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Week in Review 
For the week 1/28/2008 - 2/01/2008
Brian Trumbore

Wall Street.Thar She Blows!

The economy, that is. Here's a little ditty from BusinessWeek's Michael Mandel.

"The past 10 years will go down as one of the greatest consumer- lending sprees ever. Adjusted for inflation, consumer debt - including mortgages - rose an average 7.5% per year since 1997, far faster than the 4.2% rate of the previous 10 years. The last time debt rose so fast was the 1960s, as the postwar generation bought homes and autos..

"The extra debt also represents a formidable obstacle for banks and other financial institutions that might want to lend more to consumers. 'Going forward, we're not going to see this credit- driven growth,' says Alistair Milne, a professor and banking expert at City University in London. 'Banks are saying, 'we have to be more careful here.''"

That's a nice, succinct explanation, I think you'd agree. But you deserve more.more evidence of our current predicament.

If ever there was a week where it was important to sit back in your easy chair with the drink of your choice and the lab at your feet it was this one. You talk about a lot of noise. Try waiting 24 hours instead and focusing on the Big Picture.

And what does that picture reveal? Try the first reading on fourth quarter GDP, up a meager, and less than expected, 0.6%, a level putting it at recession's door. Or try the weekly reading on jobless claims, up a stupendous 69,000 to 375,000. This was totally out of left field. Or try Friday's figure on January employment, minus 17,000. Coupled with revisions to November and December's numbers, you have a three-month average of less than 42,000 jobs created a month when by most measurements you need at least 125,000 just to take care of an increasing labor pool.

The big culprits remained construction and manufacturing, both of which continue to bleed, and the numbers for construction spending itself have been dismal recently. And the figures for consumer spending in December were putrid, up only 0.2%.

Other data showed the housing sector to be on life support, as new home sales dropped 41% in December over the prior year (down 26% for all of 2007), which came on top of last week's equally poor data on existing home sales. Inventories remain near multi-year highs, the median home price is declining, 7.7% in the latest Case-Shiller reading of 20 major markets in November, and RealtyTrac says foreclosures were up 79% in 2007 over 2006, and 97% higher for December alone.

There were also headlines such as the following in the Journal:

"Projects Stall in Orange County"

"Bleak Prospects Delay Shopping-Center Project"

"Florida Condo Bust.."

Even a bullish one was laughable to some of us.

"In Vietnam, Real Estate Is New Hit Bet"

Just another bubble to follow, sports fans, as the article went on to talk of Vietnamese flipping condo units before they were even built. I think most of you are familiar with that one and you know how it ends.

Economist Robert Shiller of the aforementioned index told Bloomberg, "We are in a historic housing bust right now, comparable to that of the Great Depression. The unraveling of that has unpredictable consequences."

But housing stocks continued to rally, including shares in Pulte Homes, whose CEO said "The challenging market conditions that plagued the homebuilding industry for the first nine months of 2007 worsened in the fourth quarter. Levels of new and existing home inventory remain elevated, buyer demand for new homes continues to be weak, and mortgage availability is still a problem for many prospective homebuyers."

So what gives? Well, it certainly helped that the Federal Reserve lowered rates further this week, another 50 basis points on top of the 75 it slashed the funds rate on Jan. 22. The 1.25% reduction from 4.25% to 3.00% signals the fastest easing of monetary policy since 1990. Those worried about their adjustable rates resetting not only won't have as high an interest rate now, but if they qualify they can refinance into an attractive fixed rate mortgage. And if the 10-year Treasury were to continue to fall, another group of mortgage holders would be able to refinance from their already low rates as well, like moi. This is good. A major step in helping not only the housing industry, but also the average American.

Yet in watching how aggressively the Fed moved, it simply adds further proof to those such as yours truly who have criticized Chairman Ben Bernanke. As in the handwriting was on the wall last spring (at the latest) that we were heading towards a housing Depression and Bernanke and crew were totally clueless. What's sickening is that if they had acted sooner, there is no doubt hundreds of thousands may have found a remedy before being forced into foreclosure. And notice I haven't said anything about federal bailouts or raising conforming loan limits.

But I'll tell you exactly what is going to happen in the housing market the next five months. There are going to be all manner of folks calling for the bottom by March. And then you'll see a slight uptick in activity in April that will add further weight to the argument.

Then, however, we take a final leg down in the summer and when we next bottom we just sit there, for a lengthy spell. To repeat a theme of mine for the last 15 months in particular, if you believe housing prices are just going to shoot back up, you are absolutely nuts. And if you also believe you can have a full- fledged recovery without significantly working off existing inventories (unless homes that have been foreclosed on are bulldozed as part of some jobs program), then you need to join Britney Spears in the psych ward.

James Grant / New York Times, on the overall environment.

"Over the past decade, household indebtedness, expressed as a percentage of the value of household assets, has shot up into record territory. Watching house prices levitate, people did what they could have been expected to do. They borrowed heavily against the accretion in value they had already seen as well as the gains they hopefully anticipated.

"There was a rub, however, and this, too, our seers and experts failed to predict. The truth was that house prices were soaring beyond the reach of the average home buyer. Bridging this widening gap brought out the worst in just about everyone who had anything to do with money from 2003 to 2007.

"Striving so mightily to make one and one add up to three or four or five, Wall Street, Main Street and Washington collectively brought us to the impasse of 2008, in which a debt crisis is superimposed on a downturn in the economy, which is overlaid on a bear market in real estate, which is conjoined with a persistent and worrying weakness in the overseas value of the dollar. As for the crackup in complex mortgage-backed securities, now at the center of the debt predicament, the global bank UBS has justly called it 'the biggest failure of ratings and risk management ever.'"

As for the global economy the IMF lowered the projected rate of growth in the U.S. for 2008 to 1.5% from 1.9%, while it pegs the euro zone at 1.6% and Japan at 1.5%. Even when you include still surging China, India and all the nations that produce oil, you still just have an estimated 4.1% growth rate in '08, down from 4.9% in 2007. Don't be fooled by this last one. 2.5%-3.0% is recession by this measurement. [Think of it like with China, where the government needs 8% growth just to find jobs for all those flooding into the cities.]

But what of all those multi-nationals such as GE, Microsoft, IBM, or Caterpillar that speak of softness in their U.S. numbers but because they receive a majority of their orders from overseas, are telling us talk of a global slowdown is bunk?

Here's my take. GE will be among those missing expectations at some point in 2008. The global economy, beset not just by the bursting of my global real estate bubble, but also ever-rising food prices, and stubbornly high energy costs, will continue to slow. Armageddon? No. A worldwide recession? Yes. Admittedly, though, there will be more than a few times when I'll look foolish with this forecast but I'll be sitting back in my easy chair, musing about the Big Picture while the stock and bond markets play 'helter-skelter.'

Lastly, I just have to comment on Ben Stein's New York Times piece, where he says of those moving the markets on a daily basis, such as hedge funds:

"These traders, not economists or securities analysts, can turn the world upside down, make governments tremble, give central bankers colitis and ruin the lives of ordinary men and women saving for their children's college education or their own retirement. In America today, it is the traders, not the politicians or the generals or the corporate bosses, who have the power.

"This is what has become of the America of Thomas Jefferson. Lucky for the traders. Sad for the rest of us.

"And one thing's for sure: With the traders running things, it won't be a good time for amateurs until the traders cry 'Switch!' and the market starts to rise."

Well Mr. Stein wrote this last Sunday, so I'm not sure if he'd say the trader community had called 'Switch!' as the markets rose smartly this past week, but I have a question for him.

You're just getting this? Some of us have known all along Wall Street was little more than a casino, especially over any short to intermediate period. In fact I don't know why Mr. Stein had to give a long dissertation when all you need to know is that program trading overwhelms the retail variety every day. It's done so for years, nay, decades! I do agree with him, though, when he talks of it not being a time for amateurs, adult swim time, as my buddy Trader George is fond of saying. Or since it's Super Bowl weekend, at least make sure you've got that inflatable football attached when you head into the pool. Better yet, take a spear gun with you to combat the sharks you'll come across.

Street Bytes

--Thanks to a strong rally on Thursday, Jan. 31, equities didn't suffer their worst starting month ever, but the S&P 500's decline of 6.1% was still its worst since 1990 and the sixth-worst ever. So if you believe in the January barometer, the rest of 2008 won't be great, but it also doesn't mean there is necessarily a lot of downside from here, witness my own forecast of 3% to 5% declines in the major averages for the full year.

Overall, though, the week was a good one, with Nasdaq finally breaking its dreadful five-week losing streak and rallying back over 2400 (2413), up 3.8%, thanks to a general feeling that too much damage had been done to the tech sector and that the global economy was still in good shape. [They didn't ask me, in other words.]

And I guess you want to hear about Microsoft's hostile offer for Yahoo. There's really little to say except it makes perfect sense for Microsoft if it is to ever be a player in search, for starters, while Yahoo stock was simply dead in the water. In fact while everyone was singing 'Zip-pi-ty-do-daaa,' I just have to note that Microsoft's $31 offer is hardly anything to write home about, seeing as Yahoo was $34 as recently as last Oct. 29 and $40+ in January '06. But it's better than $10, which is where Yahoo was headed. Just this week, CEO Jerry Yang said the company was facing further "headwinds" this year.

I think the more interesting story this week was Google's earnings report. The company saw earnings rise 17%, $1.21 billion, on $4.83 billion in revenues ($3.39bn retained after paying fees to its partners), yet the shares tanked because both decelerated more than analysts expected. But there was something else. As Michael Liedtke wrote for the AP:

"Google executives said a revision in the company's formula for showing advertising links crimped the fourth-quarter results by reducing the number of revenue-generating clicks. Without providing details, the executives said Google made the change to decrease the frequency of 'accidental' clicks on ads."

"Accidental clicks on ads." Or click fraud. Long-time readers recognize this as a theme of mine years ago. I was a victim myself of click fraud, as I wrote. Are advertisers finally waking up and demanding the truth? Looks like it.

And Kevin Delaney had a blurb in the Journal the other day, prior to Google's report, talking of the latest data from comScore that "reported a 7% decline in the number of times U.S. consumers clicked on ads appearing alongside Google's search results in December compared to November."

Delaney quotes John Aiken, managing director at Majestic Research Corp. in New York.

"This whole idea of the Internet not being as impacted and Google not being as impacted was really holding up well until December. Then we started to see a rate of deterioration that was faster than what you'd normally expect."

Is the bloom off the rose when it comes to advertising on the Net? Or is any decline in use just because of the economy?

--U.S. Treasury Yields

6-mo. 2.13% 2-yr. 2.05% 10-yr. 3.58% 30-yr. 4.30%

[So much for 4.50% money market rates, fellow savers.]

For the record, in lowering the funds rate another percent the Fed said:

"Financial markets remain under considerable stress, and credit has tightened further for some businesses and households. Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets."

--I commented the other week in depth on the bond insurers, companies such as MBIA and Ambac, so I won't repeat my dissertation, but there were all manner of rumors that private bailouts were being worked out (not a big government one) and were this to be true, it's a definite positive. But this is more a market event than an economic one, outside of those companies that would have had further writedowns. At the same time S&P said subprime-related losses may now exceed $265 billion when the ratings of all these securities are reduced to their essence.. crapola.

--Inflation in the 15-nation euro zone is now running at an average 3.2% annualized rate, the fastest in over ten years, which means the European Central Bank won't be cutting rates any time soon to follow the Fed's lead, even as the euro economy slows. Eventually, though, the ECB will be forced to follow suit, I suspect.

--In an op-ed for the New York Times, economist Robert Shiller had some interesting points on the U.S. banking system and investors/savers.

"In the United States, the very least we can do is to raise the F.D.I.C.'s limits on insured deposits. The limit of $5,000 in 1934 was 12 years' worth of per capita personal income at the time. The limit was last raised in 1980, to $100,000, which was then 10 years' income. But because of inflation and economic growth, that limit is less than three years' income today.

"The Federal Deposit Insurance Reform Act of 2005 did not raise that ceiling, though it will start indexing the limit to inflation in 2010. We have allowed deposit insurance to go three-quarters of the way to extinction.

"The insurance limits of the Securities Investor Protection Corporation, which protects customers when brokerage firms fail, were also last raised in 1980 - to $100,000 in cash accounts and $500,000 in securities - and thus have suffered an equally drastic erosion in real value. Such erosion could suddenly matter if the crisis, or even just the psychology of the crisis, were to worsen."

--OPEC announced it will keep production at present levels out of fears soft world economies will weaken demand. This will be the official position at least until the next meeting, March 5.

--My friends at Strategic Energy Research & Capital passed along further evidence Mexico's giant Cantarell oil field will see production decline by a further 200,000 barrels a day this year, for those of you in the Peak Oil camp. Cantarell accounts for 43% of Mexico's production. It's up to Mexico and state-owned Pemex to find new reserves and this takes time.

--Exxon Mobil posted the largest profit in the history of mankind (save Cleopatra Inc.'s inflation-adjusted 2nd quarter, 48 B.C., when she overthrew her husband, brother, and co-ruler Ptolemy XIII with the aid of Julius Caesar), a cool $11.7 billion, besting its previous record of $10.7 billion in the fourth quarter of 2005. Exxon also registered a record full-year profit of $40.6 billion.

By the way, Exxon paid $29 billion in federal income taxes in '07. [Total taxes paid, including for sales taxes, were $105 billion on revenues of $404.5 billion.] Chevron also reported Friday and earned $4.88 billion. Good for them. Those two employ a lot of people, after all. Good, high-paying jobs, as our president is fond of saying.

--In a move that surprised no one, Gazprom, the natural gas monopoly and one of the world's 10 largest companies by market cap, announced that Russian Prime Minister Viktor Zubkov will replace current Deputy Prime Minster Dmitry Medvedev after the latter wins the presidential election in March. As a presidential adviser to Vladimir Putin told Bloomberg, "It is important for the state to oversee the country's largest company." Of course.

--In Australia, "The new home building sector is in danger of enduring a fifth straight year of weakness in 2008 given continued upward pressure on domestic interest rates," according to economist Harley Dale of the Housing Industry Association. "Another year where there is no catch up made in the yawning gap between housing supply and demand will only serve to extend the existing problems of very tight rental markets and deteriorating housing affordability." Ah yes, that key word. affordability. [Sydney Morning Herald]

As for the U.K., the London Times' Grainne Gilmore:

"Many lenders (in Britain) have also tightened their lending criteria, becoming much less generous with the sums that they are prepared to lend to prospective buyers. A couple of years ago there were plenty of home loan deals that offered borrowers the chance to access 100 percent of the asking price."

I had to throw this in because I know there have been skeptics when I've written the U.S. wasn't the only one with 'no money down' housing purchases. So, again, remember there are far larger real estate bubbles than in America; Spain, Britain and Ireland being among them.

--For the record, Countrywide Financial Corp. Chairman and CEO Angelo Mozilo predicted last October that the company he founded would return to profitability in the fourth quarter after posting a loss of $1.2 billion in the third. Not quite. Countrywide instead lost $422 million in the fourth. It thus makes sense that Mr. Mozilo is giving up $37.5 million in severance pay, especially after taking down $387 million in pay and stock option gains from 2002 to 2006.

--In another sign of an anemic economy, McDonald's announced its same-store sales were flat for the first time in four years.

--Merrill Lynch agreed to pay the city of Springfield, Mass., $13.9 million to settle a dispute that Merrill improperly sold Springfield a collateralized debt obligation that plunged in value. Then on Friday, Massachusetts' Secretary of State announced he was bringing fraud charges against Merrill related to sales of similar securities.

--The Wall Street Journal is reporting on Saturday that federal criminal prosecutors "are investigating whether UBS misled investors by booking inflated prices of mortgage bonds it held despite knowledge that the valuations had dropped, according to people familiar with the matter."

It is assumed the U.S. attorney is working closely with the SEC, the latter having upgraded investigations of its own into both UBS and Merrill Lynch involving similar material. But such fraud cases are very difficult to prove.

--Shares in Amazon declined following its earnings report that showed a drop in gross margins, even as sales rose 42% from the prior year's fourth quarter.

--Starbucks announced it was closing a number of underperforming U.S. stores as it finally recognized it was cannibalizing its own operations when you have two on the same block. And I got a kick out of the company's decision to pull its hot breakfast sandwiches because customers complained that the smell was overwhelming the aroma of coffee, which is why I go to Dunkin' Donuts. Founder/CEO Howard Schultz added "There's a macroeconomic headwind that we're all facing that strongly suggests that the (U.S.) consumer is in a recession."

--The UN World Tourism Organization said that global tourism soared to a record in 2007, with arrivals reaching 898 million, up 6.2% from 2006. The Middle East recorded the largest increase, up 13%. [Turkey saw a 17.6% increase in '07.]

--But when it comes to the Middle East it wasn't a great week because two communications cables crossing the Mediterranean were cut, leading to severe Internet outages in much of the region. At least some terrorists must have been hampered in their efforts.

--I've been writing about the huge endowments some colleges have and how little of it is trickling down to students to reduce tuition, and then Geraldine Fabrikant had a piece in the New York Times on some of the endowments held by elite prep schools. Phillips Exeter Academy in Exeter, N.H., for example, has an endowment of $1 billion. Goodness gracious. Tuition is $36,500 here, though the school says it spends $63,500 annually to house and educate its students. In fact Exeter is among the richest 25 private schools, including universities and colleges.

--Last week I blasted the editorial page of the Wall Street Journal for not acknowledging the gigantic sums Big Oil is shelling out in federal taxes when touting any success the Bush administration has had in reducing the deficit (fleeting as this may have been).

So this week the Journal writes the following in discussing the difference a 15% capital gains rate meant.

"In 2002, the year before the tax cut, the capital gains realizations that filers report on their tax returns were $269 billion. Realizations grew smartly in each succeeding year, and CBO is now projecting that the total for 2007 will be $863 billion.

"Yes, the stock market rose during that period along with the larger economy. But the lower rate also gave investors more of an incentive to 'unlock' their gains, taking profits and reinvesting the net proceeds."

Earth to Journal. Show a little intellectual honesty in discussions such as this. Like try rewriting the above.

"Yes, the market tumbled in 2002, as well as 2000 and 2001, and thus there were few capital gains to be found, while the stock market then rose from 2003-2007."

Personally, I would lower the cap gains rate to zero, but don't treat your readers, WSJ, like a bunch of morons.

--Josh P. passed along a sign of the times, '' in walk away from your home.

--The annual inflation rate in Zimbabwe accelerated sharply in November to a new peak of 26,470 percent, from 7,892 percent in September. The central bank raised interest rates to 1,200 percent from 975 percent. [Reuters] I'm thinking similar interest rates in the U.S. probably wouldn't be good for those holding adjustable rate mortgages.

--Japanese scientists believe they have a solution to a major issue on the global warming front, a way to neutralize the world's 1.5 billion belching cows. The key is adding a blend of nitrates and an amino acid to suppress the methane that is thought to account for 5% of all greenhouse gas emissions.

From Leo Lewis of the London Times: "Methane is about 22 times more potent than carbon dioxide at capturing atmospheric heat. Cows produce astonishing quantities of methane gas as the bacteria in their stomachs breaks down plant fibers. Their near- constant cud-chewing allows a small quantity of the gas to escape with nearly every breath each animal takes."

--My portfolio: I attended an investor lunch for my China biodiesel play this week, though I was the only one there who had actually visited the original plant. My CFO friend gave a terrific update, so for those of you playing along here's what you need to know.

With the $15 million in financing that they recently obtained, the production ramp-up at the new facility being built is on schedule for October and by next January should be running at full capacity. Without getting into a lot of specifics, my questions on feedstocks have also been answered. As in I'm not concerned about some of the negative press involving biodiesel in recent months. They also have further expansion plans, having identified another three locations in China, including one in the western part of the country where they would use cotton waste.

I started investing in this outfit about one year ago and I'm essentially flat. I did expect a higher share price by now but recognize I may need up to another year before the market begins to appreciate the growth story here. If they stick to their schedule the revenue figures will explode in the first quarter of 2009 (with a little kick in Q4 '08).

The company's underrated specialty chemical division is making noise because it is the only one in China that is qualified for use in the semiconductor industry there.

Also, the company obtained a line of credit from a Chinese bank, something a few of us have been waiting for. When questioned about this, "I thought China's lenders were told by the government to tighten up," CFO Gary immediately said, "Oh, that's for real estate and infrastructure. Real estate (lending) is a no-no. Infrastructure is a no-no. But when you say energy, it's a yes-yes."

Additionally, the biodiesel operation is breakeven at $35 oil. So the preceding is the last update I'll be providing for a while. Suffice it to say I'm hanging in there for 2008 and am not worried about the dilution resulting from the recent financing of the expansion.

Finally, I made a small purchase this week in a large cement company you all would be familiar with. Not because I see a big recovery in the economy, but rather this outfit can pick off those operators going under, while perhaps participating in what I see as a coming infrastructure boom, perhaps a result of legislation currently being pushed by Senators Chris Dodd and Chuck Hagel, as noted in a New York Times column by Bob Herbert. And I also picked up a small amount in a certain beer company that makes Dos Equis, which had the best commercial of 2007: "Stay thirsty, my friends."

Foreign Affairs

China: The head of disaster relief for the country said China is experiencing its worst natural disaster since the founding of the People's Republic in 1949 as a series of rare winter storms totally crippled vast parts of the nation, and at the worst possible time, the traditional Chinese New Year holiday.

Officially, the holiday runs from Feb. 6 to Feb. 12, with New Year's being Feb. 7, but hundreds of millions of migrants use the time to make an extended trip back home as it's the only real opportunity they get to do so, so the actual travel period is from about Jan. 19 to March 2. As I wrote a few weeks ago, the government estimated the people would take 2.2 billion trips during these six weeks.

Aside from the fact up to 800,000 were stranded at one point at the Guangzhou rail station, much of the winter crop (vegetables and fruits) has been destroyed and due to transportation issues some regions are already experiencing food shortages. Chenzhou, a city of four million, is as of this writing out of both food and fuel. Coal shipments have been severely hampered and power outages are widespread. Just last Saturday morning, before the full extent of the crisis was known, I wrote:

"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."

I met a fellow at a lunch in New York City this week who agreed with my thesis on China going after Taiwan when it needs to rally the people as a result of internal dissent, and he said all his sources tell him the Beijing government is deathly afraid of the next failed harvest, which in turn could send the country spinning out of control. The severe weather only compounds matters as the winter crop failure leads to further inflation at a time when price pressures were already impacting many other sectors.

On a separate matter, Japanese food companies faced a crisis of their own after many there fell sick from eating contaminated Chinese-made food they were importing, including dumplings containing pesticides. The Japanese government openly questioned China's commitment to food safety only weeks after the country said it had improved standards. Restaurants and schools took Chinese-made food off their menus. I recently wrote in a separate column for this site that it's no wonder at least 17 nations (including the U.S.) are training in Japan and South Korea, ahead of the Olympics, instead of having to deal with Chinese food more than they'll have to, let alone pollution prior to the Games.

Speaking of the Olympics, the government arrested a leading dissident, one of 51 online journalists jailed the past few years. In a strongly worded editorial from the Communist Party mouthpiece, the People's Daily, China said it would not submit to taunting or political pressure from groups or governments wishing to use the Beijing Olympics as a forum.

"(The activists) believe they can exert enough pressure on the Chinese government to force China into a situation where it cannot but do their bidding," the paper said. "These people have made the wrong calculation."

The editorial added that governments would be mistaken to think Beijing will pay attention to any pressure regarding Taiwan.

"There is no country in the world hosting an Olympics which would compromise on their own core interests..

"If at each subsequent Olympics people stand up and use politics to maliciously attack the host nation, and use ideology to draw up boycotts, where does that leave the Olympic spirit?"

Afghanistan: Some good news, before the bad. One of Osama bin Laden's top lieutenants in Afghanistan was killed in a suspected U.S. airstrike (probably a drone) in Pakistan. Abu Laith al-Libi was said to have directed a number of terrorist attacks in Afghanistan.

But there have been a slew of reports in the past week that warn Afghanistan is rapidly approaching "failed state" status thanks to a lackluster reconstruction effort amidst worsening security. And now Canada is threatening to pull its critical contribution unless NATO steps up aggressively to add more forces.

Remember that Taliban assault on Kabul's only luxury hotel? It has had its intended devastating impact as Westerners are disappearing from the capital at the very time when they are needed most.

Republican Senator Richard Lugar, a senior member of the Foreign Relations Committee, said "I'm not sure we have a plan for Afghanistan," in response to Democratic Senator Joe Biden's quip that "We need a significant change in policy now." Rep. Sen. Chuck Hagel added, "If we are making so much progress why are we putting in 3,200 more marines?" The State Department says they are seeking to leverage our added commitment into further contributions from NATO but this is exceedingly unlikely. Or as the Wall Street Journal opined:

"The Continentals fill up lots of air space at policy conferences talking about Europe's readiness to play a prominent role in global affairs. The Canadians are now usefully calling their bluff."

[On Friday, Germany rebuffed our request for their troops to move into the violent south.]

Iraq: Two horrific bombings in Baghdad on Friday, killing nearly 100, were yet another stark reminder we have a ways to go. What was particularly sickening was the story the terrorists supposedly strapped bombs on two mentally ill women, with the devices then exploded by remote control (cellphones). I also saw a piece by Matt Kelley in USA Today that should tick off all Americans.

"Nearly five years after the U.S.-led invasion of Iraq, allied countries have paid 16% of what they pledged to help rebuild the war-torn country.Foreign countries have spent about $2.5 billion of the more than $15.8 billion they pledged during and after an October 2003 conference in Madrid, according to a new report by the Special Inspector General for Iraq Reconstruction."

The biggest shortfalls among 41 donor countries are from Iraq's oil-rich neighbors. For example, Saudi Arabia and Kuwait each pledged $500 million and have only spent $87 million and $135 million, respectively. Spain, on the other hand, has spent $213 million of $248 million pledged. The United States has spent $29 billion to help rebuild Iraq.

Democratic Congressman Gary Ackerman, who heads the House Foreign Affairs subcommittee on the Middle East, commented on the Saudis:

"They're charging $100 per barrel of oil, making record fortunes, lecturing everyone else, and then they stiff everybody, including their cousins who they contend to be so very concerned about." Good point. From 2003 to 2006, the Saudis exported $95 billion in crude to the U.S.

Israel: The Gaza border crisis took a backseat to release of the Winograd Report on the Second Lebanese War that surprisingly (to most) stopped short of blaming Israeli Prime Minister Ehud Olmert directly, saying Olmert launched the war out of concern for the country's national interest, not political reasons. The report was, however, highly critical of the IDF (the armed forces) for its lack of preparation and decision-making. Hizbullah used it to say it proved they had won.

But the last poll I saw still said 56% of Israelis want Olmert to resign and Likud leader Benjamin Netanyahu is putting the heat on.

"Olmert refuses to take responsibility, to demonstrate personal honesty and leadership and to do what most of the public expect him to do. The prime minister is emptying of content the concept of responsibility. The people of Israel know today that they are led by a prime minister who is not qualified or fit to lead them."

Historian Michael Oren, who also fought in the war, wrote in an op-ed for the Wall Street Journal:

"Israel lacks a constitution but is bound by an unwritten social contract. Israelis defend their country with their lives and their leaders' pledge not to send them to war heedlessly. Prime Ministers Golda Meir and Menachem Begin resigned in the aftermath of disappointing wars, though both were exonerated of incompetence. By ignoring these precedents, Mr. Olmert, whose culpability began before the war, when he appointed a defense minister devoid of military experience, threatens to break the contract. Israelis will think twice before following his orders - and perhaps those of future prime ministers - into battle. The cohesiveness that enabled Israel to survive 60 years of conflict will unwind.

"Thousands of Israelis are calling for Mr. Olmert's resignation. Rightists convinced that the prime minister cannot safeguard the country's security have joined with leftists who understand that leaders who fail at war will never succeed at peacemaking. All are united by a willingness to shoulder the burden of Israel's defense. This was the commitment that united us that last night in Lebanon, as we took up the stretchers bearing the remains of somebody's son, somebody's husband, and brought them home for burial."

Lebanon: In a very worrisome development, a demonstration over power cuts in Beirut led to a riot where 8 were killed, all either Hizbullah or opposition Shiite players. It was the worst mass violence (non-car bombing) in Beirut since the 1975-90 civil war, but as of this writing there has been no follow through.

Iran: President Mahmoud Ahmadinejad said his country would be producing nuclear energy by 2009, while a senior official told reporters the Bushehr plant was expected to be operational in October. Russia, which is helping Iran to build the plant and has been providing nuclear fuel, said the plant could be operational by December. Separately, Ahmadinejad called Israel a "filthy entity," adding "(Israel) has lost its reason to be and will sooner or later fall." So who could blame Israel for acting preemptively, as I'm convinced they will this year?

North Korea: According to Kyodo News, Pyongyang has slowed the removal of nuclear fuel rods from its Yongbyon nuclear facility to less than half the rate needed to disable the site by a deadline agreed to under the six-party denuclearization deal. North Korea has removed only about one-eighth of the total supply. The White House, particularly President Bush and Secretary of State Condoleezza Rice, is looking more than a bit foolish.

Russia: The latest opinion poll ahead of the March 2 presidential election shows Dmitry Medvedev at 71%, Communist leader Gennady Zyuganov 13%, and Nationalist (pro-Kremlin) Vladimir Zhirinovsky 12%. The Election Commission formally disqualified ex-prime minister Mikhail Kasyanov, who while he wouldn't have picked up more than a percent or two of the vote was going to raise hell. "The authorities are afraid of any discussion, any risk," he said after the Stalin-like move to take him off the ballot for allegedly having too many fake signatures on his petitions.

Even Mikhail Gorbachev sharply criticized the Kremlin for the pre-election shenanigans. "Something is wrong with our elections, and our electoral system needs a major adjustment." Remember, it's not just the farcical maneuvering of Medvedev and Putin in swapping offices these days, it's the fact Putin gets to handpick all the governors. Gorbachev said this must be changed back to direct elections for the position.

Well here's what I think will happen. Even Putin doesn't want Medvedev attaining over 80% of the vote, though this is undoubtedly what he will receive, so I'm thinking Dmitry wins close to the above poll number, for appearance sake, with the other two winning similar totals. Then Putin can attempt to claim it was free and fair. I suspect each polling station already has its marching orders on how the vote is to be divvied up.

Kenya: Two opposition legislators were killed, while tourists fled the Rift Valley, the staging point for many safaris, amidst an "orgy of violence." Talk about a failed state. Former UN Secretary General Kofi Annan put the two sides together and there is talk of an agreement of some sort, but we have a long, long way to go before peace returns. The genie is out of the bottle.

South Africa: And this nation threatens to confirm my prediction for 2008 that it is a sleeper hot spot as South Africa now grapples with severe power shortages that some say will last at least five years. There will be a political crisis in the not too distant future.


Pray for the men and women of our armed forces.

God bless America.


Gold closed at $909
Oil, $89.03

Returns for the week 1/28-2/1

Dow Jones +4.4% [12743]
S&P 500 +4.9% [1395]
S&P MidCap +6.7%...not too shabby
Russell 2000 +6.1%...ditto
Nasdaq +3.8% [2413]

Returns for the period 1/1/08-2/1/08

Dow Jones -3.9%
S&P 500 -5.0%
S&P MidCap -4.1%
Russell 2000 -4.6%
Nasdaq -9.0%

Bulls 40.2
Bears 32.3 [Source: Chartcraft / Investors Intelligence]

I am off to Vegas for the entire week and will have something next time from there, but it will be abbreviated. Put a bunch of guys together who are collectively celebrating their 50th birthdays this year and, well, you know the drill.

Have a great week. I appreciate your support.

Brian Trumbore

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