Telling It Like It Is

THE ENTERPRISE--Resignation refused!

THE ENTERPRISE--Resignation refused!

Last week I posted a hypothetical resignation letter from President Bush.  This week I am posting a reply from "us"--his "fellow Americans."  I'm sure many readers will disagree with parts of it, but there is a little of everything I could think of in there.

The last posting this week, at the end, is a partial answer to the question I get asked all the time:  "What wrong with America these days?  It just isn't the same any more."  The attached is just one set of examples of what has changed, and in those changes are many of the things that are "wrong" with America--not the least of which is a phobia about political correctness, and a dominance of "special interests" over the wishes, desires and needs of the silent majority.  More about this in future editions.

IS THE WORM TURNING?
There is an old saying, "Don't bother to apologize or make excuses.  Your enemies won't believe you and your friends don't need it."  Lately, even though the bloodshed continues in Iraq, and increasing flow of elected officials and journalists are coming back from Iraq saying that things are improved.  Make no mistake, there is no easy "win" over the next horizon. Success is elusive--if anyone even knows what "success" is.

The Iraqis have been "warring" for centuries, before Iraq's current boundaries were even drawn.  I don't see any reason to expect those religious feuds to abate just because American soldiers went in and took out the dictators.  In fact, removing the dictators probably made the "warring factions" more aggressive.  Then there is Iran and al Qaeda, who both stand to gain from an American failure in Iraq.

But what is success?  What is a "win?"  I'm not sure anyone has adequately answered that question...including the President.
So, we have to reject his resignation letter of last week!
----------------------

A HYPOTHETICAL LETTER FROM THE AMERICAN PEOPLE

Dear President Bush:
We received your resignation letter of last week and regret to inform you that we cannot accept it.  Since you were a party to making this mess, no matter how good your intentions were, you must serve your full term and clean up as much of it as possible.  We need you to explain things to us, and not just use "platitudes," but help us see the reasoning behind your decisions.  The media feeds us so much biased misinformation about you and your administration, that we don't know what to believe.  We elected you (barely) because we didn't believe all that stuff Kerry was promising.  Now we need you to level with us.

We are pleased to see that certain members of your staff and cabinet are finally resigning.  They just waited way too long--all of them except Tony Snow--there you lost a good one.  One of your major errors was that you chose the wrong staffers and then were far too loyal to them when they failed you.  The Katrina mess should have taught you a lesson because however nice a supporter "Brownie" was, he wasn't capable to do what you needed.  And poor Alberto was a loyal soldier but couldn't keep his foot out of his (and his staff's) mouth long enough to say anything right--or the same way twice.  You had the right to remove those judges, but he just handled it terribly.  If it had been handled right, the decision would have been a non-issue--as would the Dubai ports management fiasco.

First lesson for Presidents:  Don't promote all your (or you Father's) buddies into the jobs surrounding you.  You need some dissenters, and some people who would tell you when you were full of - - it.  After Karen Hughes went back to her family, there was no one close to you who would head you off  before you dug a deeper hole than you were already in.  And Paul O'Neill--give us a break.  Maybe he was an OK CEO, but he and your other financial advisors for the first few years were a total disaster.  Your next try (Snow) was only a little better.

Also, when the other side starts after you about something where you are in the right (Dubai, Judicial appointments, replacing Judges, etc.), use the Clinton approach--attack them back--play offense, not defense.

You can be upset about the American people, but the average man or woman in America with an IQ of over 100 could tell that Iraq was screwed up sometime a year or two after the initial invasion and march to Baghdad.  The Iraqis probably told you that Bremer was totally out of touch with reality, and Rumsfeld was too dug in (with Dick Cheney's support) to admit that a different approach was needed.  You did a good thing, taking Saddam and his murderous sons out of power, but where the hell was General Petraeus 3-4 years ago.  He was still around, and I'd bet Colin Powell knew he was a good man for the job.  But you never liked (or listened to) Powell because he wouldn't kowtow to you--but guys like him were what you needed.

All of those revisionists from the other party thought we needed to take Saddam out too (who are now saying they didn't) .   He had everybody fooled about what weapons he really had--maybe.  You plan was a noble one, but establishing a fledgling democracy in a former dictatorship that is essentially a Third World country was unrealistic.  You wanted a U. S. foothold in between Saudi Arabia, Iran and Syria.  Not a bad idea.  The  problem was that French and Brits screwed up Iraq when they assembled one country with three violently opposed religious sects.  Only a brutal dictator could keep them in line.

Plus, you needed a strategy shift in Iraq at least 3 years ago. If you had not been intoxicated with your "political capital" from the 2004 re-election (which you have now squandered by trying to do too much--like reform Social Security--without first building a bipartisan coalition) and if you had picked some advisors from the other party--or at least the middle--you'd have made much smarter moves.   But you didn't.

As far as the economy, your tax cuts did generate more tax revenue, but you totally abdicated your responsibility to veto many of those insane spending bills, to help offset the spending going to Iraq and Afghanistan.  We can agree that for whatever reasons, your group has helped thwart any further attacks on the U. S.  If you wanted to be a "hard-ass" you should have gone after the lunatics at home like the ACLU and those special interest groups that resisted giving surveillance authority for fear someone would eavesdrop on Aunt Nellie's month rant.  The French were way out of line, so being rude to them was OK, but why you think Putin is "Ok" is a mystery to most of us.  He's just playing you like a fish.  And what the hell were you thinking doing an immigration bill in cahoots with Ted Kennedy--outrageous is too soft a word.

Now that you have sensible leaders in France and Germany to talk to, and a "decent one" in England,  how about making some amends for your past disregard for them.  While you're at it, get after that ridiculous organization that everyone thinks is so great--the U. N. (Usless Nations).   A couple of your Presidential decrees before leaving office should be to withdraw from the U. N., cut off all funding to it, and evict them from that cushy building in NYC; another should be to stop wasting our time, money and attention on the World Bank.  All the recipients of our money do is spit in our face--so let's get out of it.  Leave it to the other fools who want to give money away, that ends up in the coffers of despots anyway.  If the Democrats follow you into office (IF they win) and they choose to reinstate it all, they'll be the fools...and the American people will see that.

Finally, we want to wish you well when you do go back to Texas.  You tried hard, and stayed the course--too much so at times--but your consistency and resolve probably have kept us safe, even though (as your opponents say), the world is a more dangerous place.  While true, that is not your doing, and not your fault.  Terrorists all over the world believe that you will "fire back fast," and that is helping protect us.

At least now you have someone in charge of Treasury (Paulsen) who is very  competent, and Gates is a big improvement at Defense. (Rumsfeld was smart and a patriot, but just got too "dug in.")  You also did a good job filling the two Supreme Court spots (after that Harriet Miers fiasco--what was that all about?).   

And finally, you have found your veto pen--it's about time--and for those reasons we cannot accept your resignation--or even that of Dick Cheney's (although he should probably hang it up for reasons of health anyway).   Putting Nancy Pelosi in the White House would be...in a word...scarier than Hillary....and that's pretty scary.

Bottom line, a lot of "your fellow Americans" would still be "fellow Americans" if you'd just listen to both sides a bit more before "digging in"...and preferably before "digging at all."  You are a principled guy, a religious guy, and a man who is not afraid to stand for what he believes--even when it turns out to be wrong.  You should be listening to the moderates, and not just the financial supporters like Big Oil and big drug companies.   There is lots of value added work that can be done in crafting a real energy policy built on balanced conservation and more aggressive new sources of both fossil and alternative energy.  There is real work that can be done on a semi-universal health care plan.  That dumb drug plan for seniors costs a fortune and nobody understands it yet.  Roll it all into a "bigger Medicare plan" that has opt-in provisions for uninsured people, using means tests and so forth.

C'mon W...there is still a year left.  Give 'em hell.  After all, what have you got to lose.  And remember, Congress has an even lower approval rating than you do!  That's the grin in all this.  Resignation refused.

SIGNED:  Many of your "fellow Americans"

----------------------
I'm not sure that is exactly how everyone would say it, but it hits a lot of the issues.  Any new President will face most of these same issues.

Best, John

SCHOOL 1967 vs. 2007

Scenario: Jack goes quail hunting before school, pulls into school parking lot with shotgun in gun rack.

1967 - Vice Principal comes over, looks at Jack's shotgun, goes to his car and gets his shotgun to show Jack.

2007 - School goes into lock down, FBI called, Jack hauled off to jail and never sees his truck or gun again. Counselors called in for traumatized students and teachers.

Scenario: Johnny and Mark get into a fistfight after school.

1967 - Crowd gathers. Mark wins. Johnny and Mark shake hands and end up best friends. Nobody goes to jail, nobody arrested, nobody expelled.

2007 - Police called, SWAT team arrives, arrests Johnny and Mark. Charge them with assault, both expelled even though Johnny started it.

Scenario: Jeffrey won't be still in class, disrupts other students.

1967 - Jeffrey sent to office and given a good paddling by the Principal. Returns to class, sits still and does not disrupt class again.

2007 - Jeffrey given huge doses of Ritalin. Becomes a zombie. Tested for ADD. School gets extra money from state because Jeffrey has a disability.

Scenario: Billy breaks a window in his neighbor's car and his Dad gives him a whipping with his belt.

1967 - Billy is more careful next time, grows up normal, goes to college, and becomes a successful businessman.

2007 - Billy's Dad is arrested for child abuse. Billy removed to foster care and joins a gang. State psychologist tells Billy's sister that she remembers being abused herself and their Dad goes to prison. Billy's mom has affair with psychologist.

Scenario: Mark gets a headache and takes some aspirin to school.

1967 - Mark shares aspirin with Principal out on the smoking dock.

2007 - Police called, Mark expelled from school for drug violations. Car searched for drugs and weapons.

Scenario: Pedro fails high school English.

1967 - Pedro goes to summer school, passes English, and goes to college.

2007 - Pedro's cause is taken up by state. Newspaper articles appear nationally explaining that teaching English as a requirement for graduation is racist. ACLU files class action lawsuit against state school system and Pedro's English teacher. English banned from core curriculum. Pedro given diploma anyway but ends up mowing lawns for a living because he cannot speak English.

Scenario: Johnny takes apart leftover firecrackers from 4th of July, puts them in a model airplane paint bottle, and blows up a red ant bed.

1967 - Ants die.

2007 - Bureau of Alcohol, Tobacco and Firearms, Homeland Security and FBI called. Johnny charged with domestic terrorism, FBI investigates parents, siblings removed from home, computers confiscated, Johnny's Dad goes on a terror watch list and is never allowed to fly again.

Scenario: Johnny falls while running during recess and scrapes his knee. He is found crying by his teacher, Heather. Heather hugs him to comfort him.

1967 - In a short time, Johnny feels better and goes on playing.

2007 - Heather is accused of being a sexual predator and loses her job. She faces 3 years in State Prison. Johnny undergoes 5 years of therapy.

THE ENTERPRISE--THE UNTHINKABLE?

THE ENTERPRISE--THE UNTHINKABLE?

IMMIGRATION THOUGHTS--RECEIVED FROM A FRIEND
---During the Great Depression, President Herbert Hoover ordered the deportation of all illegal aliens in order to make jobs available to American citizens that desperately needed work. Again in 1954, President Eisenhower deported more than a million Mexican nationals (still more fled the country to avoid being rounded up) so that American WWII and Korean veterans had a better chance at jobs.  The program was called "Operation Wetback"  It took 2 years, but they deported them!  Now, if they could deport the illegals back then, they can sure deport a bunch of them today!!   Meanwhile, a reminder. Don't forget to pay your taxes. 12 million illegal aliens are depending on you!

THIS HAPPENS A LOT IN BUSINESS
Things are not going so well.  The CEO job that you always wanted has turned out to be hell on earth.  Nothing you are doing seems to work right, and even when it does, it goes unappreciated.  You begin to believe in the motto "no good deed goes unpunished."  Then, all your supporters are getting thrown out by the lead investors.  Are you next?  Sure, you probably are.  So what?  You simply arrange an amicable separation agreement (so you get some of those golden handcuffs, even if you leave) and you resign.  Good riddance to that company and job.  What is the most notable CEO in the U. S. decided to do that?

Note:  I did not originate this.  It came via email from a friend, and the original source is unknown.  I simple cleaned it up a little bit.  Who knows, maybe Karl Rove wrote it?

WHAT IF GEORGE W. BUSH RESIGNED?
You know that Karl Rove and Tony Snow resigned recently.  The President's approval ratings are very low (but not as low as Congress's), with little sign of improving.  Just imagine that all of the Americans who dislike, hate or simply disapprove of President Bush got their wish and he just said "the hell with it," and resigned--and all of his staff resigned with him.
--------------------------

IMAGINE HOW PRESIDENT BUSH'S RESIGNATION SPEECH MIGHT GO:
Normally, I start these things out by saying "My Fellow Americans." I'm not doing it this time. If the polls are any indication, I don't know who more than half of you are anymore. I do know something terrible has happened, and that you're really not "fellow Americans" any longer.  That's why I'm making this announcement today.  I'll cut right to the chase: I quit!!

Now before anyone gets all in a lather about me quitting to avoid impeachment, or to avoid prosecution or something, let me assure you: there's been no breaking of laws or impeachable offenses in this office. The reason I'm quitting is simple. I'm fed up with you people.  I'm fed up because you have no understanding of what's really going on in the world. Or of what's going on in this once-great nation of ours. And the majority of you are too damned lazy to do your homework and figure it out.

Let's start local. You've been sold a bill of goods by politicians and the news media. Polls show that the majority of you think the economy is in the tank. And that's despite record low employment--as low as it ever was during the Clinton Administration. We've had year after year of strong economic growth, while we cleaned up financial scandals (and paid the price in restated earnings) that inflated the apparent growth during Clinton's 2 terms.  I cut taxes and in spite of all the critics saying we'd blow the deficit out of sight, it's gone down--in fact, way down as a percent of GDP.  I've mentioned all those things before, but it doesn't seem to have sunk in.

Meanwhile, all you can do is whine about gas prices, and most of you are too damn stupid to realize that gas prices are high because there's increased demand in other parts of the world, and because a small handful of noisy idiots are more worried about polar bears and beach front property than your economic security.  Also, you don't have to drive 2 ton, 8 passenger SUVs to the store and soccer game.  You have a choice--think for a minute.

We face real threats in the world. Don't give me this "blood for oil" thing. If I was trading blood for oil I would've already seized Iraq 's oil fields and let the rest of the country go to hell. And don't give me this 'Bush Lied People Died' crap either. If I was the liar you morons take me for, I could've easily had chemical weapons planted in Iraq so they could be 'discovered.' Instead, I owned up to the fact that the intelligence was faulty.

Let me remind you that the rest of the world thought Saddam had the goods, same as me. Let me also remind you that regime change in Iraq was official US policy before I came into office. Some guy named 'Clinton' established that policy (his wife, the Senator even supported everything we did until it became unpopular to have done so) . Bet you didn't know that, did you?  Plus, it's no wonder France, Russia and other so-called "allies" wouldn't join us to clean up Iraq.  They were taking down billions from Saddam and the UN's corrupt  "oil for food" program, and many European countries are terrified of upsetting their large and growing Muslim immigrant communities.  If there were riots about a few cartoons, think what might have happened if France and a few others joined us in cleaning up Iraq faster.

Yes, I know I didn't have the right leadership in Iraq before, but now that we do, it seems way too many Congressional leaders want to declare a loss, take our weapons and just go home.   Why?  Because it will be embarrassing for them to admit they were wrong--ever.

You idiots need to understand that we face a unique enemy. Back during the cold war, there were two major competing political and economic models squaring off. We won that war, but we did so because fundamentally, the Communists wanted to survive, just as we do. We were simply able to outspend and out-tech them. That's not the case this time. The soldiers of our new enemy don't care if they survive. In fact, they want to die. That'd be fine, as long as they weren't also committed to taking as many of you with them as they can. But they are. They want to kill you. And they are all over the globe, and reproducing much faster than we are..

You should be grateful that they haven't gotten any more of us here in the United States since September 11. But you're not That's because you've got no idea how hard a small number of intelligence, military, law enforcement and homeland security people have worked to make sure of that. You'd rather join the ACLU in whining about your "rights" when we try to use surveillance and investigative methods that will find them.  When this whole mess started, I warned you that this would be a long and difficult fight. I'm sad how many of you people think a long and difficult fight amounts to a single season of 'Survivor'.  How about your rights to stay alive and free?  Will the ACLU protect you from Islamic terrorists?

Instead, you've grown impatient.  You've lost the will for right to prevail.  You're incapable of seeing things through the long lens of history, the way our enemies do. You think that wars should last a few months, a few years, tops. After all, TV wars get over quickly.  Making matters worse, you actively support those who help the enemy. Every time you buy the New York Times, every time you send a donation to a pacifist, cut-and-run Democrat's political campaign, well, damn it, you might just as well Fedex a grenade launcher to a Jihadist. It amounts to the same thing.

In this day and age, it's easy enough to find the truth--but not from the mainstream media. It's all over the Internet. It just isn't on the pages of the New York Times or CNN  or on The Evening News. But even if it were, I doubt you'd be any smarter. Most of you would rather watch American Idol.

What about your expectations that the government will always be there to bail you out, even when you're too stupid to leave a city that's below sea level and a huge hurricane is approaching? I could say more about your insane belief that government, not your own wallet, is where the money comes from. But I've come to the conclusion that were I to do so, it would sail right over your heads.

So I quit. I'm going back to Crawford. I've got an energy-efficient house down there (Al Gore could only dream) and the capability to be fully self-sufficient. No one ever heard of Crawford before I got elected, and as soon as I'm done here pretty much no one will ever hear of it again. Maybe I'll be lucky enough to die of old age before the last pillars of America fall.

Oh, and by the way, Dick Cheney's quitting too. That means Nancy Pelosi is your new President. You asked for it--you got it. Watch what she does carefully, because I still have a glimmer of hope that there's just enough of you remaining who are smart enough to turn this thing around in 2008 and vote in a new President that you will support.  So that's it. God bless what's left of America. Some of you know what I mean.

(signed) George W. Bush

-----------------------------
In the business world, we used to have a saying, "Be careful what you wish for, because you might just get it."  Do you think this would be a better country if this resignation letter were real?  What would our enemies think?  What would they do?  What would the economy and the stock markets do?

If you think the situation in Iraq is a problem due to lack of leadership, and an unwillingness of the Shites, Sunnis and Kurds to work together to find compromises and resolve their differences constructively, think about your own country.  Consider the paralyzing partisan political B. S. going on in Washington, and ponder our own problems for a few minutes. Can't get Congress to agree on much;  can't get Congress and the White House to agree on much either.  Something bad is wrong.

Then imagine the President and Vice President just quit.  Now think about what happens next.  Nervous?  You should be.  I would be.  We get a do over in about 14 months, but the race will get narrowed down to 2 or 3 people by next spring.  We'd better think long and hard about who we choose--and why.

Best, John

THE ENTERPRISE--A meltdown or a correction?

THE ENTERPRISE
Note:  The serious part is at the beginning, and the "not-so-serious" part is at the end of this edition.

IS THIS THE START OF A FINANCIAL MELTDOWN AND RECESSION?
Most of the sources I know and read say "NO."  The best advice is "Don't panic."  Posted below are some snippets from my sources.   First, 3 points that nearly everyone agrees on:
1) Don't "count your money" and calculate how far you are down from the peak.  You'll always find some peak that you are "down from."  Take the long view.
2) Don't panic--unless you have to sell, don't.  Only sell if you can sell on an uptick and convert some stock holdings to cash, but this is a dicey proposition--market timers seldom win--because they can't decide when to buy back in with the cash they took out.
3) Look at fundamentals and judge whether this is rational market behavior, or an irrational reaction to a series of unsettling events, and investors that were taking too much risk, using too much leverage.

A retired friend that was a very high-level executive at Merrill Lynch in his pre-retirement days.
Still a sharp, incisive thinker who understands these areas far better than I do.  He says:

"The good news is that inflation is low, interest rates are low, earnings are ok and GDP should only be effected modestly from the credit crunch.  The inverted yield curve 6 months or more ago signaled a possible recession in the later part of '07 going into '08.  The market is discounting that possibility and we will be in for a possible downturn but not a collapse.  The other positive is that the P/E multiple on the S&P 500 is only 15X which makes the stocks relatively cheap but they will get even cheaper.

He wrote this 8/15...so the Fed decided to "jump the gun" and head off recession concerns.
"The Fed will lower the discount rate by 50 basis points when it's afraid we are heading for a recession, which will calm things down a bit—but in the end the market will need to create its bottom through very hectic market swings.  Those who are in there for the long term will just ride it out.  There will be a number of unsettling times ahead.  Even though the Fed is pumping money into the system the banks are not willing to use that money (allow the public to use that money) due to the risks the banks see.  A drop in the discount rate of 50 basis points should create a more viable environment for the banks to start lending money again."

He continues to explain:
"One of the areas where a lot of selling is taking place is due to margin calls.  Because the markets had been on such a great winning streak there are many out there who are highly leveraged.  The same is true with the housing market.  There will be a short term bounce because of the oversold nature of the stock market and one might use that rally to possibly raise a bit of cash if your portfolio is heavily tilted toward stocks (meaning over 80%).  The cash will do two things.  It will ease your tendency to panic and it will enable you to use those dollars when the market turns around for the next big upward move—and there will be a number of upward moves in the future."

Tobin Smith of ChangeWave

On Fox News, as an expert analyst Tobin Smith agreed:  "Don't panic."  "Stay in the market; take the long view.  Unless you have to sell now for some emergency reason, sit tight."

James Stewart in The Wall Street Journal

Headline says:   "Despite the recent bumps, now's not the time to panic."  He continues, "It's time for all of us to take a deep breath."  (You can read the rest, if you want, in the August 15 edition of the WSJ, p. D5.)

A  good source I've been using for several years, to help me with Asset Allocation.  (Dan Weiner)

"Here's why you should remain calm, cool and collected as the storms swirl around Wall Street. First, great wealth is built in the stock markets over time. It's "time in the markets," not "market timing" that will see us to a brighter financial future. When stock markets are going up, lots of investors say, "Yeah, yeah," when I mention sticking with our investment strategies. It's easy to stay in the market when it's rising ˜ who wouldn't go for that? But when markets fall, the quick response is to say, "I want out." The problem, as I've mentioned many times, is that you may pull out of the market before it tumbles further, or you may pull out just before it begins rising again ˜ but who's going to tell you when to buy back in? I've been managing money and writing to you about managing your money since 1991 and was covering Wall Street's machinations in the early '80s, and I can tell you that I've never met a successful market timer that got two calls right. One, yes. Two? Never.

What's making people fearful is that, once again, they're counting their losses from their portfolio highs ˜ the highest level they attained in July when the markets last peaked. This is an artificial, and really, a destructive way to look at performance because unless you're hitting new highs every day, you'll always see a loss from the peak.

From a Newsletter I have found to be insightful (Gary Halbert's)

"The last several weeks have been a tumultuous time in the equity markets, both in the US and abroad. Despite some surprisingly good economic and inflation news, the equity markets have been spooked by the sub-prime mortgage debacle, which has now led to a mini-credit crunch and more hedge fund blow-ups. As a result, we are now in a liquidity squeeze.  Hedge funds, institutional players and individual investors have been selling stocks with abandon, especially over the last two weeks.

While the problems with sub-prime mortgages and related loan defaults are large, they are reasonably identifiable in terms of potential size. The greater problem on Wall Street seems to be that investors don't know where the next blow-up will be and/or whether the sub-prime debacle will seriously threaten the prime mortgage lenders and the big money center banks. As a result, investors have been flocking to the sidelines.

Making matters worse, the Japanese yen has continued to be relatively strong so far this month, and that is causing some hedge funds and large investors around the world to unwind their various so-called "yen carry trades." It is unknown just how much money is still in these carry trades, but it is believed to be huge and this, too, is adding pressure in both the currency markets and the credit markets.

The combination of the sub-prime and related mortgage dilemma, the credit crunch, plunging equity markets and unwinding of the yen carry trade was referred to by some analysts and traders as "the perfect storm," in that losses in the last several weeks have been huge for many market participants.

The liquidity squeeze reached a point last week at which the Fed and central banks around the world stepped in and injected massive amounts of liquidity into the system to stave off what looked to be a potential financial market meltdown. It remains to be seen if this large liquidity infusion will be enough for the credit markets to relax and stabilize, or if the central banks will have to inject even more credit into the system, or lower interest rates.

The big question, of course, is whether the latest plunge in the equity markets is just the much- anticipated "correction" we have been looking for, or whether the credit crunch continues and sends equities into a bear market. BCA continues to believe it's the former and not the latter. I will share BCA's latest thinking with you below:"

PER BANK CREDIT ANALYST: Stocks Make New Record Highs, Then Plummet

Over the last six weeks, we've seen yet another gut-wrenching roller coaster in the equity markets. Following a brief setback in late June, the DJIA soared to a new milestone at 14,000 in mid-July. More importantly, the much broader S&P 500 Index finally managed to reach a new all-time high above 1,550. Investors, traders and market analysts were jubilant.

But in the last full week of July, stocks got hammered with the Dow and the S&P 500 losing over 4% in just one week. This weakness came despite some of the best economic news we've seen all year. 2Q Gross Domestic Product surged by 3.4% (annual rate), well above most pre-report estimates. And the inflation figures in that same GDP report indicated that core inflation was finally down to near the Fed's supposed comfort zone. Analysts agreed this meant no more interest rate hikes.

Good news of this magnitude should have sent stocks soaring - it didn't. In fact, just the opposite occurred. Stocks have continued to fall. As we all know now, the latest plunge in stock prices is primarily due to the continuing sub-prime and related mortgage debacle which has resulted in a credit crunch. Institutional players, hedge funds of many sizes and shapes, and even individual investors were selling with abandon last week, and it remains to be seen how long this lasts.

The S&P 500 and the Dow have now fallen into an area where there should be good intermediate support based on technical analysis. My best guess is that the major equity markets will stabilize over the next week or so - assuming this is just a correction as I have suggested over the last several weeks. But of course there is always the chance the markets could blow out intermediate support levels and test the long-term support levels. I tend to doubt this for reasons I will outline below, but here is the long-term chart of the S&P 500, which puts the latest sell-off in perspective (ie - it hasn't been all that bad).

So, if we have some fairly reasonable estimates regarding how bad the losses may be, then why is there such panic selling? It may be fair to assume that market players, both large and small and in between, don't trust the estimates. But even if the estimates were twice as big, we are not likely looking at a financial crisis that would send the economy into a deep recession or worse.

The problem as I see it is that investors across the spectrum are tired of surprises. They don't know who might be next on the list to fail or have serious problems. Last week, we learned that one of France's largest money center banks, BNP Paribus, froze withdrawals from three of its large hedge funds with (apparently) significant exposure to the US sub-prime mortgage markets. So the sub-prime contagion has spread beyond our borders, but it is hardly a worldwide catastrophe that is going to shut down the global economic boom, or doom the equity markets to a prolonged bear market.

:-D
Now that you have read the serious stuff, here are a couple of things to make you grin.  Two sets of rules to live by: one written by women, one written by men.  Apply them at your own risk!  One story about easing into semi-retirement and having a little fun.

THE RULES
*****************************************
1.  The female always makes the rules.
2.  The rules are subject to change at any time without prior notification.
3.  No male can possibly know all the rules.
4.  If the female suspects the male knows all the rules, she must immediately change some or all of the rules.
5.  The female is never wrong.
6. If the female is wrong, it is due to a misunderstanding, which was a direct result of something the male did or said wrong.
7.  If rule 6. applies the male must apologize immediately for causing the misunderstanding.
8.  The female may change her mind at any time.
9.  The male must never change his mind without the expressed written consent of the female.
10.  The female has the right to be angry and upset at any time.
11.  The male must remain calm at all times, unless the female wants him to be angry and upset.
12.  The female must, under no circumstances, let the male know whether or not she wants him to be angry or upset.
13.  The male is expected to mind read at all times.
14.  If the female has P.M.S., all the rules are null and void.
15.  The female is ready when she is ready.
16.  The male must be ready at all times.
-------------------------
The Man Rules (At last a guy has taken the time to write this all down )
Finally, the guys' side of the story.  We always hear "the rules from the female side.  Now here are the rules from the male side.  These are our rules!  Please note these are all numbered "1 "  ON PURPOSE!

    1.   Men are NOT mind readers.
    1. Learn to work the toilet seat.  You're a big girl. If it's up, put it down.   We need it up, you need it down.  You don't hear us complaining about you leaving it down.
    1. Sunday sports-It's like the full moon or the changing of the tides.  Let it be.
    1. Crying is blackmail.
    1. Ask for what you want.  Let us be clear on this one:  Subtle hints do not work!  Strong hints do not work!  Obvious hints do not work!  Just say it!
    1. Yes and No are perfectly acceptable answers to almost every question.
    1. Come to us with a problem only if you want help solving it.  That's what we do.  Sympathy is what your girlfriends are for.
    1. Anything we said 6 months ago is inadmissible in an argument. In fact, all comments become Null and void after 7 Days.
    1. If you think you're fat, you probably are.  Don't ask us.
    1. If something we said can be interpreted two ways and one of the ways makes you sad or angry, we meant the other one
    1. You can either ask us to do something, or tell us how you want it done.  Not both.  If you already know best how to do it, just do it yourself.
    1. Whenever possible, Please say whatever you have to say during commercials.
    1. Christopher Columbus did NOT need directions and neither do we.
    1. ALL men see in only 16 colors, like Windows default settings.  Peach, for example, is a fruit, not a color. Pumpkin is also fruit. We have no idea what mauve is.
    1. If it itches, it will be scratched.  We do that.
    1. If we ask what is wrong and you say "nothing," We will act like nothing's wrong.
We know you are lying, but it is just not worth the hassle.
    1. If you ask a question you don't want an answer to, expect an answer you don't want to hear.
    1. When we have to go somewhere, absolutely anything you wear is fine... Really.
    1. Don't ask us what we're thinking about unless you are prepared to discuss such topics as baseball or golf.
    1. You have enough clothes.
    1. You have too many shoes.
    1. I am in shape.  Round IS a shape!

Yes, I know, I have to sleep on the couch tonight; but did you know men really don't mind that? It's like camping.
----------------------------------
Finally...just one more...
    People frequently ask me what I do to make my days interesting now that I'm semi-retired.
    The other day I went downtown and went into a shop.  I was only in there for about 5 minutes.  When I came out there was a cop writing out a parking ticket.  I went up to him and said, "Come on, man, how about giving a retired person a break"?
    He ignored me and continued writing the ticket.  I called him a "Nazi."  He glared at me and started writing another ticket for having worn tires.  So I called him a "doughnut eating Gestapo."  He finished the second ticket and  put it on the windshield with the first.
    Then he started writing a third ticket.  This went on for about 20 minutes.  The more I abused him, the more tickets he wrote.  Personally, I didn't care.   I walked downtown. 
    The car that he was putting the tickets on had a bumper sticker that said "HILLARY IN '08."   I try to have a little fun each day.   It's important to my health.

OK...that is all for this SPECIAL EDITION.   No rants, no raves, just a little politics.
I HOPE YOU FIND IT EITHER USEFUL, OR FUNNY, OR BOTH!

Best, John       

THE ENTERPRISE--Qualifications not Persona

THE ENTERPRISE--The Leading Candidates' Qualifications

KIPLINGER CALLS IT RIGHT
I have subscribed to Knight Kiplinger's KIPLINGER LETTER for years.  It is full of the most useful forecasts I can find, and seems to always hit the important topics at the right times.  In this week's edition, it does so again.  As Knight Kiplinger so aptly puts it, it is not a pretty scenario...

AN EXCERPT:
Can government do anything right? Voters of all stripes are screaming NO.
Complaints to Congress, federal agencies, pollsters and anyone who’ll listen are way up.  The public blames Bush, federal bureaucrats, the Democratic Congress and even local leaders. Competence will be a big issue in 2008.  It’s already helping some candidates...Hillary Clinton and Rudy Giuliani, for example, because they have more management experience. It’s also the reason that Michael Bloomberg, NYC’s can-do mayor, is getting attention.  And it hurts newcomers...Barack Obama, in particular...and probably John Edwards, too.
    No candidate is offering solutions. Democrats accuse Bush of incompetence,while Republicans call for leaner government but don’t suggest how to make it work better.  Ultimately, all incumbents are at risk. The GOP is blamed for weakening the government; Democrats, for failing to deliver on promises.
    The public has a lot to complain about: A badly managed war, poor care of wounded vets, porous borders, lost laptops with key data, food & drug safety, and now, falling bridges. Plus a do-nothing Congress.
    Are things really worse? Experts say yes. Sure, complaints about government go back centuries, but this is one of the low points.Why so bad? Partisanship blocks compromise. Both parties would rather score political points than make deals to pass legislation.   Another reason: Bush’s distrust of bureaucrats... crippled morale and led to an exodus of experienced workers. That was fine up to a point because it cut government interference. But when government was needed... after Hurricane Katrina hit, for example...it wasn’t up to the job and couldn’t provide adequate oversight for private contractors.
    Will it get any better? Eventually. Voters will insist on it. Americans will never agree on just what role government should play, but they do want a government that is capable of meeting basic needs... whether that’s relief after a disaster or issuing a passport on time.   But it will take years to develop or recruit experienced managers, reinvigorate systems that have atrophied and reenergize the bureaucracy.
--------------------------------------------------
©The Kiplinger Letter, Aug. 10, 2007

A RADICAL IDEA--JUDGE THEM ON QUALIFICATIONS
With that somewhat dire set of comments, I'd like to devote the rest of this issue to a method that is common in business and almost entirely neglected in elections and politics:  choosing people based on qualifications instead of personality, fame or ability to "perform"--speak and campaign well.  Someone once said "politics is like Hollywood for ugly people."  While that isn't quite right--it's not too far wrong.

IT IS TIME WE CHANGED THAT...AND JUDGED CANDIDATES BASED ON THEIR QUALIFICATIONS, NOT THEIR PERSONA.

Forget the names, the faces and the media hype.  We hire people in companies and not-for-profit organizations based on qualifications.  Should we not do it the same way in choosing elected leaders?  Shouldn't we?

Read the "thumbnail" points I have listed below: qualifications, backgrounds and so forth.  These are far from complete.   I was just hitting the high spots/low spots, but they do provide a sense of the candidates "resumes."   I have shown my 0-10 rating on three critical leadership attributes: Character, Courage and Competence, where 0 = terrible/none and 10 = superb, outstanding.  Feel free to disagree.  This has to be a dialogue, not just a diatribe. Do your own ratings.

Group 1
1. A freshman, African-American US Senator, recently a relatively obscure state Senator, who has never led anything other than his college law review, but is a charismatic speaker and an engaging personality, with very little experience and no policy making background.  Largest negative-serious inexperience and questionable leadership competence.
--Character 8, Courage 8 and Competence 4 = (20)

2.  A second term, competent female Senator, who is a long time political wife and former "First Lady" but one who was embroiled in messy scandals, and has never led any kind of organization, (other than a campaign organization) although she was a lawyer from Arkansas before her husband became first, the governor of Arkansas and then President of the US, noted mostly for her sustained "marriage of convenience" in spite of her husband's transgressions.  Largest negative-dishonest, two-faced.
--Character 3, Courage 8 and Competence 9 = (20)

3.  A rich lawyer, former VP candidate & loser in 2004, who lives in a huge house and pampers himself with expensive haircuts and spa treatments, campaigns while his wife is suffering with cancer, and is trying to position himself as the candidate who will look out for the poor working people.  Largest negative-a “pretty boy” without substance, rich, but acting like he is all for the poor.
--Character 5, Courage 5 and Competence 5 = (15)

Group 2
1.  The tough former mayor of NYC, who distinguished himself by "cleaning up NYC" and being a stalwart leader of the New York people during the trying times following 9/11, thrice divorced (one particularly messy), and estranged from his adult children, and somewhat at odds with the mainstream of his party.  Largest negative-3 marriages, dysfunctional family life, and can be abrasive.
--Character 4, Courage 9 and Competence 8 = (20)

2.  An accomplished actor, speaker and a lawyer, who was a 1-1/2 term Senator, and a former Whitewater prosecutor, but has never led any organization, who is also divorced and re-married to a much younger (and very attractive), but brilliant woman, and who left the Senate amidst the loss of a child and his loss of enthusiasm for the political life.  Largest negative-“trophy wife” & relatively inexperienced.
--Character 7, Courage 6 and Competence 5 = (18)

3.  A long-term family man, with five children, who has been a successful business leader, a prominent civic leader (who turned around a badly troubled Olympics shortly after 9/11), and was elected governor and leader of a state that is dominated by the other party, where he led the state toward a solution for its nagging health care problems.  Largest negative: His Mormon faith, ...and he flip-flopped on some issues for the National campaign from positions as governor of a liberal Eastern state.
--Character 9, Courage 8 and Competence 9 = (26)

4.  A long time Senator, former Vietnam POW, still handicapped from those injuries, who is a fiery and rebellious moderate, often at odds with his own party, but never failing to take on tough issues, even when his position was unpopular or questionable, but who would be age 72 when/if elected and age 73 when inaugurated. Largest negative; “Strong willed” to the point of being “cantankerous.” and too old!
--Character 7, Courage 10 and Competence 5 = (23)

Electability must factor in somewhere, but first let's focus on qualifications and the person.  If you accept that Group 1 and Group 2 have quite different philosophies about how the country should be led and run, you can choose just one from each group.   Then you must choose between those two philosophies (Here is another brief oversimplification to describe those differing philosophies).

--Democrats:  the government knows best, and must collect and distribute money because it will do it more wisely than the people governed--and it will need to take care of those people (and charge higher taxes to do so).  Talk to the terrorists, and reason with them, but don't offend their sensibilities.

--Republicans: People should be allowed to choose how to spend, allocate and use what they earn.  It is better to have lower taxes such that everyone be help grow the economy in a free enterprise, capitalistic system.  This will result in a  prosperous country, which will not need higher taxes.  Be on guard and defend against terrorist threats, stopping them aggressively at every turn--before they attack again.

Can you block out your preferences and biases and to simply consider the candidate's relevant experience, character and proven leadership qualification, and that these are the most important decision factors and reasons for that person to be nominated and then elected President?  Forget about George Bush.  Concentrate on the future.

I've shown my ratings.  Depending on the day I do them, they vary by a few points here and there, but the outcomes are not much different.  You should do yours. I tried to minimize my agreement or disagreement on political philosophy and concentrate on the leadership characteristics we so desperately need in this country and in the eyes of the world.

One final premise that I believe to be true:  The US seems to work best when one party “controls” the Congress and the other “controls” the White House.  Why?  “Checks and balances"— no matter which party controls which.

Who's the most qualified candidate of the leading ones for each party?  Who can lead us out of this morass we are in.  That matters a lot.  Think about it.  Discuss it.  Then stand up and be counted--both verbally before the primaries, and when it comes time to support candidates and vote for them.  That's the American way.

Best, John

THE ENTERPRISE--Line vs. Staff

THE ENTERPRISE--Line vs. Staff

THE DIFFERENCE BETWEEN LINE AND STAFF--A METAPHOR
For nearly all of my career, I was  "Line" manager and/or executive, as contrasted to the "Staff" who gave advice and counsel to the corporate CEO.  The difference is very basic.  A line manager is responsible for results--top line sales, profit/loss, customer service, quality, and employee development and relations.  Staff people are smart folks, but their input is advisory and often critical (of the line management decisions) and they often have the ability to impede (or approve) expenditures, people moves/promotions, facility decisions, etc.  Staff has significant input into policies and procedures, but Line must do the heavy lifting, get the results, hang in there when things get tough and work their way out of problems (which they may have caused by errant decisions).  "The buck stops at the line manager's desk."  If this sounds a lot like I am describing the Executive Branch of Government (the President and his Chain of Command) as compared to the Congress--Senate and the House, it is a fairly apt metaphor. 

During my career at three leading companies where I was a "Line guy" for over 25 years running major businesses (15 of the years with the title of President--not coincidentally) , I worked with a lot of Corporate staff officers.  Some very smart people, well versed in their field of expertise, and might have even been line managers at some point in their career--might have--but usually not lately  They were also politically astute people who built their power base on more than just results (like "sucking up").  The biggest difference between line and staff is that the line guys actually made important decisions that influenced the business and the  staff guys would then second guess a lot of line decisions (the good staff guys would consult with the line people, offer advice, hear the facts and then support--and often influence--the line person's decision).  The others would "pile on" repeating (with nuances) the same criticisms until, as a line manager, you wanted to either smack them down or leave the room. 

But you didn't  You stuck it out.  The thing is, successful, effective line managers (in business or in the military) don't quit when the going gets tough.  They "suck it up" and keep on.  They build organizations and when they do it wrong, or include the wrong people, they change them.  They "clean up their own messes" enduring the complaints and criticism of the staff people.   A wise CEO listens to the staff, but when the chips are down, s/he usually supports the line manager's decision--or replaces those managers, if they are not competent.  The staffers often try to add a bunch of new policies to limit the authority of the line people--on the rationale that it will protect them from making expensive mistakes.  The fact is that these policies almost always transfer power and control from the line people (who know what is really going on, because they are on the "front lines" battling with competitors, trying to keep customers happy, loyal and satisfied) to the staff people who know "theoretically" what "must be going on."

There is a value to persistence, resilience, mental toughness, calm under fire, and the ability to hang in there with what is right when things get tough.  I knew a CEO like this a few years ago.  He was a man of courage, character and competence--and a West Point grad as well.  He's probably reading this and knows I am talking about him. That is my model for a true line manager.

The line vs. staff metaphor still applies even though President Bushhas made enough mistakes to fill pages of criticism.  He is still our President and the Commander in Chief of the Armed Services.  Until someone else gets elected and sworn in, "he has to clean up his own messes" both organizationally and decision-wise.  I know that many readers are as frustrated with him as I am.  Others are downright fed up and wish he were gone a long time ago.  But he's not.  He is still our President.  And maybe, if I let the raging optimist in me consider things, he might just clean up a lot  (not nearly all) of his messes before he leaves office.  I sure hope so--because the opposing party's Presidential "favorites" won't know how to do it any better.

"A WAR WE JUST MIGHT WIN"--AN OP ED PIECE
Last week two strong liberals (Michael O'Hanlon and Kenneth Pollack both of the Brookings Institution)  of  wrote an Op Ed piece that was published in an even stronger liberal newspaper.  It was about the Iraq war and titled "A War We Just Might Win."  They had spent considerable time in Iraq and were impressed by the progress they saw.  Now I agree, progress in limited places is a long way from "winning" that messy "war."  But it was very encouraging to see them honestly and directly contradict the "party line" being spewed by such gutless voices as Senate Leader Harry Reid, who already conceded defeat publicly and is now doing his worst to make his concession come true.  The text of the NYTimes Op Ed piece follows this edition of THE ENTERPRISE, in case you missed it.

THE RIGHT LEADER MAKES A LOT OF DIFFERENCE
The big difference in Iraq is not just the widely debated "surge of troops" although that is a factor in the progress.  The big factor, just like in a business, is the right leadership with the right ideas.  General David Petraeus studied how to cope with this kind of situation for most of his career, and is now putting into practice what he believed would work.  And in several areas, it is working.  I hope he can spread it further, and that he continues to be able to lead our forces in Iraq.  I worry every day that some insane al Qaeda suicide bomber will get to him and take him out.  That is how they work, you know.  General Petraeus is also an honest, "line" leader who will report to the President in Sept. as promised, and likely tell him that it is going to take longer to clean up the mess and start leaving Iraq to the Iraqis.  Let's hope the line guy prevails over the gutless, politically motivated, second guessing "staffers".   You know who I mean.

BRIDGE COLLAPSE--WHO TO BLAME--A LACK OF MAINTENANCE
Another business metaphor hit me as I watched the tragic bridge collapse in Minnesota this week.  Maintenance always seems to be a postponable expense in business--until something critical breaks.  Then the finger pointing starts.  Why didn't you fund it, the critics ask?  Why didn't we spend the money budgeted for maintenance on actually maintaining the right things is the more appropriate question?  But of course our short memory has already forgotten the millions that were budgeted to beef up the levees around New Orleans before Katrina took them down.  It's easy to second guess, but in these cases, the "line mangers" lost the battle and the "bridge--and levees--came tumbling down."  The vast majority of the Interstate Highway system was built in the same era as this bridge.  That means there are probably a lot of suspect, aged and failing bridges around our country.  Maybe we should quit giving billions to big corporate farmers for NOT growing things and re-direct part of it into maintaining our highway infrastructure. 

I know, many of you are saying we should quit spending billions in Iraq too.  You are at least partly right, but that begs the question, because before 9/11 and Iraq were even on the table, we were still ignoring our infrastructure needs and funneling money to obsolete, politically motivated subsidies for Agriculture and lots of other places.  They were called "earmarks" tacked onto bills that slid through our government into the pockets of the wrong people for the wrong purposes.  It is time to stop that crap.

ENERGY USE--CARS AND TRUCKS AND CAFE VS. TAXES
I'll get a note from a friend at Ford on this one--telling me how well it is doling building higher mileage cars.  He's right.  GM is too.  So why are their corporate chieftains fighting the increase in the Corporate Average Fuel Economy standards?  It's disruptive, that's why--but it's necessary too.  Honda and Toyota already achieve much higher fuel efficiency, even when you adjust for the "trucks" sold in larger quantities by Ford and GM.  C'mon auto execs.  Quit playing ostrich and get your heads out of the sand (or wherever else you have them) and get with the program.  You know how to do it.   The technology exists today.  Use it.   CAFE is just one of a 3 leg stool--the other two are higher gas taxes and much, much higher gas guzzler taxes and annual license fees.  While Congress is at it, how about taxing gas and spending the money to 1) develop alternative (not ethanol!) energy and 2) reinforce a few bridges in our country. 

The only way to get people to drive less is to hit them in the pocket book.  And by the way, we need to reinstate and beef up the "gas guzzler tax" which doesn't hit the poor folks nearly as hard as a gas tax--it hits the wealthy soccer Moms driving a 70 lb. kid to soccer practice in a 5000 lb. truck-based SUV.  If Rush Limbaugh ever read the copy of this newsletter I send to him each week, he'd probably get mad at me for wanting to tax his big SUV.  To him I say, "pay if you want to play"...and you can afford it.  And hit them each year at license renewal time too, and direct that money to local/state infrastructure (bridge building, both literally and figuratively).

IMMIGRATION--A PRAGMATIC SOLUTION?
One of these days, someone will realize that we need immigrant workers in the US.  Unemployment at under 5% is structural--it is the Americans who aren't serious about finding or keeping jobs.  They are either lazy, unskilled, unreliable, worthless or all of the above.  What we need to do is to quit trying to round up all the illegals and "fine them" for coming here.  We can't stop them.  Hell, we can't even build the wall that Congress has appropriated billions for.  We need to get them to "sign the guest book" as Dennis MIller so aptly puts it.  If we know who they are, and where they are, and what they are up to, it might even help our Homeland Security.  We need skilled immigrants like doctors, nurses, scientists, and we need laborers, housekeepers and even migrant farm workers too.

While we are ticketing people like Paris Hilton and Lindsay Lohan for driving under the influence, and lots of others for driving without insurance, we should nail the "unlicensed--un-ID-card carrying immigrants" and deport just them.  If we give the ones who are here for the right reason a reasonable time window to show up and "sign in" --to get their tamper resistant, RFID chip embedded ID cards--we can let them go on about their work, picking our crops, tending our lawns and yes, even paying taxes, because now we'll know where they are and what they are up to.  Then we can deport the 5% that are "bad actors."

Well, that is plenty or ranting for a single week.  I hope some of the ideas will spur you to take some action, think a big differently, or even disagree--because in that disagreement is one of the great things about America.  Freedom to disagree...and then debate the outcome.  Go meet with your Senator or Congressman.  Start a dialogue.  They are YOUR elected representatives. 

Best, John

The New York Times
July 30, 2007
Op-Ed Contributor
A War We Just Might Win
By MICHAEL E. O'HANLON and KENNETH M. POLLACK

Washington

VIEWED from Iraq, where we just spent eight days meeting with American and Iraqi military and civilian personnel, the political debate in Washington is surreal. The Bush administration has over four years lost essentially all credibility. Yet now the administration's critics, in part as a result, seem unaware of the significant changes taking place.

Here is the most important thing Americans need to understand: We are finally getting somewhere in Iraq, at least in military terms. As two analysts who have harshly criticized the Bush administration's miserable handling of Iraq, we were surprised by the gains we saw and the potential to produce not necessarily "victory" but a sustainable stability that both we and the Iraqis could live with.

After the furnace-like heat, the first thing you notice when you land in Baghdad is the morale of our troops. In previous trips to Iraq we often found American troops angry and frustrated - many sensed they had the wrong strategy, were using the wrong tactics and were risking their lives in pursuit of an approach that could not work.

Today, morale is high. The soldiers and marines told us they feel that they now have a superb commander in Gen. David Petraeus; they are confident in his strategy, they see real results, and they feel now they have the numbers needed to make a real difference.

Everywhere, Army and Marine units were focused on securing the Iraqi population, working with Iraqi security units, creating new political and economic arrangements at the local level and providing basic services - electricity, fuel, clean water and sanitation - to the people. Yet in each place, operations had been appropriately tailored to the specific needs of the community. As a result, civilian fatality rates are down roughly a third since the surge began - though they remain very high, underscoring how much more still needs to be done.

In Ramadi, for example, we talked with an outstanding Marine captain whose company was living in harmony in a complex with a (largely Sunni) Iraqi police company and a (largely Shiite) Iraqi Army unit. He and his men had built an Arab-style living room, where he met with the local Sunni sheiks - all formerly allies of Al Qaeda and other jihadist groups - who were now competing to secure his friendship.

In Baghdad's Ghazaliya neighborhood, which has seen some of the worst sectarian combat, we walked a street slowly coming back to life with stores and shoppers. The Sunni residents were unhappy with the nearby police checkpoint, where Shiite officers reportedly abused them, but they seemed genuinely happy with the American soldiers and a mostly Kurdish Iraqi Army company patrolling the street. The local Sunni militia even had agreed to confine itself to its compound once the Americans and Iraqi units arrived.

We traveled to the northern cities of Tal Afar and Mosul. This is an ethnically rich area, with large numbers of Sunni Arabs, Kurds and Turkmens. American troop levels in both cities now number only in the hundreds because the Iraqis have stepped up to the plate. Reliable police officers man the checkpoints in the cities, while Iraqi Army troops cover the countryside. A local mayor told us his greatest fear was an overly rapid American departure from Iraq. All across the country, the dependability of Iraqi security forces over the long term remains a major question mark.

But for now, things look much better than before. American advisers told us that many of the corrupt and sectarian Iraqi commanders who once infested the force have been removed. The American high command assesses that more than three-quarters of the Iraqi Army battalion commanders in Baghdad are now reliable partners (at least for as long as American forces remain in Iraq).

In addition, far more Iraqi units are well integrated in terms of ethnicity and religion. The Iraqi Army's highly effective Third Infantry Division started out as overwhelmingly Kurdish in 2005. Today, it is 45 percent Shiite, 28 percent Kurdish, and 27 percent Sunni Arab.

In the past, few Iraqi units could do more than provide a few "jundis" (soldiers) to put a thin Iraqi face on largely American operations. Today, in only a few sectors did we find American commanders complaining that their Iraqi formations were useless - something that was the rule, not the exception, on a previous trip to Iraq in late 2005.

The additional American military formations brought in as part of the surge, General Petraeus's determination to hold areas until they are truly secure before redeploying units, and the increasing competence of the Iraqis has had another critical effect: no more whack-a-mole, with insurgents popping back up after the Americans leave.

In war, sometimes it's important to pick the right adversary, and in Iraq we seem to have done so. A major factor in the sudden change in American fortunes has been the outpouring of popular animus against Al Qaeda and other Salafist groups, as well as (to a lesser extent) against Moktada al-Sadr's Mahdi Army.

These groups have tried to impose Shariah law, brutalized average Iraqis to keep them in line, killed important local leaders and seized young women to marry off to their loyalists. The result has been that in the last six months Iraqis have begun to turn on the extremists and turn to the Americans for security and help. The most important and best-known example of this is in Anbar Province, which in less than six months has gone from the worst part of Iraq to the best (outside the Kurdish areas). Today the Sunni sheiks there are close to crippling Al Qaeda and its Salafist allies. Just a few months ago, American marines were fighting for every yard of Ramadi; last week we strolled down its streets without body armor.

Another surprise was how well the coalition's new Embedded Provincial Reconstruction Teams are working. Wherever we found a fully staffed team, we also found local Iraqi leaders and businessmen cooperating with it to revive the local economy and build new political structures. Although much more needs to be done to create jobs, a new emphasis on microloans and small-scale projects was having some success where the previous aid programs often built white elephants.

In some places where we have failed to provide the civilian manpower to fill out the reconstruction teams, the surge has still allowed the military to fashion its own advisory groups from battalion, brigade and division staffs. We talked to dozens of military officers who before the war had known little about governance or business but were now ably immersing themselves in projects to provide the average Iraqi with a decent life.

Outside Baghdad, one of the biggest factors in the progress so far has been the efforts to decentralize power to the provinces and local governments. But more must be done. For example, the Iraqi National Police, which are controlled by the Interior Ministry, remain mostly a disaster. In response, many towns and neighborhoods are standing up local police forces, which generally prove more effective, less corrupt and less sectarian. The coalition has to force the warlords in Baghdad to allow the creation of neutral security forces beyond their control.

In the end, the situation in Iraq remains grave. In particular, we still face huge hurdles on the political front. Iraqi politicians of all stripes continue to dawdle and maneuver for position against one another when major steps towards reconciliation - or at least accommodation - are needed. This cannot continue indefinitely. Otherwise, once we begin to downsize, important communities may not feel committed to the status quo, and Iraqi security forces may splinter along ethnic and religious lines.

How much longer should American troops keep fighting and dying to build a new Iraq while Iraqi leaders fail to do their part? And how much longer can we wear down our forces in this mission? These haunting questions underscore the reality that the surge cannot go on forever. But there is enough good happening on the battlefields of Iraq today that Congress should plan on sustaining the effort at least into 2008.

Michael E. O'Hanlon is a senior fellow at the Brookings Institution. Kenneth M. Pollack is the director of research at the Saban Center for Middle East Policy at Brookings.