All told, it was a tough week on Wall Street, though two of the three major indexes posted weekly gains. The S&P 500 posted a weak gain of 0.1 percent and the Nasdaq Composite was up 1.6 percent, but the Dow Jones Industrial Average was off 0.6 percent.

Despite a surge in imported oil prices, the US trade deficit markedly shrank in June, falling from $59.2 billion to $56.8 billion. Both imports and exports surged 1.8 percent and 4 percent, respectively, setting up to have a positive influence on second quarter GDP when the number is revised.

Import prices surged in July, as a weak dollar and higher food and energy prices made foreign produced goods more costly. On a month-over-month basis, prices were up 1.7 percent and 21.6 percent compared to the same period last year. That’s the biggest year-over-year price jump since tracking began in 1982. That continues to stoke inflationary worries and leaves some analysts concerned that we’ll begin to more rapidly rising prices.

On that note, the Consumer Price Index (CPI) exploded in July, showing that inflationary concerns are perfectly justified. The index was up 0.8 percent over the prior month, though the increase was a more modest 0.3 percent with food and energy costs excluded. On a year-over-year basis, the CPI took its biggest jump in 17 years, up a whopping 5.6 percent. Again, excluding food and energy, the increase was a more tempered 2.5 percent.

Although we’re certainly not facing a Zimbabwe-like situation just yet, discounters such as Wal-Mart may want to invest in more of the bigger numbers for price displays, particularly now that the company’s suppliers are agitating for price increases. And although Wal-Mart has typically resisted price hikes with all its might, the company may have little choice with commodities prices still elevated despite the recent pullback.

That issue aside, the retailer reported a stunning 17 percent jump in profit for the second quarter, even as many of its competitors look to be pinching pennies just to survive. It remains to be seen if it can maintain that level of profitability into the third quarter when stores won’t see the influx of fresh money from government stimulus checks.

Foreign buying of US financial assets posted its weakest pace in June since last September, as total net purchases of long-term equities, notes and bonds fell to $53.4 billion from $83.2 billion in May. Total net TIC flows, which accounts for both long- and short-term securities, posted a net $51.1 billion, compared to net sales of $12.3 billion a month earlier. Interesting enough, interest in agency debt such as that issued by Fannie Mae and Freddie Mac increased, with buying up a net $31.4 billion.

More Americans filed for unemployment benefits than expected last week, though they fell slightly from the previous week, with 450,000 new claims. Expectations had been for 435,000 new filings. Continuing claims also rose, hitting their highest levels in almost five years, with 3.417 million workers continuing to draw unemployment.

US Industrial production rose 0.2 percent in July, with capacity utilization rising a tenth of a percent to 79.9 percent. Production continues to be helped by a rebound in auto demand after a strike and at auto-parts supplier and increased energy demand.

GM’s still in trouble. Its sales of cars and light trucks slide to 12.5 million in July, the lowest level since 1993. The slow pace of sales and poor operating results has pushed the auto manufacturer to expand an early retirement program and cut production and staff.

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Major European economies reported GDP contractions this week, with both France and Germany, the Eurozone’s two largest economies reporting slowdowns in GDP growth. France saw quarter-over-quarter GDP fall 0.5 percent, with German growth down 0.3 percent. Italy also reported a 0.3 percent contraction. The contagion has also spread into Asia, with Hong Kong reporting its first contraction in five years, with GDP down 1.4 percent on a quarter-over-quarter basis.

Real estate also continues to slow, with a 55 percent jump in foreclosures in July. Right now, one in every 464 US households are in some stage of the foreclosure process. That’s continuing to depress housing prices as well as consumer spending given the difficulties of borrowing against their home equity, assuming they have any. Some industry experts are expecting that about 53 percent of subprime borrowers could have negative equity on their homes this year.

The uncertainly in the housing markets and mortgage rates near their annual highs are also working to depress mortgage applications, with the Mortgage Bankers Association reporting that application volume was down 1.5 percent last week.

The average rate for 30-year fixed-rate mortgages rose to 6.57 percent from and 15-year fixed-rates were up to 6.17 percent, though one-year adjustable-rate mortgages (ARM) fell to 7.15 percent.

The simmering conflict between Russia and Georgia continues to dominate the news, and earlier this week Roger Conrad examined the situation in his free weekly Maple Leaf Memo. It’s an interesting analysis of a situation which has been simmering for years.

Expedition officials compared the act to Neil Armstrong’s planting of the American flag on the moon, and the US Geological Survey determined, to a degree that should satisfy United Nations Convention on the Land of the Sea requirements (should the US eventually ratify it), that there’s not much ground for resource disputes in the area.

But Russia’s staking a tricolor claim to the North Pole was widely viewed as an act of aggression, “openly choreographed publicity stunt” or not.

Last week, symbolism became tanks and airstrikes as Russia celebrated the first anniversary of its deepwater claim by getting physical with the Republic of Georgia after several years of shadowboxing.

Accounts of Russia’s Arctic adventure framed it in terms of two larger themes: Russia’s restored sense of confidence and the international competition for oil and natural gas.

The first theme seems to be dominating Western interpretations of what’s happening in the Caucasus, but the long history of ethnic and geopolitical conflict is ripe territory for substantive argument on behalf of several interpretations.

James Traub tells the long story in The New York Times, providing solid background for the present conflict:

The combination of Vladimir Putin’s reforms and the dizzying rise in the price of oil and gas have rapidly restored Russia to the status of world power. And Mr. Putin has harnessed that power in the service of aggressive nationalism.

Marshall Goldman, a leading Russia scholar, argues in a recent book that Mr. Putin has established a “petrostate,” in which oil and gas are strategically deployed as punishments, rewards and threats. The author details the lengths to which Mr. Putin has gone to retain control over the delivery of natural gas from Central Asia to the West. A proposed alternative pipeline would skirt Russia and run through Georgia, as an oil pipeline now does. “If Georgia collapses in turmoil,” Mr. Goldman notes, “investors will not put up the money for a bypass pipeline.” And so, he concludes, Mr. Putin has done his best to destabilize the Saakashvili regime.

(snip)

Russia threatens Georgia, but Georgia threatens Abkhazia and South Ossetia. Russia looks like a crocodile to Georgia, but Georgia looks to Russia like the cats’ paw of the West. One party has all the hard power it could want, the other all the soft. And now, while the world was looking elsewhere, the frozen conflict between them has thawed and cracked. It will take a great deal of care and attention even to put things back to where they were before.

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Traub, in a characterization troubling to many realists, including The American Conservative’s Daniel Larison, seems to validate the viewpoint that Russia (read: ex-KGB official and current Prime Minister Vladimir Putin) and Russia alone is stuck in a Cold War mindset. Putin has responded to US efforts to establish a missile-defense presence in the Czech Republic, on his doorstep; the former president (it was Putin, however, who left Beijing for the Russian military’s staging ground for its current operations, not current President Dmitry Medvedev) warned, in stark terms, of Russia’s concern about the eastward creep of the North Atlantic Treaty Organization (NATO); and NATO remains a military alliance, despite the fact that its raison d’etre--the Union of Soviet Socialist Republics--no longer exists.

Here’s Larison:

The thing that I find most frustrating, and what I think Russians may also find very frustrating, is that even after years of long Russian forebearance in the face of things Moscow regarded as serious provocations and humiliations Russia has continually been portrayed as an expansionist, revisionist and (in McCain’s crazy world) “revanchist.” Many American pols were taking this view of Russia when it was quite weak, c. 1999, and you have them taking it up now that Russia is resurgent, and at neither time was it the correct view.

Traub buys into the view that recent events have made it harder to advance a realist view of Russia:

In a recent essay, the archrealist Henry Kissinger argued that Putin-era policy had been driven not by dreams of restored glory, but by “a quest for a reliable strategic partner, with America being the preferred choice.” Some Russia experts on the left, like Stephen Cohen of Princeton, have taken a similar view. But Russia’s bellicose behavior, and now the hostilities along its border, make it increasingly difficult to act on such a premise without seeming naive.

On this point, however, Kissinger and Cohen are right. One of the impediments to building such a partnership between Washington and Moscow is the assumption that Moscow is a revisionist power that must be thwarted at every step. The other obvious impediments are the steady eastward creep of NATO and the introduction of U.S. weapons systems into current central European member states. Depressingly, some of the foreign policy advisors to the candidates don’t seem to understand this at all. Just as worrying as Kagan’s misleading democracy/autocracy struggle model are the views of one of Obama’s Russia advisors, Michael McFaul:

He attributes Russia’s hostility to further NATO expansion less to geostrategic calculations than to what he says is Mr. Putin’s cold war mentality. The essential Russian calculus, he says, is, “Anything we can do to weaken the U.S. is good for Russia.”

There’s that Cold War mentality again.

For the complete article, go to http://www.kciinvesting.com/articles/9254/1/Why-Georgia-Matters/Page1.html.

Speaking Engagements

Fall is the perfect time to enjoy Washington, DC’s outdoor treasures and catch a glimpse of nature’s splendor. And this year you can enjoy the immediate aftermath of the Presidential election in the seat if the federal government.

Join Neil George, Roger Conrad and Elliott Gue for the DC Money Show, Nov. 6-8, 2008, at The Wardman Park Marriott.

Go to www.moneyshow.com or call 800-970-4355 and refer to priority code 011364 to register as our guest.

We also have a special invitation for our readers. KCI Communications, Inc., is organizing an exciting 11-day investment cruise Dec. 1-12 through the Caribbean and Panama Canal. Participants will have the opportunity to meet and chat with my colleagues Roger Conrad, Gregg Early, Neil George and Elliott Gue.

This will be a unique opportunity to step away from your daily routines, relax in one of the most beautiful parts of the world and share analysts’ knowledge and passion for the markets. During the sail, you’ll not only explore the cerulean splendor of the Caribbean, but you’ll also delve deep into current markets in search of the most profitable opportunities for your portfolios. You’ll also have the rare chance to sail through one of the world’s engineering marvels, the Panama Canal.

It’s always a special treat to meet and talk with subscribers in person, and we couldn’t have picked a better setting than aboard the six-star Crystal Serenity. This is sure to be an especially memorable experience. We hope you’ll join us.

For more information, please click here or call 877-238-1270.