Week in Review 
For the week 2/25/2008 - 2/29/2008
Brian Trumbore
President/Editor, StocksandNews.com

Wall Street

Rebecca O'Connor / London Times

"Mortgage borrowers unable to muster a big deposit have become the latest victims of the credit crunch after Britain's biggest building society effectively shut its doors to all but the most cash-rich buyers.

"Nationwide has told customers wanting a loan for more than 75 percent of a property's value that they will pay higher rates of interest to reflect the increased risks involved..

"Experts gave warning that the move would hit cash-strapped first-time buyers the hardest and could be a sign of further tightening of mortgage lending by other banks."

That's Britain. Here in the United States..

Dominic Rushe / London Times.from Cleveland, Ohio

"Look through squinted eyes and you can still see what once attracted people to Cleveland's Slavic Village.

"The area took its name from the Czech and Polish immigrants who settled there in the mid-19th century to work the city's wool and steel mills. Its tree-lined streets and attractive, wood-framed homes were once home to a community filled with factory workers, young families and first-time homebuyers.

"Small pockets still have that family feel, but decline set in during the 1980s as those jobs moved overseas and drug dealers and violence moved in. The city authorities cracked down, local people rallied round, and until a few years ago residents said life in the village seemed to be improving again. Then came the subprime debacle.

"Now Slavic Village looks as if it has been hit by a hurricane. And this man-made disaster rivals hurricane Katrina when it comes to displacing families. The 2005 storm displaced some 35,000 people in the worst-hit districts of New Orleans. Since 2003, 34,156 people have lost their homes to repossession in the Cleveland area, according to Case Western Reserve University, and the pace of those losses is accelerating. The new year is barely two months old and so far there have been 1,857 foreclosures in the Cleveland area..

"Bins and rubbish (now) litter the streets (of Slavic Village). Signs warn trespassers the structures are unsafe. People have spray-painted 'No copper' or 'No metal' on their doors to deter crooks who have stripped anything of value from these decaying shells. Even brick steps have been ripped off, leaving houses that look as if they are floating on a dark sea of garbage.

"Slavic Village is Ground Zero for a tragedy being repeated across America."

It's sickening, and scary, what is happening in our country, but I threw in the U.K. example because it further points out how truly global the crisis is when it comes to housing and the unfolding credit crunch.

This was a week here where there was a slew of news on this front and it was all disastrous. The leading S&P Case-Shiller index of 20 metropolitan housing markets revealed that prices were down 8.9% in the fourth quarter vs. a year earlier, and are now off 10.2% from the 2006 peak. January existing and new home sales continued to plummet, with the median price on the former off 4.6% year-over-year, and down a whopping 15% for the latter. Meanwhile, inventories are still rising at a time when you all know you can't have a bottom until you begin to work them off, and the ultimate indicator, foreclosures, also reflects a further weakening; as in they were up 57% in January, with Nevada the worst state and the Cape Coral-Ft. Myers, Fla., metro area suffering the most.

The nation's two largest mortgage finance companies, Fannie Mae and Freddie Mac, reported losses of $3.2 billion and $2.45 billion for the quarter thanks to plummeting values on their derivatives holdings tied to mortgages, while Newsweek had a telling story on how lenders are turning off the spigot on home equity loans, as in say your line of credit is $25,000 and you've spent $10,000. Now some lenders are stepping in and saying they will extend you no more. Only the $10,000. With moves like this, it's no surprise defaults on consumer, auto, and student loans continue to rise at an accelerating pace.

CEO Robert Toll, of the homebuilder bearing his name, in reporting the worst quarterly loss in its history, blamed the media to a large extent for hawking fear. "Revived buyer confidence is paramount to getting the market moving again," Toll said.

But while no doubt the media is guilty of fanning the flames, the truth hurts. Inflation (around the world), is a big issue, with a dire reading on producer prices, the PPI, up 1.0% in January, while readings on manufacturing, such as this week's releases on durable goods and the Chicago Purchasing Managers Index, were dreadful. So is it any wonder then that two readings on consumer confidence also came in at new, multi-year lows?

Just a note on global food prices, the UN's World Food Program, which is responsible for relieving hunger among the poor, can no longer afford the volume of aid once given because of the rising cost for agricultural commodities. You keep hearing how more and more are entering the middle class, worldwide, but many of these same folks (let alone the poor) are now being hit with soaring prices for basic staples such as wheat and rice. The director of the WFP, Josette Sheeran, said "We are seeing a new face of hunger in which people are being priced out of the food market."

Back on 1/5/08, I wrote of the potential for food inflation and "political combustibility" in countries such as Russia and China, but you can talk of this just about anywhere these days. It's the developing world that is most at immediate risk as governments are no longer able to deal with rising subsidies on everything from food to fuel. Something has to give, so they raise prices on one, or both. The people then, already barely scraping by, voice their frustration and increasingly take it to the streets. This is going to be a major theme the rest of the year, I suspect.

But what of our Federal Reserve? Chairman Ben Bernanke appeared before the House and Senate for his semi-annual testimony on the state of the economy and he left little doubt the Fed's main concern these days is to keep the economy from sliding into recession, first, while fighting inflation is going to have to take a backseat for now. Ergo, on March 18 the Fed will slash rates yet again, at least 50 basis points (1/2 percent), even though until just the past two days, reducing the short-term funds rate (its primary vehicle) has had little, if any, impact on reducing the yield on the key 10-year Treasury off which most conventional mortgages are based. Coupled with the disconnect between Treasuries and mortgage-backed securities due to the credit crisis and illiquid markets, the rate on a 30-year mortgage has risen, not what the Fed had sought by its actions.

But by week's end, rates on Treasuries had come down across the board in a flight to safety and mortgages, all else being equal, should eventually follow. The problem when it comes to reinvigorating the housing market, though, is that so few seem to qualify for a conventional mortgage these days and those with existing ones, seeking to refinance if rates fall, can't because more often than not they now have negative equity if they've acquired their home in the past 3-4 years.

Back to Bernanke, he warned some small U.S. banks could collapse in the current environment, but, fear not, no big ones! I needn't remind you this is the same man who last June was saying, in his best Bart Simpson imitation, "No problemo!" when asked about the extent of the subprime crisis. It is a national embarrassment how clueless this man is, or perhaps to put it a little more delicately, Stephen Stanley, economist at RBS Greenwich Capital Markets and a former member of the Richmond Fed staff, told Bloomberg "It really kind of scares me that the Fed had no idea things were going to get worse," particularly in terms of liquidity in the credit markets.

Speaking of clueless, there is no bigger example of this than President Bush, who was taken aback at his press conference when a reporter suggested we might see $4-a-gallon gasoline.

"Wait, what did you just say? You're predicting $4-a-gallon gasoline? That's interesting. I hadn't heard that..I know it's high now."

Josh P., out San Diego way, told me he paid $3.70 a gallon last Sunday. Just a reminder, Mr. President. As you're working out, flip on CNBC and look at the gasoline futures contract. Say you see $2.50. Now, Mr. President, tack on about 65-70 cents for a national average at the pump. That takes you to $3.15- $3.20. Some states are higher, some are lower, depending mostly on taxes. 'Huh,' you might then muse. 'We're really just one more spike away from $4.'

And since I brought up Josh, a managing director at a large financial outfit, we've been exchanging notes on our various markets and he wrote this week, "My office is in downtown San Diego and I am staring out at two 200+ unit condo towers, largely empty, as a massive 600-unit project is also going up. The inventory is staggering." I myself keep staring at the 75-unit townhouse development down the block from me, just about finished (at least the exterior), and not one 'sold' sign as yet. I have nightmares of gangs of ghouls breaking in to steal copper in my otherwise upper-middle class neighborhood. It could be time to tie up some wolverines in the yard.

Street Bytes

--Stocks opened the week strong, though no one knew why, yet finished in the red thanks to Friday's drubbing.315 points in the Dow Jones. AIG's announcement it was taking an $11 billion hit on derivatives contracts tied to mortgages didn't help matters, while uncertainty over potential workouts with some of the monoline insurers that have been in the news a lot recently provided their own source of woe. Overall, the Dow fell 0.9% to 12266, while the S&P 500 lost 1.7% and Nasdaq gave up another 1.4%. The month of February represented the 4th straight month of declines.

--U.S. Treasury Yields

6-mo. 1.81% 2-yr. 1.63% 10-yr. 3.52% 30-yr. 4.41%

Rates plummeted in the aforementioned flight to safety, as well as on Bernanke's comment the Fed will act in a "timely manner" to combat a "sluggish" economy, i.e., more rate cuts.

There has been a lot of talk about the Fed's moves and the impact on the long end of the yield curve, so I'll give you some data you won't find anywhere else..at least in such a simplistic fashion.

6/29/06.Fed hikes the funds rate 25 bp to 5.25%...10-yr. 5.22%
9/18/07.Fed lowers funds rate 50 bp to 4.75%...10-yr. 4.50%
10/31/07.Fed lowers funds rate 25 bp to 4.50%...10-yr. 4.48%
12/11/07.Fed lowers funds rate 25 bp to 4.25%...10-yr. 3.98%
1/22/08.Fed lowers funds rate 75 bp to 3.50%...10-yr. 3.52%
1/30/08.Fed lowers funds rate 50 bp to 3.00%...10-yr. 3.78%

Today, the 10-yr. is back down to 3.52%, having touched 4.00% intraday just a few weeks ago. It's not the be all to end all, but the 10-year must trade lower if a segment of the housing market is to begin the bottoming process (while assuming the mortgage securities market stabilizes in kind). But remember, once we bottom, we sit there. No 'U'- or 'V'-shaped recovery, sports fans. It will be like the end of a luge or bobsled run. You flatten out, and stop, and look around.and think now what?

--For the record, the first revision on 4th quarter GDP came in at 0.6%, same as the initial estimate.

--A UBS analyst said the total volume of writedowns as a result of the mortgage/derivatives crisis would be $600 billion. As of today, about $160 billion has been taken.

--President Bush said with a straight face that a strong dollar was in our nation's best interest; this as the dollar plummeted to another all-time low against the euro.$1.52. And the Fed is only exacerbating the problem by continuing to cut rates, which in turn is giving inflation a chance to get well-entrenched.

--The Journal had a big story on the commercial real estate glut .in the U.K.

--Wheat on Monday had its highest one-day price rise ever, up 20%, on reduced supply due to extreme weather among the leading producing nations, the lowest inventories in 60 years, and tariffs on exports among some countries seeking to maintain enough wheat for domestic consumption.

--Out of nowhere, Liechtenstein wormed its way into the conversation as the result of a wide-ranging, and scandalous, German investigation into tax evasion. Citizens of Sweden, the U.S., the U.K., France, Italy, Spain, Canada, Australia and New Zealand also have suspects that are getting swept up in the probe.

In Germany, more than 100 have already been questioned with most then confessing they were hiding income in the little principality. The data became available through an informant inside Liechtenstein's largest financial group, LGT, who then turned it over to German intelligence. With the information now being shared with the above noted countries, you have people like U.S. Sen. Carl Levin offering that the bank "apparently harbored numerous secret accounts which hid the taxable assets of thousands" around the globe. In the case of Germany, officials there are looking to recoup hundreds of millions of euros, while Chancellor Angela Merkel is also pressuring another principality under suspicion, that being Monaco.

--A trader for MF Global, the world's largest broker of exchange-traded futures and options, lost $141 million after he somehow overrode the order-entry system and "substantially exceeded" his limit in the wheat futures markets. He was immediately terminated and sent flying out a fortieth-story window.

--Ah, but $141 million is small potatoes to Sprint Nextel Corp., the third-largest wireless carrier, which posted a loss of $29.5 billion, along with scrapping its dividend, as it wrote down the value of Nextel Communications, while in the process of losing over 680,000 subscribers. It is the 5th-largest loss among S&P 500 companies since 1990 and the outlook is for more of the same, as in subscribers continue to leave in droves.

--The European Union fined Microsoft $1.3 billion for charging "unreasonable prices" to software developers who wanted to make products compatible with the Windows operating system. It's the largest fine ever and brings the total amount the EU has demanded of Microsoft in its antitrust dispute to $2.5 billion. Last week, you'll recall, in an attempt to beat back such an action, Microsoft said it was opening up its source code.

On Thursday, Microsoft also announced it was cutting the price of some versions of Windows Vista (only those sold in boxes), by 20 to 48 percent. This comes as the company prepares Vista Service Pack 1, a collection of security fixes.

Lastly, as the Wall Street Journal pointed out on Friday, it's now been one month since Microsoft made its $31 bid for Yahoo.

"It isn't just that Microsoft's own market value has declined since it went public with the takeover offer. Analysts also have been lowering their forecasts for Internet-advertising growth and Yahoo's earnings, according to FactSet Estimates, amid concerns about the slowing U.S. economy."

Check out Google, down about 15% over this time. As the Journal correctly opines, Yahoo CEO Jerry Yang is an idiot (my term, not theirs) for not grabbing Microsoft's bid because sooner rather than later, one must assume, Microsoft's Steve Ballmer will just walk away, at which point would he then pursue German software king SAP, an idea floated by Randall Stross in the New York Times?

--Four former executives of General Re Corp. and a former executive of American International Group were found guilty of a scheme to manipulate the financial statements of the world's largest insurance company. Four of them face up to 230 years in prison and a fine of up to $46 million. The fifth faces 160 years. The defendants were accused of inflating AIG's reserves through reinsurance deals by $500 million in 2000 and 2001 in order to artificially boost the stock price.

--This isn't good either. Workers are raiding their 401(k)s with increasing frequency. 18% have loans outstanding vs. 11% in 2006. As Terry Keenan noted in the New York Post, Fidelity Investments said withdrawals surged 17% in December alone, the biggest jump on record.

--BMW has increased its layoffs from 2,500 to 8,100, or 7.5% of its global workforce.

--New Jersey Dem. Gov. Jon Corzine called for a reduction in state spending of $500 million in order to begin to tackle a crippling budget crisis. I and all Republicans in my home state give him credit for finally admitting this is a course we must take, but it's also symptomatic of the issues facing other governors across the country, which means more layoffs and, invariably, higher taxes of one sort or another.

--A British study has concluded that anti-depressants, such as Seroxat and Prozac, have little clinical benefit, citing the placebo effect; people simply feeling better because they are taking a medication that they believe will help them. In England, the number of prescriptions for the drugs hit a record in 2006, even though guidelines stress they should not be used as a first line of treatment for mild depression. [BBC News]

--The U.S. Air Force had 21 B-2 stealth bombers until last Saturday, when one crashed after takeoff on the island of Guam, a growing base of operations for the military. It was the first crash for the plane since its introduction in 1989. The pilots ejected safely. I only bring this up because the B-2 (and its B-52 stealth brother) cost about $1.2 billion each. That's just staggering, and one reason why some of us will consider Sen. John McCain because I'm convinced he will take a look at all of our weapons programs. We need the B-2, but the military complex has a long, undistinguished history of cost overruns that someone with credibility, such as McCain, has to attack.

[On Friday, the Pentagon awarded Northrop Grumman and European Aeronautic Defense & Space Co. a $40-billion aerial tanker contract for up to 179 planes, a deal that Boeing thought it would get.]

--Spending on Medicare is expected to double by 2017 to $844 billion, up from $427 billion in 2007, according to the journal Health Affairs.

--Update: Pfizer canceled its long-running ad campaign for cholesterol drug Lipitor using artificial heart pioneer Robert Jarvik. Pfizer spent more than $258 million since January 2006 promoting the world's best-selling drug. The issue was Jarvik's credentials, for while he has a medical degree he is not a cardiologist nor licensed to practice medicine. Plus he used a stunt double in the commercial where he was rowing.

--Boy, the Oscars were once again dreadful, but those little gold- plated guys cost $500 to make, vs. $400 last year, due to the soaring price of the precious metal.

--Are you looking for an exciting job, but one that doesn't pay well until you hit the 'senior' level? Start taking flying lessons. Hilary Potkewitz of Crain's New York Business reports that there is a severe pilot shortage, especially for regional carriers, mostly due to factors such as extended tours of duty in Iraq and Afghanistan, as well as a ton of pilots taking early retirement.

--Time doesn't permit me to cover Warren Buffett's annual letter to Berkshire Hathaway shareholders. I have the same problem each year because he releases the darn thing Friday evening and I'm always too tired to do it justice. So next week, recognizing you will have seen and heard it all by then.

Foreign Affairs

Iraq: Turkey announced it was ending its offensive against Kurdish rebels, the PKK, after the U.S. had urged Ankara to limit the invasion, while at the same time giving Turkey's leadership a wink of approval. Cooperation between the two has increased substantially, a good thing.

Elsewhere, there is increased concern over the fate of the northern Iraq city of Kirkuk, laden with oil, that is being fought over by the Kurds, Arabs, and Turkmen. A referendum on the status was to have been held years ago and is now scheduled again for this coming June. The Turks (as well as Iraq and the U.S.) are concerned that the majority Kurds would use the oil wealth to then seek independence.

Afghanistan: The number of U.S. forces here will be at a record level by mid-summer, some 32,000, as U.S. intelligence says President Karzai controls only 30% of the country, with the Taliban at about 10% and the remainder ruled by the tribal warlords. These days, 40% of the proceeds from the drug trade go to fund the insurgency.

Israel: Remember Annapolis? That seems so long ago as on the ground the situation grows tenser by the day amid signs Israel is preparing another massive invasion of Gaza, with a goal this time of actual regime change. Hamas continued its rocket attacks this week, killing an Israeli citizen, and Israel responded with one strike after another that resulted in over 30 deaths, including six children.

Iran: Danielle Pletka and Michael Rubin, in an op-ed in the Wall Street Journal on International Atomic Energy Agency (IAEA) Director General Mohamed ElBaradei and his latest report on Iran's nuclear activities that in essence whitewashes Tehran's record.

"Mr. ElBaradei's report culminates a career of freelancing and fecklessness which has crippled the reputation of the organization he directs. He has used his Nobel Prize to cultivate an image of a technocratic lawyer interested in peace and justice and above politics. In reality, he is a deeply political figure, animated by antipathy for the West and for Israel on what has increasingly become a single-minded crusade to rescue favored regimes from charges of proliferation.

"Mr. ElBaradei assumed the directorship on Dec. 1, 1997. On his watch, but undetected by his agency, Iran constructed its covert enrichment facilities and, according to the 2007 U.S. National Intelligence Estimate, engaged in covert nuclear- weapons design. India and Pakistan detonated nuclear devices. A.Q. Khan, the Pakistani nuclear godfather, exported nuclear technology around the world.

"In 2003, Libyan strongman Moammar Gadhafi confessed to an undetected weapons effort. Mr. ElBaradei's response? He rebuked the U.S. and U.K. for bypassing him. When Israel recently destroyed what many believe was a secret (also undetected) nuclear facility in Syria, Mr. ElBaradei told the New Yorker's Seymour Hersh that it is 'unlikely that this building was a nuclear facility,' although his agency has not physically investigated the site."

Russia: Dmitry Medvedev will roll to the presidency in Sunday's vote and the only question here is whether it's 70 or 80 percent. I still go with 70 and not the 71 that Vladimir Putin received in 2004.

Medvedev, who has done virtually zero actual campaigning once he was handpicked by Putin to succeed him, has promised to intensify the fight against corruption, cut red tape and encourage small business; while towing the Putin line.

"I will feel obliged to continue the course which has proven its efficiency over the past eight years: the course of President Putin..We need political stability, we need to keep improving people's lives, develop the economy, ensure reliable protection of Russia's sovereignty and protect citizens' freedoms," Dmitry told voters in one of the few places he gave a speech in.

What's been funny for the press is watching Medvedev literally morph into Putin, including his cadence and enunciation, which is no real surprise since they have the same image makers. And as one analyst told the Moscow Times, "By parroting Putin's speech, Medvedev is also reassuring voters that the relative stability under Putin will continue after he leaves office."

Medvedev traveled to Belgrade this week to show his support for ally Serbia in its showdown over Kosovo's declaration of independence. Medvedev demanded the United States rescind its recognition in warning "there will be no stability" until the "fake state" is annulled.

Of course as will be the case over the next four to eight years, Vladimir Putin is the one pulling the strings as he moves into the office of prime minister. There are some, though, who say Medvedev will develop his own independent voice as he tires of being manipulated. I say this won't be the case, but the bigger issue will be whether Putin can control the various KGB (FSB)- oriented factions that walk the halls of the Kremlin.

Meanwhile, Estonia's president warned Russia is sliding into dictatorship, citing the atmosphere at the time of the Weimar republic, while on Friday, four Russian "Bear" bombers flew a training mission over the Atlantic Ocean, a classic Cold War tactic. But speaking of the Russian air force, for the first time that anyone can recall, one of Russia's arms customers is seeking to return some product; specifically, Algeria, which wants to send back 15 MiG-29 fighter jets, part of an $8 billion arms deal sealed in 2006, because the shipment was deemed defective. After Algerian officials discovered technical problems with the first jets they took delivery of, they concluded the aircraft were assembled with fuselages from used aircraft. [Nabi Abdullaev / Defense News]

Kosovo: It was a quiet week here, though on Friday, Germany announced it is sending more troops as part of a training exercise that is also a demonstration of force in the face of Serbian opposition. But this is a perfect example of what I've been writing of for well over a year on this front. Kosovo will take away from any hoped for increase in NATO's presence in Afghanistan. Germany, which has been loath to contribute more troops to the Afghan effort, let alone put its men in harm's way, can now say 'we are already stretched too thin.'

China: Foreign Minister Yang Jiechi expressed the sentiments of all in government in speaking out against criticism over China's human rights record and the upcoming Olympic Games.

"People in China enjoy extensive freedom of speech. No one will get arrested because he said that human rights are more important than the Olympics. This is impossible. Ask 10 people from the street to face public security officers and ask them to say 'human rights are more important than the Olympics' 10 times or even 100 times, and I will see which security officer would put him in jail."

Much of the rest of the world, though, would choose to disagree; that China's pledge to improve its human rights record ahead of the Games is bunk.

And in the drought-stricken northern part of the mainland, the agency overseeing flood control and disaster relief has asked local governments to draw up emergency plans to ensure water supplies, the recent severe winter weather having largely missed this region. Rivers continue to dry up and an estimated 2.43 million ( as well as 1.89 million cattle) are short on drinking water. If the drought continues this could lead to increased sandstorms, right around Olympics time.

As further evidence of China's wide-ranging issues on the water front, you have the story that 120 tons of phosphate-laced mud was dumped on farmland in Yunnan province, contaminating the water table. From the South China Morning Post:

"An official from (the Environmental Protection Bureau) said his agency was alerted to the contamination on Sunday after aquaculture farmers spotted dead fish in the water."

Ergo, I have to issue another warning.do not buy fish labeled "farm-raised in China."

Lastly, China is studying scrapping its one-child policy due to a rapidly aging population and the fact that the birth rate today doesn't match the replacement level of 2.1 needed to sustain the population at existing levels. The flipside is, how much would an increase in family size sap already sparse resources?

North Korea: I am ambivalent about the New York Philharmonic's historic performance in Pyongyang. On one hand, it didn't do any harm as I don't believe Kim Jong-il can hoodwink the rest of the world into thinking he can successfully use this for propaganda purposes. But at the same time Kim himself did not show up and the plain fact remains North Korea has not lived up to its promise to fully declare all of its nuclear activities, including details on the number of nuclear bombs currently in its possession.

Separately, the Wall Street Journal had an interview with the U.S. commander in South Korea, Gen. B.B. Bell, who points out that at least 77% of South Koreans today support having U.S. troops in their country and the new president is pro-American, a positive change in sentiment that makes one somewhat hopeful the North will still buckle under pressure down the road.

Kenya: Just two days after talks were suspended, Kenya's rival leaders agreed to share power. Former UN secretary general Kofi Annan brokered a deal in which opposition leader Raila Odinga will occupy a newly-created, and powerful, prime minister position, with the cabinet being split between his party and the government of President Mwai Kibaki. Perhaps, a real reason for hope here.

Cuba: Last Sunday, the rubberstamp parliament confirmed Fidel's brother Raul Castro to be the island's president, but passed over reformer Carlos Laga for the No. 2 slot and gave it to ideologue Jose Ramon Machado instead. Raul said he would consult Fidel on all important issues until the end.

At a press conference on Thursday, President Bush was queried on engaging with Raul. "Now is not the time to talk," said Bush, adding "having your picture taken with a tyrant such as Raul" is not the right thing.

So I thought back to an interview on CNN that Nebraska Rep. Sen. Chuck Hagel gave this past Sunday and here were his thoughts on Cuba and engagement in general.

"On Cuba, I've said that we have an outdated, outmoded, unrealistic, irrelevant policy. John Ashcroft and I in 1999 were two of the first to offer amendments to begin engaging with trade. It's always been nonsensical to me about this argument, well, it's a communist country, it's a communist regime. What do people think Vietnam is? Or the People's Republic of China? Both of those countries are WTO members. We trade with them. We have relations.

"Great powers engage. Great powers are not afraid. Great powers trade.

"If we're going to see any improvement in the Middle East, in Central Asia, the two wars that we're bogged down in right now, we're going to have to engage Iran.

"That doesn't mean we give up our position, that we in any way dilute our sovereignty, but in fact, Iran is going to have to be part of any mix of any solution, certainly any peace settlement in the Middle East.

"Are things getting better? I don't think things are getting better. I think things are getting worse. We're not going to be able to sustain the policies that we have in Afghanistan and Iraq. Right now we own both of those countries."

[Back to Cuba...]

"I think there's some steps before you get to President Bush sitting down with Raul Castrol. And that's where I think you should start, for example, engaging with some trade. [Hagel then pointed out that Nebraska has signed $70 million in contracts with Cuba over the last three years.]

"Now that's part of diplomacy. That's part of reaching out. That's part of engaging. That's part of improving our situation. And I think that those are the things you need to do to start building bridges to engage.

"When the appropriate time would be for the president, whether it's McCain or Obama..policies will dictate that.

"But the fact is a great nation like America should never be afraid to engage. And the reality is until you engage, things will only get worse. We're in a battle of ideas.

"We're not going to win in Afghanistan or Iraq to start with. That's never a win or lose thing. What will happen in Iraq, in Afghanistan, will be determined by the people, the Iraqi people, the Afghan people.

"Our military can play a role. They are. It is part of our arc of our instruments of power. But so is diplomacy, so are alliances, so are all the factors involved."

I think Hagel's comments are critically important as they frame the debate over American foreign policy in the years ahead. I do not agree with his stance on Iraq, necessarily, seeing as you'll recall he was against the surge, I sided with McCain and the president, and we need more time to make it work. But on engaging in general, I couldn't agree more.

President Bush added in his press conference that engaging Cuba would "discourage reformers inside their own country," while earlier he said the "stories from Cuba are unbelievably sad." So I say again, as I did last week, just what good has our existing policy done in benefiting the Cuban people the past 50 years? And carrying the argument to the Middle East, when Iran gets the bomb, we'll ask ourselves, why didn't we try some real diplomacy years earlier? Nixon went to China, Nixon and succeeding U.S. presidents negotiated arms control agreements with the Soviet Union during the height of the Cold War, all to the good. Granted, each situation is different and I have never said we should negotiate directly with Mahmoud Ahmadinejad, for example, but the lack of creativity in the Bush White House will haunt us for decades.

---

Pray for the men and women of our armed forces.

God bless America.

---

Gold closed at $975
Oil, $101.74

Returns for the week 2/25-2/29

Dow Jones -0.9% [12266]
S&P 500 -1.7% [1330]
S&P MidCap -1.6%
Russell 2000 -1.3%
Nasdaq -1.4% [2271]

Returns for the period 1/1/08-2/29/08

Dow Jones -7.5%
S&P 500 -9.4%
S&P MidCap -8.1%
Russell 2000 -10.4%
Nasdaq -14.4%

Bulls 42.0
Bears 36.4 [Source: Chartcraft / Investors Intelligence]

*If you're a baseball and high school sports fan, and live in the Summit, N.J. area, come to an event I'm sponsoring on Thursday, March 6, at The Grand Summit Hotel, 570 Springfield Ave., Summit; an evening with Willie Wilson. 7:00-9:00 pm. Admission is free. I'd love to see you.

Have a great week. I appreciate your support.

Brian Trumbore

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