Week in Review 
For the week 8/4/2008 - 8/8/2008
Brian Trumbore
President/Editor, StocksandNews.com

Wall Street

I get a kick out of those in the punditocracy who feel compelled to comment on the markets and the world three times a day, as if they then carry any credibility. It's tough enough doing a "Week in Review" of the world, but as you know I'm guided by a principle that has held me in good stead in so many ways? "wait 24 hours."

You also know I don't like to change course on my forecasts and I haven't since the end of 2006 when it came to '08, frankly. I called for a recession this year, way back then, and said it would not be a deep one but that it would last a while. I have then refined various aspects of my calls when appropriate and so I wrote on 5/24/08:

"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 wrote on 6/28/08, the day after the price of corn peaked, amid all the dire predictions with the flooding in the Midwest, that the top was in. It was. Corn has fallen from about $7.70 on 6/27 to $5.20 on Friday. [Earlier in the year I nailed the peak in rice to the day when everyone else was absurdly saying we had a shortage of the stuff around the world.]

On 7/5/08, I wrote in this space, "There is no way you can validate $145 oil, no matter what anyone says on the supply/demand front," adding, "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."

While oil hit $147 intraday on 7/11, the weekly closing high was achieved on 7/3, $145.30. This week oil closed at $115, though I'll have far more on this subject next week because I remain a Peak Oil adherent and the story from here gets complicated, including the impact of my main prediction for 2008, that Israel will attack Iran this year.

But when it comes to my favorite topic, housing, where back in 2004 I was writing of a "global" bubble in real estate, I got a kick out of a survey by data company Zillow.com, as reported on by Sushil Cheema in the Wall Street Journal. Each quarter Zillow conducts a survey to gauge homeowner confidence and in its second quarter survey, released this past Wednesday, 62% of the respondents said they believe the value of their home had appreciated the prior year. Zillow's data, however, shows that 77% of U.S. homes depreciated in value over that same period, while only 19% appreciated.

Ah yes, the state of denial. Check this out, from almost four years ago, WIR 8/30/04.

"Just last Tuesday, economists Robert Shiller and Karl Case wrote an op-ed in the Wall Street Journal on the situation in the U.S. In their own survey work of the Boston, Los Angeles and San Francisco markets, Shiller and Case found that a startling 28% of home buyers in 2004 expect 20% annual appreciation for the next 10 years. The two then conclude:

" 'A bubble occurs when exaggerated expectations of future price increases generate unusual demand either by people who fear being priced out of a market or by investors hoping to make a lot of money fast. A bubble is a self-fulfilling prophecy for a while, as successive rounds of buyers push prices higher and higher. But the willingness to continue to pay higher and higher prices is fragile: It will end whenever buyers perceive that prices are no longer going up. Hence, bubbles carry the seeds of their own destruction. Only time is needed for the bubbles to end.'"

So even though expectations of 20% returns on one's prime asset were blown out of the water, many still don't get it. Writing about the 2007 outlook on 12/30/06 I said:

"(Housing) will increasingly wear on consumer spending. This hasn't happened as quickly as I thought it would, nor has the market stagnated long enough for psychology to begin to wear thin. But at some point in 2007 reality will begin to hit Americans in the face; their leading asset has stopped appreciating, best case. The reverse wealth effect will then come into play."

Well, I got it right in theory, but I was off about a year on the consumer spending front. With so many still in denial, the consumer is hanging in there, only now she is finally showing signs of the big slowdown, with other factors in play of course. It will get worse when the na?ve finally throw in the towel. [Don't count on this little respite in oil bailing everyone out.]

But before I get to more specifics on the week's financial developments, just a general note on stocks. The news on the economy continues to worsen, especially around the world amidst the credit crunch, but stocks trade off sentiment as much, if not more so, than on fundamentals and right now they just want to go higher regardless of the roadblocks thrown in front of them. It's one reason why despite my recession calls for '08 I have stuck to my prediction the major indexes would finish the year off 3 to 5 percent. I'm not changing that one either.

OK, so this week stocks rallied strongly in the face of dreadful news. Insurance giant AIG lost $5.3 billion in the second quarter after a loss of $7.8 billion in the first. The $5 decline in its share price on Thursday was its worst ever as the company took massive writedowns on its CDO positions tied to mortgage-backed securities. I told you they should change their commercials. "Relax, Buddy. We're with AIG." Aaaghhhhh!

The twin mortgage giants, pimp Freddie Mac and the whore Fannie Mae, reported huge losses of $800 million and $2.6 billion, respectively, with lascivious Fannie taking about $5.4 billion in credit-related writedowns. CFO Stephen Swad (that almost sounds like a porn star, doesn't it? 'Fannie and Freddie do Congress', starring Stephen Swad) said "the credit picture remains very difficult." PIMCO's Bill Gross commented this week that the government, per the new legislation, will probably be ponying up $10 billion to $30 billion to buy preferred stock in the two to help them with their balance sheets. "We'll be on our way toward a joint Treasury-agency combination," said the Bond King.

If you're looking for a bottom in housing, homebuilders D.R. Horton and Beazer Homes both reported revenues were down another 40% as they offered there would be no recovery until early 2009, if then. It's still about affordability, and then tack on higher mortgage rates, despite the Fed's best efforts to the contrary, and a tightening of credit across the board and buying a home, even if you can afford to, just isn't that easy.

One of the other big negatives on the fundamental front that equity investors largely chose to ignore, except on a selected basis, was the dire news on the retail front from the likes of Wal-Mart and Target, both of which said the impact of the stimulus package was over. Wal-Mart, which has had a super year, relative to the competition in both execution and share price, is now calling for putrid sales in August, back-to-school month.

But wait, there's more. All the economic news from Europe and Asia spoke to lower growth, with much of developed Europe now in or tipping into recession, while in Asia, Japan by some measures is back in recession, South Korea is struggling, and we all hold our breath to see what happens in China, post-Olympics. And just one note on the U.K. housing market, post-bubble, which I nailed years ago, the average home value is back to 2006 levels, which means by early next year, as prices continue to tumble from here, a ton of homeowners will be underwater. I'm assuming Prime Minister Gordon Brown is looking into a new career, such is their system that he won't be around beyond the first quarter of '09, I assume.

Well, Mr. Editor, with all the bad news there had to be a reason why stocks rallied this week amidst wicked volatility.

Oil, down $9 despite the geopolitical tensions caused by the Russia-Georgia conflict - Georgia hosting two key pipelines running from Azerbaijan to Turkey - and a separate suspected Kurdish rebel attack on another key pipeline in Turkey. The "demand destruction" story is carrying the day for now, that and the fact speculators have abandoned the trade in droves.

Lastly, just a note on the auction-rate securities (ARS) fiasco, which this week saw the likes of Citigroup, Merrill Lynch and UBS cry uncle and succumb to the pressure of regulators, both state and federal, to make things right, Massachusetts and New York officials settled with Citi and UBS, with the two paying fines of $100 million and $150 million, respectively, while agreeing to buy back the securities from individuals and small institutions, thus making investors whole, while Merrill voluntarily agreed to do the same, though it still faces fines of its own, as do a number of other players in this game.

But what got me about the debate this week was there were actually a few defenders of the securities firms on CNBC who claimed that the ARS were sold to sophisticated investors and thus they should have known better that what was presented to them as a liquid cash alternative contained risk; ergo, investors should just suck it up.

This is what I can't stand about the freakin' free market purists. This was fraud! Pure and simple. Just like the research scandal involved out and out fraud. I've worked on the Street. It's a dirty place. I believe in free markets, too, and I don't want to see people bailed out just because they may have made a poor decision, but the ARS market, once it collapsed, revealed itself to be replete with fraud. I mean for crying out loud, this was a classic case where Wall Street executives were frantically trying to sell out their own positions in the crap while pressuring their underlings, particularly branch managers, I can just imagine, to sell the very same garbage to unsuspecting clients even as the market for it was drying up. There is no way in hell you can defend this.

Wall Street's behavior has been nothing but an outright embarrassment going back to the tech bubble. To argue otherwise is to reveal the brain of a ferret. Then again, I don't mean to give ferrets a bad name.

Street Bytes

--The Dow Jones rose 3.6% to 11734, the S&P 500 was up 2.9% to 1296, and Nasdaq soared 4.5% to 2414. Cisco Systems had a solid earnings report that helped power the tech sector.

--U.S. Treasury Yields

6-mo. 1.94% 2-yr. 2.50% 10-yr. 3.93% 30-yr. 4.53%

The Federal Reserve held the line on interest rates at its Open Market Committee meeting this week, as expected, and the accompanying statement didn't reveal anything new; inflation was a concern, as was growth, but the slowing economy would lead to lower inflation over time. Across the pond, the Bank of England and the European Central Bank also held the line on rates amidst concerns on growth there that trumped worrisome inflation. For this reason the dollar staged its biggest rally in some time, as the euros were seen as caving in on their past hawkish stance, and broke out of the $1.54-$1.60 euro range, finishing the week at $1.50. But as I've said in the past, wake me when we get to $1.40 before I can get too excited. In the meantime, however, the rally was a big reason for crude's fall. A continuing rally, though, would eventually hurt exports.

--Economist Martin Feldstein on the economic stimulus plan.

"An optimistic and influential study by economists at the Brookings Institution projected that each dollar of revenue loss would increase real GDP by more than a dollar if households spent at least 50 cents of every rebate dollar.

"The evidence is now in and that optimism was unwarranted. Recent government statistics show that only between 10% and 20% of the rebate dollars were spent. The rebates added nearly $80 billion to the permanent national debt but less than $20 billion to consumer spending. This experience confirms earlier studies showing that one-time tax rebates are not a cost-effective way to increase economic activity." [Wall Street Journal]

--The CRB Commodity Index is down almost 20% from its July 2 peak, but at least for now farmland values keep rising to new records in what is yet another bubble, as I identified a year ago when I spent a week in Iowa at the State Fair. The key here is the level of debt that farmers then take on, but the collapse of the housing bubble should constrain them some from taking undue risks. One state that appears to be temporarily immune is North Dakota thanks to a confluence of energy-related projects in both the wind and oil and gas arenas.

--In a regulatory filing, Citigroup revealed it lost $176 million in the second quarter packaging credit-card loans into securities, a danger sign for a business that generated $3.5 billion of revenue in the past three years for Citi, the biggest credit-card lender. Citigroup manages about $202 billion of credit-card loans worldwide, half of which have been securitized. Delinquencies on the latter have risen 16% since the end of last year to $2.16 billion as of June 30. Obviously this figure will keep growing for some time to come and present further balance sheet issues for the banks.

--Last week I referred to Medicare's roll in the exploding federal budget deficit and said I thought the legislation was from 2006. It was 2003 that the costly prescription drug benefit bill was signed. Sorry for the senior moment. But it turns out there was a "trigger" that as the Wall Street Journal editorialized "was supposed to force some future Congress to address the program's long-term insolvency" if the program draws more than 45% of its funding from general government revenue for two years in a row, as it has, at which point the White House is required to write up "corrective" legislation, which it has done. But Democrats refuse to go along since that would mean taking away one of the goodies they like to talk about come election time.

--The Journal had some salient points concerning Barack Obama's "windfall profits" tax proposal on Big Oil. Obama talked of taking "a reasonable share" of oil company profits. The Journal responded:

"Mr. Obama didn't bother to define 'reasonable'?

"Take Exxon Mobil, which on Thursday (last) reported the highest quarterly profit ever and is the main target of any 'windfall' tax surcharge. Yet if its profits are at record highs, its tax bills are already at record highs too. Between 2003 and 2007, Exxon paid $64.7 billion in U.S. taxes, exceeding its after-tax U.S. earnings by more than $19 billion. That sounds like a government windfall to us, but perhaps we're missing some Obama-Durbin business subtlety.

"Maybe they have in mind profit margins as a percentage of sales. Yet by that standard Exxon's profits don't seem so large. Exxon's profit margin stood at 10% for 2007, which is hardly out of line with the oil and gas industry average of 8.3%, or the 8.9% for U.S. manufacturing (excluding the sputtering auto makers).

"If that's what constitutes windfall profits, most of corporate America would qualify. Take aerospace or machinery - both 8.2% in 2007. Chemicals had an average margin of 12.7%. Computers: 13.7%. Electronics and appliances: 14.5%. Pharmaceuticals (18.4%) and beverages and tobacco (19.1%) round out the Census Bureau's industry rankings?.

"Or consider Google, which earned a mere $4.2 billion but at a whopping 25.3% margin. Google earns far more from each of its sales dollars than does Exxon, but why doesn't Mr. Obama consider its advertising-search-windfall worthy of special taxation?....

"The point isn't that these folks?have something to apologize for, or that these firms are somehow more 'deserving' of windfall tax extortion than Big Oil. The point is that what constitutes an abnormal profit is entirely arbitrary. It is in the eye of the political beholder, who is usually looking to soak some unpopular business. In other words, a windfall is nothing more than a profit earned by a business that some politician dislikes. And a tax on that profit is merely a form of politically motivated expropriation.

"It's what politicians do in Venezuela, not in a free country."

--Carl Icahn is not immune from his share of losers. This week his Florida homebuilder, WCI, filed for bankruptcy. The stock, 15% of which is owned by Icahn, has fallen from the $19 level he purchased it for in March 2007 to 30 cents today. Icahn had offered $22 for the whole company originally but the board rejected his offer. He was then named chairman in a proxy battle.

--Yes, it's a global real estate bubble. Moscow's First Deputy Mayor Vladimir Resin was asked to comment on the city's 40% drop in residential construction in the first half of 2008 over 2007 and he defensively said it was caused by legal disputes. But when asked about ever-rising rents and the affordability problem in the capital, Resin, in not exactly answering the question, fired back, "We don't have socialism anymore, we ended it."

Others in the government do indeed recognize affordability is a huge issue here.

--The Australian government has launched a special review of Qantas after at least five incidents the past two weeks. Despite the fact Qantas has never lost an aircraft to an accident, having a mid-air blast or developing a leak of hydraulic fluid while in the air is a bit disturbing.

--The U.S. Justice Department indicted 11 people in connection with the largest identity theft scheme to date, some 40 million consumer credit- and debit-card numbers from nine 'major' retailers, including TJ Max, BJ's, and OfficeMax. Three of the 11 were Americans, the rest from overseas.

--Former Refco Group President Tone Grant (you'll recall no relation to Tone Loc, he of the R&B hit "Funky Cold Medina"), was sentenced to 10 years for defrauding investors of $2.4 billion in an eight-year accounting scheme. Refco CEO Phillip Bennett was sentenced last month to 16 years. Refco, once one of the biggest independent futures traders, collapsed in 2005, just months after raising $670 million in an IPO.

--Bank of America, which acquired Countrywide Financial, noted in a filing on Thursday that former Countrywide CEO Angelo Mozilo was under SEC investigation and while the filing didn't say what the SEC was up to, it's suspected they are looking into insider-trading violations and whether Mozilo misled investors. Countrywide remains the subject of numerous FBI and state probes on whether it engaged in improper lending practices.

--As China celebrates the start of the Beijing Olympics, the nation's main stock index, the Shanghai Composite, fell 4% on Friday to a 19-month closing low amidst a slowing economy.

--The latest J.D. Power quality survey of the automotive industry shows that long-term quality is up 5%, with significant improvements in small and compact cars. Lexus came in at the top of the dependability rankings for a 14th year in a row. Mercury went from fourth place to second. Among premium cars, Lexus swept all categories.

[For the archives, I forgot to note last week that July U.S. auto sales came in at their lowest annualized rate since April 1992.]

--Awhile back I said that when the global economy flipped, those in the developing world who had graduated from eating insects to rice would go back to eating insects.

So along these lines I just have to note a story I saw in the South China Morning Post.

"Struggling to cope with soaring food and fuel prices, Thai rice farmers are swapping diesel-fuelled tractors for water buffalo."

The crisis has "also prompted them to rely more on manure to nourish their soil" than manufactured fertilizer.

--Barron's makes some mistakes in its reporting that are so egregious I just have to point them out. For example, in his Aug. 4 column, Alan Abelson wrote "By our reckoning, the late great bull market began in the summer of 1983, when the Dow was 1163."

WRONG! This is such a bad miss, it's truly pitiful. The bull market began on Aug. 13, 1982, after the Dow bottomed the previous day at 776 and never looked back thanks to then Fed chairman Paul Volcker cutting interest rates, as well as superstar economist/ doom and gloomer Henry Kaufman's sudden 'all-clear' signal.

Foreign Affairs

Russia/Georgia: I have long labeled this a potential 'hot spot' and boy did it flare up this week as Russian and Georgian forces have battled each other in the breakaway Georgian region of South Ossetia, bringing the two to all-out war as the leaders of both countries admitted on Friday. Russian President Vladimir Putin at first told reporters in Beijing that "countermeasures" would be taken to deal with Georgia's "aggression," then he said "war has started" as Georgian President Saakashvili accused Russia of a "well-planned invasion." Georgia appears to have started it but details remain sketchy, including reports that Georgian forces have shot down a number of Russian fighter jets. The Kremlin claims at least ten Russian "peacekeepers" were killed in the initial Georgian attack. The death toll has soared from there.

South Ossetia has a population of only about 70,000 and is one of two separatist regions in Georgia, the other being Abkhazia. Saakashvili ordered a full "mobilization" of reservists and called on his countrymen to defend "every meter" of land. I feel compelled to repeat something I noted 4/26/08, when I was warning of potential war between the two, seeing as it was just what Putin wanted.

Mart (sic) Laar, in an op-ed for the Moscow Times.

"In 1937, Hitler agitated for the rights of the Sudeten Germans in Czechoslovakia; in 1938, he annexed Sudetenland into the Reich, purging it of non-Germans. In Abkhazia, most Georgians, Armenians, Estonians, Greeks and Russians - perhaps 500,000 in all - are already gone. The Kremlin recognizes Georgia's international boundaries, but its actions belie its words.

"Meanwhile, the West appears deaf and dumb to Georgian President Mikhail Saakashvili's offer on March 28 of unprecedented autonomy for Abkhazia. Georgia's proposal of a new negotiating format for South Ossetia fares no better. Western political autism is irresponsible. The West must awake and unite - not to oppose Russia or support Georgia, but to stand up for its ideals.

" 'The belief that security can be obtained by throwing a small state to the wolves is a fatal delusion,' said Winston Churchill just before Munich. We should have learned the lesson 70 years ago."

Iran/Israel: The United States and its European allies keep threatening to impose a new round of sanctions on Tehran, now that another deadline for suspension of Iran's uranium enrichment program has passed, but Russia has said there are no deadlines and it is insisting on diplomacy. [The actions in Georgia further complicate the Iran issue and make it far less likely Russia will cooperate on anything in the near future.] In other words, Iran continues to play its version of the 'Four Corners Offense' brilliantly. By contrast, seeing U.S. Secretary of State Condoleezza Rice flail away is almost comical.

"The president keeps all his options on the table, and we still believe that the diplomatic option can work and there's time for it to work," said Condi this week.

For its part, Iran's President Ahmadinejad and Ayatollah Khamenei continue to say their nation will not give up its "nuclear rights" as they play the West for chumps.

Former ambassador John Bolton / Wall Street Journal

"Iran is pursuing two goals simultaneously, both of which it is comfortably close to achieving. The first - to possess all the capabilities necessary for a deliverable nuclear weapon - is now almost certainly impossible to stop diplomatically. Thus, Iran's second objective becomes critical: to make the risks of a military strike against its program too high, and to make the likelihood of success in fracturing the program too low. Time favors Iran in achieving these goals. U.S. and European diplomats should consider this while waiting by the telephone for Iran to call."

The U.S. is evidently sending two additional battle carrier groups to the Gulf to join two existing ones in the region.

And just a note on a piece from Barron's concerning Stratfor's (sic) George Friedman and his take on Iran.

"In Friedman's estimation, any major attack on Iran could have grave repercussions for the global economy. Most likely, Iran would attack oil tankers in the Persian Gulf and mine the Strait of Hormuz, through which 17 million barrels of oil?passes each day."

This is the least of our concerns. Any blowback would be more in the form of standard terror attacks. The U.S. and its allies will handily keep the Strait open.

But this is all about Israel as much as Iran and the United States. Does Israel attempt to set back Iran's program five years? Ten years? They will be forced to act, regardless, by year end.

On a different topic, according to an Israeli poll, 60% of Israeli Jews feel "the situation in Israel is headed in the wrong direction" and only 24% believe the nation is on the right path, though both figures are an improvement over a year before, when the figures were 74% and 16%, respectively. But the issue of corruption is as much of a concern among the people as Iran or other terror threats.

Iraq: The government failed to agree on a provincial election law, thus jeopardizing elections currently slated for this year, and then adjourned for a month; though it's tough to criticize the break when our own Congress takes the month off as well, but I digress. More importantly, aside from the story Iraq has an $80 billion surplus even as we continue to pay for the rebuilding effort (absurd), the Bush administration and Iraqi leader Nouri al-Maliki are inching ever closer to a deal for the withdrawal of U.S. combat forces in anywhere from 16 to 26 months, depending on what report one reads.

But as Jim Hoagland notes in his Washington Post column:

"Iraqi politics are especially volatile at the moment. Abdul Aziz al-Hakim, leader of the Islamic Supreme Council of Iraq, which dominates the Shiite regions of southern Iraq, is terminally ill and close to death, according to Iraqi sources. Moqtada al-Sadr has lost control over his Shiite movement, and a collective leadership is being formed to replace him. [Ed. I wouldn't go so far as to say this. Sadr's very much relevant.] Moreover, President Jalal Talabani is in the United States for treatment at the Mayo Clinic for an undisclosed illness that is not life-threatening.

"Bush waited far too long to get serious about giving Iraqis control over their country. He must now rush and take huge risks in closing the deal with Maliki, seen today as a reborn pragmatist who spent most of his life in a political party steeped in Stalinism and anti-Western attitudes."

Yes, Maliki is the big winner thus far. The same guy we wanted to boot a year ago.

China: It's been tension city as the Olympic Games begin. Early in the week China had to deal with its worst terror-related incident in years as 16 policemen were ambushed by Islamists in the restive western part of the country, Xinjing province, and then as President Bush made his way to Beijing for the opening ceremonies, he blasted China's stance on human rights in a speech in Thailand, as well as urging China to do more on Burma and Sudan, though at the same time he praised the government for its efforts to curb North Korea's nuclear ambitions, as well as its economic progress. Then in Beijing, at the opening of the new U.S. embassy, Bush said "We continue to be candid about our belief that all people should have the freedom to say what they think and worship as they choose." Yes, the U.S.-China relationship is a complex one these days.

Here is a harsh assessment from Ralph Peters, via his New York Post column.

"I'm thrilled to see global spotlights turned on Red Chinese tyranny ('Red' is for the bloodshed in Tibet, Darfur, Zimbabwe, Burma and China itself).

"The butchers in Beijing thought they could buy a happy-face propaganda image, that they could stage-manage the Olympics the way Stalin's PR boys seduced the New York Times as millions died. Boy, did their ignorance of the suppleness of today's communications networks backfire.

'President Hu Jintao and his cadres can keep a lid on most bad news at home - but all their censorship, denied visas, hotel-room-monitoring, dissident detentions, monstrous pollution and general police-state tactics won't be enough to fool the rest of the world."

Editorial / Wall Street Journal

"The challenge is to discourage China's worst tendencies while hoping that in time its economic liberalism will drive further reform. For all his recent bad press, President Bush deserves high marks for the way he has handled this puzzle, notably under the glare of the Olympics.

"Last week, before heading to Beijing, Mr. Bush met with five Chinese dissidents in the White House residence?.The U.S. media barely noticed, but China certainly did. A Foreign Ministry spokesman accused the U.S. of 'rudely' interfering in 'China's internal affairs' and sending a 'seriously wrong message to hostile anti-China forces.' Chinese President Hu Jintao remarked to a foreign press gaggle - his first such appearance - that 'I don't think that politicizing the Olympic Games will do good.' In fact, Mr. Bush is striking a responsible balance: attending the ceremonies to give China credit for its recent ascension, while speaking candidly about our differences?.

"Rather than do politics, most Chinese citizens will spend the days ahead cheering their athletes. As they mingle with and hear from foreigners, many inevitably will feel themselves, and their country, to be part of a bigger world. This is of a piece with U.S. policy toward China: It is a long-run bet that encouraging economic freedom will ultimately lead to more political freedom. We believe that is a bet worth making, though the run will be more distance than sprint."

[Ed. note: I have long been for President Bush attending the Games.]

Editorial / Washington Post

"On with the Games! Undoubtedly, today is a moment of great pride not only for those who rule China but for many ordinary Chinese as well, as the achievements of their economy and their athletes go on display. But we say this without a sense of total certainty, because the true opinion of China's people is difficult to gauge. What they know about their country and the rest of the world is filtered through the distorting lens of official propaganda and censorship. And for those who exhibit excessive curiosity, or excessive outspokenness, the consequences - loss of work, ostracism, prison - can be dire. So we wonder: How many Chinese inwardly seethe at the pollution hovering over their capital? How many anguish at the forced relocation of thousands of Beijing residents to make way for Olympic venues? How many harbor unexpressed anger at the detention of peaceful dissidents - a flat violation of their government's promise that hosting the Olympics would bring greater respect for human rights?"

Russia, part II: Watch the Russia-China dynamic during the Games. Seven Russian athletes who were strong medal contenders in their sports were suspended following revelations they had substituted 2007 urine samples. The evidence seemed clear, but a Russian coach for many of the athletes said the move was politically motivated and he blamed China, saying it was an attempt to improve China's chances, seeing as the new favorites in the various events impacted would be Chinese.

Russian dissident/nationalist Alexander Solzhenitsyn died. He was 89. Former Soviet leader Mikhail Gorbachev praised the author for helping bring to light the atrocities of the Stalin era. "Until the end of his days, he fought for Russia not only to move away from its totalitarian past but also to have a worthy future, to become a truly free and democratic country. We owe him a lot." Solzhenitsyn's writing of "The Gulag Archipelago" will stand as his greatest achievement. As writer Viktor Yerofeyev said, "This memorial, to all of the dead and all those who suffered, is a truly great memorial and will always stand as a symbol to Russian patriots and patriots all over the world." Of course Solzhenitsyn first gained fame with "One Day in the Life of Ivan Denisovich."

Masha Lipman / Washington Post

"Solzhenitsyn's life and his writing were an uncompromising war against the communist regime. His grim courage and selfless devotion, comparable to that of early Christians, gave him moral superiority over his communist adversaries. He defeated Brezhnev's Politburo, and, instead of being killed or jailed, was expelled from the country?.

"As communism and the Soviet Union neared their collapse, Solzhenitsyn wrote 'Rebuilding Russia,' an essay in which he passionately advocated taking Russia back to its past and relying on a strong and enlightened central power as well as the spirituality of the Russian people.

"Solzhenitsyn's ideas of rebuilding a Russia based on the nation's spiritual energies was, of course, utopian. The Russia of his imagination, in which spiritual roots produce a well-governed and just society, has never existed. As the grip of communism eased, the Russian people emerged into freedom demoralized, depleted of all spiritual energy and incapable of collective national efforts. When the market economy began to function, they avidly indulged, not in the least averse to television and the popular culture that Solzhenitsyn so strongly condemned. Today they enjoy personal freedoms and the opportunities of a consumer society; they have allowed the slow tide of modernization to carry them along. The call to muster spiritual energies in order to rebuild Russia as an antithesis of the soulless West would make them shrug."

Anne Applebaum / Washington Post

"In the week of his death?what stands out is not who Solzhenitsyn was but what he wrote. It is very easy, in a world where news is instant and photographs travel as quickly as they are taken, to forget how powerful, still, are written words. And Solzhenitsyn was, in the end, a writer: A man who gathered facts, sorted through them, tested them against his own experience, composed them into paragraphs and chapters. It was not his personality but his language that forced people to think more deeply about their values, their assumptions, their societies. It was not his television appearances that affected history but his words.

"His manuscripts were read and pondered in silence, and the thought he put into them provoked his readers to think, too. In the end, his books mattered not because he was famous or notorious but because millions of Soviet citizens recognized themselves in his work: They read his books because they already knew that they were true."

Editorial / Wall Street Journal

"However dourly Russian his warnings often were, Solzhenitsyn fortified the West with the truth and will to triumph in the Cold War. The great, inspiring irony of 'Ivan Denisovich' is that it ends with Shukhov concluding that, even amid his icy prison, the day was 'almost a happy one.'"

Lastly, Russia is intensifying its efforts to stake its claims to Arctic seabeds that are suspected of being rich in minerals and oil and gas, while on Aug. 21 there is to be a hearing involving former Yukos CEO Mikhail Khodorkovsky's request for early release. This could be interesting, not that anyone expects him to be set free. Instead, he could receive another five years tacked on to his sentence as a way of further stifling his voice.

India/Pakistan: Tensions have been rising between these two going back to the bombing of the Indian embassy in Kabul, Afghanistan, now that the U.S. claims elements of Pakistan's ISI intelligence agency were involved in the planning of the attack, which Pakistan has acknowledged in admitting there are "probably" some Taliban sympathizers in the ISI. When President Bush presented Pakistani Prime Minister Gillani with the evidence, supposedly Gillani didn't even know the chain of command for both the ISI and the military. Meanwhile, Pakistan is worried about the new nuclear technology deal between the U.S. and India, this as Washington presses Pakistan to go after Taliban and al-Qaeda in the tribal areas of Pakistan. Yes, it's complicated.

But then you have the issue of Pakistani President Pervez Musharraf, who the ruling coalition would like to impeach. Musharraf is showing no signs of stepping down, however, and the impeachment process could take months. The main issue here is last fall's removal of the Supreme Court judges by Musharraf that then precipitated the election chaos culminating in the assassination of Benazir Bhutto, as well as the elevation of her supporters. The political uncertainty has hammered the economy and Pakistan's financial markets and is particularly unsettling to the Bush administration.

[And just a note about last week's review, where I passed along a CBS News report that Ayman al-Zawahiri had been killed or seriously wounded in a U.S. airstrike. I check out CBS-AM world news at 5:00 a.m. each Saturday before posting this column and it was then this item appeared. While I always employ my "24 hour" rule when possible on items of this kind, I decided to mention it anyway. Sure enough, 24 hours later it appears the report was discredited.]

South/North Korea: The dispute over the handling of the investigation of the South Korean tourist that was shot threatens to boil over. The North refuses to let any authorities from the South into the country to look into the case, while on the nuclear weapons program front, President Bush admitted in his visit to Seoul that he didn't have a clue as to whether Kim Jong-il will give up his existing nukes.

Lebanon: The Syrian general most responsible for arming Hizbullah was assassinated. Last February, Hizbullah's military commander Mughniyah was killed. So who is responsible? Israel? It's a mystery thus far.

Zimbabwe: Robert Mugabe and opposition leader Morgan Tsvangirai are supposedly close to a power-sharing deal that would turn Mugabe into a ceremonial president, but Mugabe's people are insisting that Tsvangirai recognize Mugabe's reelection. Wait 24 hours on this one.

Rwanda: 800,000 died in the killing fields here in just 100 days in 1994 and now the government has accused France of having a role, naming the late former president, Francois Mitterand, and two former prime ministers, Dominique de Villepin and Edouard Balladur, among others. Rwanda's leaders say France backed the Hutu government with military and logistical support, specifically training Hutu militias for the slaughter, helping plan the genocide, and participating in the killings. Rwanda wants to bring those accused to justice. Rather explosive.

Venezuela: In his New York Post op-ed, Peter Brookes comments:

"Venezuela-Iran relations are also troubling. Chavez and Iranian President Mahmoud Ahmadinejad are chummy - and relish the idea of giving U.S. policymakers heartburn when they think of the two states cooperating on missiles or nukes. There are allegations of Venezuela-Hizbullah ties, too, with Israel insisting that Venezuela has become the largest base for the Iran-backed terror group outside of the Middle East."

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Pray for the men and women of our armed forces.

God bless America.

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Gold closed at $864
Oil, $115.20

Returns for the week 8/4-8/8

Dow Jones +3.6% [11734]
S&P 500 +2.9% [1296]
S&P MidCap +1.6%
Russell 2000 +2.5%
Nasdaq +4.5% [2414]

Returns for the period 1/1/08-8/8/08

Dow Jones -11.5%
S&P 500 -11.7%
S&P MidCap -5.2%
Russell 2000 -4.1%
Nasdaq -9.0%

Bulls 34.0
Bears 43.6 [Source: Chartcraft / Investors Intelligence]

Have a great week. I appreciate your support.

Brian Trumbore

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