Week in Review 
For the week 9/15/2008 - 9/19/2008
Brian Trumbore
President/Editor, StocksandNews.com

PANIC

Wall Street

I've been at the Jersey shore this week, but like many of you was glued to CNBC and the historic movements in the financial markets and the application of the heavy hand of government. Thankfully, I rented a house that was 100 yards from the beach and I took solace in my daily walks. Levity was provided by the flocks of sandpipers that humorously run around in packs, or solo, depending on the waves or an approaching figure. They constantly look befuddled, as has been the case with market participants recently, both here and abroad for that matter, as we watched daily price actions that by some measurements had never been seen before. And as I walked the beach part of me also wished George Washington had originally accepted the offer to be king. Suffice it to say our politicians have done little to distinguish themselves during this period, going back years as the great housing bubble sprang forth.

I have long railed that when it came to foreign policy and our policy regarding Israel and the Palestinians in particular, the United States has not been an honest broker. And today, we have now proven that when it comes to the global financial system, the U.S. has been a dishonest broker. We peddled our garbage all over the world, and seeing as we are supposed to have a monopoly on financial genius, the world ate it up. This week, collectively, the world spit it all out. It was as if the U.S., as is the case in China today, laced its financial instruments with melamine, a chemical used in fertilizer that some Chinese infant formula producers substituted for protein in an attempt to cut costs. Wall Street's mavens thought they could get away with their skullduggery, and indeed for years many did, but in the end everyone gets caught.

Before I get into some basic explanations, every single one of which has been long covered in these pages, let me tell you what I did with my own finances this week.

For starters, I made three statements last week that bear repeating.

"Caution should be the watchword, particularly if you're thinking of 'buying the dips' in the stock market. It's not a time to be a hero?.

"I've said for years the U.S. stock market is nothing more than a casino, and?the action is totally dominated by program traders, and/or the hedge funds. This isn't investing. For the average Joe, especially someone without a lengthy time horizon, it's nothing more than gambling. Folks, our market is a total joke. I'm only in it myself to the extent I believe, long term, in some individual stories?.

"I long predicted the recession for 2008, specifically, though I said as measured by the GDP figures it would be mild, but there is a fine line between recession and depression, and there are times it feels as if we're uncomfortably close to the latter."

If you didn't understand that last sentiment when I first wrote it, you do now, and in keeping with all the above this week I did nothing. In fact, as I've noted before, I haven't done anything with the few stocks I own in at least five months, except to round out my China position. For a long spell I have been guided by the late, great Sir John Templeton and his example of buying shares at the height of the Great Depression and then just waiting things out. In my case I can afford to do this because I have a solid cash position and don't need to do any panicked selling, at least not yet. I also remain satisfied with what I own, as long as the credit crisis eventually resolves itself and I catch a break on the alternative energy front. Believe me, I take the advice I dish out to the rest of you, and my portfolio of mostly microcaps did surprisingly well the past five days. But enough about yours truly.

So what happened this week, or rather the past few weeks and months, going back to the collapse and bailout of Bear Stearns in the spring? It's really incredible how the landscape has changed. No more Bear; Fannie Mae and Freddie Mac, bailed out; 158-year-old Lehman Brothers, gone; 94-year-old Merrill Lynch, no longer independent; the world's largest insurer, AIG, bailed out. And the fate of stalwarts such as Goldman Sachs and Morgan Stanley, as well as the biggest savings & loan, Washington Mutual, and powerhouse regional Wachovia, at one point or another hung in the balance.

If you're new to StocksandNews and this column, just understand that I correctly identified the tech bubble and yelled "Crash" in April 2000. I called the housing bubble, long before 99% of the "experts" did, and, just as importantly beat everyone to the punch in identifying housing as a global problem. I railed about derivatives virtually since the start of this site in Feb. '99, and on more than 100 occasions, by my best estimate, said "Wall Street is not as smart as you think and these guys don't understand what they own."

So for me it's always been about lack of transparency, and, through my own extensive Wall Street experience, where I was in positions in the fund industry subject to regulation, the lack of same when it came to many of the Street's practices.

It's been about leverage, massive amounts of it, not just on the part of our financial institutions, but at the individual level as well. It's also been about accountability, again, both institutionally and individually.

This week, New York City Mayor Michael Bloomberg slammed the "I want it now society," adding "We lost the moral compass of saying no to the people who did not have the earnings capacity to support a mortgage."

That pretty well sums up the accident that was waiting to happen on the housing front when it came to Mr. and Mrs. Jones, who were offered subprime, Alt-A, and option adjustable-rate mortgages that in so many cases the homeowner didn't have a clue as to how it would impact their financial future. But when it then came to Wall Street, it was about packaging each and every home in America, including beaver and bear dens it would seem, into some kind of structured product; product that Archie Bunker, were he still alive, would have properly described as "crapola." But we bought it?and then for this past year or so it's been a game to see who's the last one left holding the bag. Despite all the action taken by the federal government this week, when it comes to the likes of the defunct Lehman Brothers, or Morgan Stanley, for that matter, we are far from knowing where all the bodies are buried. And through it all, the regulators and boards of directors were asleep; in the case of the latter gorging themselves on fois gras at the meetings, one can assume, while the CEO had maidens feeding his hand-picked buddies grapes and supplying other tender favors.

For its part, Washington wasn't any better, a veritable plethora of buffoons, as best exhibited by those striding before the microphones this past week, including John McCain. It is utterly amazing how a McCain or Joe Biden can reside in such a position of power, for decades, and with access to the best experts in the world, yet emerge from the experience with a brain full of nothing but air when it comes to financial matters.

It was also amazing that Sen. McCain said the American economy was fundamentally sound. Oh, I know, this is a typical Republican talking point, but in the span of 24 hours on Thursday in particular we learned that not only was the U.S. economy not sound, but the entire financial system was on the verge of total collapse.

You see, credit - the mother's milk of economic activity, right down to those new microcredit programs for the poor in India and Africa one man won a Nobel Prize off of - had totally seized up. Interbank lending, the first step, had ceased to exist and if the banks wouldn't lend to each other, suffice it to say you and I wouldn't be able to obtain a car loan, or my favorite microcaps a business loan, or some large corporations the ability to finance their payrolls on an ongoing basis through what were once simple commercial paper transactions.

And it is those very commercial paper instruments that are the lifeblood of money market funds (that and short-term Treasury and other corporate securities). Suddenly, with all the uncertainty created by a seized up credit market, institutions, first, and then individuals, launched a near run on the bank; those very same, safe money market funds you and I never gave a second thought to when gauging our financial security. It all started when the father of the money market fund himself, Bruce Bent of the $62 billion Reserve Fund, realized, 'Omigod, we have Lehman paper in our fund!' and in marking it to zero caused the net asset value to break the cherished buck. FIRE!!!!

Institutions began to flee a Putnam institutional money market fund that was then forced to close, others were pulling their money from other offerings, fleeing in panic, as money then moved into one and three-month T'bills, with the cascading demand for the safest paper imaginable, at least for the moment, causing yields to approach 0.00%. But at least it was safe. Capital was preserved. [Personally, I was secure in the knowledge I had my ten coffee cans of coins stored in my laundry room should worse come to worse. Plus a gold class ring, proceeds from which I could have purchased some pasta, tuna fish and cheap wine and beer to ride out the coming revolution.]

Amidst the near stampede, however, came word that Hank Paulson, Goldman Sachs alum and Treasury Secretary, had seen the light and it was now time to save the Free World, and the authoritarian one for that matter, seeing as Russia, China and a bunch of shady Middle Eastern nations hold a ton of our debt, the rapid selling of which would only exacerbate the problem, by offering to bail out everyone from every obligation he or she ever had in their lives. It wasn't just pure coincidence that Alex Rodriguez and wife Cynthia reached a divorce settlement the same day, you understand. Paulson swooped in to clean up that mess as well.

OK, strike this last one from the record, and the bit about any obligation us schleps ever had in our lives. What Paulson did do was bail out the banks, first and foremost; offering to take in all their toxic crapola under his great robe, like the Ghost of Christmas Present. 'Come here, my children, and I'll shelter you from the storm.'

Of course under Paulson's robe already resided the remnants of Bear Stearns, some $29 billion worth, and $85 billion from the just rescued AIG, and perhaps up to $200 billion for bailing Fannie and Freddie. What will be the cost of taking on all the other bad paper, plus insuring the lion's share of money market funds, yet another of his steps? We'll learn over the coming weeks? and here I'm invoking my 24-hour rule. Suffice it to say it's a lot, as in $100s of billions, though the Fed and some experts can legitimately argue the government could make money on many of the rescue projects. Let's hope so.

But at least in the short term the bills for the taxpayer are going to be humongous, this on top of a Fiscal 2009 federal budget deficit that Paulson's own Goldman cronies have estimated to be in the $565 billion range. In fact, the potential add-on cost is truly unfathomable. Let us hope the result of Paulson's war on the free markets isn't like that moment in "The Christmas Carol," where in our case the Ghost of Christmas Yet to Come shows us a tombstone with a simple inscription? "Here lies Adam Smith, author of 'The Wealth of Nations,' model for the American Dream, 1776-2008."

---

For the archives and my running history of our times I need to get down some other thoughts before advancing to Street Bytes.

What does all of the above have to do with the economy, here and now? If we take out our three-legged stool, the consumer, housing, and capital spending, clearly, even if some form of confidence returns, especially if Wall Street continues to rally and housing bottoms, as I see early next year, the consumer has been dealt a severe body blow and to compound matters corporate America is continuing to retrench, save some tech sectors it would appear (see SAP's and Oracle's recent performance), so spending is bound to remain punk. [Lower energy won't bail us out in this regard.] The house, once a piggy bank, is no longer. The Christmas season will be a disaster and my recession forecast holds.

And, sports fans, I have not changed my tune one bit regarding the stock market. I have been steadfast we would finish the year down 3 to 5 percent as measured by the major indexes. The market moves on sentiment far more than on fundamentals.

Other items:

--The Federal Reserve actually met this week and opted to keep its target funds rate unchanged, expressing an ongoing concern with inflation even as the economy teeters, a stance that PIMCO's Bill Gross called "otherworldly," as in the Fed is clearly on another planet in holding this view.

--Lehman saw its shares tumble to zero amidst the largest bankruptcy filing in our nation's history, down from $85 in early '07. Despite up to 10,000 employees in the capital markets and investment banking divisions being rescued by Barclays, and perhaps more employees out of a total 26,000 by other outfits, the fact is a staggering amount of wealth was wiped out. This, like in the case of Bear Stearns, and massive layoffs in the industry overall, has a ripple effect that is in some respects the true heartbreak?the dry cleaner, the waiter, the driver for the car service, the coffee cart guy.

It is just incredible that Lehman CEO Richard Fuld couldn't see the coming train wreck and, having had six months since the collapse of Bear Stearns to address his firm's problems, did nothing. But it's no surprise the Lehman board did an equally poor job.

--Merrill Lynch, with 60,000 employees, was rescued by Bank of America in a deal initially valued at about $29 for Merrill shares, stock that was once $98 in '07. Many layoffs on both sides are a certainty here.

--In Britain, HBOS, the largest savings & loan in the country, was forced into Lloyds TSB's arms owing to its massive mortgage exposure. 40,000 layoffs could be the result here.

--AIG, with a presence in 130 countries, and counterparty risks in same, and with 80% of its life insurance and retirement program premiums from overseas sources, was given an $85 billion "bridge loan" by the federal government in exchange for what seems to be a good deal for the Treasury, 8% plus interest (currently about 11% as based on LIBOR), plus 80% ownership in what eventually remains of the company.

--Housing starts for August were at their lowest level in 17 years and with 4.7 million unsold homes still on the market, the inventory level has to fall considerably before homes are affordable again.

--Short-selling was banned in Britain until January, while in the U.S., the SEC banned it in 800 financials until Oct. 2 in an attempt to stem bear raids on the likes of Morgan Stanley and Goldman. As the veteran Jack Bogle put it Friday morning, the attempt to rein in the shorts "borders on insanity." Far more on this next time as the rules are still evolving, which is a big part of the problem.

--There is a ton of revisionist history going on with regards to Hank Paulson, as I will address in my next "Wall Street History" column to be posted Tuesday. For now, understand your Fed and the Treasury, once seen as a lender of last resort, is now an investor of last resort.

--China holds $376 billion in Fannie and Freddie debt, Japan, $228 billion, in case you were wondering the real reason why those two agencies were bailed out?.admittedly, a slight exaggeration, but not that much of one.

--State and local economies will continue to see their tax revenues dry up. And as one London trader put it, when it comes to high-rollers, "The bling is gone."

--And two editorial opinions, for the archives and the record.

USA Today, Thursday

"To those who would like to see more punishment and less help meted out by Washington, we say: Be careful what you wish for.

"Executives who won fat bonuses by behaving in colossally stupid ways, investing in junk mortgages and willfully ignoring risks, deserve neither help nor sympathy. But that is not the point.

"Federal Reserve Chairman Ben Bernanke and Treasury Secretary Henry Paulson are not in charge of law enforcement, ideological purity or consistency. Nor should they pass judgment on the few in ways that could harm the many. Their job is to prevent a dramatic drop in lending, which would threaten the entire economy."

Wall Street Journal, Thursday

"Perhaps Secretary Hank Paulson was right that AIG had to be rescued to avoid a broader financial collapse. We aren't privy to what he and the New York Fed were hearing about AIG's credit default swaps or its insurance 'wraps' for the commercial paper market; maybe unraveling those would have smashed the corporate debt market or caused a run on money-market accounts. So maybe he had no choice but to rescue the part of AIG that was a hedge fund wrapped around the world's largest insurer?.

"The danger is that we will get these financial melodramas every week, if not more frequently. Each one only frightens the public more and extends the panic. The two surviving big investment banks, Morgan Stanley and Goldman, continue to operate with enormous leverage yet profess to have enough capital to survive. That's also what Lehman and AIG thought. Markets are also punishing Washington Mutual, the big savings bank, and Wachovia, the regional bank, with others to follow if housing prices keep falling.

"Sooner rather than later, the Fed is going to run out of money to pull off these government takeovers. Its balance sheet was designed to finance open-market operations, plus serve as the occasional lender of last resort for regulated banks. Its assets have long been mainly Treasuries or currency.

"Since last December, however, the Fed has made creative use of its discount window with the result that its balance sheet looks uglier all the time. The Fed has guaranteed $29 billion in dodgy Bear Stearns paper, opened its window to ever more colorful collateral, and as of Monday even agreed to accept equity. With its AIG stake, the Fed now owns an insurance company. By our calculations, the Fed has committed some $380 billion of its $888 billion in assets to these mortgage rescue operations. That's nearly half. And yesterday the Treasury announced it will issue new debt to lend to the Fed, not merely to fund government operations.

"These are all taxpayer obligations, and as such they pull the Fed ever more deeply into political decisions that compromise its independence. The Fed has been pushed into that situation because Treasury lacks the legal authority for such takeovers (except in the case of Fannie Mae and Freddie Mac)?.

"We're told Treasury has a proposal ready to send to Congress [ed. Friday's announcement], but that the Members have told Mr. Paulson they don't want to see it until after Election Day. Mr. Paulson fears that if he does call for action and Congress refuses, then the contagion would be even worse. Well, how much worse can it get than a failure or two a week of a major financial institution? The sooner a resolution agency is up and running, the fewer banks will fail and the lower the ultimate cost to the taxpayer.

"Mr. Paulson ought to tell Congress that this authority is essential to stopping a panic, and that the need is urgent. If Harry Reid and Nancy Pelosi say they can't do it until December or later, then they can take responsibility for the nationalizations to come."

And so Congress is now working this weekend to prevent this from happening.

Street Bytes

*Before I continue, I recognize there are some issues I didn't totally address above, such as short-selling. I'll expound further next time as we glean more details about the various plans in play, including any debate in Congress, as well as any further changes in the rules, which can be expected. And with the proposed bailout of the banks and their mortgage portfolios, now there is some question as to the finality of the AIG rescue plan and Merrill's takeover by Bank of America. We're just getting started, in other words.

--Monday's 504-point drop in the Dow Jones was the largest since 9/11, but we then had rallies of 142, 410 and 368 points in the average, sandwiched around Wednesday's sickening 449- point slide. When it was all over, the Dow was off just 0.3% to 11388, while the S&P 500 gained 0.3% and Nasdaq 0.6%. If you only looked at the final box score, you never would have known the real tone of the game. For example, the S&P's two-day gain of 8%, Thursday and Friday, was its best performance since the aftermath of the 1987 crash. Meanwhile, the global rally over the same two days was the sharpest in 38 years as many markets on Friday registered their best point gains ever.

But in the case of the action against the shorts, the covering of whose positions created much of Friday's advance, there was one universal cry as a finger was raised to Hank Paulson. "You've changed the rules in the middle of the game!"

--U.S. Treasury Yields

6-mo. 1.55% 2-yr. 2.17% 10-yr. 3.81% 30-yr. 4.38%

Again, if you only looked at the final above yields vs. a week earlier, you never would have known the full story, like the virtually zero percent T' bills at one point. On the week, Treasuries hardly moved except on the very short end.

The interbank lending rate this week exploded from the Fed's target of 2% to 8%, and even then no bank wanted to loan to another when they didn't know what the other side had hidden on its books. [Would they get their money back? Lehman's London office says it's owed $8 billion by its own now bankrupt parent, for example.]

--There was some basic economic news. The August reading on consumer prices was down 0.1%, and up just 0.2% ex-food and energy. Ergo, just what is the Fed thinking when it says it's concerned about inflation? Additionally, the index of leading economic indicators for August was down again.

--China's central bank lowered interest rates for the first time in six years, one of many steps taken in an attempt to stoke its economy and stock market, which before Friday's 9.5% rally was off 64% for the year.

--When the 3-month T' bill hit 0.05% Thursday morning, down from 1.47% on 9/12, it was the lowest yield since 1941.

--Gold, up $89 on Wednesday, recorded its biggest two-day gain in history, including the following day, up around $130 in total, before correcting on Friday.

--From Friday's Wall Street Journal:

"Among the creditors stung by this week's bankruptcy filing of Lehman Brothers?is another casualty of the credit crunch: Freddie Mac.

"Freddie disclosed in a securities filing Thursday that it hasn't received principal payments of $1.2 billion plus interest on short-term loans to Lehman that were due Monday?.

"The U.S. Treasury has agreed to provide as much capital as needed to keep the companies in operation?.

"It isn't clear why Freddie accepted such a large exposure to Lehman at a time when that investment bank was struggling to survive as an independent firm."

Good grief. Just another example of why this story will take a long, long time to play out.

--Gulf bourses have been slammed like everywhere else around the world, and per my note last week this oil and real estate driven regional bubble is in the process of bursting, too.

--Oil did rally back to $103 after plunging to $91. Damage to Gulf rigs as a result of Hurricane Ike appears to be substantial, but the refineries should be back on stream before long.

--Russian authorities, facing a total crash in their stock market, down 55% in about four months and off 20% at one point on Tuesday, closed it for two days in an attempt to calm the waters. I have written extensively of my travels to Moscow and how the average Russian is as much in debt as any other in the world. They are living in a fantasyland (the elite and wannabe-elites in Moscow) and now the bill is due like everywhere else these days.

But President Medvedev, in the one thing I could agree with since he's come to power, proposed legislation that would put an end to state inspections of business, 99% of which are unannounced and nothing but brutal shakedowns that often ensnare the only good people left in the country.

Medvedev also backstopped the stock market to the tune of up to $120 billion, $20 billion initially, and the RTS benchmark index rose a stupendous 22%, before they suspended trading again. Russia's finance minister, Alexei Kudrin, accused the United States of egging on American financiers to punish Moscow. Kudrin went so far as to call Treasury Secretary Paulson to ask directly if U.S. banks had been ordered not to lend to Russian companies. 'No,' said Paulson, adding 'But why would they lend to you guys anyway?' [OK, so I wasn't present at this one, but this is what I would have told Kudrin.]

--Lehman Brothers' exposure to Miami real estate is said to be in the $2 billion range and in the form of construction loans. New buyers of the paper will be found, but at a steep discount. It's just another window into how long the bankruptcy procedure will take.

--And get this. A government-owned German lender, KfW Bankengruppe, transferred $426 million to Lehman Brothers on the day the investment bank filed for bankruptcy. Germany's Bild newspaper splashed the headline, "Germany's Dumbest Bank." Of course the funds are now somewhere in the black hole of the courts.

--So I'm in the affluent beach community of Avalon, N.J., south of Atlantic City and roughly across from Philadelphia, and I spent the week in a spectacular home near the beach, which was good for my sanity, but one day I was driving around with an old friend of mine, another former Wall Streeter, and we just couldn't believe the homes here. So we checked out Weichert.com. Just plug in "Avalon, N.J." and you'll find 100 homes on the market for at least $2.4 million. Your guess is as good as mine how many will actually end up being sold for that amount given the current environment.

--In another sign of the times, in the fall of 2006 the Sands Casino Hotel in Atlantic City was demolished to make way for a new casino owned by Pinnacle Entertainment. But now Pinnacle is holding off on the $1.5 billion to $2 billion facility, owing both to the slowing economy and the credit crisis, leaving A.C. with a giant vacant lot. "They had an operating casino running. They buy it, crush it and take all the jobs away. Now they can't build," said Councilman Dennis Mason.

--U.S. household net worth declined 0.8% in the second quarter, bringing it to 2006 levels.

--Foreign net buying of U.S. stocks and bonds was just $6.1 billion in July, the weakest since Aug. 2007. Picture what the figure will look like in Aug. and Sept.

--Update: The government nixed the golden parachutes for the dismissed heads of Fannie Mae and Freddie Mac. You can expect the two involved to contest the decision.

--Texas' state-led insurance pool has only $2.3 billion and yet the damage caused by Hurricane Ike is at least $16 billion. So, the Texas government could be on the hook for the balance.

--The world's largest fertilizer companies have been accused of price-fixing in U.S. District Court in Minneapolis. Farmers have been crying foul as prices have soared. Among the defendants are Potash Corp., Mosaic, and Agrium. [Wall Street Journal]

--Shares in General Electric hit an 11-year low on Tuesday.

--Hewlett-Packard is cutting 24,600 jobs, about half of which will be in the U.S., as part of the consolidation with recently acquired Electronic Data Systems.

--Home Depot said it was going to begin slashing prices 5 to 50 percent on 1,200 items, including trash bags! [I love sales on trash bags.] More and more companies are going to have to do this going into the holiday shopping season.

--In a case of poor timing, Forbes released its list of the 400 richest Americans.

1. Bill Gates 2. Warren Buffett 3. Larry Ellison?booo 4.-7. The Waltons of Wal-Mart fame 8. Michael Bloomberg

--Buffett once again showed why he is the real master of the universe as he scooped up Constellation Energy for what could be viewed as a fire sale price due to Constellation having some liquidity issues. Even after Buffett's MidAmerican Energy takes care of Constellation's debts, most experts say it is a phenomenal buy.

--It's incredible to think that Maurice Greenberg, former CEO of AIG, lost up to $6 billion the past few months.

--Kraft is replacing AIG in the Dow Jones Industrial Average.

--The Italian flag carrier, Alitalia, founded in 1946, is days from total collapse.

--You can't make this stuff up. As reported by Sewell Chan of the New York Times, Michael Axel, a stockbroker for Tripp & Company, stole $600,000 out of client accounts by arranging for checks to be cut, forging signatures and such. Then, get this. Mr. Axel received a Nigerian e-mail and fell for it! He wired $400,000 overseas so that he could get the $8,750,000 the standard fake e-mail said he'd be eligible for.

And so because Mr. Axel was sophisticated enough to steal the funds out of his client accounts, but then fell for an elementary school-level ruse, he receives a plaque in the "Idiots Hall of Fame."

--Jim Cramer has had some good comments these past few weeks, but last July I called him on the table for saying on July 24 that the July 15 low of 1214 on the S&P 500 was "the last low, forever." At the time I just thought it was irresponsible. Some of you then quickly noted when the market rallied, defending Cramer. On Wednesday, the S&P closed at 1156. And on Thursday, he told his "Mad Money" viewers to "do some selling," Friday. Of course the market then rose another 368. My point is, don't bother with his market forecasts or stock selections, but his general commentary is good.

--180 hedge funds liquidated in the second quarter, according to just-released figures. Third quarter numbers should be interesting.

--Between my own tech guys at Web Epoch and some computer store folks I know in the area, no one has had a good word to say about Vista, even after Microsoft was to have fixed the initial problems. And now Business Week reports that Hewlett-Packard "has quietly assembled a group of engineers to develop new software that will let customers bypass certain features of Vista." And a "skunk works team" is working on replacing Windows with an HP-assembled operating system.

--My portfolio: The House passed an energy bill that would aid my little guys in the solar and geothermal fields, but I'm not optimistic the credits will come through in any final legislation as President Bush is threatening to veto the package in its current form. Something about Big Oil, you understand.

--Lastly, each day as I walked the beach here in Avalon one thing was very noticeable?.the wind was blowing pretty strong, all the time. And as I stared into the ocean all I could see was a no-brainer opportunity?wind power!

Foreign Affairs

Pakistan: Pakistani troops confronted U.S. forces attempting to cross the Waziristan/Afghan border, firing in the air as the Americans withdrew, and now Pakistan's soldiers have evidently been given the order to fire directly the next time this occurs. A U.S. representative met with the government and promised to respect Pakistan's sovereignty, but just hours later the U.S. launched another airstrike against suspected militants. Newly elected President Zardari was largely silent during the week.

Editorial / Washington Post

"By now it is clear that Pakistani army and security forces lack the capacity to defeat the extremists - and may even support some of the Taliban commanders?.

"In these circumstances President Bush's reported decision in July to step up attacks by U.S. forces in the tribal areas was both necessary and long overdue. According to a count by the Associated Press, there have been seven [ed. now at least eight] missile strikes by remotely controlled Predator aircraft in the past month, as well as one ground assault by helicopter-borne American commandos. At least two of the targets have been Taliban commanders reportedly considered friendly by Pakistani intelligence - including Jalaluddin Haqqani, the alleged author of the Indian embassy bombing [in Kabul]. The results of the attacks are hard to gauge, since U.S. officials refuse to discuss them; reports from the remote areas, often by sources sympathetic to the Taliban, frequently allege that most or all of the casualties are civilians.

"To its credit, the Bush administration has tried to execute this shift in tactics while preserving its alliance with the Pakistani army and the new civilian government. It's a tricky balancing act?.

"There's a risk that the missile strikes will prompt a breach between the U.S. and Pakistani armies, or destabilize Mr. Zardari's democratically elected administration, which is the friendliest Washington could hope for in a country with strong anti-American sentiment?..U.S. commanders say that victory in Afghanistan is impossible unless Taliban bases in Pakistan are reduced?.(The attacks) must continue."

Russia: While the Kremlin talked of withdrawing some troops in Georgia, at least 1,200 remain at 19 checkpoints, including 12 outside South Ossetia and Abkhazia. President Medvedev then signed treaties with the two guaranteeing them protection in case of attack. U.S. under secretary of state William Burns attributed turmoil in Russia's stock market and a drop in investment to concern over the conflict in Georgia.

"I think what's becoming clear in this crisis is that there are some consequences for the kind of national assertiveness and overdoing of things which we are seeing in the Georgia crisis," Burns told the Senate Foreign Relations Committee.

Editorial / Wall Street Journal

"As it turned out, much faster than anyone realized or hoped during the Georgian war in August, Western governments haven't had to do anything to have Russia pay a price for its aggressive behavior. Which is fortunate, considering the weak stomachs in Europe and at the State Department for any serious response to the war. Investors did it for them.

"The war has also exposed the fiction that Russia is the next China - an authoritarian political regime that's stable, predictable and on a path toward becoming a free-market economy. It's authoritarian all right, but it lags China on other counts. After this war, Russia is unlikely to join China in the World Trade Organization. Georgia and Ukraine, another potential target for Russian aggression, are in that club and in a position to block entry. But the bigger hurdle ought to be the WTO's standard that candidates be 'market-based' economies ready to respect the commitments and rules of this international organization. By this standard, Russia doesn't belong there, or in the OECD or G-8.

"Perhaps the Russian people, who give their leaders high marks in opinion polls, will begin to see the economic toll from Putinism and question whether their country is well-served by this leadership."

Meanwhile, Russia is increasing its ties with Syria to include use of a port by the Russian fleet for a better foothold in the Mediterranean. During the Cold War, Syria was Moscow's strongest Middle East ally.

Ralph Peters / op-ed USA Today

"Does this ruthless, focused leader have a weakness? Yes: his temper. Despite his icy demeanor, Putin's combustible. He takes rebuffs personally and can act impulsively - and destructively. Instead of lulling Europeans into an ever-greater dependence on Russian gas, he angrily ordered winter shut-offs to Ukraine and Georgia, alarming Western customers. Rather than concealing the Kremlin's cyber-attack capabilities, he unleashed them on tiny Estonia during a tiff over relocating a Soviet-era memorial - alerting NATO.

"Putin's invasion of Georgia was also personal. In addition to exposing the West's impotence in the region, he meant to punish Georgia's defiant president. The lengths to which Putin was prepared to go in a personal vendetta should worry us all.

"Such outbursts of temper suggest that Putin's campaign to restore Russia's greatness could end very badly. We needn't take his dispatch of a naval squadron to Venezuela or bomber flights over U.S. Navy carriers seriously. They're staged for his domestic audience and militarily absurd. But Putin's willingness to use naked force against regional democracies suggests that, like so many strongmen before him, he'll ultimately overreach.

"Meanwhile, our next president will have to cope with this brilliant, dangerous man. That's going to require the experience and skills to exploit every element of our national power; to convince Europe that appeasement will only enlarge Putin's appetite; and to draw clear lines while avoiding drawn guns. Above all, our president will have to take Putin's measure accurately and not indulge in wishful thinking. Managing Putin's Russia could emerge as our No. 1 security challenge."

U.S. Secretary of State Condoleezza Rice added this week:

"The attack on Georgia has crystallized the course that Russia's leaders are taking - and brought us to a critical moment for Russia and the world," calling for the West to stand up to Russia.

Rice, like Peters, also mocked Russia for its efforts to project its influence into America's backyard through its renewed ties to Cuba and Venezuela.

"We are confident that our ties with our neighbors, who long for better education, better health care, better jobs, and better housing, will in no way be diminished by a few, aging Blackjack bombers, visiting one of Latin America's few autocracies."

Lastly, I've been talking in all seriousness of a coming invasion of Canada's Arctic territories, though perhaps not until 2010, and this week President Medvedev claimed vast areas of the Arctic as formally being under Russian control. I may have to move my timetable up to 2009.

Israel: Tzipi Livni won the Kadima Party election to succeed Prime Minister Olmert by only 430 votes, 43 to 42 percent, and now has 40 days to form a new ruling coalition. If she is not able to do so, Israel would be forced to hold a national vote in early 2009. But after the ballot, rival Shaul Mofaz said he was leaving government, throwing the whole coalition forming process into turmoil. Likud Party leader Benjamin Netanyahu immediately called for a general election before '09. In the meantime, Olmert remains in charge. Should Livni finally cobble together the coalition, she is expected to follow Olmert's negotiation stance with Palestinian President Abbas, though Abbas himself is slated to leave early next year.

Meanwhile, Hizbullah chief Sheikh Nasrallah, in an interview with Iran Broadcasting, said "As long as Israel exists and its eyes are honing in on the territories of other states, the world will not know peace in the Middle East."

Iran: The government is warning of severe power issues this winter as disgust with President Ahmadinejad's rule continues to grow. The average Iranian is suffering immensely and I'm once again reminded of an opportunity that President Bush missed last year, one that no one else wrote about at the time. The students at Tehran University had invited him to speak and he turned down the invitation. Of course Ahmadinejad would not have allowed him to appear anyway, but that was the point of it all. Bush could have very publicly called his bluff and then had a platform within Iran itself. The students may have started a massive wave of demonstrations, in defiance of their own leader. While it's easy to then say it would have been brutally crushed, who knows for sure? It was a gamble worth taking.

Curiously, Ahmadinejad found it necessary to say on Thursday that while he opposed the state of Israel, his hostility did not extend to the Israeli people.

"We have no problem with people and nations. Of course, we do not recognize a government or a nation for the Zionist regime?. (But) we are opposed to the idea that the people (in Israel) should be thrown into the sea or be burnt. We believe that all the people who live there, the Jews, Muslims and Christians, should take part in a free referendum and choose their government."

The comment was seen as a defense of his tourism minister, who this summer said Iran was "a friend of the Israeli people," a comment he repeated later and caught a lot of heat for.

Iraq: General David Petraeus turned over the reins to Lt. Gen. Odierno, with Petraeus now having oversight for both Iraq and Afghanistan, as well as all of South Asia. To say the least, Petraeus' 20 months were a tremendous success, but disconcertingly, violence spiked considerably the past week with numerous car bombs, as well as an attack that claimed 8 Kurdish soldiers, this last bit an example of the ongoing conflict between the Iraqi government, as a whole, and the Kurds who desire more autonomy.

Afghanistan: A second governor was killed here in just a few weeks, while the lead U.S. general on the ground, David McKiernan, said he needs 10,000 more troops on top of the 3,700 being transferred over from Iraq.

North Korea: Reports that Kim Jong-il is incapacitated continue to gain credence, this as the North test-fired a new rocket engine capable of propelling a long-range missile that could hit America while saying it was going to reassemble the Yongbyon nuclear plant and that it no longer desired to be removed from Washington's list of nations supporting terrorism.

China: The good feelings generated from the holding of the Beijing Olympics is rapidly fading thanks to the terrible story gripping the nation these days, that being the tainted infant milk powder scandal as noted above that has claimed at least four babies' lives and sickened 6,000. At last word, 18 have been arrested as it's come to light that 1/5th of the nation's formula makers are impacted. There simply is no assurance any of the food (or drugs for that matter) is safe in China and this is the kind of crisis that scares the heck out of the Commie leadership.

This comes on the heels of a landslide triggered by the collapse of an illegal mining dump. The death toll there is at least 250, but the provincial governor was forced to resign amid reports authorities were trying to hide the body count. 13 from the mining company have been arrested.

And the mainland's top environmental official said severe pollution in the Pearl River Delta threatens the area's social and economic development.

Thailand: The government ended a state of emergency imposed to control a violent political protest, in large part because the images of government opponents laying siege to the prime minister's complex had severely hurt the key tourism industry, as well as the stock market, the latter to the tune of at least 25%.

But as for the successor to Prime Minister Samak, who was dismissed, the new prime minister, Somchai, is the brother-in-law of former leader Thaksin Shinawatra. Elected by parliament and needing the approval of the king, the move does little to appease the antigovernment forces, who argue Thaksin, now in exile in Britain, is still controlling things. What's confusing here is that the protesters are demanding the dismantling of the one-man, one-vote democratic system, claiming it can be manipulated by populist politicians. So, the opposition is for the traditional ruling elite, including the armed forces.

Bolivia: Socialist President Evo Morales has his country on the brink of full-blown civil war as he placed the governor of one of five provinces that are disputing his rule under arrest and the people under martial law amidst soaring violence. Morales, a disciple of Venezuela's Hugo Chavez, receives $100 million in U.S. aid for development programs that an impatient Congress could easily pull if he's not careful in negotiating a truce with his rivals.

Ukraine: We are now within a 30 day window for a new government to be formed, as the battle between President Yushchenko and Prime Minister Tymoshenko unfolds. The problem here, as far as the West is concerned, is that the pro-Russian Viktor Yanukovych is waiting to play kingmaker and there is a distinct possibility that, owing to Yushchenko's abysmal approval rating, try 5 percent, a Tymoshenko / Yanukovych alliance is the result and thus a tilt back to Moscow.

Yemen: The U.S. embassy was the target of a car bomb attack that killed 16, including one American. Coincidentally, two days before the Wall Street Journal had a report concerning the Guantanamo Bay detention facility. As much as U.S. Secretary of Defense Robert Gates is among those who want it closed, there has always been concern that the biggest block of terrorism suspects, Yemenis, "won't be properly monitored if they are sent home." The attack the other day had all the hallmarks of al Qaeda.

India: New Delhi was the latest city to be hit with a series of bombs, another sophisticated attack by Islamists that killed at least 20.

Zimbabwe: Monday morning I caught some of President Robert Mugabe's address to the people as he began his new power-sharing agreement with opposition leader Morgan Tsvangirai and Mugabe showed his true colors, railing against the "colonialists," Britain and the United States. Then the 84-year-old talked of needing advice on how to pick up women?seriously. Tsvangirai and his allies get 16 seats in the new parliament and Mugabe gets 15 and to say peace has now broken out and the broken economy will suddenly rebound would be a massive misjudgment. In fact, Mugabe is already making waves about scrapping the deal.

South Africa: President Thabo Mbeki is on the verge of being ousted by his own party in favor of Jacob Zuma. Recall, Zuma is a certifiable nut job.

Somalia: Despite the presence of an international naval force in waters south of the Gulf of Aden, there have been at least 13 attacks on shipping and private pleasure craft in the last two months by pirates off the Somali coast. French commandos have been involved in some rescues, but it's a sad commentary that the world can't even protect commercial interests from what largely amounts to a bunch of Bloods and Crips.

Mexico: A grenade attack in President Calderon's home town killed eight. It was another move on the part of the drug cartels to destabilize the nation. My call for Americans to stop snorting powder up their nose for at least one day went unheeded.

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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?up $100 on the week
Oil, $103.73

Returns for the week 9/15-9/19

Dow Jones -0.3% [11388]
S&P 500 +0.3% [1255]
S&P MidCap +2.1%
Russell 2000 +4.7%
Nasdaq +0.6% [2273]

Returns for the period 1/1/08-9/19/08

Dow Jones -14.1%
S&P 500 -14.5%
S&P MidCap -6.2%
Russell 2000 -1.6%
Nasdaq -14.3%

Bulls 37.9
Bears 43.7 [Source: Chartcraft / Investors Intelligence]

Have a great week. I appreciate your support.

Next time, part II of the Great American Bailout?or 'How Hank Paulson saved the Mets from another September swoon.'

Brian Trumbore

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