For the week 1/14-1/18

[Posted 7:00 AM ET]

Wall Street……hitting a bottom?

Let’s start with the carnage. Following are the declines from the
highs, based on Friday’s closing prices.

Dow Jones -14.6%
S&P 500 -15.3%
Nasdaq -18.2%*
Russell 2000 -21.3%

*From a nearly 7-yr. high, not all-time, as is the case with the
others.

A ‘correction’ is defined as a 10% drop from the highs, while a
‘bear market’ is commonly defined as a 20% decline, so you can
see that small caps have already experienced a bear.

But for now I have to get a few things off my chest before
delving into this week’s market specifics. For you relatively new
readers, including the past few years, your editor was selected
No. 1 for “economic commentary” for the period 1998-2000 by
Online Investor magazine. [I’ll send you the reprint…I have
thousands of them.] I sometimes forget this myself, and sad
to say the publication went under in 2002, if I remember
correctly.

I bring this up because for the past 1 ½ years in particular, you’d
be hard-pressed to find anyone who has called this market and
economy better than I have. Oh, sure, you can find dramatic
doom and gloomers like David Tice (who I respect), or even
Marc Faber that have been consistent bears, but I specifically
pinpointed recession as occurring in 2008, while at the same time
not going crazy with my equity forecasts, as in if 2007 ended 8
trading days into ’08, it would have been scary just how right I
was last year in my ‘plus’ or ‘minus’ 3 percent forecast for the
three major indexes.

So this year, if we assume we get the recession I’ve been writing
of, as measured either the standard way, two negative quarters of
growth in a row, or by the NBER down the road in their far more
complicated calculation, I have also said stocks would decline
3% to 5%. As you know we are already well below those
figures, so with this kind of start to 2008, you might be
wondering if I’m worried on being grossly off my forecast.
Nope. Stocks do not move in lockstep with the economy.

I’m not into yelling “CRASH” (though I did just that, correctly,
for the Star-Ledger and my own readers in the spring of 2000),
on the hope that I can one day look back and say, ‘See, I nailed
that one.’ This is what happens to the likes of Tice and Faber.
Or to cite perhaps a more famous example, how many of you
know Joe Granville is still alive? [I read his stuff at least once a
month, but only hard-core newsletter readers really know of him
these days. He’s now 82, by the way.]

My point being you know me well enough by now that I don’t
change my positions unless I see a reason to, and as my whole
thesis these past few years has been built around a global real
estate bubble (as opposed to Marc Faber or Jim Rogers’ global
commodity boom thesis, with only Faber more recently adding
real estate) I’m not about to change now.

Simply put, for the umpteenth time, the credit crisis we keep
hearing about, a very real one, is the direct result of the housing
boom and until the latter plays out more fully, which will be
years because not all markets around the world have truly rolled
over yet, it’s tough seeing a successful solution to the problems
that currently face us.

A loyal reader, Scott P., commented on the Federal Reserve and
my position since mid last year that it was “irrelevant” and I feel
compelled to spell out one more time what I mean. [Both Scott
and I aren’t Bernanke fans, to say the least.]

The real estate bubble in the U.S. popped and there is little the
Fed can do to lessen the damage. What it can do is at least try to
prevent us from going from recession to Depression, assuming at
the same time Congress doesn’t do anything stupid like the
Smoot-Hawley Act of 1930. In other words aggressive lowering
of interest rates, but even here some of us can point to the
example of Japan which for over a decade was mired in recession
despite zero interest rates. What then happened in Japan’s case?
Real estate values still kept going down, down, down.

But I was talking to Trader George the other day and those of us
in this game are always taught to think, “What can go wrong?”
Not just bad stuff, like on the geopolitical front, but “What can
happen to change my opinion?” In terms of my own forecast,
“What would turn me bullish?”

I thought of this in reading the news from IBM and GE, for
example, who would have you believe all is hunky-dory, and
indeed their earnings reports and outlooks were solid. Others,
particularly on the tech side, such as SAP, Oracle and Sun Micro,
have issued generally positive forecasts based in large part on
continuing growth overseas.

So, again, I question myself, “Am I missing something?” and the
answer keeps coming back, “No.” I see the global economy
slowing, and in some cases hard. I see a UK with retail sales for
Christmas that were as horrid as here in the United States and
with a real estate market that is also softening rapidly.

I see nations such as Ireland and Spain that are screeching to a
halt, while Japan by some measurements is heading back into
reverse.

I see gigantic real estate bubbles in Russia and China, and am
floored, as I was this week, to see an article on China saying the
real estate boom is just getting started. Earth to earthlings.
China’s real estate market has already peaked. Russia, and here
it’s necessary to just talk about the only two parts that matter,
Moscow and St. Petersburg, is in a bubble of enormous
proportions.

Remember, it comes down to one word…affordability. It
doesn’t matter where in the world you live, the fact is while the
‘middle class’ is growing by tens of millions a month, according
to some, the growth has come at a cost…gigantic personal debt
loads. Trust me; America isn’t the only place where you could
buy a home with little or no money down and then parlay that
into other lines of credit.

So that’s what’s been on my mind these days. If you want to
play this game and throw your opinions out into the Webosphere
for all eternity (and believe me, it sticks…I know), then you have
to constantly go through a reexamination of the facts or you’re
just some simple buffoon, crying wolf, waiting to be
acknowledged for your five minutes of fame.

One other thought. There is an amazing consensus that the first
half of the year will be poor and the second half great. Talk
about way too easy. It’s going to be far more difficult than that
and it’s not about clarity over the election. Just think Pakistan
and Iran, for starters; though after three weeks score one for the
consensus.

—

OK, the facts. IBM did indeed beat expectations with its fourth
quarter report, citing rising overseas demand with earnings being
helped in no small part by a weak dollar. Business software
giant SAP also had good things to say about its prospects and the
aforementioned GE is trying to convince us the global economy
will be solid all of 2008. Meanwhile, J.P. Morgan chimed in
with solid results, thus proving that not all banks are created
equal. That’s most of the good…now the bad.

Citigroup cut its dividend, announced a slew of layoffs, and has
now written down $22 billion in mortgage-related investments
and bad loans. Citi has also been forced to seek $12.5 billion in
cash from the likes of Kuwait, Singapore, Prince Alwaleed and
former chairman Sandy Weill; the latter the man responsible for
much of the carnage in the first place.

Merrill Lynch…step forward. It was forced to get another $6.6
billion cash infusion from Korea, Kuwait, and even New Jersey’s
pension fund (which also invested in Citigroup). Merrill wrote
down an additional $14 billion in mortgage-related losses, on top
of $8 billion from the previous quarter. Included in Merrill’s
tally was $1.9 billion from a basically defunct bond insurer ACA
Capital. More on this business later.

Washington Mutual wrote down $1.6 billion, while warning of
consumer credit issues, thus joining the likes of Citigroup, J.P.
Morgan and Wells Fargo in this regard; all making statements
such as “We remain extremely cautious on 2008” (JPM) or “we
see a challenging consumer sector” (WFC). Coupled with last
week’s similar news from AT&T and American Express, you
can easily see that the real estate issue, and the negative wealth
effect, is hitting consumer credit and auto loans, just as some of
us long expected. Those who originally said the effects of a
popped housing bubble would be limited, like Bernanke and
Paulson, look like idiots.

And in case you were wondering just how much the banks have
written off related to real estate, it’s now over $105 billion.

But…this week there was one overriding issue, even worse than
the likes of Citigroup and Merrill; that being the bond insurers,
companies like the aforementioned ACA Capital, Ambac and
MBIA. This is a complicated arena, but to oversimplify, these
boys provide the insurance so that municipalities, for one, can
issue bonds in the first place. They are also heavily involved
in the mortgage-backed securities business, particularly in
insuring CDOs, or collateralized debt obligations. Often it’s
the Ambacs of the world that are pledging to cover losses on
CDOs tied to the housing market, but since housing is going to
hell in a handbasket, the mortgage pools, sliced and diced as they
were, are worth nowhere near what they were when first set up
so you have all these tranches (classes of CDOs and other
derivatives) that are floating around out there with little or no
value; along with credit default swaps speculating on the ability
of a company or municipality to repay its debt. The problem is
now there is no market for the instruments so establishing a value
is next to impossible, which is why the likes of Merrill Lynch
and Citigroup are finally biting the bullet and writing much of it
off. To finish this thought, the bulls say, however, eventually
some of these bonds and derivatives have value and that’s how,
possibly, down the road you could see an earnings surprise or
two.

Anyway, the bond insurers exist only if they can keep their
AAA-rating and, as in the case of ACA, the losses were so huge
on the pools they were insuring that they lost it, and once you do
the business is over. Friday, Fitch lowered Ambac to AA so it is
on life support. S&P and Moody’s are sure to follow.

Think about this. MBIA was trading at $76 on 1/29/07 and today
is $8. Ambac hit $96 as recently as 5/18/07 and is now $6.
MBIA just one week ago raised $1 billion in capital to keep its
AAA-rating, but had to cough up a 14% interest rate to do so.
[And the bondholders then suffered an immediate hit of 30 cents
on the dollar by last count.] With its plunging share price,
Ambac doesn’t exactly have the best story in town for anyone
looking to throw good money after bad either.

If MBIA and Ambac were to go the route of ACA, then that
would mean further massive writedowns at the banks, for
starters. It would also mean that municipalities would be
scrambling big time because no one is going to buy a sewer
bond, backed by some kind of tax, if the bonds aren’t insured.
[Or the city would have to pay an exorbitant interest rate to
satisfy investors, costs rise, workers are laid off, etc.] In other
words, a critical industry that no one paid attention to in the past
is on the verge of collapse.

As I write, though, there are a number of bailout plans being
floated, including one by CNBC’s Jim Cramer, and everyone is
standing around, waiting for Warren Buffett and/or the
government to come riding to the rescue, Mr. Buffett having
already expressed an interest in the business.

Sorry the above is so dense, but it’s not easy. I also recognize
I’m glossing over some important tangential topics, such as
‘counterparty risk,’ but I’ve said a lot about that in the past.

A few other big topic items. On the real estate front, housing
starts were down 14% in December, while building permits were
off 8%; putrid, and far worse than expected in both cases.

And did you wonder about all the capital infusions? It’s up to
$59 billion as of Wednesday, according to Bloomberg. Do you
want a good example of balance sheet destruction? Try Merrill
Lynch. In their press release they said the book value had
declined over the past year from $41.35 to $29.37, so I was
curious and looked up the third quarter figure, $39.75. Over $10
in three months. That’s what writedowns will do for you and the
solution, more cash, only hurts existing shareholders in terms of
dilution. Of course the alternative is bankruptcy.

Lastly, Ben Bernanke strode before Congress and declared that
he remained bullish on overseas prospects and exports, but the
U.S. would see “below trend growth in 2008 and 2009.” Doh!
Not exactly what the Street wanted to hear, though no one should
have been surprised as someone must have grabbed Clueless Ben
by the lapels before his appearance and said, “Listen up…you’re
no longer living in Princeton, where fantasy never intrudes with
reality. We’re in deep trouble. Begin admitting that. Now go
forth and spread the word.” Well, he didn’t necessarily say the
sky is falling, but he came as close to doing so as we can expect.

Street Bytes

–In case you were vacationing in the Caribbean and wanted to
know what was happenin’ to the ol’ portfolio, try the worst week
since July 2002 for the S&P 500, down 5.4%. The Dow Jones
and Nasdaq both lost 4%. The technical damage done to the
indexes has been severe. But what can we look forward to? A
ton of earnings releases and probably more detail on an
economic stimulus package.

As for the rumored stimulus idea of an $800 rebate check, I
remember writing of the $300 rebate we received in 2001 that I
would spend it on premium beer. But $800 presents a whole
different world of possibilities. Like premium beer and a night
in New York. Or premium beer and a roundtrip to Paris, though
in this instance I’d have to turn right around because I wouldn’t
have anything left over for coffee, let alone an overnight stay.

Or, and I’ve discussed this with a few friends, I could get
married and qualify for a $1,600 check! The only issue here
would be that I’d have to get to the mailbox first. But I’m pretty
good at keeping schedules and tipping the mailman, so that
shouldn’t be a problem. Of course for this ruse to work, I’d have
to marry someone who doesn’t read the newspaper or watch the
news. Since that isn’t likely to happen, I’m back to Plan A and
what to do with the $800, which more likely than not would
really go towards paying my heating bills.

–U.S. Treasury Yields

6-mo. 2.84% 2-yr. 2.35% 10-yr. 3.63% 30-yr. 4.28%

The core producer price and consumer price indexes came in at
2.0% and 2.4%, respectively, for 2007, but food inflation is up
5%, as you are all undoubtedly aware. Bonds rallied big again as
the Street keeps waiting for Bernanke to cut 50 basis points (1/2
percent), but for whatever reason he appears to be insistent on
waiting until the Jan. 30 meeting. [Fed funds futures are betting
on a 75 bp cut.]

–Unrest over the issue of inflation is gradually spreading. This
week’s target was Indonesia due to record soybean prices;
soybeans being a staple food. The bean price is being impacted
by bad harvests in Argentina and Brazil, rising demand in China,
and, of course, U.S. ethanol as our farmers replace soybeans with
corn. The corn-based ethanol debacle will go down in the
history books as one of our nation’s big mistakes.

–For a 14th consecutive year, Hong Kong was ranked as the
world’s freest economy, according to the annual Heritage
Foundation/Wall Street Journal survey that grades countries on a
combination of factors including property rights protection, tax
rates, government intervention in the economy, monetary, fiscal
and trade policy, and business freedom. No. 2 is Singapore, No.
3 Ireland, No. 4 Australia and No. 5 the United States.

China, by the way, is ranked No. 126 and Russia is No. 134.

–On top of all the problems that the big investment banks face is
an ongoing SEC investigation into ‘front-running’ by the likes of
Merrill Lynch. It’s just another name for insider trading as the
firms act on nonpublic information to place their own orders
ahead of client tickets. It’s also why I say again that while we
might be No. 5 in economic freedom, our capital markets are a
freakin’ joke.

–New Merrill CEO John Thain told the Wall Street Journal.

“Merrill had a risk committee. It just didn’t function. So now
when we have a weekly meeting, the head of fixed income and
equities show up. I show up, and the risk heads show up.”

This is unbelievable. The members of the committee made
$millions a year and didn’t even do something simple like attend
a meeting on the very risks they were taking. And this was
tolerated.

–The Journal had a story that epitomized some of the issues in
today’s real estate market. Developer Bruce Eichner defaulted
on a $760 million construction loan for a twin-tower casino in
Las Vegas after failing to get refinancing. The $760mm figure is
part of an overall $3 billion project called Cosmopolitan Resort
Casino that is to include 2,184 ‘condo hotel’ units, which is
proving to be a very shaky segment of the market nationwide.

Overall, $35 billion of new construction is planned or under way
in Vegas, with another 40,000 hotel rooms slated to come online
by 2012. CRASH!

–Shares in Merck and Schering-Plough plunged as a clinical trial
on their joint cholesterol drug effort, Zetia, not only failed to
slow the accumulation of plaque in the arteries, but also may
have contributed to plaque formation. The result was
“shocking,” in the words of renowned cardiologist Dr. Steven
Nissen. “This is as bad a result for the drug as anybody could
have feared.”

Even more disconcerting was the fact the two companies delayed
release of the results. In the case of Schering, 70% of its
earnings are said to depend on Zetia and another pill that
contains it, Vytorin.

–General Motors CEO Rick Wagoner urged shareholders to be
patient as he outlined a “significant” profit outlook over the next
two to three years, owing to ongoing cost-cutting initiatives and
strong growth overseas. I believe him, but at the same time if
you are in the recession camp and see ’08 as another miserable
year, particularly in the U.S., I imagine you can be patient;
though I’m personally putting GM on my watch list for down the
road.

–Boeing announced yet another delay in rolling out its 787
Dreamliner jet, the third by my count, meaning it will be
impossible for the aircraft manufacturer to meet its goal of
delivering over 100 of the planes by Dec. 2009. The big issue is
shortages of parts at the supplier end.

Meanwhile, competitor Airbus warned that the latest global
boom in aircraft orders was over, expecting the pace to fall 50%
in 2008. It’s as if by 2010 to 2012, everyone who wanted a new
jet will have ordered one. Or another way to look at it is if I’m a
worker at Boeing or Airbus, I’m saving for a rainy day.

[By the way, it’s very possible the Boeing 777 crash on Thursday
at Heathrow (which thanks to the skill of the pilot and co-pilot
resulted in zero fatalities) may have been the result of the engines
sucking in a flock of Canada geese, which are known to frequent
the reservoirs near the airport. All the more reason to destroy
the geese, worldwide. Sorry PETA. Just remember I’m for
saving the whale!]

–Former Brocade Communications Systems CEO Gregory
Reyes (no relation to Mets shortstop Jose), was sentenced to 21
months and ordered to pay $15 million for backdating options in
the first such case to go to trial that resulted in a conviction. This
is good news, even though his defenders say ‘no harm, no foul’
since the company didn’t actually lose money.

–Job losses: Citigroup is letting another 4,200 go (with many
more to follow), Bank of America announced 650 layoffs in
investment banking, Lehman is slashing 1,300 mortgage-related
jobs, home-lender IndyMac is cutting 2,400 positions (on top of
1,600 announced last year), and Applied Materials is handing out
pink slips to 1,000.

And then there is Sprint, which on Friday announced it was
cutting 4,000 jobs as the 3rd largest U.S. mobile carrier continues
to bleed subscribers and warned of a seriously large charge ahead
to cover “goodwill impairment.”

–Do you want some good news? Net foreign-capital inflows
into the U.S. jumped 63% in November to $149.9 billion,
reaching their highest level since January 2006. Back in August,
during the first stage of the credit crisis, $150 million flowed out.

–And now…your China update, ‘Street Bytes’ edition.

The government is estimating there will be more than 2.3 billion
trips by commuters criss-crossing the country over the Chinese
New Year holiday season. 22 million are expected to fly, up
10% from last year.

China’s longest river, the nasty, polluted Yangtze, is at its lowest
level in 142 years in some areas due to the drought.

But the government’s Ministry of Agriculture says a crackdown
on illicit practices has significantly improved the quality of the
farmed fish industry. Regulators claim over 30,000 inspectors
have canvassed the country, looking for the use of banned
ingredients or antibiotics that are known to cause cancer. At
least the ministry admits pollution and water quality are among
the biggest issues facing China, let alone the fish industry.

And wouldn’t you know, but in a separate report, “Serious
heavy-metal contamination has been found in vegetables from
the Pearl River Delta and in the soil they grow in,” according to
the South China Morning Post and Guangzhou Daily. But
authorities say the problem really isn’t that serious because you
can wash off the metals before eating, though I’m really not into
buying lettuce that has “lead levels 37.5% above acceptable
limits,” know what I’m sayin’?

Lastly, the World Health Organization said the H5N1 bird flu
virus may sometimes stick to surfaces or get kicked up in
fertilizer dust to infect people, a rather worrisome development,
especially for China.

–Apple Inc. announced it has sold 4 million iPhones since
introduction, but shares in the company tanked as investors were
underwhelmed by what they heard at Macworld and new product
introductions, such as an $1,800 laptop that fits in your wallet but
has zero features most use.

–Research at Cal Tech has shown that a person’s enjoyment of
wine can be heightened if they are simply told it is a more
expensive brand. In a test of 21 volunteers, the researchers were
able to pass off a $90 bottle of Cabernet Sauvignon as a $10
bottle and presented a $5 bottle as one worth $45. Which
reminded me of a recent party where Trader George
surreptitiously placed a jug of Almaden on the table at this
otherwise ritzy affair, while we stood around watching to see
who would drink it. But you better know the hosts before you
try this yourself and it needs to be pointed out that Trader George
is a professional

–My portfolio: Sometimes you just have to laugh. Remember
how I said the first week of the year was one of my best ever?
It’s all gone and I no longer needn’t worry about being out of
balance with my 80% cash / 20% stocks recommendation, which
looks pretty good today, doesn’t it? My solar play started the
year at $8, went to $16.80, and is now down to $7.50. [I’m still
way ahead, though.] Yes, of course I wish I had sold but the
story is only going to get better, longer term, and I can afford to
be patient. I tried to sell some around $16 but the market moved
faster than my fingers could hit the keyboard and after that I just
walked away. That’s the great thing about this business. You’re
always learning. But the key is to be in a position where you
aren’t crying at night. These days, that’s where the cash comes
in.

–Lastly, and in yet another example of the still unwinding real
estate bubble, comedian Eddie Murphy has dropped the price on
his Englewood estate, appropriately named “Bubble Hill,” from
$30 million to just $19.5 million. [After stopping at $22
million.] I’m a buyer of the seven-bedroom mansion, complete
with recording studio and bowling alley, when it hits $195,000.

[It also needs to be noted that Murphy’s pseudo-marriage to
Tracey Edmonds appears to have lasted a whopping two weeks.]

Foreign Affairs

Iraq: There was some major movement on one of President
Bush’s benchmarks the past week, that being the Shia-led
government’s acknowledgement, finally, that some of Saddam’s
former Baathist party officials should be admitted to the
government to bring about some political reconciliation.

But the devil is always in the details and, for starters, Prime
Minister Maliki is not about to let in more than a handful of very
low-level officials. As the Washington Post editorialized:

“Some former members of Saddam Hussein’s party would be
given pensions and other chances at state jobs. Yet, taken
literally, the law would exclude many Sunnis from Iraq’s army
and security forces, including thousands who are now serving or
seeking to enroll – a huge step in the wrong direction.”

You can say the same about efforts to share the oil wealth. From
time to time you hear of a breakthrough, but on closer inspection
it’s a sham. In this regard, start with the Kurds. They already
have their de facto independence and they’re not about to divvy
up the spoils.

Speaking of oil, the positive is that while production has been
mired around 2 million barrels per day, the projection for 2008 is
2.2 million. However, before you start dancing the huka,
understand this is still below pre-war levels of about 2.4mmbd.

Lastly, Iraq’s defense minister said his security forces would not
be in a position to take full responsibility for internal security
until 2012, nor be able to defend the borders until at least 2018.
On Friday, violence involving the Shiite cult Soldiers of Heaven
killed at least 50 and now Moqtada al-Sadr is threatening to
break his truce.

Middle East…President Bush’s trip: I can’t blame Bush for
going to the region as he did. Better to talk to the players up
close and personal than by other means, but the mission has
already proven to be an unmitigated failure due to the immediate
surge in violence between the Israelis and Palestinians. The tit-
for-tat was never more evident as Hamas lobbed at least 100
missiles and mortars over the border and Israel responded by
killing 29 Palestinians, mostly militants, in three days. And just
three weeks into 2008, my prediction for the two leaders
involved seems virtually destined to become true.

Recall I said that Israeli Prime Minister Ehud Olmert would be
forced out by right-wingers upset over his overtures to his
Palestinian counterpart, Mahmoud Abbas, and talk of turning
over territory. Olmert’s governing coalition is now falling apart,
even before the release of what promises to be a scathing report
on the conduct of the Lebanese war of ’06. [He is down to just
67 seats out of 120 in the Knesset, with further defections likely.]

As for Abbas, I said he would be “taken out.” On Thursday, he
said he is considering resigning unless Israel immediately stops
its military operations, that on Friday included reinstituting a
blockade of Gaza, meaning badly needed supplies can’t get in.
Gaza, controlled by Hamas, is a pure hell-hole and humanitarian
disaster.

For his part, President Bush seems to believe that Abbas could
contain Hamas until a peace deal was reached. Right.

The rest of Bush’s trip was taken up by talk of Iran and the threat
it posed to our allies. In his major speech in Abu Dhabi, the
president said “Iran today is the world’s leading state sponsor of
terror. Iran’s actions threaten the security of nations
everywhere.”

Iran does indeed pose a threat to Israel, but following is a
different opinion, from an editorial in Lebanon’s Daily Star.

“U.S. President George W. Bush used his speech in Abu Dhabi
on Sunday to reiterate many of the same accusations about Iran
that we have heard him throw around since his first weeks in
office seven years ago. Back then, Iran’s president was
Mohammad Khatami, a reform-minded leader whose efforts to
promote inter-cultural understanding earned him the recognition
of international institutions such as the United Nations, which
acted on his suggestion to proclaim 2001 the Year of Dialogue
Among Civilizations. The ensuing election of Khatami’s hard-
line successor, Mahmoud Ahmadinejad, has made Bush’s talk of
the Iranian ‘threat’ an easier sell, but Arab audiences still seem
less worried today about the possibly nefarious aims of the
Islamic Republic than they are about the U.S. president’s proven
track record of stirring up chaos and instability in the region.”

And from a different part of the world, an editorial in the South
China Morning Post [Hong Kong].

“The 9/11 terrorist attacks on the United States have defined the
administration of George W. Bush, for the worse and for too
long. Evidence of that can be seen in the consequence of its
adoption of unilateralist policies abroad and in its sacrifice of
American values, both supposedly justified as part of the so-
called ‘war on terror.’….

“Mr. Bush is a weakened leader who is also part of the problem,
and not just because he is a lame-duck president. His political
capital remains depleted by a disastrous record in the region,
starting with the invasion and tragic occupation of Iraq that
squandered international support and sympathy generated by
9/11. Suspicions that the Annapolis summit had a hidden agenda
of isolating Iran may be unfounded, but his rallying call to Arab
nations to confront what he called Iran’s threat to world security
fell a little flat after the International Atomic Energy Agency said
Iran had agreed to answer outstanding questions about its nuclear
programs within a month. This came after a U.S. intelligence
report found that Iran had halted a nuclear-weapons drive in
2003.”

Again, the above is just some of what the world believes when
viewing U.S. actions. I myself remain convinced that Iran is
proceeding rapidly to have a nuclear weapons capability and
Israel will be forced to act preemptively this year. [Which is also
why if I see oil tumble to $80 or below, I’m a buyer.]

What frustrates me, though, is that we should have been talking
to Iran years ago. Now the horses are out of the barn, even if
Ahmadinejad suffers a crippling defeat in upcoming
parliamentary elections.

Finally, wrapping up President Bush’s trip, he groveled at the
feet of Saudi Arabia’s rulers, asking for more oil to be pumped
into the market to drive down prices, and when the princes acted
like they didn’t hear him, Bush said, ‘How about if I sell you $20
billion of arms to combat Iran?’ To which the Saudis whispered
to each other, ‘Sucker. Iran isn’t about to attack Saudi Arabia.
But we get the weapons anyway.’

Then Bush met for all of four hours with Egyptian dictator Hosni
Mubarak, pleading for Egypt to stop the flow of weapons into
Gaza, and Mubarak kissed him on both cheeks while winking to
his aids.

Afghanistan: There are some that say if the Taliban is resorting
to suicide bombing, it shows they’re desperate; but on the other
hand if the Taliban attacks Kabul’s only luxury hotel and kills 8
in a suicide bomb attack and assault involving at least four of
them, that’s not exactly the “last throes of an insurgency” type of
stuff.

This week Defense Secretary Robert Gates caught some flack
when he told the Los Angeles Times, “I’m worried we’re
deploying [military advisers] that are not properly trained, and
I’m worried we have some military forces that don’t know how
to do counter-insurgency operations;” referring specifically to
operations in the south led primarily by Britain, Canada and the
Netherlands.

Some in Europe were furious, especially the Dutch who
summoned the U.S. Ambassador in The Hague to explain Gates’
comments, while a British MP said “they were bloody
outrageous.” Patrick Mercer added, “I would beg the Americans
to understand that we are their closest allies, and our men are
bleeding and dying in large numbers.”

The Pentagon said Gates “was not criticizing any specific
country. But he did want to make it clear that he believes NATO
as an alliance has not redirected its training quickly or effectively
to deal with asymmetric threats.”

The Washington Post editorial board weighed in.

“[It is a good thing that 3,200 Marines] rather than European
soldiers will deploy in Helmand province this spring to head off
any Taliban offensive. Defeating the Afghan insurgency will
require the United States to take on a larger part of the fighting.
Success will also require U.S. commanders to insist that a more
coherent, nationwide counterinsurgency strategy be pursued –
including aggressive training of the Afghan army and police,
economic development that is centrally coordinated, and a
focused attack on the opium business that supplies most of the
Taliban’s funding. If that means downgrading NATO’s role or
bruising the feelings of some allied governments, so be it.”

Pakistan: I’ve been taking off on the Bhutto family, and not in
the least bit concerned I could be offending anyone who may not
have done their homework, so I have to now note the thoughts of
Fatima Bhutto, Benazir’s 25-year-old niece, who gave her first
interview, post-assassination, to the London Times. There are
some who feel that Fatima, not 19-yearr-old Bilawal, Benazir’s
son, is the rightful heir to the party throne, yet Fatima rejected
her own claim to the Bhutto legacy and called for a new era
based on platforms rather than personalities.

“That’s the problem – it’s a field that’s held hostage by so few
and it’s become in a sense the family business, like an antique
shop, where it’s just ‘So and So and Sons’ and then grandsons
and great grandsons….

“The idea that it has to be a Bhutto, I think, is a dangerous one.
It doesn’t benefit Pakistan. It doesn’t benefit a party that’s
supposed to be run on democratic lines and it doesn’t benefit us
as citizens if we think only about personalities and not about
platforms.”

Fatima has serious doubts about the will that supposedly named
Bilawal as heir, a point I raised the other week as well.

Meanwhile, four weeks before the rescheduled parliamentary
elections, former prime minister and opposition leader Nawaz
Sharif blasted President Pervez Musharraf. “Musharraf has
destroyed Pakistan. He is blindly following America’s orders.”

Remember, I’ve long written Sharif is no friend of the U.S. and
Washington can not be pleased he could yet emerge as the new
leader. He is aligned with the extremists.

China: Wendell Minnick of Defense News reported on the
growing concern at the Pentagon over China’s anti-ship ballistic
missile program. As in here is one scenario.

“In March 2012, Washington responds to Chinese threats to
invade Taiwan by sending two U.S. aircraft carrier groups
toward the Taiwan Strait. Rhetoric out of Beijing and
Washington escalates with threats and counterthreats, then open
battle.

“On the second day, Taiwan and U.S. fighter aircraft engage
Chinese aircraft over the strait in what one Taiwanese pilot
describes as a hornet’s nest from hell. On the third day, two
dozen ASBMs sink the aircraft carriers and several Aegis-
equipped destroyers and amphibious warfare ships, killing more
than 18,000 U.S. sailors and Marines. In just under an hour, the
Chinese inflict four times the losses of the Iraq war.”

Mark Stokes, a former country director for China at the Defense
Department and a former military attaché in Beijing, said a
“question many friends in Taiwan have asked is whether or not
the United States would intervene, should the PRC use force
against Taiwan. As time goes on, it may become more of a
question of could the U.S. intervene with sufficient alacrity
before being handed a fait accompli.”

Well I’ve asked that question for years and I have the answer.
Of course the U.S. will abandon Taiwan, and that would be a
tragedy on so many levels.

But…will China ever really need to take Taiwan by force? After
all, the Kuomintang scored a decisive victory in parliamentary
elections last weekend, a result seen as a vote of no-confidence
for President Chen Shui-bian’s independence agenda. The KMT
picked up 51% of the vote, while Chen’s DPP came in at only
37%. The size of the KMT’s win gives it absolute control of the
legislature (without getting into all the specifics, it’s confusing).

Chen resigned as party chairman and the DPP has its work cut
out for it ahead of the March 22 presidential election. And in
repudiating Chen’s hardline stance against Beijing, one has to
wonder just how buddy-buddy the KMT will now get with the
mainland. After all, the party advocates keeping the status quo
as well as possible reunification. Who knows, after the
Olympics China could just toss a few missiles in the waters off
Taiwan and then sue for peace.

Remember a theme of mine since day one of “Week in Review.”
Businessmen do not operate in the interests of their own people
and Taiwan is loaded with corrupt titans (most connected to the
KMT), who would sell their nation out in a heartbeat if given the
chance.

Kenya: The catastrophe continues as at least 20 more died in
protests.

Russia / Britain: Employees at two British Council (cultural)
offices in St. Petersburg and Yekaterinburg were harassed and
questioned by the FSB (the former KGB), leading Foreign
Secretary David Miliband to warn Russia that the intimidation is
“completely unacceptable.”

The situation goes back to the dispute over the murder of ex-
KGB agent Alexander Litvinenko, who was poisoned in London.
Britain has wanted Russia to extradite Andrei Lugovoy, a former
KGB agent who is the leading suspect. Instead the Kremlin
ordered British Council offices outside Moscow shut, but Britain
refused, so the FSB began visiting employees at their homes and
calling them into FSB headquarters. Finally, Britain gave in and
closed the two bureaus.

As Russians are fond of saying, “If you want to be respected, it
helps to be feared.”

France: Yet another reason to “wait 24 hours.” French President
Nicolas Sarkozy, Wonder Boy, stumbled badly due to his
relationship with model Carla Bruni (the man-eater), that we’re
told has resulted in marriage. But as Sarko’s popularity has
plummeted, along with a slowing economy, he has reassured his
nation he is back to work. Basically he’s been out of control.
But you ain’t seen nothing yet, sports fans. Wait until he takes
over the EU leadership later this year.

Random Musings

–Let’s start off with our “Idiot of the Week,” shall we? Ohio
Democratic Congresswoman Marcy Kaptur, who during the
House Budget Committee hearing on Thursday with Fed
Chairman Ben Bernanke, mistook him for Treasury Secretary
Hank Paulson.

“Seeing as how you were the former CEO of Goldman Sachs,”
Kaptur began, before being corrected by Bernanke.

“I’ve got the wrong firm? Paulson, oh, OK. Where were you
sir?” Bernanke told her he was chairman of Princeton’s
economics department.

“Oh, Princeton, oh, all right, sorry.”

If I were in Kaptur’s district, I’d demand her immediate
resignation. And what about the idiot’s staff? Kaptur was
reading off prepared remarks, after all. Are there no schools in
Ohio? Are there no workhouses?

–George Romney’s boy Mitt won the Michigan primary over
John McCain, 39-30.

In a New York Daily News survey of voters in the state, among
black voters Barack Obama leads Hillary Clinton, 42-40, while
Hillary leads with women, 50-29, and men, 42-25.

In New Jersey, a Super Duper Tuesday state, Rudy Giuliani
thought he was a lock and in October led McCain 44-12. But
now McCain leads 29-25. [Hillary is ahead of Obama in my
state by a 42-30 margin.]

In a L.A. Times/CNN/Politico survey of California voters (with
the primary slated for Feb. 5), Clinton still leads Obama, 47-31,
while on the Republican side….down..the..stretch..they come!
McCain, 20; Romney, 16; Giuliani, 14; Huckabee, 13.

In a Quinnipiac University survey of likely voters in Florida’s
Republican primary (Jan. 29), McCain leads Giuliani, 22-20,
with Huckabee and Romney tied at 19.

Nationally, the Washington Post/ABC News survey revealed that
Clinton leads Obama, 42-37 (Edwards 11), while McCain takes
28 percent, Huckabee 20, Romney 19, and Giuliani 15. Obama
is leading among African-Americans 2 to 1.

As for South Carolina and the Republicans on Saturday, as well
as Nevada…….

–Thankfully, Hillary Clinton and Barack Obama have called a
truce on the race topic. Prior to Tuesday night’s debate in Las
Vegas, I thought the Washington Post had the right idea.

“A hallmark of Mr. Obama’s campaign is its transcendent,
universal appeal. He refreshingly portrays himself as a candidate
for the presidency who happens to be black, not the black
candidate for president. As long as racial divisions remain in
America, race is a legitimate, important subject for political
debate. But the current finger-pointing is unproductive and even
dangerous because it threatens to revive those divisions that
bridge them.”

–George Will: “America has passed another milestone on its
march to equal opportunity thanks to Robert Johnson, founder of
Black Entertainment Television, who this week proved that a
black billionaire can be just as witless as are certain white
billionaires who think their wisdom is commensurate with their
net worth.”

–Just a little history lesson on the whole Martin Luther King Jr./
LBJ civil rights debate, this from “The Presidents,” edited by
Henry F. Graff.

“(Following JFK’s assassination) the civil rights bill was the
focus of Johnson’s labors in the first several months. Its passage
as the Civil Rights Act of 1964 would thenceforth be the
keystone of Johnson’s claim to fame as inheritor and keeper of
the urban liberal base of the Democratic Party. In seeking
support for the bill’s passage, he had beseeched Congress on
sentimental grounds: ‘No memorial oration or eulogy could more
eloquently honor President Kennedy’s memory than the earliest
possible passage of the civil rights bill.’ In short order, the bill
that Kennedy had prepared had been made stronger by a number
of amendments proposed by ardent advocates. The House
passed the revised bill on 10 February. In the Senate it met a
filibuster by southerners that lasted eighty-three days, ending on
10 June only with the enactment of a cloture resolution. The bill
finally became law on 2 July.

“Johnson, feeling special responsibility as a southerner, had
made the bill’s passage a personal crusade. His efforts can only
be called Herculean, for he cajoled and pulled strings to round up
support from early in the morning to late at night, day after day,
week after week. On more than one occasion in the White
House, he upbraided opponents or fence-sitters by fairly
screaming as he faced them down – often nose-to-nose, ‘Do you
know what it is to be black?’

“The act set in place some of the most fundamental social
changes in American history. Among its provisions, it forbade
discrimination on account of race in places of public
accommodation. It contained protection of the right of blacks to
vote. It forbade discrimination on account of race or sex by
employers and labor unions. Moreover, to help monitor the
law’s operation, the Equal Employment Opportunity
Commission was established. To accelerate the desegregation of
schools, the new law empowered the attorney general to
challenge local discriminatory practices in court.”

Yes, Hillary was not entirely off-base in her comments.

–I see that Jack Kemp is helping John McCain on the campaign
trail, specifically in shaping McCain’s economic message. Note
to the senator…Jack Kemp is a loser. Nice guy, but he’s death to
those asking for his assistance. [Kemp is urging McCain to talk
about corporate tax cuts as part of an economic stimulus package
and while this is certainly needed, down the road, it’s the last
thing the average American wants to hear today when they are
just trying to make ends meet.]

–Adm. Mike Mullen, chairman of the Joint Chiefs of Staff, told
reporters touring Guantanamo Bay with him that “I’d like to see
it shut down.” Asked why he thinks it should, Mullen said
“More than anything else it’s been the image – how Gitmo has
become around the world, in terms of representing the United
States.”

Traveling as I have, and seeing this issue come up time and time
again, I couldn’t agree more.

–George P. Schultz, William J. Perry, Henry A. Kissinger and
Sam Nunn offered up their latest ideas on the nuclear
proliferation front in another op-ed for the Journal. In
conjunction with an organization I bring up frequently, the
Nuclear Threat Initiative, which seeks to find ways to reduce the
threat of loose nukes and nuclear material, I think it was Gov.
Schwarzenegger, cited by the authors, who put it best.

“Mistakes are made in every other human endeavor. Why should
nuclear weapons be exempt?”

As the authors add, “To underline the governor’s point, on Aug.
29-30, 2007, six cruise missiles armed with nuclear warheads
were loaded on a U.S. Air Force plane, flown across the country
and unloaded. For 36 hours, no one knew where the warheads
were, or even that they were missing.”

–Long-time readers know my disdain for retired Army Gen.
Tommy Franks, so you shouldn’t be surprised I have to note a
Washington Post article this week on the ongoing scam among
veterans charities, “including one that paid [Franks] $100,000 to
appear in its solicitation letters using money the nonprofit raised
to help soldiers returning from Iraq and Afghanistan.”

Franks received his money on behalf of the Coalition to Support
America’s Heroes, while a well-known conservative, Richard
Viguerie, received a $1 million loan from Help Hospitalized
Veterans for a start-up initiative at his firm. Both Republicans
and Democrats “voiced outrage over what (Cong. Henry)
Waxman called an ‘intolerable fraud.’”

I think I proved my support for the troops long ago, but until
Gen. Petraeus came along I have also blistered America’s
military leadership for the conduct of the war in Iraq. They are
deserving of as much blame as the president. So when I read
something like this about Franks, I can’t help but say ‘I told you
so.’ But to attempt to be fair to the man, I note that a spokesman
told Congress Franks ended his support for the charity in
question “when he learned that the percentage of money raised
that was going to the troops was less than 85 percent.”

–We note the passing of former chess champion Bobby Fischer,
64, one of the primo weirdoes in the history of mankind. But it
was in 1972, during his match with Boris Spassky in Reykjavik,
that America discovered the sport. I imagine I wasn’t the only
kid who played chess all that summer (in my case with my
father) as we followed the matches on PBS and that great
commentator, Shelby Lyman. I can’t believe that was almost 36
years ago. Thanks, Dad. Those are great memories.

–Finally, I took a quick trip last Sat./Sun. to Kansas City to meet
with a friend and attend a function at the Negro Leagues Baseball
Museum. The unofficial theme at the awards show boiled down
to dignity and respect, when it came to the heritage of those
playing at a time when there were barriers of all sorts, including
the most obvious one. I’ve now been to two functions here since
October and had the opportunity to meet with a few of the old-
timers and, boy, are these men different from many of today’s
athletes. They are absolutely the most enjoyable people to be
around and exude class.

But along the lines of barriers, Continental Airlines lost my bag
on my return flight for the fifth time in the last three years. I no
longer get upset because each previous time I did finally get it
back within about 24 hours so the inconvenience was minor.

This time Continental also couldn’t have been more helpful in
following up during the course of Sunday afternoon, updating me
at home on when I might see my luggage after it had been
tracked down (it helps to be a Gold member) and at 2:30 pm I
was told the bag had been loaded onto the van in Newark and I
would receive it shortly.

Well, I knew this probably wasn’t the case because the driver is
delivering tons of bags, all over the area, and so by 9:00 pm
when the phone rang, I had forgotten about the delivery entirely.

So I pick up the phone, I hear a foreign voice, can’t understand
him, and hang up. At that moment it hit me, ‘it must be
Continental’s delivery guy,’ and sure enough he called right
back.

Let’s just say for the next 40 minutes I tried to guide him to my
place when at the start he was all of about four blocks away.
Granted, it’s not the easiest home to find, but it got a little
ridiculous.

The whole time, though, I didn’t lose my cool because I kept
thinking, ‘This guy just came to the country and is simply trying
to do his job.’ That’s a lot more than can be said for a lot of
people here, I mused. In other words, sometimes you just go
‘Whaddya gonna do?’

And so I’ve rambled because I couldn’t help but then think of the
whole immigration issue. I’m glad I’m not running for political
office these days and having to tackle it. I do understand how
some like John McCain, in attempting to do good, nonetheless
get blasted. It’s an issue that still threatens to tear our country
apart.

It’s also about dignity and respect; two virtues that are often
missing in today’s America. I finally guided the bag man into
my complex and met him outside. You could tell he was afraid I
was going to chew his head off as he attempted to apologize,
probably fearing I’d call Continental, complain, and he’d lose his
job. Instead I smiled, shook his hand, said “I’m sorry it was so
hard for you” and handed him a tip. Now admittedly, my
attitude was good because I had my bag back. I’ll worry about
extending the border fence tomorrow.

—

Pray for the men and women of the armed forces.

God bless America.

—

Gold closed at $883
Oil, $90.64

Returns for the week 1/14-1/18

Dow Jones -4.0% [12099]
S&P 500 -5.4% [1325]
S&P MidCap -5.0%
Russell 2000 -4.5%
Nasdaq -4.1% [2340]

Returns for the period 1/1/08-1/18/08

Dow Jones -8.8%
S&P 500 -9.8%
S&P MidCap -11.9%
Russell 2000 -12.1%
Nasdaq -11.8%

Bulls 45.6
Bears 26.7 [Source: Chartcraft / Investors Intelligence]

Have a great week. I appreciate your support.

Brian Trumbore