Educate Yourself

Week in Review
For the week 7/21/2008 - 7/25/2008
Brian Trumbore
President/Editor, StocksandNews.com

There are two poll numbers that stand out for their consistency thus far in 2008; President Bush's overall approval rating, 28 to 30 percent regardless of the poll, and the number of Americans who think the country is on the right track, a mere 13 or 14 percent. This week's NBC News/Wall Street Journal survey, for example, had the figures at 30 and 13, while two polls from the prior week were at 28 and 14.

So it was amusing to see the president's YouTube moment. Not because it was in the least bit embarrassing that he was caught off guard, it wasn't, but rather how once again he just didn't get it.

Bush said of the problems in the financial sector, "There's no question about it. Wall Street got drunk?it got drunk and now it's got a hangover. The question is how long will it sober up and not try to do all these fancy financial instruments."

I would submit, Mr. President, that the above leads one to ask, "So where the heck were the regulators?" From the accounting scandals of the Enron era to the chicanery on Wall Street and with many in the mortgage community, those whose job it is to monitor basic functions of both our markets and consumer protection were asleep at the switch.

The result of this laissez-faire, anything goes era is a housing bailout, or rescue package, take your pick depending on which side of the bed you woke up on, that is designed to help stabilize the mortgage market at a time of still soaring delinquencies. No one can be against a little help for those truly deserving of it, but the consequences of this potentially massive program, whose eventual cost is anyone's guess, will be talked about for years, maybe decades. Fannie Mae and Freddie Mac, the two prime beneficiaries, are privately held companies after all, but you might as well stick their logos on the backs of our currency because they are now wards of the state.

Some opinion follows, both on the housing bill (to be signed by the president next week it appears) as well as the era in general.

"Combine a housing meltdown with election-year politics and the results were not going to be pretty. Add a crisis in confidence in Washington's favorite quasipublic companies and what we're getting is a rout for taxpayers, especially those who kept their heads during the housing mania?.

"The White House has thrown its reservations overboard and is begging to sign this boondoggle?.

"Even conservative estimates by the Congressional Budget Office say the cost for this bailout will run to $41.7 billion, with $16.8 billion offset by higher taxes. No one has any idea of the real cost. The most expensive provision gives the Treasury temporary authority to pour money into Fannie Mae and Freddie Mac. The CBO says this could cost $100 billion, or it could cost 'nothing.' So it threw a dart at the wall and assigned a $25 billion price tag to the Fan and Fred bailout.

"Likewise, the bill's $300 billion to refinance and insure distressed loans through the Federal Housing Administration will supposedly cost just a few billion dollars. That assumes few homeowners and lenders will sign up for the program because lenders will have to take a 10% haircut to be eligible. If no one needs this program, why is it there?....

"Alongside these big-ticket items, we suppose the $4 billion tax credit for first-time home buyers, or the $4 billion in 'community development' pork grants, or the $180 million for housing counseling are merely routine outrages.

"On the other hand, the kid-glove treatment of Fannie Mae and Freddie Mac is very much worth worrying about. On the floor of the House yesterday, Democrats argued that this bill was the least Congress could do 'for the people,' given the way the government had 'helped' Bear Stearns. The cost borne by Bear Stearns was having its shareholders all but wiped out and half its employees pink-slipped. Countrywide was likewise sold at a fire sale price. Not so these two government-chartered giants.

"Fannie and Freddie may well be too big to fail, as Treasury Secretary Hank Paulson keeps reminding us. That is true in large part because they were allowed - no, encouraged - to grow like Topsy while Congress shielded them from oversight. At a minimum, the cost of a lifeline ought to include some accountability and assurance they cannot get into such a fix again. Instead what we have is a promise that Fannie and Freddie will pay us Tuesday for an explicit taxpayer guarantee today. The Treasury will get unlimited authority to recapitalize the mortgage giants, effective immediately, while a new regulator will have to run a gauntlet of confirmation and Congressional hazing over the companies' portfolios of mortgage securities the way a Supreme Court nominee has to handle Roe v. Wade?.

"If Fannie and Freddie can't be brought to heel politically now, when weeks ago their very survival was in doubt, not even a newly empowered regulator will have any hope of reducing their claims on the public fisc once the dust settles?.

"(The) White House and Treasury are betting that this bill will put a floor under the housing market and buoy bank stocks, and thus avoid a deeper financial downturn. The rescue will only delay a housing market bottom, and it may or may not help bank stocks. The one certainty is that taxpayers are assuming a huge new risk."

"What worries me is the complete lack of accountability by Fannie's and Freddie's executives, as well as Wall Street investment bankers also now being insured by taxpayers. We've created the worst form of socialized capitalism - private gains combined with public losses. These executives and bankers are among the best paid in all of corporate America. Their organizations are treated as if they're giant investor-driven private-sector entities as long as they're healthy. But when they start to go down the tubes they become public entities with public responsibilities, and the rest of us have to bail them out."

"The plan advanced by Secretary Paulson provides an open- ended source of funding for the government to buy the stock of the companies and to lend them unlimited amounts of money. While it may be a necessary last-ditch effort to save them, the plan leaves existing management and directors in place and asks for no explicit accountability for existing shareholders and other investors. Unfortunately, this appears to be related to the enormous political power Fannie and Freddie have developed through decades of political contributions and management by politically connected individuals like Franklin Raines [Clinton's OMB director and former chief of Fannie Mae] and Jim Johnson [until recently an Obama adviser. Johnson was also chairman of the Goldman Sachs board's compensation committee while Paulson was its CEO.]"

"Surely things are somewhat amiss when a country's finance minister [Paulson] plays bond salesman for a supposedly privately-owned company."

"Borrowers who are in trouble on their mortgages have seen their government move slowly - or not at all - to help them. But banks and the executives who ran them are quickly deemed worthy of taxpayer bailouts."

Henry Paulson: "This is a very manageable situation." At what cost, Mr. Secretary?

"Have the stewards of other people's money not made a hash of high finance? Did they not enrich themselves in boom times, only to pass the cup to us, the taxpayers, in the bust? Where is the people's wrath?"

I can't help but add, where's the revolution? It's sickening how there is zero accountability. I'm all for the Michael Dells or Bill Gates or the Google boys making a killing off of their entrepreneurship. But for some of Wall Street's titans of finance and marketing to escape scot-free with their $millions is beyond scandalous, whereas those perpetrating mortgage fraud should be locked up for life without parole. Our penalties for financial crimes, as premeditated as any crime one can commit, need to be brought into the 21st century. Actually, China has the right idea in this regard, but punishment there is far from evenly applied.

So what of the economy overall? The latest housing data for June was awful, with existing home sales (90% of the total) hitting another low as inventories rose to 11 months supply. You know the mantra by now. There is no sustainable recovery until you first work off a large portion of the inventory?.period. Foreclosures continue to rocket higher, nationwide up over 120% in the second quarter over a year earlier levels, and a 20-year high for a key state such as California. In Stockton, California, one in every 25 homes was foreclosed on?staggering. I get a kick out of all those trying to pick the bottom in housing. Don't waste your time. As I've said for years now (and which even PIMCO's Bill Gross seems to have come around to recently), when we do hit bottom, whether it is next month or early 2009, we'll just sit there for awhile.

It's still all about affordability and despite the Federal Reserve's best efforts, rising mortgage rates aren't helping matters. But will the congressional bailout help? I doubt it, plus the above discussed blowback in terms of the impact on the federal debt and the pressures to finance it could make things even worse in terms of ever higher rates.

Speaking of the Fed and interest rates in general, you still have a number of Fed governors telling us that Ben Bernanke's wrecking crew "can't wait" any further to raise rates because the inflation genie is out of the bottle. Raising rates now would of course be the worst thing the Fed could do. And I know it's hard to see today because prices (except for the recent break in energy) appear to be marching ever higher, but within just the next two or three months you'll see the debate has shifted on this front.

But this is important. The producer and consumer price picture may begin to brighten in terms of official numbers, but costs such as for tuition and healthcare will keep rising, which in turn will further fuel the angst of the middle class, in broad terms, i.e., that meager 13 to 14 percent who believe the country is on the right track isn't about to rise significantly anytime soon.

As for the U.S. banking sector, it was another week of incredible volatility as displayed further below. All manner of institutions in releasing their earnings reports, such as with Wachovia and Bank of America, added to their loan-loss reserves because of a further deterioration in the consumer sector as the crisis evolves from housing to home equity loans to auto loans and credit cards. Separately, American Express shocked the Street by missing its earnings forecast by a mile as "consumer spending slowed? beyond expectations."

Finally, the global economy continues to weaken. Britain is dead in the water on a GDP basis and retail sales there plunged 4% in June while officials warn of huge increases in utility costs this coming winter.

"Thousands of first-time buyers are being forced to pay out sky- high mortgage rates because negative equity has trapped them with their current lender.

"The new buyers, who purchased their houses with 100 percent mortgages, are now unable to switch to a cheaper lender because they have no equity built up in their homes."

Meanwhile, German Chancellor Angela Merkel said a "clear economic slowdown" appeared unavoidable with a "significant fall" in growth likely in 2009, while all manner of consumer and business sentiment readings in Germany, France and Italy have hit new multi-year lows.

One key individual player, Vodafone, the world's largest mobile phone operator, talked of slowing global demand in its latest earnings report, and even New Zealand's central bank felt compelled to lower interest rates despite current inflationary pressures because the slowing economy there took precedence. All in all, the global scene is tepid at best, just as I said it would be in earlier forecasts.

So is there any good news out there? Why yes. Oil continued to slide from its closing high of $145 (and intraday peak of $147+) to finish the week at $123.50, quite a decline in less than three weeks. Natural gas has taken an even greater header in percentage terms, while gasoline futures plunged to the $3.00 level, a point at which $3.80 or so at the pump on a national basis would be the norm were we to hold this mark for another few weeks.

Such a break on energy prices can certainly be helpful for stocks, if not on consumer spending overall, and it's one reason why I have seen no reason to change my original forecast for 2008 that the major indices will finish down 3 to 5 percent for the year compared to far more sizable losses to date, but I still have trouble raising my 80% cash / 20% equities split just yet, even if the sentiment readings I've been discussing the past few weeks are in a contrarian's favor.

This isn't a normal bear market as you've heard so many say by now. It's not a normal inventory led downturn, for example. It's a financial and housing led one, with an energy kicker. One can't begin to make heads or tails out of the investment banks for fear of what lies inside their still opaque books, for starters, nor do we know where the bottom truly is in the average American's number one asset, their home, and the securities attached thereon, nor can you get too hopeful on the energy front, even with ongoing demand destruction, because we've yet to enter the peak of hurricane season and we are no closer to a resolution on the Iran nuclear weapons front.

[Late Friday, the Feds closed two more banks?1st National Bank of Nevada and First Heritage Bank, operating in Nevada, Arizona and California.]

--Stocks were mixed, with the Dow Jones falling 126 points to 11370, while Nasdaq tacked on 28 to 2310. Earnings reports continued to flood in. Among the winners were Bank of America, Caterpillar, DuPont, AT&T, General Dynamics, McDonald's, Amazon, Credit Suisse and 3M. The losers included American Express, Apple (on its guidance), Texas Instruments, Wachovia, Washington Mutual, UPS, Yahoo, Boeing, and Dow Chemical.

There were two positives on the economy that helped stocks out a bit on Friday, barely, those being a bounce in consumer confidence off a 28-year low and a solid durable goods (big ticket items) number for June that some analysts made way too much of. As I write from time to time, there is no more volatile data point than this one but the Street has been giving it way too much respect, both up and down. You need to string at least two of these together to glean anything truly meaningful.

The Federal Reserve's beige book on regional economic activity contained no surprises; slowing growth and rising inflationary pressures. But as alluded to above, there is no way the Fed hikes rates at least until the fourth quarter, if at all this year.

"Bob Dylan said it best: 'The answer is blowin' in the wind.' While politicians and environmentalists have been busy arguing about how best to require that greenhouse gases be curtailed, the world around them has changed. The precipitous rise in oil and gas prices over the past year has made the debate on greenhouse gas emissions moot. The reduction in the output of those gases will move forward at warp speed, not because of rules, regulations and cap-and-trade decrees but because of free markets and economics.

"Two factors are driving this sea change. First, the price of our traditional fuels - oil, gas and coal - has risen dramatically. Second, the silent and inexorable march of technology has dramatically reduced the costs of clean alternative energy sources such as wind turbines and photovoltaics, which converts sunlight into electricity. The result will be a dramatic reduction in the emission of greenhouse gases - without politicians passing a single additional piece of legislation?.

"Today, wind energy is economic at about 7 cents per kilowatt hour, and that is without factoring in production tax credits. A few years ago, that cost was 15 to 20 cents. Compare the 7 cents for wind energy with the 12 cents per kilowatt hour required to build a gas-fired power plant, and you can see why there is a veritable land rush to harness wind energy?.

"The cost of (solar) has fallen over the past few decades and is about ready for prime time. That retail electricity prices are increasing by as much as 30 percent this year will only accelerate the arrival of the 'liftoff' phase of photovoltaics. Also, retail electricity prices in New York may soon be headed to 30 cents per kilowatt hour. At those prices, an investment in a photovoltaic array on the rooftop of a house will pay for itself in fewer than 10 years, resulting in a greater than 10 percent return on one's capital cost. Compared to the sub-5 percent yield on municipal bonds, this return represents an extraordinary investment."

But as I've noted, we still need the credits extended for just another 5 to 10 years to solidify the gains already made and really take alternative energy to the next level. [And to take my own investments in same up three- to five-fold, darn it.]

--We still need oil and gas in the meantime, however, and a four- year study by the U.S. Geological Survey found that the area north of the Arctic Circle contains about 90 billion barrels of oil, and three times the natural gas equivalent.

So you couple this finding with the fact the Arctic is increasingly ice free in the summer and it's no wonder there is a race between the five circumpolar states - the U.S., Canada, Denmark, Norway and Russia - to stake their claims, with Russia having already planted its flag 14,000 feet under the North Pole. [Hopefully it was devoured by a giant squid.] Separately, Russian President Medvedev said the Kremlin will select the companies to develop their Arctic reserves to ensure only state- owned operators are involved. Which leads me to?.

--The struggle between a giant joint energy venture, TNK-BP, and the Kremlin is getting nastier and nastier. Vladimir Putin and the boys want BP out and BP announced its last 60 employees in Russia will be leaving soon, with CEO Robert Dudley leaving on Thursday three days before his visa expired. The company initially had 150 employees there but they have continually been harassed on the visa and work permit front. Last March BP's offices in Russia were raided.

So BP is fighting back in the best way it can by blocking the payment of $1.8 billion in dividends to its partners in TNK-BP, specifically four Russian billionaires and their cronies. A BP spokesman said "They're there for the cash." Like try $18 billion in dividends paid out to this group since 2003. Two oligarchs alone have received $4.5 billion each. Yes, with a 'b.' Talk about insane.

But this wasn't the only story in the Russian markets this week. Stocks plunged on Friday to the tune of over 5% as Vladimir Putin severely criticized a large steel company, Mechel, which some read to mean he is out to grab the assets, a la the seizure of Yukos. This may not turn out to be the case, but as I've never said Russia was a safe place to invest, and for long stretches I've looked bad as stocks soared here as a result of rising energy prices, one thing is for sure; Russia is a vile place with a leadership that is looking more Stalinesque by the minute.

--Ford posted its largest loss ever, $8.7 billion in the second quarter, most of which was a writedown of its North American assets as well as losses on the credit co.'s lease portfolio. Revenue fell from $44.2 billion a year ago to $38.6 billion.

But Ford also announced it will bring six European small car models to North America by the end of 2012 in response to high gasoline prices. All of us who have traveled over the years, to Europe or Asia, for example, have had the same thought when seeing small cars overseas that you know are made by Ford and GM. 'Why don't they sell them here?' Well, Detroit has finally learned its lesson.

For its part on Friday, Chrysler announced it would no longer offer auto leases through Chrysler Financial because it is simply uneconomic to do them amidst plunging resale values for less fuel-efficient vehicles such as trucks and SUVs. Coincidentally, an article in the 8/4/08 edition of BusinessWeek addresses this very issue with one expert labeling it a $4.7 billion industry-wide problem.

--Meanwhile, Daimler and Renault cited deteriorating conditions in Europe for lowering their respective forecasts. As a result Renault is cutting 4,700 jobs in Europe.

--But Honda Motor Co. reported a record profit for its quarter, $1.68 billion. Revenues dipped slightly due to a rising yen, though it sold a record 962,000 vehicles worldwide. Demand is particularly strong in Asia and Brazil, while in the U.S. for the month of June, Honda had been the only automaker to record better sales here than a year ago.

--Apple beat Wall Street's earnings expectations for the quarter as it shipped more Macs than ever before - 2.5 million, with desktop shipments actually growing faster than laptops. Sales of iPods rose 12 percent and the company is confident it will sell 10 million iPhones over the next 12 months.

But the shares dropped not only on lackluster guidance for the current quarter but also growing concerns over Steve Jobs' health and a possible return of his pancreatic cancer. Aside from looking much thinner at a recent appearance, he did not join this week's conference call with investors and CFO Peter Oppenheimer declined to answer questions on his health, calling it a "private matter."

--While some try and convince you Las Vegas is immune to the problems in the economy, yet another high-profile project, Lake Las Vegas, a massive resort community under development, was placed in bankruptcy amidst a lack of cash and $800 million in debt. Only 1,600 of 9,000 planned homes have been built.

--Research into Vytorin, the cholesterol drug that is a joint venture of Merck and Schering-Plough, found a disturbing link to cancer; this on top of failing to prevent complications from heart valve disease. Shares in both plummeted on the news.

Vytorin does slash cholesterol levels, 61 percent vs. those taking the placebo, but there were basically the same number of complications in both groups plus the elevated cancer threat.

--New York Attorney General Andrew Cuomo filed a civil lawsuit against UBS, the Swiss banking giant, for deceptive marketing of auction-rate securities, sold as money-market alternatives only to see the auction market that enabled the game dry up amidst the credit crunch. UBS executives are also under the gun for dumping $21 million in personal holdings as the market collapsed, even as the firm was still selling the investments to clients. UBS "continued the fraud after they knew the fraud was revealed for what it was," said Cuomo. UBS customers are holding a staggering $25 billion in the now-illiquid paper. Other securities firms are under the microscope as well. Big names?very big names. For its part, UBS said it did nothing wrong. Right.

Washington Mutual?5/2 $13; 7/14 $3; 7/21 $6.50; 7/25 $3.80
Wachovia?5/2 $31; 7/15 $7.80; 7/23 $19.50; 7/25 $14.50
Merrill Lynch?5/2 $54; 7/15 $23.50; 7/23 $37; 7/25 $27.50
Fannie Mae?5/2 $31.50; 7/11 $6.70; 7/21 $18.50; 7/25 $11.50

--The combination of Sirius Satellite Radio and XM was first proposed in February 2007 and finally, 18 months later, it has received the approval of the FCC by a 3-2 vote.

--Yahoo gave up three board seats to activist investor Carl Icahn in its ongoing attempt to stay independent and, coupled with a poor earnings report, the shares slipped further to $21 and change, well below Microsoft's initial $34 bid for the company.

--The New York Times saw yet another drastic fall in advertising revenues, down 16.4 percent in June. One sector that is killing media, both old and new, is a plunge in real estate classified ads.

Yes, the housing sector is hurting the likes of Google too. In the UK, for example, overall ad revenues on Google fell from $800 million in the first quarter to $780 million in the second. [Approximate figures.] This may not seem like much but Google is supposed to be a growth story.

--Do you want to go to the Olympics? If you can get a flight there are ample hotel rooms with some in Beijing slashing rates by as much as 30 percent because demand didn't materialize. Officials were expecting 500,000 foreign guests but many are being scared off by high prices and difficulty in getting visas. Some of the security measures the government is taking are also a bit unnerving, like the stationing of a ground-to-air missile battery just 1,000 feet from one Olympic venue.

--And if you are an investor in Macau, be aware the Chinese government is cracking down on the number of resident visits from neighboring Guangdong. Despite the people having a reputation for gambling, like all Asians for that matter, the central government is anti-gambling. Prime Minister Wen Jiabao has warned Macao against "putting all its eggs in one basket," and as Fox Yi Hu of the South China Morning Post opined, "history tells us that the central government does not tolerate disobedience by local governments." Some merchants and casino operators say business is suddenly off 30 to 40 percent.

--Mark R. says he now knows why Brett Favre is so desperate to get back into football. He's been 'long' financials.

--On Thursday before the market opened, Jim Cramer said "we hit the bottom (in the stock market) ten days ago?forever." Cramer deserves credit for being spot on in his coverage of the Fed, Fannie et al, but such reckless b.s. as the preceding is what makes him look like a clown.

--Kind of funny how I slammed CNBC's Erin Burnett last Saturday and then the next day the New York Times had a glowing story on the rising star. I maintain her viewers are often being treated like chumps.

--Finally, how unnerving was that Qantas Airways story; being forced down from 40,000 feet due to a large hole suddenly appearing in the fuselage? 346 passengers and a crew of 19 were diverted to Manila after leaving Hong Kong. Aside from the 9- foot hole next to the wing, part of the flooring and ceiling collapsed. Passengers described hearing a large bang and felt a rush of wind and debris through the cabin. The crew, however, received major kudos for its professionalism.

Iraq: President Bush and Prime Minister Maliki, in an attempt to end-run the yearend U.N. deadline for the withdrawal of all foreign troops, have agreed on a "general time horizon" as a way of dragging out a formal "status of forces" agreement. But despite Maliki's seeming endorsement of Barack Obama's timetable, which he then quickly denied, Maliki's own aides concede they are looking for 2010 as the time when Iraq's military should be in a position to stand on its own. At the same time, Iraq's military leaders want the U.S. to stay well beyond 2010. It boils down to Iraq's upcoming provincial and parliamentary elections, the latter slated for next year while the former are now a question mark for this fall. Appearing to set a timetable, even a general time horizon, allows certain Iraqi political factions to claim they are being tough on the United States. At least this week Gen. David Petraeus got to put in his own two cents during Obama's visit to the country.

Admiral Mike Mullen, chairman of the Joint Chiefs of Staff, on withdrawing all combat troops from Iraq within two years.

"I think the consequences could be very dangerous. It's hard to say exactly what would happen. I'd worry about any kind of rapid movement out and creating instability where we have stability. We're engaged very much right now with the Iraqi people. The Iraqi leadership is starting to generate the kind of political progress that we need to make." [AP]

Iran: At the much anticipated meeting in Geneva with the EU-3 plus two (the five permanent members of the U.N. Security Council plus Germany, with the U.S. sending a diplomat for the purposes of 'listening'), Iran was to respond to the latest incentive package of rewards for disabling its uranium enrichment program, but instead the Iranians countered with a whopping two-page document that was said to be full of misspellings. Totally bush league, pardon the pun. Needless to say, Iran is not interested in freezing its program but now has about another week to give a better response or it could see a new round of sanctions (assuming Russia and China cooperate), not that the previous three rounds have had any impact.

"Diplomacy has its uses, and the U.S. can do more to support the Iranian peoples' struggling to shake off their oppressive theocracy?.

"But diplomacy also means getting something for giving something. That's not how it has worked here. Mr. Bush has conceded Iran's supposed 'right' to build nuclear reactors, despite the fact that Tehran forfeited that right when the U.N. found it to be in material breach of the Nuclear Nonproliferation Treaty. Mr. Bush has also offered to negotiate directly with Tehran on the sole condition - the only 'precondition,' as Barack Obama refers to it - that Iran stop enriching uranium. Yet Iran continues to enrich.

"The Iranians understand that the fondest wish of America's foreign policy establishment is to strike what is often called a 'grand bargain' that would lead to the normalization of relations between the two states. We would not be opposed to such a bargain, provided it required Iran to verifiably abandon all its nuclear programs, including the so-called civilian ones; stop supplying arms to militias that are killing our soldiers in Iraq; end its support for terrorist groups and hand over the suspects in the 1996 Khobar Towers bombings, in which 19 U.S. servicemen died.

"Instead, Iran is having it both ways, behaving like a rogue state even as it is increasingly accorded the respect due a normal one?.

"We know from our Israeli friends, too, that they sense the accommodationist drift of our Iran policy and are drawing conclusions of their own. Unlike the Bush administration in its legacy-hunting days, inconstancy is not a policy option they can afford."

"Diplomacy is not wrong, but President Bush's reversal is diplomatic malpractice on a Carteresque level that is breathing new life into a failing regime?.

"The State Department places its about-face in the context of multilateralism. This is nonsense. By agreeing to suspend its demand for a cessation of uranium enrichment, Washington is signaling to Tehran that it need not adhere to three current U.N. Security Council resolutions. Rather than reinforce diplomacy, the White House reveals that its red lines are illusionary.

"While European diplomats hope regime pragmatists might re- inject responsibility into the Iranian debate, Ms. Rice's State Department has bolstered Ahmadinejad and his fellow travelers. As Ahmadinejad begins his reelection campaign, he can say he has successfully brought Washington to its knees through blunt defiance, murder of U.S. troops in Iraq, and Holocaust denial. Should he win reelection in 2009, he will have Mr. Bush's whiplash diplomacy to thank for his greatest - and, given the state of his economy, perhaps only - victory."

"In the weeks leading up to the State Department's announcement [that it was sending a diplomat for direct meetings with Iran's nuclear negotiators], Iran had been deliberately provocative. At a Kuala Lumpur summit for developing nations, Iranian president Ahmadinejad warned of George W. Bush's 'satanic desires.' Iran test-fired long-range missiles, including the Shahab-3, which is capable of striking Israel. And a few days after that, it rejected a generous aid offer from our European allies - backed by the State Department - that included nuclear fuel, assistance on a nuclear reactor, and improved trade and diplomatic relations, if the Iranian regime would simply suspend its uranium enrichment program.

"The State Department response wasn't to get tough. Instead, Condoleezza Rice directed her diplomats to simply drop the one precondition for engagement that we had insisted on for years and in effect reward these provocations?.

"[Including our action on the North Korean front it] has been a dispiriting few weeks. Several conservative political appointees have said that they are embarrassed to be working in the Bush administration. One called the new policies 'preemptive capitulation.' Another suggested that whatever credit the Bush administration deserved for keeping Americans safe in the seven years after 9/11 would be offset by the blame the administration will have earned for emboldening America's enemies with its reflexive weakness. And a former adviser to Condoleezza Rice said: 'This is stunningly shameful.'"

"(It) is now obvious that the American move [to negotiate with Iran] has completely altered the appearance of the diplomatic process. Readjustments in the U.S. stance have made the Americans appear to be the more flexible party in the Iranian- American cold war, whereas before the lack of progress could be blamed on a duo of obstinate rivals. Even the most pro-Iranian observer cannot deny that the Americans have now gone 180 degrees and more than 6,550 kilometers from Washington to Geneva, while the Iranians are still talking about progressing in millimeters."

Israel: Amidst all that is on this country's plate these days, an indictment of Prime Minister Olmert on corruption charges is said to be imminent, but at the same time the key prosecution witness is now slated for a final round of cross-examination around Sept. 1 and Olmert is being interviewed again next week as this whole process drags on and on and on.

Separately, Israel took a lot of heat for once again going back on its promises concerning settlements in the West Bank.

But of course it's really all about Iran these days, as well as waiting to see if an emboldened Hizbullah decides to make a move of some kind. Departing Israeli Ambassador to the U.N. Dan Gillerman was interviewed by a number of folks on various issues.

Q: The Bush administration, it seems, has not done much to advance the Mideast peace process, would you agree?

Gillerman: I think the key is in the Arab world. The Palestinians' real tragedy is that they have not been able to produce a Nelson Mandela. Every single day, Muslims are killed by Muslims. You do not see a single Muslim leader get up and say, 'Enough is enough.' It's nearly as if we live in a world where if Christians kill Muslims, it's a crusade. If Jews kill Muslims, it's a massacre. And when Muslims kill Muslims, it's the Weather Channel. Nobody cares.

Q: Is Israel going to do something to prevent Iran from becoming a nuclear power?

Gillerman: I think Israel should do everything in its power, literally everything, to prevent that mad regime in Tehran?from achieving nuclear weapons. I believe it is Israel's responsibility to its people, but I believe also it is the responsibility of the international community. Iran is a threat not just to Israel but to world peace and security. It is up to the international community to act rather than to expect Israel to act.

Gillerman: I have no doubt that if Iran is allowed to develop its nuclear program, many other countries in the region - including Saudi Arabia and Egypt - will follow suit. Saudi Arabia is probably more threatened by Iran than Israel is. Iran has designs on Saudi Arabian oil.

Gillerman: Hizbullah is back to its prewar strength and maybe even beyond it because it has not been made to disarm. The situation in southern Lebanon and on our northern border is very fragile - literally explosive.

Afghanistan: The halo over President Hamid Karzai's head has long since dimmed and now some former State Department officials have come forward to say Karzai is protecting the drug lords. Thomas Schweich told the New York Times "narco- corruption went to the top of the Afghan government." But it's also true that the U.S. and Britain see the Taliban, not poppy suppression, as the primary goal today, as it should be, but with 90% of the world's opium/heroin coming from here, what kind of government are we really supporting?

India/Pakistan: The government of Indian Prime Minister Singh narrowly survived a no-confidence vote in parliament, 275-256, that would have forced an early election and torpedoed the U.S.- Indian nuclear technology cooperation agreement that brought this all on in the first place.

But Pakistan isn't happy as it warned the U.S.-India deal will accelerate the nuclear arms race between Delhi and Islamabad and is attempting to block approval of the International Atomic Energy Agency and Nuclear Suppliers' Group nations, which is necessary before the agreement can go into effect. [Assuming the U.S. Congress also signs off.]

[India's high-tech capital of Bangalore was hit by seven simultaneous explosions on Friday, killing one, but as of this writing authorities couldn't identify the group responsible.]

Russia: An anonymous air force official told Russia's state paper, Izvestia, that Russia could deploy nuke-capable strategic bombers in Cuba if the United States goes through with missile defense deployment in Eastern Europe.

China: Some of us, going back years, have talked about the coming wars over energy in Asia and so it's important to keep an eye on a growing dispute between China and Vietnam involving exploration in the South China Sea off Vietnam's south and central coasts. China is protesting a proposed Vietnamese venture involving ExxonMobil and Exxon has to be careful because it doesn't want to be shut out of future projects in China.

But the reason why I placed this item here rather than in the discussion of energy in Street Bytes is because I didn't realize a number of months ago that in a diplomatic communiqu? between the U.S. and Vietnam, Washington said it would support Hanoi's "national sovereignty." The item was purposefully buried.

Of course the United States has also vowed in the past to protect Taiwan, the sincerity of which I have often questioned. Last review I wrote of how the Bush administration has decided to hold off on an earlier agreed upon arms shipment to Taiwan and this week Dan Blumenthal, Aaron Friedberg, Randall Schriver and Ashley J. Tellis commented in an op-ed in the Wall Street Journal.

"While defense experts in Taipei and Washington debated the utility of some of these systems for Taiwan's defense, as a package they constituted a powerful signal of America's long- standing commitment to Taiwan's defense and contained important elements of a stronger Taiwanese deterrent against potential Chinese aggression. The offer made good on Mr. Bush's promise that the U.S. would 'do whatever it takes' to defend Taiwan?.

"The Bush administration now appears unwilling to follow through on its side of the bargain. [Ed. note: Remember, the White House didn't notify Taipei first; Taiwanese President Ma had to learn of our reneging on the arms deal in the press.]

"Why the volte-face? Following its initial offer of assistance, the Bush administration came to regard former Taiwanese President Chen Shui-bian as a reckless provocateur?.Fearful that selling Mr. Chen arms would only embolden him, some administration officials were quietly thankful for the continuing turmoil and indecision in Taipei.

"Whatever the validity of these concerns, they no longer apply. In May 2008, the Taiwanese people elected opposition leader Ma Ying-jeou to the presidency. Mr. Ma is dedicated to improving cross-straits ties and eschews Mr. Chen's inflammatory rhetoric. But, like his predecessor, he is committed to strengthening Taiwan's self-defense capabilities.

"Since Sept. 11, 2001, the Bush administration has been anxious to avoid antagonizing Beijing and eager to win its support on a variety of issues, especially its continuing efforts to denuclearize North Korea. Though the extent to which China has actually been helpful is debatable, the administration has increasingly subordinated many aspects of its Asia policy to the overarching aim of not offending Beijing.

"The policy of not offending China, no matter what the costs, does not serve U.S. interests in the Taiwan Straits. First, it undermines Mr. Ma's ability to deal with Beijing from a position of strength, and to that extent it undermines the common objective of peaceful reunification, should the Taiwanese desire it?.

"At stake is not only the defense of a democratic friend, but the credibility of the Ma government. Also at stake are America's commitment to protect its long-term interests throughout the Asia-Pacific, and Mr. Bush's determination to defend freedom. Failure to act would also set a dangerous precedent. For the first time since its opening to China, the U.S. government would have sidestepped its obligation to assist Taiwan in hopes of appeasing Beijing. Now is the time to change policy and move forward: both principle and pragmatism demand it."

Serbia: Bosnian Serb war criminal Radovan Karadzic, living in Belgrade for years under disguise as an alternative medicine expert, was finally picked up by the West-leaning government. Twice Karadzic has been indicted by the U.N. war crimes tribunal and eventually he will stand trial in The Hague like his buddy, the late Slobodan Milosevic. Karadzic was responsible, along with fellow fugitive General Mladic (still at large) for the 1995 massacre of 7,500 Bosnian Muslims at Srebrenica as well as the tragic shelling of Sarajevo.

But the clips of the man on the street in Belgrade are more than a bit disturbing as Karadzic still has a ton of support.

Zimbabwe: Robert Mugabe and opposition leader Morgan Tsvangirai met face to face for the first time in 10 years in an initial attempt to forge talks aimed at some sort of power-sharing arrangement. South African President Thabo Mbeki mediated the deal. To say the least, I'm underwhelmed.

Thailand/Cambodia: A border dispute out of nowhere between these two has become a mini-hot spot that is about to go before the U.N. Security Council. The ancient temple of Preah Vihear has long been claimed by both, even after being awarded to Cambodia in 1962 by the U.N. But what has everyone on the Thai side all riled up now is that Preah Vihear has been listed as a U.N. World Heritage Site, in Cambodia. [Interesting list, by the way. Look it up.]

Egypt: I was just skimming over some papers from the region and an article caught my eye. Egypt and Iran haven't had full diplomatic relations since 1979 when Sadat hosted the deposed shah as Ayatollah Khomeini took power, but just when things were looking up between the two, today a movie out of Iran praising the assassins of Sadat has many in Egypt's government (but not necessarily the man on the street) in an uproar. Understand that the reason why Iranians would glorify Sadat's killers is because he was responsible for the peace deal with Israel. [More so than a Sunni/Shia dynamic.] Said one Egyptian editor, "This simply gives Egyptians another reason to hate Iranians."

Britain: One of Prime Minister Gordon Brown's senior advisers was the victim of a "honeytrap" operation by Chinese intelligence agents. The poor sap's BlackBerry was stolen after he was picked up by a Chinese woman who approached him in a hotel disco and the two went off to his room and?you know?. the BlackBerry was missing the next day. Huh.

Venezuela: President Hugo Chavez was in Moscow to pick up a reported $2 billion in arms. He also asked for Russia's protection from the United States.

Mexico: The navy seized six tons of cocaine found inside a 31- foot makeshift sub in the Pacific Ocean. U.S. intelligence helped in the operation. Four Colombian crew members were taken into custody. This is the first intercept of such a craft, though U.S. and Mexican officials have known they are out there.

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