Educate Yourself

Week in Review
For the week 7/14/2008 - 7/18/2008
Brian Trumbore
President/Editor, StocksandNews.com

What a week. And where does one begin to attempt to make sense of it all? The action was best summed up in the fact that the financial sector had its worst day ever on Monday, and its best on Wednesday. On Tuesday, the Dow Jones Industrial Average closed below 11000 for the first time since July 2006, but then staged a stirring comeback, reversing some 500 points to finish the week at 11496. In between you had a ton of earnings reports from the likes of IBM, JPMorgan, Citigroup and Microsoft, with the usual mixture of those that beat expectations and those that didn't. Plus you finally had a reversal in oil and the now seemingly unending saga of Fannie and Freddie.

But before we get to all this, let's start off with the semi-annual state of the economy testimony of Federal Reserve Chairman Ben Bernanke, as given to Congress, because it will lead into my own opinion on where we stand as far as the Big Picture.

"The effects of the housing contraction and of the financial head winds on spending and economic activity have been compounded by rapid increases in the prices of energy and other commodities, which have sapped household purchasing power even as they have boosted inflation. Against this backdrop, economic activity has advanced at a sluggish pace during the first half of this year, while inflation has remained elevated?.

"The possibility of higher energy prices, tighter credit conditions and a still-deeper contraction in housing markets all represent significant downside risks to the outlook for growth. At the same time, upside risks to the inflation outlook have intensified...."

Regarding this last point, Bernanke was certainly backed up by the data, with the June reading on producer prices rising a whopping 1.8%, 9.2% year over year, while consumer prices for the same month rose 1.1%, or up 5.0% since June '07. Forget that the numbers, as usual, were far less when you exclude food and energy since none of us have learned to exclude them in real life. If and when we do, we'd have quite a scoop.

In terms of economic activity and the latest releases, lost in the storm of news was a putrid reading on June retail sales, up 0.1% when a gain of 1.3% was expected. So much for the stimulus checks, which we've now learned went towards all things porn- related, see below. And the data on housing, while at first blush a plus in a better than expected reading on housing starts for June, was in actuality a crock as it includes many multi-housing projects that were accelerated for tax purposes. In fact I now realize why there was a sudden rush of activity at that complex down the block from my home I've been telling you about. The one where it appeared all building had stopped with nary a unit sold. Suddenly, I saw landscapers! [Still no sales I'm aware of, but at least the outsides will get finished before the vagrants move in.]

Anyway, Barron's July 14 edition had a cover story on how housing has bottomed. Here's my rejoinder. There was nothing in the piece about bottoming and then just sitting there, nor did the author talk about a V-shaped bottom either. It's pretty much just left to the imagination. 'We've bottomed.' Yeah, well then what, Einstein?

The deal is that numbers are being skewed these days because of all the foreclosures. In some markets, such as in Southern California, sales can look robust but it's folks trying to pick off foreclosed properties at fire sale prices. So be careful when you read of an increase in sales in your neighborhood. Dig deep for the facts. After all, sales of foreclosed homes drive down the value of everything else in a neighborhood.

So let's work our way into the financial sector. JPMorgan Chase surprised to the upside in reporting its quarterly earnings this week, which along with a solid report from Wells Fargo supplied the catalyst for the rally in bank stocks. JPM CEO Jamie Dimon, in discussing his firm's outlook, said:

"Our expectation is for the economic environment to continue to be weak - and to likely get weaker - and for the capital markets to remain under stress. We remain conscious that since substantial risks still remain on our balance sheet, these factors will likely affect our business for the remainder of the year or longer."

Mr. Dimon, though, is known to talk down prospects in an effort to make it easier to beat expectations next quarter, but there is nonetheless little reason to doubt the above.

Deutsche Bank CEO Josef Ackermann was more optimistic, saying the credit crunch was at "the beginning of the end" and that many businesses were slowly returning to normal, citing the banks' efforts to rebuild their balance sheets by raising beellions and beellions, as Carl Sagin would have put it.

But the banks are far from being out of the woods, to say the least. Aside from the fact most banks' balance sheets are nothing but a black box, even a full year into the crisis, borrowers are defaulting on all manner of commercial real estate loans, home mortgages and consumer loans at an increasing rate as the likes of JPMorgan and Citigroup pointed out in their reports.

Ah yes, Citi. Wall Street loved, in its own perverted way, that it had to write down an additional $7.2 billion of mostly subprime related debt (meaning it's now written off a total of about $50 billion since last year), while credit costs because of bad consumer loans increased $4.5 billion. In other words, it's not too soon to think of a Christmas season where finding a parking spot at the mall won't be an issue.

But before we get to Fannie and Freddie, let me interject my own thoughts on the economy overall by referring to two statements of mine from the past two months.

"I believe inflation will moderate for one simple fact. The global economy is about to totally flip, just as we have done in the U.S., and demand not only for oil but wheat, rice and just about everything you can imagine will fall. Not a crash, mind you? just call it the Big Moderation."

I'm more convinced of this than ever, and not for nothing but I called the peak in corn prices to the day, 6/28/08, as I did earlier in the year with the rice bubble.

"But, I have also said the recession would be shallow, in terms of the official numbers, though lengthy. Whenever the bottom is, whether for housing or the overall economy, we'll just sit there, which will continue to do a job on consumer confidence as Americans' number one asset is no longer a bank of last resort.

"On the inflation front?falling demand, both for oil in the U.S. as well as all forms of consumer spending, both large (autos) and small (eating out), will over time lead to a lessening of inflation pressures. This will be true in virtually the entire developed world as well.

"Which leads me to oil. I'll lay out the facts below but I want to be clear. I am definitely in the Peak Oil camp, but that doesn't mean I can't also call for a big drop in the price of oil at some point the next six months, to $100 or below. There is no way you can validate $145 oil, no matter what anyone says on the supply/demand front. I know all the arguments, and I have some good friends who make their living in the energy sector and would disagree, but there is no doubt speculation has played a role in the high price just like speculators bid up the price of some tech stocks during that bubble."

With oil having fallen below $130 since the above, I stand by this last point as well.

OK, on to those two massive government-sponsored enterprises. Last Sunday evening, as parents around the country were beginning to put the young ones to sleep while worrying about what Monday would bring in the markets at the same time, Treasury Secretary Paulson strode before the assembled microphones and talked of how the government wasn't giving up on Fannie and Freddie. They were both too important to fail, seeing as they backstopped 50 percent of the mortgages in America. Well, actually you and I as taxpayers backstop them, but more on this later.

Paulson laid out a plan whereby (1) Treasury would seek the "temporary authority" to ensure there was an adequate flow of capital into the two in order to continue the flow of money into home mortgages. (2) Fannie and Freddie would be granted access to the Fed's discount window as necessary, meaning they could go up and exchange a Barry Bonds card for $2 billion, or something like that, and, (3) the U.S. government would extend the lines of credit already issued to the siblings. After some fits and starts, Fannie and Freddie saw their shares recover a bit over the course of the week but in the halls of Congress and the water coolers on Wall Street and Main, there was much discussion about systemic risk and moral hazard.

Following are a few scattered thoughts I clipped out?like coupons for my local CVS Pharmacy.

"Since they were chartered as government-sponsored, publicly- traded corporations four decades ago, [Fannie and Freddie] have used their lobbyists and political allies to bail them out of minor pinches. When critics suggested, say, that they should be required to report to the Securities and Exchange Commission like other corporations, or pay state and local taxes, or increase their capital reserves, their influence-peddling machine went into action.

"But their true ace in the hole has always been the 'implicit guarantee' - now an explicit one - that Uncle Sam would have no choice but to back them up if they ran into real trouble.

"Whatever the government does to right Fannie and Freddie now, it has to understand - and taxpayers have to understand - that these are fundamentally flawed institutions."

"The hope is that the mere promise of a bailout will be enough to restore confidence - so that this expensive promise [of aid] will never have to be kept. Fannie and Freddie do back mostly high- quality mortgages, and housing prices can't keep going down forever. But, just to be on the safe side, the government has to attach some strings. At a minimum, Congress and the Bush administration should be rewriting pending housing legislation to require the GSEs to maintain greater capital reserves, as banks do, once the crisis is over. Mr. Paulson, however, has said only that 'use of either the line of credit or the equity investment would carry terms and conditions necessary to protect the taxpayer.'"

Vincent Reinhart, former director at the Fed, in an op-ed for the Washington Post

"(There) are two reasons to doubt that this movie ends so happily and two reasons to wish it were never made.

"First, in the near term, continued double-digit declines in housing prices will raise doubts about the repayment prospects of more and more mortgages. Add to that the difficulties associated with an economy teetering on the brink of recession. Anyone holding mortgages or mortgage-related securities is in for a bumpy ride. Fannie and Freddie, which are exposed to more than half the market, are sure to face large losses and squalls of investor uncertainty.

"Thus the second problem: The endgame is uncertain. The government's funding responsibility will end only when the two firms have raised sufficient capital. It will be impossible for the Fed or the Treasury to turn away a request for more credit. The overall provision of credit could, therefore, be sizable and extended.

"While policymakers have at least temporarily resolved this crisis, we will live with the consequences for a long time. Consider the downsides:

"First, the Federal Reserve is likely to be given additional responsibilities related to overseeing housing finance. What happens when that goal interferes with the ones Congress has already given it - fostering maximum employment and stable prices? An overextended Fed might be tempted to keep the liquidity tap open too long to support housing finance, even at the cost of a pickup in inflation.

"Second, the government had to act because, in today's interconnected markets, Fannie and Freddie are too big to fail. Policymakers missed an opportunity for significant reform."

"The parlous financial condition of Fannie Mae and Freddie Mac threatens the global economy. Treasury Secretary Henry Paulson Jr.'s request for standby authority to lend the mortgage giants more money and, if necessary, inject capital seeks to reduce this 'systemic risk.' Democratic leaders in Congress plan to attach the Fannie-Freddie rescue to housing legislation already passed by the Senate and slated for House consideration. Strangely, though, both the Senate and House versions of the bill potentially increase the very risks Mr. Paulson's plan is intended to mitigate.

"Both measures would encourage Fannie Mae and Freddie Mac to buy bigger mortgages on the secondary market (which they would then either hold or sell as guaranteed securities to investors). Ordinarily, the government-sponsored enterprises (GSEs) buy high-quality loans under $417,000 for a single- family home. This 'conforming' loan limit not only limits taxpayer risk, it also anchors the profit-hungry GSEs to their statutory mission: supporting affordable housing. Earlier this year, as clouds were already gathering over the GSEs, Congress raised the limit - to almost $730,000 in certain high-cost areas - on the theory that Fannie and Freddie could help unfreeze the housing market. The measure was supposed to be temporary. But the pending Senate and House bills impose permanent increases. The Senate would go up almost 50 percent, to $625,000. The House, led by Speaker Nancy Pelosi (D-Calif.), who represents the pricey San Francisco Bay Area, is considering a $730,000 cap. Either way, Congress would be authorizing the GSEs to pile more risk onto their already staggering balance sheets, and mostly for the benefit of buyers and sellers of expensive houses."

But here's the bottom line as we move forward. Congress, as you can see, has yet to actually approve any plan but the market liked that the Fed was making it clear it would not let Fannie and Freddie fail. In the end, however, the actual risk to the government and us taxpayers, let alone the market, will be determined by how much farther we have to go in the housing cycle and how many more defaults we see.

As to who is responsible for the mess, blame both Congress and the Fed. But this story has a long way to run.

And a few other bits to munch on. President Bush would like you to believe that his lifting of an executive prohibition on energy exploration in the outer continental shelf was the reason why oil dropped from $145 to just below $130. But this would be far from the truth and Congress still has to either overturn or let its own prohibition expire before the states can then decide what they want to do. Most say that if the outer shelf is opened up you won't see significant new oil into the system for 7 to 10 years, but off California, for example, there is some that could be accessed quickly, though Californians are still against lifting the ban (however this attitude is changing weekly in favor it seems).

The reason for the slide in crude was simple. Demand destruction is taking hold and the inventory picture has brightened considerably. But the facts alone didn't necessarily warrant such a big slide so why did it happen now? Speculators cashing in. Not manipulators. Speculators.

Lastly, there was a lot of talk of leadership this week. One who hasn't been is President Bush. In lifting the executive order on banning drilling, for the first time the president actually used the word "conservation." "We must implement good conservation policies." Then he blamed Congress.

The next day at his news conference, he was asked why he hadn't mentioned conservation before and he replied "It would be a little presumptuous on my part to dictate how (the American people) should lead their lives." At this same performance, when talking about high energy prices, Bush said "We understood what was coming" and "I don't want to be an 'I told you so,' but I told you so." Thanks, Mr. President. You're so prescient.

--The past two weeks I've hammered away at the bull/bear sentiment readings because I thought it was important to bring them to you. Traders in particular should take a look at my "Wall Street History" link where I have more work on the topic. I personally have not changed my 80% cash / 20% equities allocation, despite saying I might in coming weeks, though it would have been a nice ego trip if I could have raised the equity allotment before this week's big rally. Alas, I'm just proud I brought the facts to you in the fashion I did and anyone following the indicator and acting accordingly did quite well, at least for one week. There is just so much going on these days, however, that I need a little more time to process it all before I make a big change (it won't be half-a*% if I do). In fact most of you would agree that's one of life's frustrations. We never have enough time to just think.

For now the rally in the market was led by the drop in oil, renewed confidence that the worst may be over in terms of financials, particularly in the case of Fannie and Freddie, and some better than expected earnings.

The positive earnings came from the likes of Johnson & Johnson, Intel, Wells Fargo, Abbott Labs, JPMorgan, United Technologies, IBM, Citigroup (though this is kind of a joke), and Schlumberger. The negative reports in terms of reaction included those of eBay, Merrill Lynch, Microsoft, and Google.

On the tech front, Goldman Sachs analysts say the global spending environment is the worst since 2003, but, overall, tech is holding up quite well. Better than I would have anticipated.

But one issue that Microsoft faces which is very troubling is the ongoing piracy problem that is costing it $100s of millions, if not $billions. In China, for example, the company says eight in ten programs are illegal copies. Excuse my French, but this sucks and is yet another reason why I believe half the people in the world are bad.

Yet there was one other item of note that helped out stocks, particularly financials, and that was the news that SEC Chairman Christopher Cox was going to limit "naked short-selling," a practice in which traders sell shares short without actually holding them. Cox specifically limited the practice to 17 financials plus Fannie and Freddie, for now, having seen enough of the types of bear raids that took down Bear Stearns and threatened Lehman Brothers the other day.

Before the order, any seller had an obligation to "locate" shares to be borrowed, but no physical contract. The SEC is in effect saying "try harder" and may codify the rule later. In the meantime, aside from some cumbersome operational issues for Wall Street's titans until they get the hang of it (and figure out how to circumvent the new rules because this is what they do), don't get hung up on discussion of this topic. If it lessens the chances of manipulating the market, good. There are other regulations to come that will warrant far more discussion than this one.

Rates on the long end rose on the inflation numbers as well as a flight from bonds back into stocks. Plus Minneapolis Fed bank president Gary Stern also said the Fed can't wait until financial and housing markets stabilize before raising interest rates to combat inflation.

--The IMF raised its global outlook for 2008 and now sees the U.S. growing at 1.3%. The Federal Reserve amended its own as well and sees GDP in the 1.0 to 1.6 percent range, up from an earlier forecast of 0.3 to 1.2.

--Among the 23 industrialized nations in the MSCI World Index, only Canada averted a bear market decline of 20 percent, according to a report by Bloomberg. And you know how I've noted I have handwritten readings on various benchmarks going back to March 1990? When I saw that the Tokyo Nikkei closed Friday at 12803, off for a sixth straight week, I decided to go back to July 20, 1990. Guess where the Nikkei was then? Try 32421. [Conversely, the Dow Jones finished that particular week at 2961 as we were about two weeks from Saddam's invasion of Kuwait and a quick bear market that would take the Dow down about 20% from the highs set a week earlier.]

--Spain's largest developer went bust in the nation's biggest bankruptcy ever, while consumer sentiment in Japan is at the worst level since they began tracking such data.

--Wall Street banks are still holding $50 billion of old LBO debt and carrying it at about 85 to 88 cents.

--Analysts had expected Merrill Lynch to report a loss of $1.90 a share and instead Merrill came in with a loss of $4.95 as it wrote down an additional $9.7 billion. Merrill also announced it had sold its 20 percent stake in Bloomberg for $4.4 billion and was selling its controlling stake in fund administrator Financial Data Services. But for now they're keeping their 49 percent stake in BlackRock. What a sad, sad story.

--Keep an eye on labor talks with the likes of Con Ed in New York City as well as Verizon workers on the East Coast. The key is going to be who pays for medical benefits, as opposed to substantial wage increases that simply aren't in the cards. Expect strikes.

--Last week I noted that New York Sen. Charles Schumer was blamed by federal regulators for the collapse of IndyMac Bancorp. Schumer had written a June 26 letter that questioned whether IndyMac could survive and it's no wonder this caused a run on the bank after he made it public. Schumer said in response to the allegation, "The regulator here was asleep at the switch. The administration is doing what they always do, blaming the fire on the person who called 9-1-1." The Office of Thrift Supervision says depositors withdrew $1.3 billion in the 11 days following Schumer's disclosure.

"Very few banks, if any, would remain standing for long in the current tense financial environment after a Senator, in effect, told its depositors to run for the exits. In the 1930s, such tipsters were derided as rumormongers and often faced indictment for encouraging depositors to stampede banks.

"Only last week, the Securities and Exchange Commission announced an investigation into the role of rumor-peddlers in the run on Bear Stearns. We somehow doubt that Mr. Schumer will receive similar SEC scrutiny for his very similar role in bringing about a liquidity crisis at IndyMac. But he may be more deserving."

[Separately, the FBI is now investigating IndyMac for fraud, including insider trading and accounting and loan irregularities, among other things.]

--General Motors is cutting its white-collar payroll by 20 percent and selling assets, it hopes, to the tune of $15 billion over the next 18 months as part of its effort to avert a bankruptcy filing at some point in 2009. Currently, GM is bleeding about $1 billion a month in cash, though the shares have rebounded off a 54-year low of $8.80 to close the week at $13.20.

--Star Oppenheimer analyst Meredith Whitney, who after her performance the past year in gauging the banking sector deserves to be in the Research Hall of Fame, not only nailed Merrill's loss, but said of Wachovia, "Expenses simply cannot come down fast enough, seriously jeopardizing Wachovia's ability to generate earnings. We fear the company will have the greatest reckoning with asset re-valuation and/or credit costs." Fire!

Second-quarter sales volume in The Hamptons dropped 29 percent and the median price fell 11 percent. But there is far more damage to come, I imagine. [Of course few Americans give a damn about this part of the country. The median price, after all, is still $735,000, with a median price of $891,000 in Southampton itself.]

Donald Trump sold one of his Palm Beach mansions for $95 million to a Russian fertilizer tycoon, Dmitry Rybolovlev, who no doubt will have many an armed guard wherever he goes, because this is what these folks are all about. Trump, by the way, is calling it a $100 million sale but the Palm Beach Post notes the deed lists the price at 95. Regardless, The Donald pulled off a good one, having paid $41.35 million for the property in 2004. And get this, the paper reports Rybolovlev is considering tearing down the mansion, which would make it the most expensive teardown in the history of the universe.

Alas, all is not well in the San Diego County market, as Josh P. notes. Housing prices dropped here 25 percent in June, year- over-year. The condo market is even worse. A median of $259,000 compared to $397,500 in June '07.

Meanwhile in the San Francisco Bay Area, home prices have plunged 27 percent to the lowest level since March 2004.

Two weeks ago I questioned why Merrill Lynch, with the latest delays in the ground zero construction, let alone its financial condition, would commit to moving its headquarters there. So on Wednesday, it was announced Merrill had terminated talks on the project in a huge setback for the Port Authority and developer Larry Silverstein. Now, given the state of the economy and the banking sector, the entire project, which was to consist of four towers, is in doubt unless the owners get some big players to commit. Merrill had been the first to express interest. [Its lease at the World Financial Center, next door, expires in 2013 and they could just extend that until 2018.]

Jeff S. apprised me of a piece in the Arizona Republic that addresses a nightmare condo and townhouse owners can appreciate. In Phoenix, The Landmark Towers, a 45-year-old apartment complex, recently underwent an extensive renovation as part of a project converting it to condos in 2005, the peak of the bubble. So now property owners are seeing their association fee rise from a monthly $230 to $700, plus residents have to pay an additional $800 a month for eight months to pay for new air- conditioning units. Yikes! Be careful when buying into older projects, sports fans.

David P. passed along a research note from Credit Suisse that concludes the Irish real estate market could fall another 30 percent. The chief reason? No surprise here?it's still largely about affordability.

--China's consumer inflation rate fell to 7.1 percent in June, with the economy growing at a 10.1 percent clip for the second quarter, a decline from the previous quarter's 10.6 percent but still above the 8 percent rate that is generally considered necessary to keep the masses happy and employed.

--In announcing its disappointing earnings, though to be fair net income was still $1.25 billion, Google said click-throughs on ads rose just 19 percent compared to 47 percent in the year earlier period. Last April CEO Eric Schmidt said Google would outrun any slowdown in the economy, but on Thursday he noted the company faces "a more challenging economic environment." Ergo, Google is not immune, which anyone with common sense knew all along. The shares fell a record $52 on Friday to $481.

--Do you have the ability to interact with strangers? Do you like to entertain? Do you want to see the world? Then try IBM, because in announcing its solid quarter it said it would spend an additional $1.6 billion on sales and marketing in developing countries through 2010. While U.S. revenue rose just 5 percent, sales in the Asia-Pacific region climbed 16 percent and in the Middle East, 20 percent.

--Midwest Airlines is reducing its work force by a whopping 40 percent, or 1,200, while Europe's biggest budget carrier, Ryanair, warned it will carry almost one million fewer passengers this coming winter as it cuts flights by 14 percent, and Australia's Qantas is slashing at least 1,500 jobs.

--Intel Corp. turned 40 on Friday, and as alluded to above issued a solid earnings report for the quarter as strong world-wide demand for its chips overcame the soft U.S. economy. But former chairman Andrew Grove has been working on other projects these days and had the following thoughts on the topic of energy in an op-ed for the Washington Post.

"Energy independence is the wrong goal. Oil, like all other goods, flows toward the highest bidder. Consequently, talking about 'independence' in a global economy ruled by market forces is a contradiction.

"As national policy, we must protect the U.S. economy from interruptions in the supply of such a critical commodity - whether those interruptions are related to natural or political causes. I believe that the appropriate aim is to strengthen our energy resilience to adjust to such changes. We can do this by increasing our reliance on electricity.

"Electricity can be transported only over land. Consequently, it will stay in (or stick to) the continent where it is produced. Equally important is that electricity can be produced using multiple sources of energy. Petroleum, yes - but also coal, which is abundant in the United States; wind; hydroelectric; nuclear; and solar energy. If one source suffers a shortage, we can produce electricity from another. Electricity will give us the greatest degree of energy resilience.

"Most everything today runs on electricity. A big exception is the transportation sector. Transportation uses more than half of the petroleum consumed in this country. If we don't convert a large portion of the transportation sector to electricity, we cannot make real progress toward energy resilience.

"This conversion will not be easy. It requires growth in generation capacity as well as in the capacity and reach of the transmission infrastructure. Most important, it requires vehicles to run on electric power."

[For his part, former vice president Al Gore called on Americans to abandon electricity generated by fossil fuels within a decade. Gore gave both Barack Obama and John McCain credit for being ahead of most politicians in the fight against climate change. In 2007, electricity generated from non-fossil sources amounted to almost 28 percent of the total, led by nuclear. Hydro-electric was responsible for about 6 percent of the total and wind and solar around 2 percent. Coal accounts for about half.]

--Speaking of wind, utilities in Texas gave approval to a $4.9 billion plan to build new transmission lines to carry wind- generated electricity, such as in T. Boone Pickens' proposed wind farm on 200,000 acres in the Panhandle.

--InBev, in acquiring Anheuser-Busch, said it will not cut back on advertising and promotional support for the sports industry. AB is the No. 1 spender in this category, some $218 million in 2007 on sports ads. Citizens in St. Louis in particular are concerned, though, that InBev will force Bud to cut back on local charities. Separately, the AB-InBev combination, combined with MillerCoors, will account for 80% of the U.S. market.

--Last week I told you of problems in the Pakistani stock market due to restrictions placed on trading by their Securities and Exchange Commission that didn't keep the market from tumbling. This week protesters stormed the Karachi Stock Exchange after the government relaxed some of the restrictions and share prices plunged even further. The concern is the demonstrations could spread and take down the new government.

--Earlier in the week, the London and Paris stock markets were among those hitting their lowest levels since 2005. So much for decoupling from the U.S.

--BlackRock, tied to Merrill Lynch but nonetheless far more successful than the firm tethered to a bull, is moving its 1,200 employees from Plainsboro, N.J. to Philadelphia, in yet another blow for my state. So much for Gov. Jon Corzine, former Wall Street maven.

--The FDIC's deposit-insurance fund is $53 billion and the IndyMac collapse will cost it $4 billion to $8 billion. Ergo, should more banks go under, we could have a budgeting problem. It's also at times like these we are reminded of the $100,000 insurance limit, $250,000 for retirement accounts. 37 percent of the nation's $7.07 trillion in deposits at the end of the first quarter was uninsured.

--Strategist Ed Yardeni summed up the state of the financial industry and the likes of Fannie and Freddie. "We are increasingly nationalizing the financial system and leaving upside out."

--Inflation Alert: The newsstand price of the Wall Street Journal is rising 33 percent to $2. So I have a choice. Continue to get the hard copy and go from a large Dunkin' Donuts coffee to a medium, or read the paper online and get the large coffee. I think coffee will win out.

--CNBC's Erin Burnett is totally out of control and the network needs to rein in her massively expanding ego. Ms. Burnett also needs to understand that soaring jet fuel costs were indeed the prime factor in the airline industry's dire straits. This week she tried to convince her viewers otherwise in a truly embarrassing moment.

--From Barron's: "Viewership of adult-entertainment Websites has jumped since the start of the year, and particularly since May, when the first of the government's economic-stimulus checks were mailed." What a country, eh?

Iraq: The White House has abandoned hopes for a long-term agreement on status of forces before the Bush presidency ends, looking for a 'bridge' instead, short term, but on Friday, in a surprise announcement, President Bush and Iraqi Prime Minister Maliki announced "a general time horizon" for withdrawing all U.S. forces. This news hit late in the day and on major issues such as this I like to wait 24 hours as much as possible. For now, it's been apparent the Iraqi government feels emboldened as top officials claim their army will control the country by year end, even after a series of attacks this week killed over 55. But Admiral Mullen of the Joint Chiefs of Staff has been optimistic the U.S. would be able to announce further troop withdrawals by fall and Friday's move is along these lines it would seem. Iraqi politicians demanded a timetable so they could tell their constituents before provincial elections that they've been tough on the Americans.

As for the latest sentiment in the U.S., only 36 percent believe the Iraq war was worth fighting, according to an ABC News/ Washington Post survey, but then 46 percent said significant progress has been made. One of the tangible measures of the progress has been a 70 percent drop in roadside bombs, according to U.S. officials. Iran appears to have decreased its activity here.

Israel: Where to begin? French President Nicolas Sarkozy hosted member states of his new Mediterranean association, including Syrian President Assad and Israeli Prime Minister Olmert, and Assad, happy to be back in the spotlight, spoke of peace, though he hastened to add not until after President Bush leaves office. At the same time, Syria and Lebanon agreed to exchange embassies as a first step in Syria's formal recognition of Lebanese independence. But of course the embassies could easily be nothing more than spy nests. As to talks between Syria and Israel, which thus far have been moderated by Turkey on a fairly low level, Assad continues to demand a return of all territory taken by Israel during the '67 war, including the Golan Heights. Amidst his ongoing corruption investigation, many in Israel question whether Prime Minister Olmert is selling out.

And such calls were made in the country following the wrenching trade of the bodies of two Israeli soldiers in exchange for five Lebanese held by Israel, as well as the remains of 200 Lebanese killed by Israel since about 1980 in various conflicts.

It was in the summer of 2006 that Hizbullah captured the two Israeli soldiers, Goldwasser and Regev, which led to the war and all this time, until the actual moment when they were handed over, the actual fate of them had been kept a secret, in case anyone is wondering about Hizbullah's growing strength, as well as its command and control. There were some in Israel who actually thought at least one of the two was still alive so imagine the anguish when at the appointed time and place two caskets were produced.

Among the five Israel released, however, was a man who had killed five back in 1979. There were thus cries that Israel had given up too much, even though the Israeli military has always said it will never leave one of its own behind.

But here's the bottom line. This whole transfer was a huge victory for Hizbullah and Sheikh Nasrallah as the coming home of the five prisoners, as well as the bodies, was celebrated by the entire nation and all its disparate leaders in Beirut, including President Sleiman and Prime Minister Siniora, which had to be a bit troubling to Washington. The prisoners, incidentally, immediately said they would continue the fight against Israel.

Nasrallah declared "The period of defeat is over and the time of victory has arrived." Prior to this week, a poll of Arab sentiment across the Middle East found that Nasrallah was the most admired leader with 26 percent. Syria's Assad was second, 16 percent, and Iran's President Ahmadinejad, 10 percent.

An emboldened Hizbullah is now talking of taking back Shebaa Farms from Israel, with the Israelis saying they will not give it up. Remember, as I first called for years ago, if Israel gave up Shebaa, it would take away Hizbullah's reason to exist and allow the international community to put pressure on the Lebanese government to force the militia to disarm. Until then, however, there will be nothing but trouble and the odds of another war rose two- or three-fold this past week.

Iran: Which brings us to the ongoing topic of Israel and Iran's suspected nuclear weapons program. The U.S. has been urging the Olmert government to back away from launching an attack on the nuclear facilities because Washington has been saying, in public through officials such as Admiral Mullen, that the United States is stretched too thin and is in no position to handle the blowback. So what did we see this week? The White House sending Undersecretary of State William Burns to be an 'observer' at talks between the EU and Iran; this after the Bush administration said it wouldn't negotiate with Tehran. Personally, I have no problem with this but the European proposal of a "freeze for freeze," a six-week halt in Iran's uranium enrichment in exchange for a halt to strengthen financial sanctions against the Ahmadinejad government won't work.

So for now we're back to square one. Six years after we knew Iran was gearing up to get into the nuke business, we're left with a country that for all we know is six months or so from having enough material for a bomb; a situation that is simply untenable from Israel's standpoint, regardless of who is running their own government, which is obviously not going to be Olmert by September or October, it would appear. It's about Israel's very survival. So I say, as I have since last December, that sometime in 2008 Israel will have to make a move, regardless of what we believe here in America is the prudent course of action. And at this point the nuclear genie is basically out of the bottle in Iran. Despite having problems with Ahmadinejad's leadership, the hardliners in Iran still are the prime movers of policy and at this point they are not about to give up their opportunity to obtain the bomb and then have the rest of the world begging at their feet. And that, friends, makes for a most dangerous world with today's conflicts in Iraq and Afghanistan looking like child's play by comparison.

Russia: Not only did the Kremlin slap the U.S. and U.K. in the face in vetoing new sanctions against Robert Mugabe and his thugs in Zimbabwe (with China also vetoing the measure), but Russia continues to make waves over the two breakaway republics in Georgia, with Georgia threatening to shoot down any Russian fighter jets that violate its airspace (as they have), while the Kremlin has been drastically reducing the supply of oil to the Czech Republic after the Czechs agreed to host part of the U.S. missile defense system.

What has developed this week, though, is that President Dmitry Medvedev has granted Prime Minister Putin powers to implement foreign policy, which had previously been under the purview of the presidency. Medvedev himself said on the overall topic:

"Russia has become stronger and is capable of assuming greater responsibility for solving problems on both a regional and global scale. The world, which got rid of the Cold War, still cannot achieve a new balance. Moreover, a trend towards the use of force (in international relations) has become stronger."

On the missile shield, Medvedev told a group of 200 Russian ambassadors, "Deployment?only makes the situation worse. We will need to react to this adequately."

What appears to be happening is Putin will call the shots on foreign policy, but for now continue to let Medvedev be the public face. There is no doubt that for his part, Dmitry is already flashing his hardline credentials.

China: The government warned foreign performers and entertainers against doing or saying anything that would harm China's sovereignty or ethnic unity in a sign of increasing nervousness ahead of the Beijing Games. Tens of thousands of police are being deployed in an attempt to shield the world from any demonstrations that could tarnish China's image.

Then you have the environmental issues. Aside from the algae problem, which appears to have been rectified, now officials are concerned that a plague of locusts from Mongolia could descend on Beijing during the Games. Seriously.

For my part, I maintain as I did last December in one of my '08 predictions that the Games will be tense and take on a Cold War tone. President Bush's presence, however, could help relieve some of the building pressures.

Nonetheless, in looking at the long-term relationship between the United States and China, it's important to keep the following in mind, as reported by Defense News' Wendell Minnick.

"China's air power modernization efforts are largely focused on overpowering Taiwan's Air Force and destroying high-value ground targets. However, the People's Liberation Army Air Force (PLAAF) is also preparing for the possible intervention of U.S. forces on Taiwan's behalf.

"The PLAAF trains for four types of air campaigns: air offensive campaigns, air defense, air blockade and airborne. All four are focused on a Taiwan campaign with possible U.S. involvement.

" 'When fighting enemy air forces, there is a strong preference for attacking them on the ground, as opposed to fighting them in the air, presumably because they recognize that their fighters and pilots are still largely inferior to those of the United States and Taiwan,' said Roger Cliff, a China military specialist at the RAND Corp."

Meanwhile, because of warming ties between Beijing and Taipei, the U.S. has frozen $11 billion in arms sales to Taiwan, including delivery of dozens of F-16 fighter jets, until after President Bush leaves office, at the earliest. Part of me understands this move. The tourist exchange between Taiwan and China is going well, for example. But from what I've read, the administration didn't tell Taiwan first that they planned on freezing the weapons sales.

North Korea: Six-party talks on nuclear disarmament resumed as Pyongyang said the Yongbyon nuclear plant would be fully disabled by October in return for massive fuel and food aid. But the Commies said they wouldn't resume talks with South Korea, nor at last word have they allowed the South to investigate the killing of the South Korean tourist at the North's Diamond Mountain resort.

Art Brown, former CIA operative in Asia, commented in an op- ed for the New York Times.

"As it stands now, we have agreed to ship North Korea a million new tons of fuel oil, released Mr. Kim (Jong-il) from the handcuffs of our Trading With the Enemy Act, and - within the legally mandated 45 days - will throw in other goodies that come with removing North Korea from the State Department's state- sponsor-of-terrorism list. This comes on top of the American decision last year to allow the North Koreans to transfer their tainted money out of a bank in Macao.

"But the topper is that Kim Jong-il knows he still gets to keep his stockpile of plutonium and even hang on to his existing rack of nuclear weapons (minus the one he tested in October 2006 to set the tone of the game).

"Nor are the North Koreans going to be required to fess up to the uranium-enrichment program they picked up from Pakistan earlier in the decade. Nor must they explain their role in the suspected nuclear reactor in the Syrian desert that Israeli jets were reported to have destroyed in 2007?.

"Basically, all the North Koreas had to do for these latest concessions was to blow up the cooling tower at the Yongbyon nuclear plant, a publicity stunt for which they billed the United States $2.5 million. Kim Jong-il's plus-minus sheet looks decidedly better than ours?.

"No one should imply that North Korea is an easy nut to crack?. But things are not made any better by pretending that we are making progress, as Washington seems to have decided to do, or by ignoring the real concerns of our allies."

[This coming week in Singapore it appears the North Koreans will sign the Treaty of Amity and Cooperation in Southeast Asia, a non-aggression pact, that to me is worthless but will garner Kim more favorable press, as it already has in the region.]

India: This coming week the government faces a no-confidence motion amidst a developing scandal where the opposition has accused the ruling Congress Party of massive vote buying. According to the London Times, "An MP said that the government was offering to pay as much as $6 million for each vote in parliament."

And get this. "The government secured three votes yesterday by naming an airport in Lucknow after the father of Ajit Singh, the leader of a small regional party. It is even planning to free six jailed MPs for the vote, five of whom are allies and four of whom are convicted murderers."

This all goes back to the nuclear technology deal with the U.S. and if the government loses the no-confidence vote, that would lead to a snap election as early as November.

South Korea / Japan: These two are squabbling over some disputed islands and Seoul recalled its ambassador.

Turkey: 86 were charged in the supposed coup plot after two retired senior generals were arrested. I don't believe the government on this one.

Ukraine: Tensions are once again rising as President Viktor Yushchenko and Prime Minister Yulia Timoshenko are at war with each other yet another time. Ukraine's inflation rate is a whopping 29 percent, the highest in Europe, while the economy is slowing. And talk about poor approval ratings. Yushchenko's is 6 percent and Timoshenko's 18 percent. As Bloomberg News quoted a businesswoman, "Our government is a nut house."

Sudan: As noted last week, the International Criminal Court did indeed call for the arrest of President al-Bashir on charges of genocide and war crimes. One of Bashir's lackeys then said "Darfur will be the graveyard for the enemies of Sudan." The U.N. withdrew much of its staff in anticipation of reprisals.

Zimbabwe: The news on renewed sanctions against Mugabe's regime hit as I was writing last week's review. For the record, of the 15 in the Security Council, aside from permanent members Russia and China voting against, and thus killing the measure, Libya, South Africa and Vietnam also said no, with Indonesia abstaining. The nine voting 'yes' would have been enough were it not for Russia and China. It's the hope here that in the cases of Libya, South Africa and Vietnam, the White House sends a message that they have made a big mistake. But, alas, I'm sure business will proceed as normal, especially in the case of our new friend the Vietnamese.

Mexico: The head of Mexico's intelligence service warned that the government and all democratic institutions are truly under threat from the drug cartels. Guillermo Valdes told the Financial Times, "Drug traffickers have become the principal threat because they are trying to take over the power of the state."

"Congress is not exempt (from the moves the cartels are making on the local front). We do not rule out the possibility that drug money is involved in the campaigns (of some legislators)."

Venezuela / Colombia: What's this? Good news? Presidents Chavez and Uribe held a meeting and Chavez said a new era of cooperation was dawning. Uribe said the two could solve their differences. Clearly, the freeing of the 15 hostages the other week has helped Uribe's position as Chavez himself had been backing off of his support for FARC weeks before the hostage drama.

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Note: Finally, in about ten days I'll be rolling out the new and improved version of StocksandNews, a "soft launch" as we say while we iron out the inevitable kinks. We'll do our best to incorporate any suggestions you may have, but for now I will be introducing a podcast for Week in Review by September and perhaps a video or two by year end.

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