Educate Yourself

Week in Review
For the week 2/18/2008 - 2/22/2008
Brian Trumbore
President/Editor, StocksandNews.com

"When Shirley Hale's husband dumped her for a younger woman and moved to the Czech Republic, Hale didn't get mad. She got a new house.

"After selling the family home in 2002, she bought a house in the suburbs of this old industrial city in northern England and took out a mortgage to fix it up. By last year, though, Hale had fallen behind on the payments on her 'gorgeous little place' and was looking at foreclosure - until a sales agent for a mortgage 'rescue' company stopped in.

"Hale signed over her house for $50,000 less than what it was worth. In return, she says, she was told she could live in it as long as she wanted if she paid the company $600 a month. Six months later, Hale learned her home had been sold and the mortgage transferred to one of Britain's major subprime lenders. Hale had 28 days to get out.

" 'I don't even know who owns it now,' Hale, 72, said wistfully in an interview in the tiny public-housing apartment she lives in now. 'It's empty still.The garden shed has been stolen, all my built-in kitchen has been smashed to pieces, the wallpaper's been ripped off.They could have let me stay.'

"The American subprime mortgage crisis has received attention worldwide, and European officials have been quick to blame lax U.S. oversight of lenders for the international credit crunch that has crippled banks and sent shock waves through the financial markets. But Europe has its own burgeoning mortgage meltdown - in Britain."

"Remember, the bubble isn't just a U.S. story, it's global; whether we're talking Britain, Spain, Australia, or China."

Funny how years later some are still just getting this. I got a kick out of a breathless CNBC reporter who came on this week to cite a new research report from Tobias Levkovich of Citigroup who was now talking of a global real estate bubble as a new risk. No kidding, Sherlock.

By one indicator of the UK housing market, the average home price is $466,000. Kim Murphy wrote of "modest three-bedroom tract houses in the London suburbs going for $2.2 million at one point."

I know I've been beating a dead horse on this topic but it has been, and continues to be, issue No. 1. The focus since August may be on the credit crisis and mammoth writedowns in the financial sector, but the Big Picture starts with the fact that the chief asset of people in America, Britain, Spain, Australia, China and everywhere in between has either peaked, and is now crumbling, or is about to. Without the real estate bubble you don't have the other crises, plain and simple. And when your prime asset is increasingly underwater (10.3 percent of all U.S. homeowners, today, according to Moody's Economy.com), this is a growing number that will lead to severely reduced personal consumption.

Take auto sales. You thought they were punk last year? By one estimate they were down another 16% in the first 15 days of February. No wonder GMAC is closing more than half of its auto-financing offices in the U.S. and Canada, cutting at least 1,000 jobs, as auto delinquencies rise.

State budgets are also taking an increasing hit as property and sales tax revenues begin to dry up. In New Jersey, Governor Corzine is looking to eliminate 3,000 to 4,000 positions. Cuts in college aid can also be expected around the country, on top of the normal reductions in services found during most recessions.

But back to real estate, while in Africa, President Bush made the following statement. "I think the economy is down because we built too many houses." That's not totally inaccurate, but coming from the man who at every opportunity was touting home ownership, while not having a clue as to the quality of the homebuyer, makes some of us want to scream. There are those who say government was powerless to stop the madness, but that's a bunch of bull. Or rather that's what the bully pulpit is for, as I've argued in the past.

"The current situation has the elements of a Catch-22: The credit flows needed for economic expansion require confidence in the values of existing financial assets, but market participants may not have such confidence while the risk of recession hangs over us.

"There is plenty of blame to go around for the current situation. The Federal Reserve bears much of the responsibility, because of its failure to provide the appropriate supervisory oversight for the major money center banks. The Fed's banking examiners have complete access to all of the financial transactions of the banks that they supervise, and should have the technical expertise to evaluate the risks that those banks are taking. Because these banks provide credit to the nonbank financial institutions, the Fed can also indirectly examine what those other institutions are doing.

"The Fed's bank examinations are supposed to assess the adequacy of each bank's capital and the quality of its assets. The Fed declared that the banks had adequate capital because it gave far too little weight to their massive off balance-sheet positions - the structured investment vehicles (SIVs), conduits and credit line obligations - that the banks have now been forced to bring onto their balance sheets. Examiners also overstated the quality of banks' assets, failing to allow for the potential bursting of the house price bubble.

"The implication of this for Fed supervision policy is clear. The way out of the current crisis of confidence is not. We can only hope that those who predict nothing worse than a temporary slowdown are correct."

For now, though, the hits just keep on coming.to the balance sheets, that is. How about Credit Suisse, for example. One week after telling the world that its fourth quarter earnings would reflect that it had avoided the worst of the subprime mess, CS shocked the world with a $2.85 billion writedown as the result of a few traders mispricing positions on the books. A UBS analyst said that on top of the $150 billion already written off by the financial sector to date, an additional $120 billion to $200 billion was in the offing. Examples such as Credit Suisse's mispricing are particularly worrisome because everyone knows the practice is widespread. I at least give them some credit for admitting it had to be divulged now rather than to try and keep hoodwinking shareholders while awaiting a hoped for recovery in asset values.

It was also a week where the likes of titan KKR had problems repaying some short-term debt and a few hedge funds began to acknowledge issues, and losses, of various shapes and sizes.

Then there's inflation. The consumer price index for January was up 0.4% for a second consecutive month and has now risen 4.3% over the past 12 months; 2.5% if you strip out food and energy, though unfortunately you and I aren't able to on a day- to-day basis.

But while the Federal Reserve acknowledges there are growing pricing pressures, market participants are convinced the Fed is going to keep slashing interest rates to buck up the economy, first, and worry about fighting inflation later if need be. After all, the Fed cut its growth forecast for 2008 to 1.3% to 2.0%, this as the European Commission was cutting the forecast for growth in its own region to 1.8% from 2.2%, as inflation in the euro- zone is running at 2.6%. This isn't yet stagflation as we had in the 1970s, but it wouldn't surprise a lot of folks were we to develop a milder version in the intermediate term.

--Stocks were about to suffer a down week until literally in the last half hour on Friday equities staged a strong rally on the heels of a CNBC report that one of the struggling bond insurers, AMBAC, was going to receive a bailout. Earlier, stocks had struggled on growing recession fears as a reading on Philadelphia area manufacturing came in particularly weak. In the end the Dow Jones and S&P 500 eked out fractional gains while Nasdaq still declined 0.8%.

The yield curve flattened just a bit this week, though intraday there was quite a bit of volatility with the 10-year at one point approaching 4.00% on the poor inflation data before recovering at week's end. The Fed has been hoping that through their rate cuts, yields would plummet across the board but they have no control over the key mortgage rate, the 10-year, and that has been rising; hardly a solution if you're seeking to reinvigorate the housing industry. [Plus you have the issue of more and more existing homeowners losing equity and thus unable to refinance even if they wanted to.]

--The British government stepped in to nationalize mortgage lender Northern Rock in a highly controversial move; the first such step to nationalize a company or industry since the dreadful 1970s. Recall that last fall, Northern Rock suffered the first bank run in the UK in over a century, forcing the government to step in and guarantee deposits.

But then the Gordon Brown administration sought takeover offers, received two, including one from Richard Branson's Virgin Group, only to then reject the bids and opt to continue to subsidize Northern Rock with $100 billion in loans, and the ongoing guarantees, as the government instead hopes to revitalize it and then return the bank to the private sector at a better price.

Not only are shareholders left penniless, though, with thousands of employees also facing layoffs, but this is a huge gamble and UK taxpayers could easily have to foot the bills down the road as the whole mess ends up being a referendum on Brown and the Labor Party itself.

--Inflation in China is running at a 7% clip, the highest in 11 years, thanks in no small part to disruptions caused by the recent severe winter weather and soaring food and fuel prices.

--The subprime crisis reached into Australia & New Zealand Banking Group, in what CEO Michael Smith said was a "bloodbath" in debt markets due to derivatives linked in this case to insurer ACA Capital.

--Us savers have seen our money market yields drop 0.6% in the past two months. We're being penalized for doing the right thing, by god.

--By an 8-1 vote, the Supreme Court ruled that makers of medical devices like implantable defibrillators are immune from liability for personal injuries as long as the FDA approved the device beforehand. Thousands of existing lawsuits against the manufacturers could now be dismissed. Writing for the majority in Riegel v. Medtronic, Justice Antonin Scalia said that allowing state juries to impose liabilities on the maker of an approved device "disrupts the federal scheme," 'under which the FDA has the responsibility for evaluating the risks and benefits of a new device and assuring that it is safe and effective for its intended use.' [Linda Greenhouse / New York Times]

--Societe Generale confirmed a record fourth-quarter loss of $4.9 billion due in no small part to the $7 billion trading scandal. But regarding the rogue trader Jerome Kerviel, it's increasingly clear that others, at the least, should have known of the fraud, though a report commissioned by SocGen said the opposite; that he acted alone.

--Microsoft chairman Bill Gates said there was "nothing new" in the Yahoo takeover process. "We've reinforced that we consider (the original $31 price) a very fair offer." Microsoft is threatening to launch a proxy fight.

Separately, Microsoft said it was opening levels of the company's software, making it easier to create new products that run or link to Microsoft's designs. Many, such as the European Commission, which has had a long-running battle with Microsoft and its perceived monopolistic practices, are less than impressed.

--Google's 10-K (annual report) reiterated it is "taking steps to reduce accidental clicks." Click-fraud.

--I got a kick out of GE's regulatory filing that it has found more accounting errors in various divisions in terms of how revenues are recognized. The SEC has been investigating the behemoth's accounting since 2005. Of course during the bull run ending in 2000, GE was notorious for managing to 'beat' earnings expectations by a penny every single quarter. The last few years they have generally been meeting analyst estimates. Basically, it's all a joke.

--Sharper Image Corp. filed for bankruptcy protection and will shed half of its 184 stores as it seeks a loan to stay in business and restructure. It's largely a matter of "tired" stores and the fact that in a recession type environment, we don't need the gadgets Sharper Image peddles.

--New York developer Harry Macklowe, attempting to stave off bankruptcy, has received at least three bids of $3 billion or more for the iconic General Motors building in New York, which would be a record for a single edifice in the U.S. Of course this is totally absurd. As Jennifer Forsyth noted in the Wall Street Journal, "the rents from the building barely pay the mortgage and many of the tenants have long-term leases far below current rates. Yet, the sales price jumps every time it changes hands. 'Nobody ever made money owning the General Motors Building; they only made money selling it,' says Lawrence Russo, president of a real-estate investment advisory firm."

--Update: Regarding the cause of the British Airways Boeing 777 crash at Heathrow Jan. 17, a mechanical defect has been ruled out, as were ice and birds. No one evidently has a clue what the real cause was, which is equally unsettling.

--Chaohu lake, China's fifth largest and one of the most polluted, is employing 50,000 silver carp with, get this, another 1.55 million to be added shortly, in an effort to gobble up toxic blue algae. But when the carp mature, fishermen are then allowed to catch and sell them.

So here's my take on this. If you see "Farm-raised carp from China" at your local supermarket, take a pass.

--The U.S. Dept. of Agriculture ordered the largest beef recall in U.S. history, four times the size of the previous record, as a result of an animal-abuse investigation into Chino, California-based Westland/Hallmark Meat Co. Undercover video from the Humane Society showed crippled and sick animals ("downer cows") being shoved with forklifts and sprayed with water in an effort to get them to walk into the slaughterhouse. Otherwise, the meat isn't supposed to find its way into the food chain. Westmark is a leading provider of beef to school lunch programs but there was no evidence consumers have gotten sick from the product. The film itself was disgusting.

--Deflation Watch: Charles Schwab cut its online trading commission to $8.95 from $9.95. Thanks, Chuck.

--Media giant Reed Elsevier is paying a staggering $4 billion for personal data provider ChoicePoint. Anglo-Dutch Reed is attracted by the prospects of selling ChoicePoint's 19 billion pieces of data to insurers, employers, and financial institutions.

--Charles K. and I exchanged some notes on a topic I brought up a few weeks ago, the Internet disruptions in the Middle East and South Asia caused by the severing of up to five key cables that cross the Mediterranean, the cause of which has yet to be determined. Was it terrorism? India's Economic Times noted "It provided a grim prospect of the Net being hostage to terrorist attacks." In reality cables could be severed by earthquakes, submarines, or monster fish..OK, maybe not this last one.

But one expert told the Christian Science Monitor that "Cable cuts happen on average once every three days" and are nothing more than an inconvenience, with fishing boats being the most common cause.

Perhaps the bigger issue, though, is the lack of redundancy. Regardless, fundamental networks, including electronic banking, are at increasing risk and maintenance of the networks is largely in private hands so it would be easy to infiltrate them if you wanted to wreak havoc.say as part of a wider-scale operation. [This last bit is simply my own personal conclusion.]

--Martha Stewart Living Omnimedia acquired the rights to Emeril Lagasse's franchise of cookbooks, television shows and kitchen products for $45 million in cash and $5 million in stock at closing. The company didn't acquire Emeril's 11 restaurants. Good for Emeril. You can't help but love the guy.

--Zimbabwe's inflation rate is now more than 100,000 percent, "gaining 34,367 percentage points on the December rate of 66,213 percent," according to the government. At least 80 percent of the people here live below the poverty line.

--My portfolio: I communicated with the CFO of the biodiesel company in China last weekend following a negative piece in Barron's on one of their auditors, but the company opted not to take my advice and issue some kind of statement. Frankly, I'm a better troubleshooter than they are. Fourth-quarter earnings and the annual report are due out shortly, however, and they've assured me they will address it at that time. I see no reason to do anything with my holdings.

But remember when I said I owned solar-power giant Suntech at one point, buying at $31 and selling at $47, only to then see it run up to $90? Shares in the company hit $35 this week on an earnings miss, though the growth rate is still spectacular. My remaining solar play pre-announced that it would not only exceed expectations for its fourth-quarter, but that the outlook for 2008 remained strong as well, yet the market still took this one out back and shot it. All hyper-growth industries go through these phases but understand, solar is here to stay. You must, however, go with the leaders, or in the case of my existing holding, companies that have a technological advantage.

"I have said this is a flashpoint worth keeping your eye on.not because it would be a market-moving event, but rather it would sap resources from the war in Afghanistan. That is the import I have yet to see anyone mention."

"Kosovo will remain a big issue and could yet explode depending on how far Russia wants to support its client Serbia."

The Kosovar parliament declared independence last Sunday and among those immediately recognizing the fledgling nation were the U.S., UK, France and Germany. Others, such as Slovakia, Spain and Cyprus have yet to do so due to fears that separatist movements in their own countries could flare up as a result of Kosovo's move.

As for Russia, it is not necessarily a done deal that they will take advantage of the renewed chaos to then actively support not just Serbia, but separatist movements in Abkhazia and South Ossetia, both of which broke off from Georgia in the 1990s. The leaders of these two immediately said they would seek their own independence, but Russian officials were less than welcoming of the statements.

The Kremlin has long felt there was no need to change the UN protectorate status going back to 1999 and the end of the Yugoslav wars that claimed 10,000 lives in Kosovo alone. The Western powers and the UN felt otherwise; that it was only fair to protect the two million ethnic-Albanians in the province who had been systematically persecuted, and worse, while Russia and Serbia argue that by granting Kosovo its independence, 120,000 Serbs living there will become the new victims.

So on Thursday, during a mass rally in Belgrade, Serbian Prime Minister Kostunica fanned the flames by proclaiming "As long as we live, Kosovo is Serbia" and a few hundred drunken thugs took it upon themselves to attack the U.S. embassy while Serbian police were nowhere to be seen, a total outrage.

But in keeping with my own predictions over the past year, I expect the violence to be mitigated thanks to the existing presence of 16,000 NATO troops on the ground, with more police and advisors on the way. This means, however, that, yes, it will be sapping strength from Afghanistan; a fact I still don't hear anybody talking about. That's why we need to focus on Kosovo in keeping our eye on the real Big Picture. You undoubtedly saw that over 130 were killed in two suicide attacks in Afghanistan on consecutive days last week; the first of which killed 100 and represented the single deadliest attack since the invasion. From a political standpoint in the U.S., the Democrats would be foolish not to admit successes in Iraq, but then pivot to Afghanistan with credibility.

Iraq: In a somewhat surprising, yet positive, move on Friday, Shia cleric Moqtada al-Sadr ordered a renewal of the ceasefire his Mahdi Army militia has been observing the past six months; a major reason why there has been such a significant drop in violence amidst the surge of Gen. David Petraeus. Petraeus is due to address Congress in April and Sadr's apparent move can lend credence to the general's plans to withdraw more troops.

One other item. On Friday, Turkey launched a ground offensive to root out Kurdish rebels, as is their right at this point, and reportedly killed 24. It's clear that military cooperation between Ankara and Washington is once again on a strong footing after the relationship suffered at the beginning of the Iraq war.

Iran: President Ahmadinejad renewed his despicable threats to destroy Israel as the world community does nothing in response. Hizbullah, meanwhile, issued its own warnings in the aftermath of the assassination of Imad Mugniyeh, who it is now known was killed by a headrest bomb.

But I noted with interest the opinions of two who are calling for something that I long have, dialogue with Tehran.

Writing in the Wall Street Journal, Christopher Hitchens said we should use the pretext of Iran's exposure to catastrophic earthquakes, such as 2003's Bam quake, where "American search-and-rescue teams performed prodigies of valor and skill and became so popular locally that the news of their achievements had to be hushed up by the regime's less-than- perfect censorship."

Continuing, "Consider, then the 'public diplomacy' impact of a serious public offer to Iran, made through international media and from the podium of the United Nations. The U.S. could propose the following: a commitment to help Iran protect its centers of population and its key installations against an earthquake. Along with the provision of expertise and advice would come a request for inspections of key facilities, especially those which might, if ruptured, pose a Chernobyl-type threat to neighboring countries.

"At one stroke, this would make a strong appeal on a matter of urgent material interest, to the general Iranian public. It would point a contrast between our priorities and those of the regime. And it would position us, before the fact, for something not unlike the well-improvised post-tsunami operation mounted by the U.S. Navy in Indonesia."

Reuel Marc Gerecht of the American Enterprise Institute, in an op-ed for the New York Times.

"For far too long, the United States has failed to wage a war of ideas with the Iranian regime over the proposal that scares them the most: the reopening of the American Embassy. Washington has the biggest bully pulpit in the world, and we are faced with a clerical foe that constantly rails against the intrusion of American values into the bloodstream of Iranian society. There are profound social, cultural and political differences among Iran's ruling elites, let alone between that class and ordinary Iranians. Some of these differences could conceivably have a major effect on the progress of Iran's nuclear-weapons program. And the way to make these differences increasingly acute is to apply American soft and hard power.

"Ayatollah Khamenei needs to be put off balance, as he was in 1997 when Mr. Khatami unexpectedly tapped into a huge groundswell of popular discontent and became president. What we need now is a psychological repeat of 1997: a shock to the clerical system that again opens Iran to serious debate.

"When dealing with the mullahs, it is always wise to follow the lead of one of Iran's most audacious clerical dissidents, former Interior Minister Abdallah Nuri. In 1999, he mocked the regime for its organic fear of the United States. Is the revolution's Islam so weak, he said, that it cannot sustain the restoration of relations with the United States?

"It would be riveting in Tehran - and millions of Iranians would watch on satellite TV - if Secretary of State Condoleezza Rice challenged the regime in this way: Islam is a great faith; the United States has relations with all Muslim nations except the Islamic Republic; we have diplomatic relations with Hugo Chavez and American diplomats in Havana. Why does the Islamic Republic fear us so? Is the regime so fragile? President Khatami repeatedly said that he wanted a 'dialogue of civilizations.' The United States should finally say, 'O.K., let's start.'

"If the Bush administration were to use this sort of diplomatic jujitsu on the ruling clerics, it could convulse their world. No, this is absolutely no guarantee that Tehran will stop, or even suspend, uranium enrichment. But a new approach would certainly put the United States on offense and Iran on defense. We would, at least, have the unquestioned moral and political high ground. And from there, it would be a lot easier for the next administration, if it must, to stop militarily the mullahs' quest for the bomb."

To me it's always been about Diplomacy 101. Put Iran on the record. I have advocated two steps the last two years. End-run Ahmadinejad and talk to Rafsanjani (which neither Hitchens nor Gerecht discuss) and, second, President Bush should accept Tehran University's invitation from last year (which I assume still stands) to address the students. Again, of course Ahmadinejad would forbid this, but what would have been accomplished? It would put his regime on the record, obtain the further backing of the West, and galvanize the students.

But without engagement, such as that suggested above, it is a certainty in the eyes of your editor that Israel will have to launch a preemptive strike on Iran's suspected weapons facilities by year end. Iran is ripe for revolution, but I'm afraid we have missed our opportunity.

Pakistan: The late Benazir Bhutto's Pakistan People's Party (PPP) finished first in the parliamentary voting as her husband, Ali Zardari, takes control, while former prime minister Nawaz Sharif's PML-N captured second with President Musharraf's party a distant third. But as Zardari and Sharif, once bitter enemies, formed a coalition, they still don't have the two-thirds needed in parliament to oust or impeach Musharraf. At least not now. Other smaller parties may yet cross over to support the majority.

Musharraf has thus far vowed not to resign, but one has to wonder just how long he can hang on. At least for now he is saying he "wants to avoid confrontation" and will gradually "ease himself out" of politics "in a peaceful and civil manner."

One thing is apparent, however, and that is the reinstatement of Pakistan's chief justice Chaudhry, whom Musharraf had fired last year, thus precipitating the crisis. And a player who deserves a lot of credit for the relatively peaceful election (considering it was Pakistan) is Army Chief of Staff Gen. Kayani, who acted responsibly throughout and gained the plaudits of U.S. Senator Joe Biden, a witness to the vote.

But back to Zardari and Sharif, amidst all the glowing talk of an emerging democracy in Pakistan, remember that these two (along with Bhutto) were absolutely awful when they were previously in power.

" 'Sinister' may not be the right word, but I do think that China wants to be the hegemon of East Asia. By that I mean that Beijing aspires to be in a position where it can effectively - through economic and diplomatic pressure, for the most part - direct the course of events in the region that affect Chinese interests. This will certainly impact U.S. allies and interests, but it is the course of action we should expect China to take."

"Some say that China is reusing the strategy that it used over 20 years to marginalize Taiwan in the region and on the world stage: financial incentives, gifts of aid and arms, and outright bribery."

"Clearly, Washington.is allowing a laser-focused Beijing to shape the strategic agenda in the Pacific," Tkacik said, adding that America's democratic friends and allies in the Asia-Pacific "watch with great anxiety America's new willingness to accept China's new preeminence in the region."

On a different issue, the recent breaking up of an alleged spy ring by the U.S. Justice Department, Taiwanese authorities are concerned China now has access "to the crypto/keying material/ algorithms that could allow Beijing to penetrate Taiwan and U.S. networks." [Wendell Minnick / Defense News]

And then you have the incredibly successful satellite shootdown by the U.S. Navy. Congratulations, guys!

Oh, but China accused the United States of hypocrisy in criticizing other nations' space ambitions while rejecting a proposed space treaty and firing a missile to destroy one of its own.

"The United States will not easily abandon its military advantage based on space technology, and it is striving to expand and fully exploit this advantage." [South China Morning Post]

Well, talk about a bunch of garbage, I can't put it any better than an editorial in the Wall Street Journal did, prior to the shootdown.

"As early as today, the U.S. Navy will aim a ship-based SM-3 missile at a decaying satellite that is falling to Earth. The missile's make, the general location of the launch vehicle and the target are all known - because the U.S. government has publicly stated these facts. Still, the Chinese and Russian governments are raising a fuss.

"Contrast this operation with what happened a year ago January, when Beijing surprised the world by shooting down one of its weather satellites in a test of its antisatellite capabilities. Not only was the test unannounced, but it took China days to concede that it had happened. Because the satellite was destroyed at an altitude of approximately 850 kilometers, it left countless hazardous particles drifting in orbit that could harm future space flights."

Russia: The presidential election is just a week away, March 2, but in a scary reminder of where this nation might be headed, Moscow has seen six fatal attacks on dark-skinned people in just the past week, all in separate incidents. Last year, 42 of 1,101 killings were said to be racially motivated.

As for the election, some are saying that Dmitry Medvedev can't receive more than 71 percent of the vote because anything above this would be an embarrassment to Putin, who was very proud he garnered that figure in the 2004 election. No doubt Medvedev will receive 80 percent, if the vote is tallied accurately, so if we instead see 69 or 70, you know it was manipulated.

North Korea: Not for nothing, but zero is going on here in terms of negotiations to completely end the country's nuclear program per previous agreements. It's now basically March and Pyongyang was to have provided a full declaration of all its activities by the end of 2007. Kim Jong-il continues to play us for chumps.

Africa: There is little to say about President Bush's trip to Tanzania, Benin, Ghana, Liberia and Rwanda except to note that he deserves credit for his malaria and AIDS initiatives and the pictures from the trip were nothing but positive in terms of America's image.

But obviously the continent remains awash in conflict, whether it's Kenya, Somalia, Sudan/Darfur, Congo or Zimbabwe. Regarding the latter, there is a big election coming up March 29 and, finally, it would appear President Mugabe could meet his end. Remember the name Simba Makoni, a finance expert who had previously been in Mugabe's cabinet and has now broken ranks. He gets high marks from all.

As for Kenya, there was talk of a settlement between the two leading factions and the creation of a prime minister post that would go to the opposition, but we've learned to 'wait 24 hours' here. There was also a disturbing story that some of Kenya's top distance runners have been funding and organizing tribal gangs involved in the worst violence in the Rift Valley; the region that produces most of the nation's elite athletes. Two have already died in the violence.

Cuba: You've undoubtedly noticed I tend to list the countries for this section of WIR in terms of their priority for the week, so my ranking of Cuba down this far tells you everything about my opinion of the announcement Fidel Castro was formally stepping down.

Castro, 81, is turning power over to brother Raul, 76, who it is expected will be anointed successor at a meeting of the national assembly on Sunday. Will Raul take the path of a reformer? Possibly. It can't get much worse here. But my reading of the situation says to follow No. 2, 56-year-old Carlos Laga, who is a known reformer.

As for the U.S. embargo, which in terms of farm products was dismantled back in 2000, it should of course be totally shelved, following a face-to-face between President Bush and either Raul or Carlos. Now ask me if that will happen this year? Of course not. It's an election year and the exile community in south Florida (and Union City, N.J.) calls the tune. Otherwise, in all honesty this issue bores the hell out of me because for the better part of 50 years the United States has blown it. Ask yourself just one question. By our policy of refusing to engage, in what way did we better the lives of the Cuban people? Class dismissed.

Mexico: I read two separate articles on Tijuana. The first said tourism was down 90% due to the widespread drug violence. According to a story in the L.A. Times, only 150 tourists show up each day now. That was Sunday. Then on Wednesday I read the following Reuters bit.

"Drug hitmen have killed a popular Mexican singer along with his manager and assistant (in Tijuana).The body of Jesus Rey David Alfaro, known as 'The Little Rooster,' was one of six that turned up tortured, murdered and pinned with threatening messages for Mexico's army."

Turns out Little Rooster had ties to a rival drug cartel. I think I'll pass on a roadtrip to Tijuana over the coming year.

Returns for the week 2/18-2/22
Dow Jones +0.3% [12381]
S&P 500 +0.2% [1353]
S&P MidCap +0.7%
Russell 2000 -0.9%
Nasdaq -0.8% [2303]

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