were built. 40,000 real estate agencies, half the overall total, have now gone under across the country. Imagine being one of 84,000 Brits who purchased homes here from 2000-2003 and are now at risk of losing everything, with no compensation!

--Ford is looking to cut as many as 13,000 jobs, including 2,000 salaried positions, on top of 44,000 jobs shed since early 2006. But like GM, Ford will be offering buyouts first in the hope of replacing some of the positions with lower-wage employees.

--London's financial center is preparing for substantial job losses, a predicted 8,000 this year. About 25,000 jobs have been lost on Wall Street thus far, including 1,000 just announced at Morgan Stanley.

--A study of college endowments has found that a record 76 schools now have pools of $1 billion or more, thanks to an average 17.2% rate of return last year over 2006. Of the 785 schools that participated in the study, total endowments are now $411 billion.

But as I first brought up months ago, it's the percentage of the endowments that are actually spent each year that is so controversial. As reported by Mary Beth Marklein in USA Today, "Schools with $500 million or more in assets reported spending an average 4.4%, vs. an overall average payout last year of 4.6%."

Sen. Charles Grassley, R-Iowa, notes that schools should be required to spend 5% each year, just as private foundations must, and use it "to help families and students afford college."

"I don't begrudge them their financial success," he said in a statement. "I just want to remind them that their money is tax- exempt. They're supposed to offer public benefit in return for (that) exemption."

Ohio University professor Richard Vedder (no relation to Pearl Jam singer Eddie Vedder?at least not that I'm aware of) weighed in with the following for an op-ed in the Washington Post.

"An academic arms race is underway, requiring lots of spending. And Harvard has the most guns, although by some measures Yale and Princeton are equally wealthy. (To) increase applicants (Princeton) has built the ultimate student-living facility, Whitman College (after eBay chief executive Meg Whitman, the donor), that cost $388,571 per room unit, nearly identical to what Donald Trump spent on his luxury resort Ocean Club Panama?. Why should Whitman get a multimillion dollar tax break for building a luxury hotel for the children of mostly wealthy Americans?

"The Harvard and Yale moves (to provide more tuition assistance) do nothing to deal with the root causes of rising college costs, which include:

"The student loan explosion. When third parties are paying a lot of the bills, universities have few incentives to conserve on resources or to reduce their costs?.

"No bottom line. Did Harvard have a good year in 2007? Who knows? There are few measures of the value added in attending college, making it difficult for schools to even define goals, much less achieve them?.

"Overcompensation. There is a strong correlation between government aid to schools and faculty income levels, and staff salaries are rising sharply for top people."

[Whitman, incidentally, announced she is stepping down as CEO. EBay stock has been dead money for years.]

--On a related matter, Sallie Mae, the student loan giant, announced a $575 million loan-loss provision against expected defaults.

--Bird flu is still simmering and the latest scare is more worrisome than some of the others. India's worst outbreak of H5N1 has suddenly erupted in Calcutta, while Indonesia and Vietnam have reported new human deaths, prompting a warning from the United Nations. But in Calcutta we are talking a teeming city of 14 million and an inept bureaucracy. Inspectors may have flooded the city markets, looking for signs of bird flu, but there is no way anyone should take comfort from this, especially since the strain has hit chickens kept by peasants in their yards. In many instances the chickens represent a family's only source of income, so they are hiding them.

--As reported by Business Week, for the first time since 1885 Britain will surpass the U.S. in terms of per capita gross domestic product, $46,088 this year, compared with $45,598 in America. However, much of this is due to the pound's strength against the dollar, so to my American readers don't take this news and jump off a bridge. But at the same time, be in all the earlier Monday morning.

--Russian President Vladimir Putin went to Bulgaria, seeking support for a multibillion-dollar pipeline aimed at further strengthening Moscow's hold on the energy market. Agreements on a big project called South Stream, as well as seven other oil and gas deals, were reached and the Moscow Times reports the key may have been talks at a Sofia piano bar, 'Sinatra,' where Bulgarian President Georgi Parvanov took Putin for a night out.

Of course Putin is a teetotaler and drank only water, leaving at 12:30 am, while "Parvanov drank wine and stayed until 2:00," said the bar manager. Gazprom's Dmitry Medvedev (the next president) and Bulgaria's prime minister also dropped in later. Something tells me you should assume Russia got the best of the deals.

--I follow the weather around the world daily and it's been interesting to me the amazing contrasts in Europe; as in it was far colder when I was there in November and December than it has been in January. [While at the same time, Iran is suffering its worst winter in memory?which when you look at a map puzzles any junior meteorologist.]

So imagine that Continental European economies have seen their energy prices rise 9.2% thus far in '08 over last December's pace, thanks to the high price of oil and natural gas early on in January. If they had been suffering through a normal winter, consumers here would be crushed even further.

--Yahoo will be cutting up to 700 jobs as its reorganization efforts continue. The company is announcing its earnings on Jan. 29, having reported seven straight quarters of declining profit.

--Another sign of the property bubble now unwinding. The Journal reported that Pierre Auguste Renoir's Paris home is on the market for about $5.5 million. Renoir purchased it in 1870 for $450 in wine, at least that's the guess here.

--More on the fish front. Per a story in the New York Times, "Recent laboratory tests found so much mercury in tuna sushi from 20 Manhattan stores and restaurants that at most of them, a regular diet of six pieces a week would exceed the levels considered acceptable by the Environmental Protection Agency."

There is no reason why similar results wouldn't be found elsewhere across the country. Said one doctor, a professor of environmental and occupational medicine, "No one should eat a meal of tuna with mercury levels like those found in the restaurant samples more than about once every three weeks."

--Ah ha! So you laughed when I said I was sticking with traditional incandescent light bulbs, didn't you?

Jan. 24, 2008?headline in the Wall Street Journal

"The Dark Side of 'Green Bulbs'?Disposing of Fluorescents, Electronics Releases Toxins"

"(One) product that should be recycled is the fluorescent light bulb?.

"Yet unlike traditional incandescent bulbs, these bulbs contain mercury, a metal hazardous to human health and the environment. Consumers are urged not to toss them in the trash."

And as I noted weeks ago, the problems occur when you drop one of them. "As long as people clean up broken bulbs right away and don't let kids touch them, people should be able to prevent contamination in their home," says Ellen Silbergeld, a professor of environmental health sciences. [The government suggests airing out the room for at least 15 minutes as a precaution.] Yet Ms. Silbergeld says she is more concerned about the environmental impact if millions of these bulbs end up in landfills or incinerators.

" 'I don't think anybody has really grappled with this,' she says."

I have. I'm just not buying them. This will rival asbestos as a future money pit for lawyers 20 years from now.

Foreign Affairs

Israel / Palestinians: Power was shut off to Gaza by Israel on Sunday, and in response Hamas accelerated what was clearly a plan in the works in blowing up a portion of the wall between Gaza and Egypt. At which point tens of thousands of Palestinians crossed the border in search of food and fuel.

Of course that means hundreds of terrorists could cross into Gaza, let alone the ones already there being able to restock in Egypt. In other words, an incredible mess.

Just last week I noted President Bush's almost farcical discussions with Egyptian President Hosni Mubarak as Bush pleaded with Mubarak to shut down the tunnels funneling arms into Gaza, and here was a case where Mubarak and his military just looked the other way for 48 hours before beginning to reinforce the border. At which point Hamas punched another hole in the wall and at last word Egyptian forces were retreating.

Iran: The UN Security Council (and Germany) have agreed on a new round of sanctions on Iran, but as Russian Foreign Minister Sergey Lavrov put it, the sanctions call "for vigilance" and little else, which is why Russia and China went along. Sure, there will be increased asset freezes and even tighter travel restrictions, but Iran continues on with its nuclear weapons program, even as it parades inspectors from the International Atomic Energy Agency past cardboard centrifuges that Tehran will claim are real and not in use. IAEA chief Mohamed ElBaradei will then nod in agreement, "I see."

But there is a hopeful sign in the growing conflict between Supreme Leader Ayatollah Khamenei and President Ahmadinejad, this time over the harsh weather and Ahmadinejad's refusal to supply remote villages with gas. Khamenei overruled him, a big embarrassment to the president.

Lebanon: For a 13th time the presidential vote in parliament was postponed until Feb. 11 as Syria and Hizbullah continue to muck things up, while Lebanon's weak-kneed pro-democracy forces cave. This week Hizbullah's Sheikh Nasrallah appeared for the first time in public since Sept. '06 as he rallied the troops in south Beirut and claimed Hizbullah held the remains of Israeli soldiers from the war. One Israeli minister replied that Nasrallah was a "sewer rat" and that "we should take him out." All ministers, for that matter, uttered the same assassination call.

But Israel sent six jets over southern Lebanon, violating its airspace (grossly illegal) and the Lebanese army fired on the jets without damage. Then on Friday, there was another bombing in Beirut, this one killing a key intelligence officer who had been investigating earlier attacks on anti-Syria politicians. Four others died in the bombing that was the most powerful since the 2005 attack on Rafik Hariri.

Iraq: The New York Times reported Gen. David Petraeus was in line to take over NATO command, which would put him in charge of the effort in Afghanistan, as well as dealings with Russia, but the Pentagon said at week's end that Petraeus was staying put at least until the fall. Meanwhile, the No. 2 in Iraq, Lt. Gen. Odierno, is scheduled to depart Iraq mid-February on completion of his tour.

Afghanistan: Speaking at the Davos Economic Forum, Afghan President Karzai blasted the efforts of British troops in Helmand province.

"Before (the arrival of the British forces in the southern region), we were fully in charge. They came and said, 'Your governor is not good.' I said, 'All right, do we have a replacement for this governor; do you have enough forces?' Both the American and the British forces guaranteed to me they knew what they were doing and I made the mistake of listening to them. And when they came in, the Taliban came."

David Satterfield, the U.S. co-coordinator on Iraq, told the London Times:

"It is the nature of Afghanistan. Afghanistan has many deficits not present in Iraq. Iraq is a wealthy country, it has resources - badly used - but it is rich. Iraq for all its difficulty in unifying politically has many quasi-democratic recognizable political forces. Afghanistan has warlords."

Karzai angrily rejected Satterfield's analysis. And then on Thursday, it was reported that nine Afghan police officers were killed accidentally in a firefight with American forces when they were mistaken for Taliban during an operation to root them out.

Pakistan: President Pervez Musharraf has been touring Europe, seeking support for his government and renewed investment, but back at home the knives are out in force. He has vowed the parliamentary elections slated for Feb. 18 will be free and fair. If they aren't, he'll be tossed out onto the street within days after.

North Korea: Pyongyang is complaining the White House hasn't removed the commies from the state sponsors of terrorism list, while the Bush administration says that it is waiting for a complete declaration of all its nuclear activities.

Separately, an administration envoy to North Korea, Jay Lefkowitz, gave a speech this week questioning the failure to rein in the North's weapons program. The Wall Street Journal editorialized:

"Kim Jong il has now had nearly a year and two deadlines to fulfill his nuclear promises and shows no intention of doing so. Chances are he now figures he can wait out this Administration and hope for better terms from President Clinton.

"On present course, (Secretary of State) Rice is setting President Bush up to spend his final year begging Kim to cooperate by offering an ever growing and more embarrassing list of carrots. Mr. Bush would do better to listen to Mr. Lefkowitz, while ordering Ms. Rice to introduce him to the Chinese and Russians."

[Rice had said the two countries didn't know or care who Lefkowitz was. What a miserable failure she has been. As Donald Trump first said, Rice just flies around and looks good.]

Russia: Foreign Minister Lavrov gave his annual news conference and lashed out at the European Union, saying "a reorganization of the entire European architecture" was one of the country's key foreign policy objectives for 2008, accusing the EU of promoting the illegitimate interests of individual nations under the guise of solidarity.

As reported in the Moscow Times, Lavrov cited the recent row between Britain and Russia as an example, "warning London not to turn the dispute into an issue for the whole union."

But of most immediate import was Lavrov's warning on Kosovo that the Kremlin would not look kindly on recognition of a unilateral declaration of independence, calling such an act an illegal move that would set a dangerous global precedent. So you can see where this is all headed. Kosovo could be declaring its independence shortly, just as Serbia itself is wrapping up a contentious presidential election between two candidates with totally opposing views towards relations with the West.

Meanwhile, Russia's own presidential election is rapidly approaching, March 2, at which point Dmitry Medvedev will receive his 80% plus of the vote. Former Prime Minister Mikhail Kasyanov, who was a candidate, is now under criminal investigation as prosecutors trump up charges in an effort designed to force him out. The prosecutor general is claiming Kasyanov submitted thousands of fake signatures to get on the ballot. Kasyanov said it was all politics, as his campaign said people who signed his petitions were being threatened with home searches, arrest and dismissal from their jobs.

Another candidate, Communist Party leader Gennady Zyuganov, has denied he is withdrawing. The Kremlin shouldn't want this because then the election will appear even more one-sided, thus creating a further image problem abroad; not that greedy global business leaders seeking the Kremlin's blessing give a damn about this prospect.

But I just have to throw in a note on Poland, concerning the proposed missile defense program that the U.S. wants to install near the Russian border. I was reading an AP story by Ryan Lucas on how residents of one Polish village where a base could be built were concerned they'd then become a target, and a restaurant owner made the following point.

"We have not received any benefits from our cooperation with the Americans so far - not one thing. Not in Iraq, not in Afghanistan, not in Poland - nothing. We don't even have visas. I'll tell my grandchildren that maybe in 20 years they'll have a shot at visa-free travel to the U.S."

The man is 100% right. We've treated the Poles like crap in the guise of security post-9/11, and it's time the White House is called on it.

Finally, Russian Gen. Yuri Baluyevsky made a rather belligerent statement this week, concerning his country's nuclear force.

"We have no plans to attack anyone, but we consider it necessary for all our partners in the world community to clearly understand ?that to defend the sovereignty and territorial integrity of Russia and its allies, military forces will be used, including preventively, including with the use of nuclear weapons."

Lovely.

China / Taiwan: Taiwan presidential candidate Ma Ying-jeou said if elected this spring, his Kuomintang (KMT) party would seek a "peace agreement" with China, along with cross-strait military confidence-building measures. Seeing as Ma is heavily favored to win at this point, his three-pint program is worth noting.

"First is the normalization of our economic relations. Meaning: to have a comprehensive economic cooperation agreement signed, which will cover a wide variety of economic issues.

"The second one is about the peace agreement, which will terminate the state of hostilities across the Taiwan Strait, which could last for 30 or 50 years, and which will include, critically, the confidence-building measures, particularly in the military field.

"And the last one?is about Taiwan's international space. Looking from broader terms, there is no reason for mainland China to further squeeze or suffocate Taiwan in the international community. We are not threatening them in terms of legitimacy or competing over the ruler of China?.I think that we should really sit down and think about what should be the future mode of cross-Strait relations on the diplomatic front."

China won't be happy until Taiwan is fully in the fold?that's the real bottom line. And remember, when the Chinese people rise up over food and energy shortages, for example, and demand more democracy, Beijing will play the nationalism card to reunite the people, with Taiwan the victim.

Along these lines, President Hu Jintao urged the Communist Party's public relations staff to fire up the propaganda machine prior to the Olympics as a way of showcasing all that is good in the land, human rights be damned. Hu instead wants all to know of "the rejuvenation of the nation, the happiness of the people and the harmony of the society," as reported by the South China Morning Post.

But back to shortages, China today faces a real energy crisis thanks to severe shortages of coal, with the government now demanding that no coal be shipped for export in order to address domestic demand. It's all about ill-advised price controls not being consistently applied. Beijing fixed power tariffs, but coal prices were allowed to float. Thus the utilities, whose electricity prices were capped, couldn't afford the soaring price of coal to power their plants so they shut some operations down or they would have gone bankrupt. You'll recall you had the exact same issue last fall when the government tinkered with diesel fuel price controls amidst soaring prices for crude. The refineries suspended operations because the cost of the raw material was above what they were allowed to charge for it. All this is happening at the start of the new year holiday season when virtually the whole nation hits the road.

To further compound matters, China is also dealing with record snows, which has interrupted the delivery of not just coal, but could also hamper the delivery of food stocks in some regions. In other words, President Hu may have to play the nationalism card earlier than I thought.

Africa: A study has concluded some 45,000 people die each month in Congo, or an estimated 5.4 million between 1998 and 2007, with most not dying from the actual fighting in the civil war but rather from rampant disease and food shortages created by it. In a mildly positive development, though, Congo's government announced it had reached agreement with a renegade general whose insurgency had led to the displacement of 400,000.

But elsewhere in Africa, specifically the southern part, Zambia, Zimbabwe and South Africa are beset by severe power shortages. In Zambia and Zimbabwe, nationwide blackouts were the norm this past week. It was so bad in the latter that state radio, running on generators, made the announcement yet no one seems to understand exactly the causes, which in the case of South Africa led to a shutdown of the above-mentioned gold mines.

And in Kenya, the violence continued despite a meeting between the two main political leaders. It's always great for tourism when you see headlines such as "Kenyans Hacked to Death With Machetes."

"One man staggered past with blood streaming from the stump of his arm??.." [AP]

Italy: Prime Minister Romano Prodi lost a confidence vote, ending his government after less than two years in power, so Italy may now turn back to former Prime Minister Silvio Berlusconi to form government number 62 since World War II. Berlusconi's alliance leads opinion polls by a significant margin at the moment, as his supporters in parliament popped champagne corks on the Senate floor, creating a sticky mess. [Well it was, you know.]

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Pray for the men and women of our armed forces.

God bless America.

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Gold closed at $910
Oil, $90.71?earlier in the week was down to $86

Returns for the week 1/21-1/25

Dow Jones +0.9% [12207]
S&P 500 +0.4% [1330]
S&P MidCap +2.1%
Russell 2000 +2.3%
Nasdaq -0.6% [2326]

Returns for the period 1/1/08-1/25/08

Dow Jones -8.0%
S&P 500 -9.4%
S&P MidCap -10.1%
Russell 2000 -10.1%
Nasdaq -12.3%

Bulls 41.6*
Bears 31.5 [Source: Chartcraft / Investors Intelligence]

*Remember, this is a contrarian tool and thus it's interesting to note that back on 10/9, the bulls hit 60.2, with the bears at 21.5. That very day the S&P hit its all-time high, 1565. The following week, 10/16, the bulls peaked at 62.0 and the bear reading was 19.6. The indicator has been working pretty well the past two years after a long drought where it was frankly useless. We'll see what the bull reading is this coming week as potential evidence of at least a short-term bottom.

Have a great week. I appreciate your support.

Brian Trumbore

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