Skiracer's stock slopes

[skiracer]

another interesting read.

By George Friedman

There are moments in history when everything comes together. Today is the sixth anniversary of the al Qaeda attack against the United States. This is the week Gen. David Petraeus is reporting to Congress on the status of the war in Iraq. It also is the week Osama bin Laden made one of his rare video appearances. The world will not change this week, but the convergence of these strands makes it necessary to pause and take stock.

To do this, we must begin at the beginning. We do not mean Sept. 11, 2001, but the moment when bin Laden decided to stage the attack -- and the reasoning behind it. By understanding his motives, we can begin to measure his success. His motive was not, we believe, simply to kill Americans. That was a means to an end. Rather, as we and others have said before, it was to seize what he saw as a rare opportunity to begin the process of recreating a vast Islamic empire.

The rare opportunity was the fall of the Soviet Union. Until then, the Islamic world had been divided between Soviet and American spheres of influence. Indeed, the border of the Soviet Union ran through the Islamic world. The Cold War between the United States and Soviet Union created a tense paralysis in that world, with movement and change being measured in decades and inches. Suddenly, everything that was once certain became uncertain. One half of the power equation was gone, and the other half, the United States, was at a loss as to what it meant. Bin Laden looked at the Soviet withdrawal from Afghanistan and saw a historical opening.

His problem was that contrary to what has been discussed about terrorist organizations, they cannot create an empire. What they can do is seize a nation-state and utilize its power to begin shaping an empire. Bin Laden had Afghanistan, but he understood that its location and intrinsic power were insufficient for his needs. He could not hope to recreate the Islamic empire from Kabul or Kandahar. For bin Laden's strategy to work, he had to topple an important Muslim state and replace it with a true Islamist regime. There were several that would have done, but we suspect his eye was on Egypt. When Egypt moves, the Islamic world trembles. But that is a guess. A number of other regimes would have served the purpose.

In bin Laden's analysis, the strength of these regimes also was their weakness. They were all dependent on the United States for their survival. This fit in with bin Laden's broader analysis. The reason for Muslim weakness was that the Christian world -- the Crusaders, as he referred to them -- had imposed a series of regimes on Muslims and thereby divided and controlled them. Until these puppet regimes were overthrown, Muslims would be helpless in the face of Christians, in particular the current leading Christian power, the United States.

The root problem, as bin Laden saw it, was psychological. Muslims suffered from a psychology of defeat. They expected to be weaker than Christians and so they were. In spite of the defeat of the atheist Soviets in Afghanistan and the collapse of their regime, Muslims still did not understand two things -- that the Christians were inherently weak and corrupt, and that the United States was simply another Crusader nation and their enemy.

The 9/11 attack, as well as earlier attacks, was designed to do two things. First, by striking targets that were well-known among the Muslim masses, the attack was meant to demonstrate that the United States could be attacked and badly hurt. Second, it was designed to get a U.S. reaction -- and this is what bin Laden saw as the beauty of his plan: If Washington reacted by doing nothing effective, then he could argue that the United States was profoundly weak and indecisive. This would increase contempt for the United States. If, on the other hand, the United States staged a series of campaigns in the Islamic world, he would be able to say that this demonstrated that the United States was the true Crusader state and the enemy of Muslims everywhere. Bin Laden was looking for an intemperate move -- either the continued impotent responses to al Qaeda attacks in the 1990s or a drastic assault against Islam. Either one would have done.

For the American side, 9/11 did exactly what it was intended to do: generate terror. In our view, this was a wholly rational feeling. Anyone who was not frightened of what was coming next was out of touch with reality. Indeed, we are always amused when encountering friends who feel the United States vastly exaggerated the implications of four simultaneous plane hijacks that resulted in the world's worst terrorist attack and cost thousands of lives and billions in damage. Yet, six years on, the overwhelming and reasonable fear on the night of Sept. 11 has been erased and replaced by a strange sense that it was all an overreaction.

Al Qaeda was a global -- but sparse -- network. That meant that it could be anywhere and everywhere, and that searching for it was like looking for a needle in a haystack. But there was something else that disoriented the United States even more. Whether due to disruption by U.S. efforts or a lack of follow-on plans, al Qaeda never attacked the United States again after 9/11. Had it periodically attacked the United States, the ongoing sense of crisis would not have dissipated. But no attack has occurred, and over the years, actions and policies that appeared reasonable and proportionate in 2001 began to appear paranoid and excessive. A sense began to develop that the United States had overreacted to 9/11, or even that the Bush administration used 9/11 as an excuse for oppressive behavior.

Regardless of whether he was a one-trick pony or he did intend, but failed, to stage follow-on attacks, the lack of strikes since 9/11 has turned out to be less damaging to bin Laden than to the Bush administration.

Years of vigilance without an indisputable attack have led to a slow but systematic meltdown in the American consensus that was forged white hot on Sept. 11. On that day, it was generally conceded that defeating al Qaeda took precedence over all other considerations. It was agreed that this would be an extended covert war in which the use of any number of aggressive and unpleasant means would be necessary. It was believed that the next attack could come at any moment, and that preventing it was paramount.

Time reshapes our memory and displaces our fears from ourselves to others. For many, the fevered response to 9/11 is no longer "our" response, but "their" response, the response of the administration -- or more precisely, the overreaction of the administration that used 9/11 as an excuse to wage an unnecessary global war. The fears of that day are viewed as irrational and the responsibility of others. Regardless of whether it was intentional, the failure of al Qaeda to mount another successful attack against the United States in six years has made it appear that the reaction to 9/11 was overblown.

The Bush administration, however, felt it could not decline combat. It surged into the Islamic world, adopting one of the strategies bin Laden hoped it would. There were many reasons for this, but part of it was psychological. Bin Laden wanted to show that the United States was weak. Bush wanted to demonstrate that the United States was strong. The secretary of defense at the time, Donald Rumsfeld, used the term "shock and awe." That was precisely the sense the United States wanted to deliver to the Islamic world. It wanted to call bin Laden's bet -- and raise it.

That was more than four years ago. The sense of shock and awe, if it was ever there, is long gone. Rather than showing the Islamic world the overwhelming power of the United States, the United States is now engaged in a debate over whether there is some hope for its strategy. No one is arguing that the war has been a slam dunk. Whatever the complex reasons for invading Iraq, and we have addressed those in detail, time has completely undermined the psychological dimension of the strategy. Four years into the war, no one is shocked and no one is awed. The same, it should be added, is true about Afghanistan.

Time has hammered the Bush administration in two ways. In the first instance -- and this might actually be the result of the administration's success in stopping al Qaeda -- there has been no further attack against the United States. The justification for the administration's measures to combat al Qaeda, therefore, is wearing thin. For many, a state of emergency without any action simply does not work after six years. It is not because al Qaeda and others aren't out there. It is because time wears down the imagination, until the threat becomes a phantom.

Time also has worn down the Bush administration's war in Iraq. The Islamic world is not impressed. The American public doesn't see the point or the end. What was supposed to be a stunning demonstration of American power has been a demonstration of the limits of that power.

The paradox is this: There has been no follow-on attack against the United States. The United States did dislodge Saddam Hussein and the Taliban, and while the war goes badly, the casualties are a small fraction of those lost in Vietnam. Most important, bin Laden's dream is gone. No Muslim state has been overthrown and replaced with a regime that bin Laden would find worthy. He has been marginalized by both the United States and by his rival Shiite radicals, who have picked up the mantle that he dropped. His own jihadist movement is no longer under his effective control.

Bin Laden has been as badly battered by time as Bush. Unable to achieve any of his political goals, unable to mount another attack, he reminds us of Che Guevara after his death in Bolivia. He is a symbol of rebellion for a generation that does not intend to rebel and that carefully ignores his massive failures.

Yet, in the end, Guevara and bin Laden could have become important only if their revolutions had succeeded. There is much talk and much enthusiasm. There is no revolution. Therefore, what time has done to bin Laden's hopes is interesting, but in the end, as a geopolitical force, he has not counted beyond his image since Sept. 11, 2001.

The effect on the United States is much more profound. The war, both in Iraq and against al Qaeda, has worn the United States down over time. The psychology of fear has been replaced by a psychology of cynicism. The psychology of confidence in war has been replaced by a psychology of helplessness. Exhaustion pervades all.

That is the single most important outcome of the war. What happens to bin Laden is, in the end, about as important as what happened to Guevara. Legends will be made of it -- not history. But when the world's leading power falls into the psychological abyss brought about by time and war, the entire world is changed by it. Every country rethinks its position and its actions. Everything changes.

That is what is important about the Petraeus report. He will ask for more time. Congress will give it to him. The president will take it. Time, however, has its price not only in war but also psychologically. And if the request for time leads to more failure and the American psychology is further battered, then that is simply more time that other powers, great and small, will have to take advantage of the situation. The United States has psychologically begun tearing itself apart over both the war on terrorism and the war in Iraq. Whatever your view of that, it is a fact -- a serious geopolitical fact.

The Petraeus report will not address that. It is out of the general's area of responsibility. But the pressing issue is this: If the United States continues the war and if it maintains its vigilance against attacks, how does the evolution of the American psyche play out?




Tell George what you think

[peanuts]

Thanks for that last post, Skiracer. It had some very serious and interesting thought behind it.

Regarding any geopolitical implications: I still think that the majority of Americans will care more about their wallet- war or no war, bin Laden or not, terror attack or increased complacency... who cares about it here? So what happens across the pond? We just want our 2 gallon per mile Hummers, diamond encrusted cellphones, baby seal fur coats, submersible cruising yachts, $5000 per oz. caviar, Peruvian house staff, private jets, box seats, and a mansion for all four seaons on 6 continents.

[skiracer]

Thanks for that last post, Skiracer. It had some very serious and interesting thought behind it.

Regarding any geopolitical implications: I still think that the majority of Americans will care more about their wallet- war or no war, bin Laden or not, terror attack or increased complacency... who cares about it here? So what happens across the pond? We just want our 2 gallon per mile Hummers, diamond encrusted cellphones, baby seal fur coats, submersible cruising yachts, $5000 per oz. caviar, Peruvian house staff, private jets, box seats, and a mansion for all four seaons on 6 continents.

thank you for taking the time to read the article and comment on it Peanuts. I agree with your insight wholeheartedly.
there are people out there that will say i'm nuts but I liken all of this to the final phase of other great civilizations like Greece, Egypt, and Rome. moral decay sets in due to the rise in the standard of living and the want for instant gratification. the have nots want what the haves have gotten and the haves want more and more and think that they are actually better than others and will do anything to keep and maintain what they have. the have nots will do anything to gain some resemblence to what the haves have gotten. everyone loses sight of what is morally right and what the empire was originally built on that made it great in the first place. take a good close look at the entire world and what is going on. can you say that it is really good. is the united states really utilizing what we have for the betterment of mankind or have we even tried. we make great weapons and make great war to make big money for the people in control. not to much else. all the good things that could be produced for the betterment of everyone is legislated out of the legislature for other special interests that could care less about the universal betterment of mankind and our planet. it's a special interest environment that works only for the special interests and things only get done for the special interests and the money behind them.

[peanuts]

...take a good close look at the entire world and what is going on. can you say that it is really good. is the united states really utilizing what we have for the betterment of mankind or have we even tried...

We're awfully good at running the money printing machines

Ski, you might like this song: MP3 download link

When I donate my personal money, I make sure that it goes to truely good causes. I nearly lost my sister to breast cancer. When I donate, that's where my American money goes.

[skiracer]

We're awfully good at running the money printing machines

Ski, you might like this song: MP3 download link

When I donate my personal money, I make sure that it goes to truely good causes. I nearly lost my sister to breast cancer. When I donate, that's where my American money goes.

as an alternative to the past 6 years or so of nothing but war in the middle east what could we have accompolished worldwide if the same money and energy was put into the research for cancer, aids, or some other strains of the HIV viruses. how about feeding the starving and just the basic medical aid for people in the impoverished nations in Africa and South America. how about a working health care plan for regular people flying without it here in our own country. there are too many alternative areas where all that money could have been put to good productive use and gotten better results but not a drop of consideration to do so. it is so clear but no one sees it or seems to want to. we are tied up in a bureaucratic and political maze that doesn't work anymore and the taxpayers that are paying for it have no say as to what the government does with our money. they just do what they want to do and tell us anything. one thing is for certain though and that is that the politicians will keep spending on the things that are most important to the special interest groups and keep taxing the general population to pay for it until it breaks down completely and doesn't work anymore. i believe we are not to far from that point morally and economically unless we change our mentallity and soon. these past 6 years have been completely unproductive on every front. i've been trying to come up with one productive area. just one good thing for the betterment of mankind or the general population in the areas that i mentioned and i can't.

[riverbabe]

as an alternative to the past 6 years or so of nothing but war in the middle east what could we have accompolished worldwide if the same money and energy was put into the research for cancer, aids, or some other strains of the HIV viruses. how about feeding the starving and just the basic medical aid for people in the impoverished nations in Africa and South America. how about a working health care plan for regular people flying without it here in our own country. there are too many alternative areas where all that money could have been put to good productive use and gotten better results but not a drop of consideration to do so. it is so clear but no one sees it or seems to want to. we are tied up in a bureaucratic and political maze that doesn't work anymore and the taxpayers that are paying for it have no say as to what the government does with our money. they just do what they want to do and tell us anything. one thing is for certain though and that is that the politicians will keep spending on the things that are most important to the special interest groups and keep taxing the general population to pay for it until it breaks down completely and doesn't work anymore. i believe we are not to far from that point morally and economically unless we change our mentallity and soon. these past 6 years have been completely unproductive on every front. i've been trying to come up with one productive area. just one good thing for the betterment of mankind or the general population in the areas that i mentioned and i can't.

Ski, at least we still have USAID (federal). If you google that and/or "US aid" you will find positive programs, such as the following: http://usinfo.state.gov/xarchives/di...ataruK0.725033

And then there are the private programs. The bulk of my charitable dollars goes to Doctors Without Borders and also the American Friends of the Episcopal Diocese of Jerusalem that funds hospitals and schools in Israel/Palestine/Jordan without regard to nationality and to promote peaceful interaction among those populations.

The waste of taxpayer dollars by unscrupulous and greedy politicians is an outrage by any standards. But there are still efforts to promote programs for the greater good going on without big fanfare. Please don't let cynicism break your heart.

[ywamchris]

How Can We Help...

skiracer; ...is the united states really utilizing what we have for the betterment of mankind or have we even tried...

I hope I'm not un-invitedly jumping into the conversation here but in response to your statement here. Given the point that everyone could do more for the betterment of mankind, the US accounts for over 90% of the charitable giving on the globe, in addition to the foreign aid we supply on a federal level. The fact is around the world there are countless non-profs, NGO's and charities that have more money than they can effectively use. The real need for these groups is people resources (aka community members) that will step in and serve. Engaging the community at large to respond the the needs of the community at-risk is what will ultimately lead to the betterment of mankind. You can't legislate (or fund) the betterment of the world any more than you can legislate morality. So the answer to your question lies with us. If you & I are actively working to respond directly to the needs of the at-risk community, therefore offering them hope, than we (citizens of the US ) have started the process of doing what we can for the betterment of humanity.

What are your thoughts on this quote, "The responsibility of prosperity is implementing hope."



/

[skiracer]

I hope I'm not un-invitedly jumping into the conversation here but in response to your statement here. Given the point that everyone could do more for the betterment of mankind, the US accounts for over 90% of the charitable giving on the globe, in addition to the foreign aid we supply on a federal level. The fact is around the world there are countless non-profs, NGO's and charities that have more money than they can effectively use. The real need for these groups is people resources (aka community members) that will step in and serve. Engaging the community at large to respond the the needs of the community at-risk is what will ultimately lead to the betterment of mankind. You can't legislate (or fund) the betterment of the world any more than you can legislate morality. So the answer to your question lies with us. If you & I are actively working to respond directly to the needs of the at-risk community, therefore offering them hope, than we (citizens of the US ) have started the process of doing what we can for the betterment of humanity.

What are your thoughts on this quote, "The responsibility of prosperity is implementing hope."



/

sorry to have taken so long to respond to your post. the point i was trying to make was that we have made war instead of progating peace and the relieving of the rest of the socio-economic and medical ills that are facing the world. we have done more to alienate the USA from the rest of the world than to instill the concept that we are the richest and most advanced country on the planet and to have the rest of the world respect us and look to us for leadership. I know that we send alot of money and the necessary supplies, whatever they may be, to anyone or any country that has suffered a devasting disaster but my own feelings are that any of the good that we have done is negated by the war thing. just my opinion. i think that you are talking more on the individual level while my premise was more pointed towards foreign and international policy.
i don't have the answer but it seems that whatever policy that we have been following isn't working. we are never going to please the entire international community and certainly never the interestes that are trying to bring us down but the current strategic planning and policy isn't working.
i think that the richest and most affluent owe it to the rest of the country or world to offer some of their wealth back in the hope that it will advance the standard and quality of life to others.

[mrmarket]

as an alternative to the past 6 years or so of nothing but war in the middle east what could we have accompolished worldwide if the same money and energy was put into the research for cancer, aids, or some other strains of the HIV viruses. how about feeding the starving and just the basic medical aid for people in the impoverished nations in Africa and South America. how about a working health care plan for regular people flying without it here in our own country. there are too many alternative areas where all that money could have been put to good productive use and gotten better results but not a drop of consideration to do so. it is so clear but no one sees it or seems to want to. we are tied up in a bureaucratic and political maze that doesn't work anymore and the taxpayers that are paying for it have no say as to what the government does with our money. they just do what they want to do and tell us anything. one thing is for certain though and that is that the politicians will keep spending on the things that are most important to the special interest groups and keep taxing the general population to pay for it until it breaks down completely and doesn't work anymore. i believe we are not to far from that point morally and economically unless we change our mentallity and soon. these past 6 years have been completely unproductive on every front. i've been trying to come up with one productive area. just one good thing for the betterment of mankind or the general population in the areas that i mentioned and i can't.

Well said. The whole idea of government is somewhat archaic. We needed government 200 years ago when there was no means for communication, transportation and redistribution of wealth. Now we have wireless phones, text messaging, the internet, superhighways, and paypal buttons on websites from around the world. Individuals with wealth can easily send money anywhere in the world to whatever cause make sense to them. We don't need government to do that for us anymore. We can do it much more efficiently.

If I want to help the victims of an earthquake, why does my money need to go through Dick Cheyney's hands first?

[skiracer]

another interesting read. a game of chess being played out amongst interested parties all looking to better their position in the region. any thoughts?
Red October: Russia, Iran and Iraq

By George Friedman

The course of the war in Iraq appears to be set for the next year. Of the four options we laid out a few weeks ago, the Bush administration essentially has selected a course between the first and second options -- maintaining the current mission and force level or retaining the mission but gradually reducing the force. The mission -- creating a stable, pro-American government in Baghdad that can assume the role of ensuring security -- remains intact. The strategy is to use the maximum available force to provide security until the Iraqis can assume the burden. The force will be reduced by the 30,000 troops who were surged into Iraq, though because that level of force will be unavailable by spring, the reduction is not really a matter of choice. The remaining force is the maximum available, and it will be reduced as circumstances permit.

Top U.S. commander in Iraq Gen. David Petraeus and others have made two broad arguments. First, while prior strategy indeed failed to make progress, a new strategy that combines aggressive security operations with recruiting political leaders on the subnational level -- the Sunni sheikhs in Anbar province, for example -- has had a positive impact, and could achieve the mission, given more time. Therefore, having spent treasure and blood to this point, it would be foolish for the United States not to pursue it for another year or two.

The second argument addresses the consequence of withdrawal. U.S. Secretary of State Condoleezza Rice summed it up in an interview with NBC News. "And I would note that President [Mahmoud] Ahmadinejad said if the United States leaves Iraq, Iran is prepared to fill the vacuum. That is what is at stake here," she said. We had suggested that the best way to contain Iran would be to cede Iraq and defend the Arabian Peninsula. One reason is that it would release troops for operations elsewhere in the world, if needed. The administration has chosen to try to keep Iraq -- any part of it -- out of Iranian hands. If successful, this obviously benefits the United States. If it fails, the United States can always choose a different option.

Within the region, this seems a reasonable choice, assuming the political foundations in Washington can be maintained, foundations that so far appear to be holding. The Achilles' heel of the strategy is the fact that it includes the window of vulnerability that we discussed a few weeks ago. The strategy and mission outlined by Petraeus commits virtually all U.S. ground forces to Iraq, with Afghanistan and South Korea soaking up the rest. It leaves air and naval power available, but it does not allow the United States to deal with any other crisis that involves the significant threat of ground intervention. This has consequences.

Iranian Foreign Minister Manouchehr Mottaki attended a meeting of the Iranian-Russian Joint Economic Commission in Moscow over the weekend. While in the Russian capital, Mottaki also met with Russian Atomic Energy Chief Sergei Kiriyenko to discuss Russian assistance in completing the Bushehr nuclear power plant. After the meeting, Mottaki said Russian officials had assured him of their commitment to complete the power plant. Iran's top nuclear negotiator, Ali Larijani, said, "With regards to the Bushehr power plant, we have reached good understanding with the Russians. In this understanding a timetable for providing nuclear fuel on time and inaugurating this power plant has been fixed." While the truth of Russian assurances is questionable -- Moscow has been mere weeks away from making Bushehr operational for the better part of the last three years, and is about as excited about a nuclear-armed Iran as is Washington -- the fact remains that Russian-Iranian cooperation continues to be substantial, and public.

Mottaki also confirmed -- and this is significant -- that Russian President Vladimir Putin would visit Tehran on Oct. 16. The occasion is a meeting of the Caspian Sea littoral nations, a group that comprises Russia, Iran, Azerbaijan, Kazakhstan and Turkmenistan. According to the Iranians, Putin agreed not only to attend the conference, but also to use the visit to confer with top Iranian leaders.

This is about the last thing the United States wanted the Russians to do -- and therefore the first thing the Russians did. The Russians are quite pleased with the current situation in Iraq and Iran and do not want anything to upset it. From the Russian point of view, the Americans are tied down in an extended conflict that sucks up resources and strategic bandwidth in Washington. There is a similarity here with Vietnam. The more tied down U.S. forces were in Vietnam, the more opportunities the Soviets had. Nowadays, Russia's resources are much diminished compared with those of the Soviets -- while Russia has a much smaller range of interest. Moscow's primary goal is to regain a sphere of influence within the former Soviet Union. Whatever ambitions it may dream of, this is the starting point. The Russians see the Americans as trying to thwart their ambitions throughout their periphery, through support for anti-Russian elements via U.S. intelligence.

If the United States plans to stay in Iraq until the end of the Bush presidency, then the United States badly needs something from the Russians -- that they not provide arms, particularly air-defense systems, to the Syrians and especially the Iranians. The Americans need the Russians not to provide fighter aircraft, modern command-and-control systems or any of the other war-making systems that the Russians have been developing. Above all else, they want the Russians not to provide the Iranians any nuclear-linked technology.

Therefore, it is no accident that the Iranians claimed over the weekend that the Russians told them they would do precisely that. Obviously, the discussion was of a purely civilian nature, but the United States is aware that the Russians have advanced military nuclear technology and that the distinction between civilian and military is subtle. In short, Russia has signaled the Americans that it could very easily trigger their worst nightmare.

The Iranians, fairly isolated in the world, are being warned even by the French that war is a real possibility. Obviously, then, they view the meetings with the Russians as being of enormous value. The Russians have no interest in seeing Iran devastated by the United States. They want Iran to do just what it is doing -- tying down U.S. forces in Iraq and providing a strategic quagmire for the Americans. And they are aware that they have technologies that would make an extended air campaign against Iran much more costly than it would be otherwise. Indeed, without a U.S. ground force capable of exploiting an air attack anyway, the Russians might be able to create a situation in which suppression of enemy air defenses (SEAD, the first stage of a U.S. air campaign) would be costly, and in which the second phase -- battle against infrastructure -- could become a war of attrition. The United States might win, in the sense of ultimately having command of the air, but it could not force a regime change -- and it would pay a high price.

It also should not be forgotten that the Russians have the second-largest nuclear arsenal in the world. The Russians very ostentatiously announced a few weeks ago that their Bear bombers were returning to constant patrol. This amused some in the U.S. military, who correctly regard the Bear as obsolete. They forget that the Russians never really had a bomber force designed for massive intercontinental delivery of nuclear devices. The announcement was a gesture -- and reminder that Russian ICBMs could easily be pointed at the United States.

Russia obviously doesn't plan a nuclear exchange with the United States, although it likes forcing the Americans to consider the possibility. Nor do the Russians want the Iranians to gain nuclear weapons. What they do want is an extended conflict in Iraq, extended tension between Iran and the United States, and they wouldn't much mind if the United States went to war with Iran as well. The Russians would happily supply the Iranians with whatever weapons systems they could use in order to bleed the United States a bit more, as long as they are reasonably confident that those systems would not be pointed north any time soon.

The Russians are just as prepared to let the United States have a free hand against Iran and not pose any challenges while U.S. forces are tied down in Iraq. But there is a price and it will be high. The Russians are aware that the window of opportunity is now and that they could create nightmarish problems for the United States. Therefore, the Russians will want the following:

In the Caucasus, they want the United States to withdraw support for Georgia and force the Georgian government to reach an accommodation with Moscow. Given Armenian hostility to Turkey and closeness to Russia, this would allow the Russians to reclaim a sphere of influence in the Caucasus, leaving Azerbaijan as a buffer with Iran.

In Ukraine and Belarus, the Russians will expect an end to all U.S. support to nongovernmental organizations agitating for a pro-Western course.

In the Baltics, the Russians will expect the United States to curb anti-Russian sentiment and to explicitly limit the Baltics' role in NATO, excluding the presence of foreign troops, particularly Polish.

Regarding Serbia, they want an end to any discussion of an independent Kosovo.

The Russians also will want plans abandoned for an anti-ballistic-missile system that deploys missiles in Poland.

In other words, the Russians will want the United States to get out of the former Soviet Union -- and stay out. Alternatively, the Russians are prepared, on Oct. 16, to reach agreements on nuclear exchange and weapons transfers that will include weapons that the Iranians can easily send into Iraq to kill U.S. troops. Should the United States initiate an air campaign prior to any of this taking effect, the Russians will increase the supply of weapons to Iran dramatically, using means it used effectively in Vietnam: shipping them in. If the United States strikes against Russian ships, the Russians will then be free to strike directly against Georgia or the Baltic states, countries that cannot defend themselves without American support, and countries that the United States is in no position to support.

It is increasingly clear that Putin intends to reverse in practice, if not formally, the consequences of the fall of the Soviet Union. He does not expect at this point to move back into Central Europe or engage in a global competition with the United States. He knows that is impossible. But he also understands three things: First, his armed forces have improved dramatically since 2000. Second, the countries he is dealing with are no match for his forces as long as the United States stays out. Third, staying out or not really is not a choice for the United States. As long as it maintains this posture in Iraq, it is out.

This is Putin's moment and he can exploit it in one of two ways: He can reach a quiet accommodation with the Americans, and leave the Iranians hanging. Conversely, he can align with the Iranians and place the United States in a far more complex situation than it otherwise would be in. He could achieve this by supporting Syria, arming militias in Lebanon or even causing significant problems in Afghanistan, where Russia retains a degree of influence in the North.

The Russians are chess players and geopoliticians. In chess and geopolitics, the game is routine and then, suddenly, there is an opening. You seize the opening because you might never get another one. The United States is inherently more powerful than Russia, save at this particular moment. Because of a series of choices the United States has made, it is weaker in the places that matter to Russia. Russia will not be in this position in two or three years. It needs to act now.

Therefore, Putin will go to Iran on Oct. 16 and will work to complete Iran's civilian nuclear project. What agreements he might reach with Iran could given the United States nightmares. If the United States takes out Iran's nuclear weapons, the Russians will sympathize and arm the Iranians even more intensely. If the Americans launch an extended air campaign, the Russians will happily increase the supply of weapons even more. Talk about carpet-bombing Iran is silly. It is a big country and the United States doesn't have that much carpet. The supplies would get through.

Or the United States can quietly give Putin the sphere of influence he wants, letting down allies in the former Soviet Union, in return for which the Russians will let the Iranians stand alone against the Americans, not give arms to Middle Eastern countries, not ship Iran weapons that will wind up with militias in Iraq. In effect, Putin is giving the United States a month to let him know what it has in mind.

It should not be forgotten that Iran retains an option that could upset Russian plans. Iran has no great trust of Russia, nor does it have a desire to be trapped between American power and Russian willingness to hold Iran's coat while it slugs things out with the Americans. At a certain point, sooner rather than later, the Iranians must examine whether they want to play the role of the Russian cape to the American bull. The option for the Iranians remains the same -- negotiate the future of Iraq with the Americans. If the United States is committed to remaining in Iraq, Iran can choose to undermine Washington, at the cost of increasing its own dependence on the Russians and the possibility of war with the Americans. Or it can choose to cut a deal with the Americans that gives it influence in Iraq without domination. Iran is delighted with Putin's visit. But that visit also gives it negotiating leverage with the Americans. This remains the wild card.

Petraeus' area of operations is Iraq. He may well have crafted a viable plan for stabilizing Iraq over the next few years. But the price to be paid for that is not in Iraq or even in Iran. It is in leaving the door wide open in other areas of the world. We believe the Russians are about to walk through one of those doors. The question in the White House, therefore, must be: How much is Iraq worth? Is it worth recreating the geopolitical foundations of the Soviet Union?


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The Obstacles to the Capture of Osama bin Laden

By Fred Burton and Scott Stewart

Al Qaeda's As-Sahab media arm released a video Sept. 11 to commemorate the sixth anniversary of the 9/11 attacks. Although the 47-minute video features a voice-over introduction by Osama bin Laden, the bulk of it is of Abu Musab Waleed al-Shehri, one of the suicide bombers who crashed American Airlines Flight 11 into the World Trade Center's north tower. That recording was made prior to al-Shehri's travel to the United States in the spring of 2001.

There is nothing in bin Laden's audio segment to indicate it was recorded recently. The production does include a still photograph of him -- one taken from what appears to be a real bin Laden video released Sept. 7 (in which he sports a dyed beard), but bin Laden's comments about the death of Abu Musab al-Zarqawi suggest they were recorded during al Qaeda's 2006 media blitz.

The release of two successive bin Laden messages, however, has again focused attention on bin Laden, who before last week had not been seen on video since late October 2004. This increased attention has once again caused people to question why the United States has failed to find bin Laden -- and to wonder whether it ever will.

While the feds generally get their man in the movies or on television, it is very difficult in real life to find a single person who does not want to be found. It is even harder when that person is hiding in an extremely rugged, isolated and lawless area and is sheltered by a heavily armed local population.

The United States and Pakistan have not launched a major military operation to envelop and systematically search the entire region where bin Laden likely is hiding -- an operation that would require tens of thousands of troops and likely result in heavy combat with the tribes residing in the area. Moreover, this is not the kind of operation they will take on in the future. The United States, therefore, will continue intelligence and covert special operations forces efforts, but if it is going to catch bin Laden, it will have to wait patiently for one of those operations to produce a lucky break -- or for bin Laden to make a fatal operational security blunder.

Needle in a Haystack

Finding a single man in a large area with rugged terrain is a daunting task, even when a large number of searchers and a vast array of the latest high-tech surveillance equipment are involved. This principle was demonstrated by the manhunt for so-called "Olympic Bomber" Eric Rudolph, who was able to avoid one of the largest manhunts in U.S. history by hiding in North Carolina's Great Smoky Mountains. The task force looking for Rudolph at times had hundreds of federal, state and local law enforcement officers assigned to it, while some of its search operations involved thousands of law enforcement and volunteer searchers. The government also employed high-tech surveillance and sensor equipment and even offered a $1 million reward for information leading to Rudolph's capture.

However, Rudolph's capture in May 2003, more than five years after he was listed on the FBI's most-wanted list, was not the result of the organized search for him. Rather, he was caught by a rookie police officer on a routine patrol who found Rudolph rummaging for food in a dumpster behind a grocery store. The officer did not even realize he had captured Rudolph until he had taken him to the police station for booking.

Hostile Terrain

The terrain in the Smoky Mountains is tough and remote, but it is nothing compared to the terrain in the soaring, craggy Safed Koh range that runs along the Pakistani-Afghan border or in the Hindu Kush to the north. Some of the peaks in the Safed Koh range, including Mount Sikaram, are well over twice as high as any peak in the Smokies, while the Hindu Kush contains some of the highest peaks in the world.

But it is not only the terrain that is hostile. In the Great Smokies, there are some people who are not happy to see "revenuers" and other government agents -- or other strangers, for that matter -- but at least the area is under the federal government's control. The same cannot be said of the lawless areas along the Afghan-Pakistani border -- the Federally Administered Tribal Areas (FATA) and the North-West Frontier Province (NWFP). The presence of Pakistani military forces is resented in these areas, and troops are regularly attacked by the heavily armed tribesmen living there.

This is not a new phenomenon by any means, though. The Pashtun tribes in the rugged area along the Durand Line (the line set to demarcate the border between the British Raj and Afghanistan, which later became the Afghan-Pakistani border) have always been difficult to control. Even before the establishment of Pakistan, the inhabitants of the area gave the British colonial authorities fits for more than a century. The Britons were never able to gain full control over the region, so they instead granted extensive power to tribal elders, called maliks. Under the deal, the maliks retained their autonomy in exchange for maintaining peace between the tribesmen and the British Raj -- thus allowing commerce to continue unabated.

However, some dramatic flare-ups of violence occurred against the Britons during their time in the region. One of the last of them began in 1936 when a religious leader known as the Faqir of Ipi encouraged his followers to wage jihad on British forces. (Jihad against invading forces is a centuries-old tradition in the region.) The faqir and his followers fought an extended insurgency against the British forces that only ended when they left Pakistan. The United Kingdom attempted to crush the faqir and his followers, but the outmanned and outgunned insurgents used the rugged terrain and the support of the local tribes to their advantage. Efforts to use spies to locate or assassinate the faqir also failed. Although the British and colonial troops pursuing the faqir reportedly numbered more than 40,000 at one point, the faqir was never captured or killed. He died a natural death in 1960.

A Modern Faqir?

Under U.S. pressure, the Pakistani military entered the FATA in force in March 2004 to pursue foreign militants -- for the first time since the country's creation -- but the operation resulted in heavy casualties for the Pakistani army, demonstrating how difficult it is for the Pakistani military to fight people so well integrated in the Pashtun tribal badlands. Following that failed operation, the Pakistani government reverted to the British model of negotiating with the maliks in an effort to combat the influence of the Taliban and foreign jihadists -- and has been harshly criticized because of it. Nowadays, jihadist insurgents are attacking Pakistani security and intelligence forces in the Pashtun areas in the Northwest.

The parallels between the hunt for the Faqir of Ipi and bin Laden are obvious -- though it must be noted that bin Laden is a Saudi and not a native-born Pashtun. However, many of the challenges that the United Kingdom faced in that operation are also being faced by the United States today.

Aside from the terrain -- a formidable obstacle in and of itself -- U.S. forces are hampered by the strong, conservative Islamic conviction of the people in the region. This conviction extends beyond the tribes to include some members of the Pakistani military and Pakistan's intelligence agencies -- especially those at the operational level in the region. It must be remembered that prior to 9/11 the Pakistani Inter-Services Intelligence agency and military openly supported the Taliban and their al Qaeda allies. In addition to the relationships formed between bin Laden and the so-called "Afghan Arabs" (foreign jihadists) during the war against the Soviets, Pakistani troops also trained and fought alongside the Taliban and al Qaeda in their battles against the Northern Alliance and other foes. Because of these deep and historic ties, there are some in the Pakistani government (specifically within the security apparatus) who remain sympathetic, if not outright loyal, to their friends in the Taliban and al Qaeda.

Additionally, and perhaps just as important, many in the Pakistani government and military do not want to kill their own people -- the Pashtuns, for example -- in order to destroy the much smaller subset of Pakistani and foreign militants. The challenge is to eliminate the militants while causing very little collateral damage to the rest of the population -- and some in the Pakistani government say the airstrikes in places such as Chingai and Damadola have not accomplished this goal. In August, Pakistani Foreign Minister Khurshid Kasuri told television channel AAJ that Pakistan had done all it can in the war on terrorism and that, "No one should expect anything more from Islamabad."

In an operation such as the manhunt for bin Laden, intelligence is critical. However, the Taliban and al Qaeda so far have used their home-field advantage to establish better intelligence networks in the area than the Americans. According to U.S. counterterrorism sources, U.S. intelligence had gathered some very good leads in the early days of the hunt for bin Laden and other high-value al Qaeda targets, and they shared this intelligence with their counterparts in the Pakistani security apparatus to try to organize operations to act on the intelligence. During this process, people within the intelligence apparatus passed information back to al Qaeda, thus compromising the sources and methods being used to collect the information. These double agents inside the Pakistani government did grave damage to the U.S. human intelligence network.

Double agents within the Pakistani government are not the only problem, however. Following 9/11, there was a rapid increase in the number of case officers assigned to collect information pertaining to al Qaeda and bin Laden, and the CIA was assigned to be the lead agency in the hunt. One big problem with this, according to sources, was that most of these case officers were young, inexperienced and ill-suited to the mission. The CIA really needed people who were more like Rudyard Kipling's character Kim -- savvy case officers who understand the region's culture, issues and actors, and who can move imperceptibly within the local milieu to recruit valuable intelligence sources. Unfortunately for the CIA, it has been unable to find a real-life Kim.

This lack of seasoned, savvy and gritty case officers is complicated by the fact that, operationally, al Qaeda practices better security than do the Americans. First, there are few people permitted to see bin Laden and the other senior leaders, and most of those who are granted access are known and trusted friends and relatives. Someone else who wants to see bin Laden or other senior al Qaeda leaders must wait while a message is first passed via a number of couriers to the organization. If a meeting is granted, the person is picked up at a time of al Qaeda's choosing and taken blindfolded via a circuitous route to a location where he is stripped and searched for bugs, beacons and other tracking devices. The person then reportedly is polygraphed to verify that his story is true. Only then will he be taken -- blindfolded and via a circuitous route -- to another site for the meeting. These types of measures make it very difficult for U.S. intelligence officers to get any of their sources close to the al Qaeda leaders, much less determine where they are hiding out.

The areas where bin Laden likely is hiding are remote and insular. Visitors to the area are quickly recognized and identified -- especially if they happen to be blond guys named Skip. Moreover, residents who spend too much time talking to such outsiders often are labeled as spies and killed. These conditions have served to ensure that the jihadists maintain a superior human intelligence (and counterintelligence) network in the area. It is a network that also stretches deep into the heart of Islamabad and Rawalpindi, Islamabad's twin city and home to the Pakistani army's general headquarters.

The Price of Security

Although al Qaeda's operational security and the jihadist intelligence network have been able to keep bin Laden alive thus far, they have lost a number of other senior operatives, including Khalid Sheikh Mohammed, Mohammed Atef, Abu Zubaydah, Ramzi bin al-Shibh, Abu Faraj al-Libi and others. Most of these have been al Qaeda operational managers, people who, by the very nature of their jobs, need to establish and maintain communications with militant cells.

This drive to recruit new jihadists to the cause and to help continue operational activity is what led to the lucky break that resulted in the 1995 arrest of Abdel Basit, the operational planner and bombmaker responsible for the 1993 World Trade Center bombing. Basit had tried to recruit a foreign student to assist him in one of the attempts to conduct "Operation Bojinka," a plan to bomb multiple U.S. airliners. Having gotten cold feet, the student revealed the plot, thus allowing Diplomatic Security special agents the opportunity to coordinate an operation to arrest Basit.

Al Qaeda has learned from the mistakes made by the men it has lost and has better secured the methods it uses to communicate with the outside world. This increased security, however, has resulted in increased insulation, which has adversely affected not only communications but also financial transfers and recruiting. Combined with U.S. efforts against al Qaeda, this has resulted in a reduction in operational ability and effectiveness.

The tension between operations and security poses a significant problem for an organization that seeks to maintain and manage a global militant network. By opting to err on the side of security, bin Laden and the others could escape capture indefinitely, though they would remain operationally ineffective. However, should they attempt to become more operationally active and effective -- and decrease their security measures to do so -- they will provide the United States with more opportunities to get the one break it needs to find bin Laden.



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Dear Investor,
If you thought the subprime mortgage crisis was big, you haven't seen anything yet. This week has all the signs of a major market tipping point. That's because four of the biggest names on Wall Street are about to step into the earnings confessional.
Now if you listen to the Wall Street analysts, you'd think nothing unusual was afoot. Sort of like the musicians playing waltzes while the Titanic sank. Just stay calm… nothing to worry about folks…
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The reason this week is shaping up as a make-or-break moment for the market is simple… Four of the biggest banks on Wall Street are being forced by law to come clean about a whole host of sins. Sins like subprime mortgage exposure, plunging returns, hedge fund losses, and more.
When these banks are forced to put all their cards on the table starting tomorrow, the effect could be nothing less than a shock wave on Wall Street. Here's why:
First of all, Wall Street is enmeshed in a tangled web of relationships. Banks own hedge funds. Hedge funds invest in bundled subprime mortgages. Brokerage houses acquire subprime mortgage companies…
Which is why tremors in one area of the market ripple out rapidly to the rest of the financial markets. It's like the San Andreas fault runs under Wall Street…
Second, Wall Street's biggest sources of revenues have dried up. Only no one is talking about it. Investment banks like Goldman Sachs and Bear Stearns made a fortune off of hedge funds. Now those funds can't meet their quarterly redemptions and many are experiencing wide losses.
Merrill Lynch, Goldman and Bear Stearns also raked in billions from M&A activity… Activity that's rapidly drying up along with the supply of cheap money.
And third, let's not forget that subprime mortgages were so profitable that both Lehman Brothers and Merrill Lynch ran out and acquired mortgage companies. They paid top dollar at the peak of the market. Now those companies are hanging like a noose around their necks…
It's only a matter of time until Wall Street earnings take a hit. But if you think the fallout will be limited to the financial sector, think again…
Beware of the S&P 500 Ripple Effect

The financial sector isn't some small obscure corner of the market. The financial sector makes up a whopping 21% of the S&P 500!
Now the S&P 500 is considered the gold standard of the mutual fund industry. Successful funds benchmark against it. That means your 401k, your kid's college fund, and the most actively traded ETF - the "Spyders" - all take their cue from the S&P 500. As the financial sector goes, so goes the S&P 500…
Which is why this earnings week has deep and lasting ramifications for all investors.
Because we feel so strongly that all investors must have this critical information before the financial earnings hit the tape this week, we created a special breaking report, Financial Shock Waves & Earnings Surprises.
It's yours FREE just for taking a no-risk look at my Earnings Tip Sheet.

Call us today at (800) 524-2170 to find out how you can get your copy and take a no-risk look at the Earnings Tip Sheet.

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Some pretty interesting stuff for the trader looking for some insight into the markets and what are some developing trends to help with picking stocks.

Week of September 17, 2007

ETF Overview - Rallying on the Heels of the Fed

This week's surprise action by the FOMC caught the Street by surprise, to say the least. While the market had some rumblings about the potential for the Fed to cut interest rates by 50 basis points weeks ago, these rumblings had died down to tiny murmurs by 2:14 on Tuesday afternoon. Aside from a few individuals in the media that had been calling for "financial shock and awe," the possibility for the dramatic action had been all but forgotten.
Then the FOMC dropped the "daisy cutter" of monetary policy at 2:15 Tuesday afternoon. The 50 bp cut boosted the market by more than 300 points, as traders tried to catch up with stock prices through the rest of the day. So did the market get what it needed or just what it wanted?
We've held that the tail has been wagging the dog when it comes to the FOMC lately. The analyst community and media had basically drawn the FOMC's statement for them. Last week, an analyst whom I deeply respect was quoted as saying that the Fed had its chance to let the market know that cuts were out of the question. In other words, the lynch mob would have saddled up if the Fed had not cut rates. Then, Alan Greenspan comes out the weekend before what is arguably the most important FOMC meeting in years and claims that Ben Bernanke's concerns with inflation were on target. I don't think that anyone has been envious of Bernanke's position lately.
The rally has now pulled the major index ETFs to the respective areas of large call open interest, meaning that we expect to see some resistance over the short-term.
We find it interesting that the market has become extremely bullish on the Fed's rate cuts, despite the continued warnings signs that have been flashed. The housing industry continues to struggle and threatens to spill over into other areas of the market, the financials continue to see pressure due to credit concerns, and the consumer's ability to weather the storm that has been brewing for some time is coming into question.
For now, it has become hard to fight the tape as the money flow, at least on a short-term basis, has reversed course and appears to be flowing back into stocks. Investors should watch the current levels on the QQQQ and SPY as they close in on the July highs. Breaks above these levels may likely spark another round of buying, while failure to move higher may see stocks begin to slide under the pressure of profit-taking.
The ABCs of ETFs

Questions. We need questions. Tell us what you like or don't like, and we'll try to do better next time. We really do listen, because we want ETF Advantage to help you navigate this crazy ETF world as much as possible. So tell us what you think at [email protected].
Once again, this issue's ABC section is a potpourri of stuff. Let's start with the costs of ETFs. We've talked about the cost advantage ETFs have over mutual funds (lower fees), although there is a commission cost involved, just like stocks. But there's another fee you need to consider, one that is easily hidden and ignored. It's the bid-ask spread, or the difference between what buyers are willing to pay for the fund and what sellers are willing to sell.
With the growth of highly specialized funds that are thinly traded, the spread can be a big deal. For example, the spread for the HealthShares Infectious Disease ETF ($3 million in net assets) had an average spread of 1.6 percent in the second quarter. Contrast that with the more liquid iShares S&P 500 and iShares MSCI EAFE ETFs, with average spreads of just 0.2 percent or less in July and August. So keep the bid-ask spread in mind when considering an ETF, especially one of the niche funds with low volume.
Recent growth in the number of ETFs has slowed among the domestic equity and international funds, though they still comprise the lion's share of ETFs. The hottest growth sector has been in bond funds. In fact, the number of bond funds has increased by five times (from six to 30) just this year, according to ICI. But bond funds have been very susceptible to the credit crunch and subprime mess. What's more, many of the newer bond funds are focused on the riskier areas of the market, such as emerging market debt and high-yield or "junk" bonds. One example is the iShares iBoxx $ High Yield Corporate Bond (HYG), which is geared for bond players with higher risk tolerance. If that's not you, stick with the safer funds that focus on short-term high-quality bonds or longer-term Treasury funds.
The choice between ETFs and mutual funds doesn't have to come down to one or the other. For instance, if you want to invest more than, say $5,000, an ETF is the way to go. Commissions at discount brokers run around 10 bucks for this trade (keep the bid-ask spread in mind, as discussed above), and ETFs can be traded throughout the day. But for smaller amounts and for more frequent trading, such as with a systematic investment program, these commission costs can add up. If you have a portfolio of $25,000 and make 50 trades per year, you've just sucked up $500, or two percent, of your gains.
For this type of trading, Bill Donoghue of MarketWatch suggests a no-load, no transaction cost mutual fund family, such as ProFunds. This allows you to make automatic purchases of at least $100 with no transaction costs. That beats an ETF hands down. Of course, this is just one factor to decide which type of fund vehicle to use, but it should figure into your decision process.
ETF News and Notes

Ian Salisbury of The Wall Street Journal reports that selective sector ETFs may be losing some of their appeal, especially since the market started having troubles a couple of months ago. The trend toward narrower funds, both in terms of number of funds and asset flows, was impressive last year, when $8.9 billion poured into sector and industry ETFs and only $1.1 billion found its way into broad-market and large-company funds. But outside of technology and energy funds, which show continued strength, the narrower funds are facing net outflows. Whether these flows are due to retail or institutional investors remains to be seen. But if a fund, especially a sector fund, does not perform, they should expect to lose assets.
The move to include ETFs in retirement plans gained some ground last week with the announcement that Rydex had teamed up with Invest n Retire (INR) to offer eight of its ETFs in INR retirement plans. These plans enable investors to own whole and fractional shares of ETFs without incurring the expense of opening a separate, self-directed brokerage account. Select SPDRs, iShares, PowerShares, and Vanguard are also working with INR to include their ETFs in these plans.
Goldman Sachs is telling investors to use at-the-money puts on ETFs as a hedge against a slowdown in the U.S. economy. Specifically, the firm recommends puts on funds tracking the industrial, raw material, and technology sectors. Maria Grant and John Marshall wrote in a research report that "The probability of an early 2008 economic slowdown has increased significantly as economic data has weakened over the past month." Puts on those ETFs "provide the best potential payouts across sectors if there is a sharp downgrade to U.S. growth expectations."
Barclays has big plans for its iShares, according to Michael Latham, managing director of iShares, Americas. In an interview with InvestmentNews, Latham said that Barclays is determined to position iShares to better compete with mutual funds in the retirement market. Currently, about seven percent of Barclays' assets are in retirement plans, but that includes individual retirement account rollovers and 401(k)s. Although iShares' U.S. ETF market share is up to 59 percent now (around $300 billion in assets), Latham acknowledged the strength of Vanguard as a competitor. But he believes that Barclays may have a leg up because it sells almost exclusively through advisors. In fact, Latham says he thinks more full-service broker-dealers are the way of the future and that in 10 years, 90 percent of the business will go to fee based.
Speaking of Barclays, on September 10 they were the first to launch a municipal bond ETF - the iShares S&P National Municipal Bond Fund (MUB) on the American Stock Exchange. MUB contains municipal bonds from a diverse group of U.S. state and local governments. Each bond must be denominated in U.S. dollars and have a minimum par amount outstanding of $50 million. One of the big draws of municipal bonds is their tax-favored status, as interest income is exempt from federal income taxes. The fund has an annual expense ratio of 0.25 percent.
Next week, PowerShares is slated to launch five new international ETFs on the AMEX:

• FTSE RAFI® Asia Pacific ex-Japan Small-Mid Portfolio (PDQ)
• FTSE RAFI® Development Markets ex-U.S. Small-Mid Portfolio (PDN)
• FTSE RAFI® Emerging Markets Portfolio (PXH)
• FTSE RAFI® Europe Small-Mid Portfolio (PWD)
• International Listed Private Equity (PFP)

According to the PowerShares press release, "PowerShares' Global series of FTSE™ RAFI® Portfolios are based on FTSE™ RAFI® global indexes, uniquely constructed using four fundamental measures of a firm's size: book value, cash flow, sales and dividends. The equities with the highest fundamental strength are then weighted according to their fundamental scores. PowerShares' Fundamentals Weighted™ portfolio is rebalanced and reconstituted annually."
Also according to the press release, "PFP seeks to replicate the Red Rocks International Listed Private Equity Index, which includes a diversified mix of more than 30 internationally listed companies with direct investments in more than 1,000 private global businesses." The launch of these funds will mark the 100th portfolio in the PowerShares family. The franchise has nearly $35 billion in assets.
The ProShares family of funds passed the $7 billion mark in little more than a year from launch. ProShares' claim to fame is having the only ETFs that provide short or magnified exposure to well-known market indexes. These short ETFs have become more popular during the market's recent declines.
ETF Focus: Homebuilders Building A Bottom?

One of the more interesting rallies in the wake of the Fed's surprise this week was the SPDR Homebuilders ETF (XHB). The shares rallied more than five percent on Tuesday, as investors rushed in to buy the deeply discounted group. Then, in a surprise, the shares got another boost on Wednesday as the buying continued. To say I was surprised is an understatement. This group hasn't seen too many consecutive up days lately.
Those of you familiar with our Behavioral Valuation approach may have been surprised as well. Let's look at why.
Looking at the fundamentals, the picture for the housing industry is far from pretty. Recent data shows that new home starts dropped to their lowest level in 12 years. In addition, foreclosures spiked again in August, as the credit situation continued to tighten. It was interesting that the CEO of Toll Brothers released a statement on Tuesday that the Fed's rate cut would not help the housing industry. From a fundamental perspective, the housing industry is believed to be at least another year from bottoming.
Technically, XHB is, well, awful. To no one's surprise, the housing ETF has been on a significant downtrend, as investors continue to punish these stocks. All of the pertinent trendlines that we refer to in our analysis are flashing long-term bearish signals and warning investors that the bottom has not yet been hit.
Now the surprise. Despite the fundamental and technical situation in the XHB, investor sentiment is noticeably bullish. That's right, no typos there, investors have been growing bullish toward XHB.
Looking at XHB options activity, the trend in the volume put/call ratio has moved to a new one-year low. Low put/call ratios indicate that the options crowd is becoming more bullish toward the underlying stock (in this case XHB), as the number of calls increases with respect to puts.
Similarly, short interest on XHB has been on the decline. While we would expect to see some of the shorts closing their positions out at a profit, you typically have new shorts piling on in situations of long-term bear markets in a sector or stock. This is not the case with XHB, which suggests that there is some optimism among the short sellers.
Now, I know that investors love a bargain more than my wife loves a shoe sale at Nordstrom's (that's a lot). But there is a point where bargain shopping can be dangerous and this is one of them. Investors trying to buy the homebuilders on the heels of Tuesday's rate cut strikes me as tantamount to trying to catch the falling knife that's been dropped out of a high-rise building.
Bottom line, our current Behavioral Valuation of XHB remains negative and as such we have been cautioning investors to remain on the sidelines when it comes to this sector. XHB continues to display the characteristics of a train wreck, which is always better to watch than be a part of.
We look forward to providing you with the next regularly scheduled ETF Advantage Report the week of October 1.
Again, if you have a question that you'd like us to consider for a future issue, please email us at

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here is a good basic explanation of a cup and handle chart formation/pattern along with the numbers I was talking about regarding success / failure percentages. interesting stuff if you like to keep the percentages and edge in your favor and definitely worth knowing about. check this site out for all of Bulkowski's chart patterns and the accompanying info and success/failure percentages for each pattern plus the true definitions of each chart pattern and an explanation of each. after all these years it is now out into to open that there are success/failure percentages assigned to each chart pattern if the pattern is close to how Bulkowski defines it. he is the acknowledgeable source for definitions of these patterns. you can check out the site at www.thepatternsite.com.

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here are a few examples of cups with handles that did or did not perform as expected and a couple that i am watching now as they form their cups or the right side of their cups before going into their handles phase. good time to catch them as they start to form that right side of their cup pattern from the bottom of the cup as they begin to turn up the right side.
here is the 1st example:
OAKF



here is another one that i have been watching. a pretty cup but still lacking as far as the definition and thus the percentages but still a nice formation. consensus on the handle still out. this still could have been a nice play in entering at the beginning of the right side of that cup as it started to form and begin moving up.



here is another one that i like and have been watching for that play up the right side.