Monday, May 30, 2005


An 'exhastive study'/white paper on the potentials of the mining industry as enunciated by Secretary Defensor obtained over the internet. Learn, appreciate and enjoy...

What Can Mining Companies Expect in 2005 and Beyond?


Secretary Michael T. Defensor
Department of Environment and Natural Resources

(A paper presented during the Asia Mining Congress 2005 to on 21-24 March 2005 at the Oriental, Singapore)


The Philippines — situated in the so-called Pacific “rim of fire” — is a mineral-rich country. However, its vast mineral reserves remain untapped for a variety of socio-economic, legal and environmental reasons.

Mindful of the potential of mining in jumpstarting the Philippine economy, the Government has embarked on a program to revitalize the industry, guided by the principle of balancing mining development with socio-environmental concerns. With the recent decision of the Supreme Court allowing foreign investment in mining projects in the Philippines, the mining industry has been given a new impetus to fulfill its role in the economic development of the country.

The Philippine Mining Sector: A Situationer

The Philippine mining industry has only two (2) big mines in operation. Added to these are three (3) medium-scale chromite mines, four (4) medium-scale nickel mines and five (5) medium-scale gold mines with fifteen (15) cement plants and quarries at work.

There are currently 442,268.72 hectares of land covered by approved mining tenements covering 206 Mineral Production Sharing Agreements (MPSAs), 13 Exploration Permits (EPs), 2 Financial or Technical Assistance Agreements (FTAAs), and 310 Mining Lease Contracts/Patents.

Despite this meager picture compared to its potentials and glorious past, the mining industry in 2003 contributed PhP18.0 billion to the economy or 1.6% of the GDP and employed 104,000 Filipinos who received wages and benefits of up to PhP5 Billion. For each mining job, 4 to 10 allied jobs are created upstream and downstream. In 2002, the industry paid the government in taxes and fees amounting to PhP2.1 Billion with a paid-up investment of PhP367 Million.

Mining Potentials

Such minor contributions to the Philippine economy by the mining sector would be a thing in the past once the country’s mining potentials, now lying hidden beneath its lands and waters, are tapped in a responsible manner.

On-shore, nine (9) million hectares are high potential sites for copper, gold, nickel, chromite, and other minerals. With this mineral wealth, the Philippines has the potential to be in the top 10 largest mining power in the world. Sadly, only 1.4% of potential sites are now covered by mining permits.

Off-shore, the Philippine’s Exclusive Economic Zone (EEZ) covers 2.2 million square kilometers with mineral resources of Placer including gold, chromite, magnetite, and silica. It has also aggregate resources, manganese nodules/encrustations with associated copper, gold, zinc, cobalt, and Polymetallic sulfide deposits containing copper, cobalt and other minerals.

As of 1996, the mineral reserves of the Philippines were comprised of 6.67 billion metric tons of metallic and 78.472 metric tons of non-metallic minerals. A large part of the metallic reserves is copper (70%) followed by nickel (16%). Limestone and marble account for almost 85% of the non-metallic mineral reserves. A study conducted by East-West Center in 1994 estimated that about 11 new deposits under a “conservative estimate” and 25 deposits under a “most likely estimate” might be developed during the period 1995-2015. Such figures are fairly large relative to the land area of the country. This is the reason why there has been a renewed interest in setting up investments in the Philippine mining industry in recent years.

Recently, the government has identified twenty-three (23) potential medium to large-scale metallic mining projects estimated to have a gross value of mineral deposits of US$ 90.8 billion. The Philippine Government is, thus, expecting around US$ 6.5 billion in foreign direct investments with an annual sales/foreign exchange of US$ 3.4 billion. Annual excise tax from these projects is estimated to be US$ 61.4 million with annual corporate income tax of US$ 432 million. Above all, an estimated 200,000 direct and indirect employment would be generated. For the job multiplier effect alone of 10 allied jobs per mining job created, around 2 million jobs will be generated by these 23 identified mining projects. That is why, of the many sectors the DENR has in its mandate, only mining has been explicitly included in President Gloria Macapagal Arroyo’s Ten-Point Program of Government.

Indeed, the mining sector is standing up to its lofty calling. Mines of world-class quality are emerging from Luzon to Mindanao. In Luzon is the Lepanto Far Southeast Copper-Gold deposit, which is open for joint-venture partnership. In Mindanao is the Philex Boyongan Copper-Gold deposits under the joint-venture partnership of Philex Gold and Anglo-American, and the Tampakan Copper-Gold deposit under the consortium of JV of Sagittarius, Indophil, Xstrata and J.P. Morgan.

There are six (6) pipeline projects that are online nationwide. These are the Didipio Copper-Gold Project in Nueva Vizcaya, the Rapu-Rapu Polymetallic deposit and the Aroroy gold deposit, both in the Bicol area. The Palawan HPP Project in Palawan, the Canatuan gold project in Zamboanga del Norte, and the Diwalwal gold deposit in Davao.

Several other Copper-Gold projects are now in various stages of exploration. In Luzon, the Teresa gold project of Lepanto Consolidated; Padcal copper expansion project of Philex mines; the government-owned Batong-Buhay Copper-Gold project; and the San Antonio copper project of Marcopper. In the Visayas is the Atlas Copper project of Alakor Corporation while in Mindanao, are the government-owned Amakan copper-gold project and KingKing copper gold project of Benguet Corporation.

In addition, seven (7) other projects are also in the pipeline. The Itogon gold project in Benguet, the Mindoro nickel project in Mindoro island, the Siana gold project, Adlay nickel project, Nonoc nickel project and Nonoc iron fines projects, all in Surigao, as well as the Pujada nickel project in Davao.

Revitalizing the Mining Industry

Given the potential of mining in addressing both the fiscal difficulties facing the government and boosting the Philippine economy, the President has initiated a new paradigm from tolerance to active promotion of mining. This paradigm shift, however, is geared towards responsible mining, that adheres to the principles of sustainable development.

This led to the issuance of Executive Order No. 270 that provided for a set of principles that will govern the revitalization of the mining industry. Issued on January 2004, it has 12 guiding principles for responsible mining towards sustainable development, and calls for the formulation of a Minerals Action Plan.

The Minerals Action Plan was prepared by the Department of Environment Natural Resources (DENR) in collaboration with other government agencies and stakeholders. It contains 57 strategies and 126 activities to address the problems of mining, such as, the permitting system.

The 12 guiding principles – which are the points of convergence among the various positions of the stakeholders – further emphasize the government’s sincerity to only pursue responsible mining. These are:

  1. Recognition of the critical role of investments in the minerals industry in support of national development and poverty alleviation goals;
  1. Provision of clear, stable and predictable investment and regulatory policies to facilitate investments;
  1. Development of downstream industries or value-adding of minerals;
  1. Support to small-scale mining in order to rationalize their activities;
  1. Adoption of efficient technologies to ensure judicious extraction and optimum utilization of non-renewable mineral resources;
  1. Protection of the environment in every stage of mining operations;
  1. Safeguarding the ecological integrity of areas affected by mining;
  1. Pursuing mining within the framework of multiple land use;
  1. Rehabilitation of abandoned mines;
  1. Ensuring the equitable of benefits among direct stakeholders;
  1. Sustained information, education and communication ((IEC) programs and respect for the rights of the indigenous people and communities; and
  1. Continuous and meaningful consultations with stakeholders.

Recent Developments

Recent developments in the Philippine mining industry could be considered as bullish. Just before the end of 2004, the Supreme Court decided that the provision of the Philippine Mining Act of 1995 on foreign ownership in mining activities is legal. The High Tribunal affirmed the President’s prerogative to enter into Financial or Technical Assistance Agreement (FTAA) with foreign corporations to explore, develop and utilize the mineral resources “for the greater good of the greatest number of people.”

The Supreme Court decision paved the way for a more business-friendly investment climate and reduced the risks and apprehensions of investors, both foreign and Filipino business groups. The Highlight of the Decision is the affirmation that the Mining Act’s Implementing Rules and Regulations (IRR) and the Financial and Technical Assistance Agreement (FTAA) of Western Mining Corporation do not contravene the Philippine Constitution. It also noted that the Constitution expressly allows service contracts in the large-scale exploration, development and utilization of minerals, petroleum and mineral oils and that the State may undertake these activities via “agreements with foreign-owned corporations involving either technical or financial assistance” as provided by law. Likewise, the Supreme Court emphasized the need for an appropriate balancing of interest and needs – the need to develop the stagnating mining industry in order to jumpstart the floundering economy on the one hand, and on the other, the need to enhance nationalistic aspirations, protect indigenous communities, and prevent irreversible ecological damage.

Seeing the road clear, the Philippine Government conducted a mining roadshow to China this January, which generated around US$ 1.6 Billion in investment commitments. Together with the Philippine Chamber of Mines, an International Mining Investment conference was held at the New World Heritage Hotel in February 2-4 that saw the attendance of around 150 foreign investors and committed more than US$ 300 million in mining investments.

Significantly, the permitting system has been streamlined. It reduced by 57% the permitting process covering Exploration Permits; 54% covering the Mineral Production Sharing Agreements; 27% the process covering the certification of the National Commission on Indigenous Peoples (NCIP); and cut to 120 days the approval of the Environmental Compliance Certificate (ECC).

As a result, for the period covering January 2004 to February 2005, the DENR was able to issue twenty (20) Mineral Production Sharing Agreements; three (3) Mineral Processing Permits; One (1) Special Mines Permit; two (2) Exploration Permits renewals; and five (5) new Exploration Permits.

In a similar way, the government has opened new areas for investments by cancelling eighty-four (84) dormant mining permits and contracts covering 100,000 hectares to give way to serious investors. It is now in the process of cleansing mining applications including FTAAs covering 1.8 million hectares. Administratively, the DENR has significantly reduced the number of pending cases in the Mines Adjudication Board and the Panel of Arbitrators, both quasi-judicial bodies, handling the resolution of mining cases.

In a strategic manner, the government has identified its legislative agenda in support of responsible mining, which is crucial to win the support of the Local Government Unit (LGU). The DENR is supporting House Bill 1445 involving the direct remittance of LGU share on excise taxes. It is also supporting the proposed National Land Use Act to provide guidelines for the use and allocation of lands for mining purposes, and have recommended various incentives for pollution control devices.

Against the backdrop of the bullish scenario for the mining industry in view of the recent developments cited above, the government is aware that a large part of the population has some apprehensions, even strong opposition, in its revitalization for a number of legal and environmental reasons. That is why during the Mining Investment Conference in the Heritage Hotel, a parallel Stakeholders Forum on Mining was also conducted by the government on February 3 at Malacanang Palace with representatives from the industry, civil society, indigenous peoples, LGUs and church groups wherein the President gave assurance that her government will not sacrifice the rights of same stakeholders in the face of the capital flowing in for mining.

On the terrible side that mining has imprinted on the minds of the Filipino people, the DENR has already directed Marcopper, in a demand letter to fully undertake the recommendations made by the United States Geological Society (USGS) to rehabilitate the affected areas of Marinduque. The USGS recommendations fully address the engineering, environmental, social, health, and geological aspects of rehabilitating the areas affected by the accident of Marcopper in 1996.

Major Types of Mining Tenements in the Philippines

The Philippine Mining Act of 1995 provides for a variety of mining tenements designed to cater to the needs of foreign and local investors alike. The Exploration Permit is a two-year contract renewable for up to 8 years and grants exclusive right to explore and eventually enter into Mineral Agreement or Financial or Technical Assistance Agreement. The Mineral Agreement, on the other hand, is a 25-year permit and renewable for another 25 years consisting of Mineral Production Sharing; Co-Production; and Joint Venture modes of agreement with the government. The FTAA, which was recently considered by the Supreme Court as legal, is also a 25-year agreement renewable for another 25 years that needs the approval of the President. It involves large-scale mining operations with minimum committed investment of $50 Million for infrastructure and development. For mineral processing operations, a Mineral Processing Permit is issued covering a 5-year period but renewable up to 25 years. On the other hand, a 100% foreign participation is allowed under the Exploration Permit, FTAA and Mineral Processing Permit except for the Mineral Agreement which requires at least 60% Filipino ownership.

Mining Incentives

Mining companies can avail of fiscal and non-fiscal incentives granted under the Omnibus Investment Code of 1987.

These incentives are availed through tax exemptions in the form of Income Tax Holiday (ITH); exemption from taxes and duties on imported spare parts; and exemption from wharfage dues, and export tax, duty, impost and fees; tax credit on raw materials and supplies; and additional deductions from taxable income for labor expense and necessary and major infrastructure works. Non-fiscal incentives may also be availed of through employment of foreign nationals; simplified customs importation procedures and importation of consigned equipment for a period of 10 years.

In addition to these incentives, the Mining Act also grants incentives for pollution control devices; income tax carry forward of losses; income tax accelerated depreciation on fixed assets; and investment guarantees, such as, investment repatriation, earnings remittance, freedom from expropriation and requisition of investment and confidentiality of information.

For FTAA contractors (foreign-owned companies), an additional incentive, in the form of a tax holiday on national taxes, is granted from the start of the construction and development period up to the end of the cost recovery period, but not to exceed five years from the start of commercial operation. After the recovery period, the contractor starts paying these taxes, including an additional government share based on negotiated scheme.

Fortifying the Foundations for a Revitalized Minerals Industry

The Philippine Government remains steadfast in its thrusts to further fortify the foundations for a revitalized minerals industry by providing clear, stable and predictable policies, and further streamlining the procedures for mining applications and by providing a more stable fiscal regime and equitable sharing of benefits.

The DENR hopes to address the remaining environmental and social concerns by rationalizing environmental standards and further strengthening the protection measures and sureties provided in our laws.

Finally, with the implementation of the Minerals Action Plan the Government has now provided strategic direction for the development of our mineral resources.


With the easing out of the obstacles in eventually developing the Philippine’s mining potentials, the Government welcomes foreign companies to invest their money and expertise in achieving responsible mining in the country.

In partnership with the best in the global mining arena, the Philippines hopes to realize its vision for a minerals industry that is not only prosperous but also socially, economically and environmentally sustainable, with broad community and political support, while positively and progressively assisting in the government’s program on poverty alleviation and contributing to the general well-being of the nation.

Sunday, May 29, 2005

Bill Haynes: Abandoned Gold Standard Guarantees Inflation

Abandoned Gold Standard Guarantees Inflation
by Bill Haynes

In recent weeks, as prices have surged higher, "revived" inflation has become the topic du jour among establishment writers. Unfortunately, these writers point to the usual suspects, i.e. higher energy costs, higher interest rates, etc. In fact, the cause of inflation is the United States’ abandonment of the gold standard.

The United States’ abandonment of gold as the foundation of its monetary system came in two steps. In 1933, President Franklin Roosevelt ended Americans’ right to surrender paper dollars for gold and even to own gold bullion. Step two came in 1971 when President Richard Nixon "closed the gold window" and denied foreign governments the right to turn in paper dollars for gold.

Roosevelt’s move was a major step in shifting the world from the gold standard to the gold exchange standard. Under the gold standard, governments fixed the prices of their currencies in terms of a specified amount of gold and stood ready to convert their currencies into gold at the fixed prices.

Under the gold exchange standard, governments could hold U.S. dollars and British sterling as reserves because those currencies were "exchangeable for gold." The move to the gold exchange standard became official with the adoption of the 1944 Bretton Woods Agreement. When Nixon closed the gold window, those nations counting paper dollars as reserves found themselves holding paper instead of gold.

Although in 1974 President Gerald Ford signed legislation that permitted Americans again to own gold bullion, that legislation did not put the United States back on the gold standard.

Under the gold standard, a government is limited – both legally and practically – as to how much paper money it can print. As recently as the Lyndon Johnson administration, the U.S. could print paper dollars equal only to four times the value of the nation’s gold reserves.

Under the gold standard, governments that print too much paper money risk runs on their gold reserves. Runs occur as holders of the paper seek to convert to gold before the vaults are empty. A run on the dollar is what happened in the late 1960s, which culminated in President Richard Nixon closing the gold window in 1971.

"Closing the gold window" is a euphemism for the U.S. defaulting on its promise to other countries to redeem dollars for gold. As an alternative, Nixon could have devalued the dollar and continued to redeem. In effect, he chose a one hundred percent devaluation, a de facto default on the promise to redeem.

In the 34 years before Nixon closed the gold window, the money supply in the U.S. grew less than two fold. In the 34 years after Nixon’s action, the money supply expanded 13 fold. The Fed’s massive inflation of the 1990s resulted in the greatest advance in stock market history. Continued inflation is now pushing housing prices to record levels. Automobiles now cost more than houses did only thirty years ago.

Despite establishment assertions that the dollar is "sound," investors should prepare for further declines in the value of the dollar and plan their investments accordingly. History shows that no government, after going on a fiat monetary system, ever reverses course until its paper currency is destroyed. There is no reason to believe this time will be any different.

Bill Haynes [send him mail] has been a precious metals dealer since 1973. Bill starts his day reading’s selected articles. His website can be seen at

Copyright © 2005

Thursday, May 26, 2005

May2605 Phisix reflects Asian Equity Weakness

During the past sessions you’ve probably heard our so called market experts attribute the current sluggishness to either being caused by political uncertainties or to weak economic figures.

In particular, prior to the VAT’s enactment, most of the doldrums were heaped on it. However, despite last week’s VAT’s passage, market activities have failed to pick up. And with no headlines to impute on the market, the most likely culprit would be the sacking of the Estrada appointee NLRC chief who defiantly called for the ouster his new employer. Well, based on news accounts it appears that the malcontent had no specific charge but, as the usual, motherhood craps. While even today’s country credit rating upgrade by Fitch failed to inspire a rally!

Now since I am not in a habit of making headline analysis I opt to look at what has been developing in the market since the start of the week.

First it is noteworthy to mention that volume has shriveled remarkably. Peso volume turnover has averaged only a meager P 594.5 million! And yet about 38% of that is due to special block sales and cross transactions which leaves average board transactions to about only a dumbfounding P 368.59 million for the past 4 days!

Now if we take into account the participation of foreign money, then the recent dreariness could be deduced to foreign selling as overseas capital registered about P 95 million of outflows or about .4% of the cumulative turnover while dominating the trading activities with a 65% share! So with the VAT law in place and a credit rating upgrade, could it be that slower imports (lagging indicator) or politics be the culprit? My lowly hunch, NO!

Since foreign capital dictates upon the directional flows of the domestic market, then taking a broader view of the regional bourses should give us an idea of the current activities of 'hot money'.

The chart below shows that the Phisix (candlestick) appears to be tracing the moves of the Dow Jones Global 1800 Asia Pacific Index (red line)…

Phisix vis-a-vis Dow Jones Asia Pacific

In the face of tightening liquidity environment as evidenced by a flattening yield curve in the US, it appears that capital flows have currently been directed towards fixed income securities at the expense of Asian equities as the emerging market bonds have outperformed. We could likely expect the return of capital flows to equity markets as the interest rate hikes in the US will officially be suspended. Posted by Hello

Tuesday, May 17, 2005

Martin Spring: Positioning Yourself for a Tough Time

One of my favorite analyst Martin Spring argues that in the coming months, rising interest rate environment increases the risk prospects hence the financial markets may experience some degree of volatily or turbulence. However he also recommends of a rentry to equities particularly in the natural resources sector and in Asia when the US Federal Reserves CEASES to raise interest rates. While Mr. Spring thinks that this should transpire by next year, my opinion is that this will happen during the second semester of this year. I hope you enjoy reading his insightful article...

Martin Spring: Positioning Yourself for a Tough Time

The next few months are likely to be unpleasant for equity investors.

The period from May to October is usually (though not always) a time of stock market weakness. In America, the market has made very few gains during this period over the past half-century, the exceptions being during major bull markets (which we’re certainly not currently experiencing). In Britain, the worst months for equities since 1966 have been September, June, May, July and October (in that order). In Japan, too, average returns since 1970 have been almost exclusively negative over the June to November period.

So there is validity in the old British stock market adage: “Sell in May and go away, stay away till St Leger’s Day” (mid-September). “No wonder American traders prefer to wait until Halloween (31 October) before they buy back into their markets,” says James Ferguson in MoneyWeek.

Corporate earnings, whose strength has driven the bear-market rally of the past two years, will come under pressure from slowdown in all the major economies, higher energy and materials costs, and more expensive labour. In the US the biggest gains in productivity from applying infotech are coming to an end, while the costs of employment benefits, especially healthcare, are soaring.

Earnings growth in America peaked at around 20 per cent last year. HSBC Global Research predicts growth will fall to 10 per cent this year and to 2 per cent in 2006. The markets won’t like that, as rising profits have been an important rationale for share valuations that are high by historical standards.

Interest rates are likely to continue rising because we’re now in a phase of worsening inflation in the US and Europe. Because of the way equities are valued, this will make shares look “too expensive.” Costlier credit will also be a source of pressure on corporate earnings.

In particular, rising rates squeeze profits from financial services. The latter now account for an amazingly high share of corporate earnings. One study puts the figure at 44 per cent of all profits in America. And Marc Faber suggests this may even be a significant understatement, if you add in “financial earnings from industrial companies such as GE Capital and General Motors’ financial subsidiaries, and the profits earned by large multinationals from their treasury activities, which resemble hedge fund-type financial transactions.”

Global markets for all investments, not just equities, have been put on a starvation diet with the withdrawal of the massive stimuli that have boosted them in recent years – an abundance of credit creation by central banks, government spending increases and tax cuts. For various reasons, we’re not likely to see a repeat of those stimuli for some time. Meanwhile, ominously, the growth rate of global liquidity is plunging towards zero.

Economic growth and investment gains have been driven in recent years by one important chain reaction. It’s this… A real estate bubble in the Anglosphere has been inflated by cheap credit; which in turn has encouraged and made it possible for consumers to borrow heavily against the collateral of their rising home values to finance their profligate spending. In the past, the resulting boost to imports would have triggered a balance of payments crisis, devaluation and a big hike in interest rates. But that hasn’t happened this time, because exporting nations have been recycling their trade surpluses back into the bonds and bank deposits of the trade-deficit countries, holding down their interest rates and keeping their property bubbles expanding.

We’re now seeing early signs that this comfortable process may be about to come to a painful end. The real estate boom in some countries (Australia and Britain) is being choked off by softening demand – potential buyers can’t afford the high prices. And the cost of mortgage finance is creeping up.

In the US, consumers are so heavily in debt that they are starting to lose their enthusiasm for taking on more. And rising interest rates are making it harder for them to finance what they already owe.

There is now risk of some kind of financial crisis within the next 12 months, which would be a major shock to business and consumer confidence – and to the values of all except the most conservative investment assets, such as cash, gold and government bonds.

Years of cheap credit, with interest rates almost nothing in nominal terms and negative in real (inflation-adjusted) terms, have stimulated a global financial bubble of enormous proportions.

Managers of pension, insurance and trust funds, as well as banks, hedge funds and wealthy individual speculators, have been using cheap credit to buy exposure to risk in various forms, in their hunt for higher returns. One example of the extremes to which this has been taken, according to CLSA’s Christopher Wood, is “highly leveraged funds-of-funds invested in highly leveraged hedge funds.”

No one knows how large the financial bubble has become, nor how risky it is, as so many of the transactions involved are beyond the purview of regulators.

It would only take one unexpected event, such as a terrorist act, natural disaster or business shock (a fraud or bankruptcy involving a major group) to trigger a crisis that bursts the financial bubble, as those exposed to risk seek to unwind their positions or are forced to raise capital to cover them.

What conclusions should you draw from this increasingly threatening environment for your personal investment strategy?

Raise the cash in your portfolio relative to your equity holdings. Possibly raise your gold holding, too, as the metal now looks cheap.

Get out of, or at least reduce, your equity holdings in the most dangerous sectors such as finance, technology, media, and many of the cyclical industries. However gold mining should gain, while oil and natural gas and other sectors being sustained by China’s demand should be resilient in the downturn.

Shift from high-yield corporate and emerging-market bonds into lower-yield stuff, such as the government securities of major nations, particularly euro-denominated ones.

Use the next six months to research and prepare for major re-entry into equities. The best sectors to move into for the next major rally will probably be Asia and natural resources (especially energy).

The timing signal to watch for will be the first indication that the Fed is going to stop raising interest rates, and is about to resume its policy of pumping out abundant cheap credit.


May 17, 2005: Profuse Domestic Liquidity Will Eventually Flow to the Philippine Stock Market

I just find it quite amazing anent the correlation between the movements of our currency vis-a-vis the US dollar and the stock market, as I have pointed in the past.

Yesterday, as the Peso depreciated quite substantially, our market dropped. Last night, as the US dollar fell against the Euro and Yen, Wall Street recorded a ferocious rally. Meanwhile our Peso was trading modestly higher this morning and the Phisix rallied moderately. It just shows how money flows have been a big influence to the stockmarket's trajectory.

Talking about money flows, if you read today's newspaper about the recent Philippine domestic bond offering, the 91-day T-bill rates have sunk by as much as 14 basis points while the one year coupon dropped by a notable 17.2 basis points. The 91-day papers was almost 6 times oversubscribed (bidded volume was P 11.28 billion against an offer of P 2 billion.)! To quote Businessworld, "Liquidity is at an all-time high, you can see it in the bids," National Treasurer Omar T. Cruz told reporters after the auction." With all these local money sloshing around in an era of low yields it is quite a puzzle why the risk aversion towards the Philippine stock market considering that a 'home bias' is a natural predesposition among investors in general. (Maybe Filipinos simply don't trust in themselves.) Albeit, today's gains in the Phisix was largely fueled by local investors.

Nevertheless, historically, the previous bullmarket was driven by the locals before foreign money joined the bandwagon, could it be the other way around this time? Well, I am inclined to think that despite the warts and all, the Asian Growth story whereby the Philippines is constituent of, should eventually goad local investors back to their domicile market. By then the bull market phase would have been greatly amplified.

That's the way it looks from here,


Monday, May 16, 2005

Gail Jarvis A 'Benevolent Dictator'

This article published by reminds me of the clamor of certain sectors of the society to install a 'benevolent dictatorship' to rule the country, in the hope that, despite the past miserable outcome under the same fold of government, they may turnout to be a better solution to the country's malaise. This insightful piece by Mr. Javis should make us see through these illusions...

A 'Benevolent Dictator'
by Gail Jarvisby Gail Jarvis

In a recent discussion of the problems our country is facing, someone suggested that we need a "benevolent dictator" like Abraham Lincoln. A comment like this is usually made by a person who, like many Americans, has neither the time nor the inclination to look beyond the establishment’s portrayals of history. And court historians with the help of a complicit media, have prevented the true Lincoln from being unmasked for a generation or more. They admit that Lincoln was a dictator, but try to sanitize his actions as being those of a "benevolent dictator," dismissing his illegal and cruel acts as simply minor abuses of power.

Of course, with politicians, abuses of power are a common occurrence. Not a day goes by that we do not read about an elected official’s involvement in some kind of scandal. The more flawed the individual, the more serious the breach of ethics. But these unethical lapses do not usually threaten lives nor cause death. And that is the difference between a corrupt public official and a tyrant. The actions of dictators often cause the loss of lives, yet dictators believe that their actions are defensible because the end justifies the means, however harsh they may be.

Dictators do not feel bound by rules of law; their actions must not be questioned, they do not negotiate, and they silence or eliminate those who oppose their policies. Unfortunately, no form of government has been designed that can prevent the emergence of a tyrant. Dictators simply ignore or circumvent established laws by using cunning verbal platitudes. And too often, those with influence do not speak out against them until it is too late.

But, contrary to what court historians claim, there is no such thing as a benevolent dictator. A brief look at some of history’s more famous tyrants will show that they all were cast from the same mold and they were not benevolent.

Although he was Emperor of Rome for only four years, that was enough time for Caligula to create a legacy of barbaric cruelty. Caligula had been raised by his uncle, the Emperor Tiberius, who decreed that Caligula and his nephew, Tiberius Gemellus should succeed him as joint emperors. But Caligula had his nephew murdered in order to become sole emperor. Caligula soon depleted the treasury and had to impose heavy taxation, including a tax on prostitutes, in order to maintain his lavish, debauched lifestyle. Like most dictators, he aggressively silenced and eliminated any opposition, - primarily with "treason trials" for those he accused of "disloyalty." Conviction of treason was a foregone conclusion and those convicted were executed and their property confiscated. (So many so-called "criminals" were executed that there weren’t enough criminals to fight lions in the arena. On one occasion, Caligula became so peeved by the inadequate number of criminals that he literally ordered spectators to be dragged from their seats and placed in the arena to face the lions.)

Many believe that Caligula was insane and as evidence they cite his attempt to make his horse a senator. But this may have been the Emperor’s way of expressing what he thought of the Roman senate. Caligula created so many enemies that a member of his own guard finally assassinated him.

It shouldn’t surprise anyone that someone who becomes the absolute ruler of a nation at age three would eventually develop despotic tendencies. So it was with Ivan the Terrible who assumed the throne when he was three years old and became Russia’s first tsar at age sixteen. There were positive aspects of Ivan’s reign but they are overshadowed by his tyrannical actions. He enacted laws restricting the freedoms of peasants that eventually reduced them to virtual serfdom. Also, Ivan created the infamous Oprichnina; a personal security force whose purpose was to suppress those, primarily members of the nobility, who offered opposition to his actions. The Oprichnina murdered both nobles and peasants as Ivan viewed his rule as absolute and would not tolerate dissenters. Ivan murdered his own son during an argument. And history reports that a secret dose of poison caused Ivan’s death.

America’s founders thought they had fashioned a republic resistant to a dictatorship. But President Abraham Lincoln brushed aside the Constitution and the Bill of Rights that the Founders had so carefully constructed. "Saving the Union" was Lincoln’s excuse for refusing to meet with representatives from Southern states in order to attempt a negotiated compromise to the impending war. In true despotic fashion, Lincoln decided that there was only one way, his way, to save the Union. (Can you imagine George Washington, Thomas Jefferson or any of our other presidents refusing to attempt a negotiated compromise to a war; especially an internal war that would eventually cost the lives of over 600,000 young men?) Apparently, "saving the Union" was also Abraham Lincoln’s justification for waging war against defenseless civilians in Georgia, South Carolina and other parts of the South. In doing so he established a bloody precedent. Lincoln also shut down newspapers, arresting and imprisoning newspaper editors for being "disloyal."

An infamous example of Lincoln’s oppressive and illegal acts against civilians occurred in October 1862, in Palmyra, Missouri. The Union relied on secret informers to disclose the locations of Confederate sympathizers so they could be arrested. When their informer in Palmyra suddenly disappeared, General John McNeil ordered that a public decree be issued warning that if the informer was not returned within ten days, military forces would execute ten Palmyra civilians. The townspeople didn’t take the threat seriously because they couldn’t believe the federal government would ignore due process and certainly would not slaughter innocent civilians. However, when the informer was not located within the allotted time, ten civilians were selected by lottery and executed. (One was a nineteen year old man whose wedding had been scheduled for the day following his execution.) Newspapers in the South, the North and even Europe furiously condemned this murder of innocent civilians, labeling General McNeil the "Butcher of Palmyra." But President Lincoln rewarded McNeil by promoting him to Brigadier General of the United States Volunteers.

Lincoln conducted his presidency using the same techniques he had used as a country lawyer. He would support one position in one case, and the opposite position in another. And, although a non-believer, he laced his compassionate speeches to jurors with biblical quotations. His passionate, high-flown and manipulative rhetoric worked well with jurors and seems to be the only basis for today’s "Lincoln mythology." But Lincoln’s tyrannical behavior earned him the hatred of thousands of Americans and, as we know, one of those enraged Americans assassinated him.

The designation of history’s most notorious dictator might come down to a contest between Joseph Stalin, Benito Mussolini and Adolph Hitler. Although the enormity of Hitler’s atrocities still amazes us, his method of operation was no different from other dictators.Like Lincoln, Hitler also utilized the military to suppress any opposition to his policies. He shut down newspapers; had books burned, spied on and harassed ordinary citizens, and created concentration camps. Adolph Hitler also borrowed a page from Lincoln’s play book and converted the "saving the Union" ploy to "lebensraum" - living space - as justification for war. Whereas Lincoln had made Southern secessionists his scapegoat, Hitler blamed Germany’s problems on the Jews. So successful was Hitler’s propaganda machine that he was able to eliminate millions of European Jews. But Hitler’s grand scheme was too grandiose and unrealistic to succeed and when it eventually collapsed, the demoralized dictator took his own life.

Smaller nations have also been plundered by dictators as evidenced by Francois (Papa Doc) Duvalier of Haiti. One of Papa Doc’s first acts was the creation of a secret police force, the Tontons Macoute, that was used to silence and eliminate his opponents. In addition to the Tontons Macoute, Duvalier also had a Palace Guard and his own personal army. Like Lincoln, Papa Doc, claiming "seditious acts," arrested and jailed the country’s leading newspaper editors and radio station owners. Duvalier had his opponents executed and even went so far as to execute his own allies if he felt they were becoming too ambitious. Papa Doc was able to terrify the uneducated mass of Haitians into subservience by claiming to be a voodoo spirit of the dead. For years Duvalier duped Washington into giving him larger and larger sums of foreign aid, usually playing the race card by accusing America of leaving his "poor Negro Republic out in the cold." Although during his lifetime Papa Doc took in enormous amounts of foreign aid, he died leaving Haiti in financial ruin; a land of miserable slums filled with a homeless and starving populace.

These tyrants I’ve mentioned were all cut from the same cloth, all were seriously flawed individuals, and all are distinguished by their arrogance, an insistence on the absolute rightness of their opinions and a refusal to negotiate differences. History will remember them for their inhumane treatment of others, especially those who opposed their actions. The fickleness of destiny thrust each into a position of power for which they were unsuited, either by temperament or ability. Consequently, the lives of those they ruled were made worse by their appalling abuses of power.

But there are those who say that we mustn’t forget that Mussolini made the trains run on time; that Hitler planned and constructed the Autobahn, or that Lincoln "freed" the slaves. These rationalizations are supposed to mitigate the barbaric actions of these dictators. However, intelligent people are not fooled. Also these justifications are not true. Mussolini did not make the trains run on time. The corrections to Italy’s railway system began long before Mussolini came to power and even during his reign they were still sub-par. The construction of the German Autobahn began years before Hitler came to power. And, not a single slave was freed during Lincoln’s presidency as a result of any initiative of his - some slaves were voluntarily manumitted by their masters but not as a result of any government directive. Slaves were finally freed as a result of the 13th Amendment. When it was ratified, Lincoln had been dead for almost a year.

America’s current court historians are doing a great disservice to our country by trying to elevate a malicious dictator like Abraham Lincoln into sainthood. And the continued justification of the dictatorial acts of this president can only encourage the acceptance of dictatorial actions of current and future leaders.

Saturday, May 14, 2005

Robert Prechter: The Primary Preconditions for Deflation

Famed contrarian and deflationist advocate, Mr. Robert Prechter of the Elliot Wave International, seems to gloat over the recent US dollar’s successful breakout from its 3-year downtrend. In an article defining the preconditions of a deflationary environment, he implies that the rallying dollar and falling assets elsewhere are probable indications of these. Quoting at length Mr. Prechter...

Deflation requires a precondition: a major societal buildup in the extension of credit (and its flip side, the assumption of debt). Austrian economists Ludwig von Mises and Friedrich Hayek warned of the consequences of credit expansion, as have a handful of other economists, who today are mostly ignored. Bank credit and Elliott wave expert Hamilton Bolton, in a 1957 letter, summarized his observations this way:

In reading a history of major depressions in the U.S. from 1830 on, I was impressed with the following:

(a) All were set off by a deflation of excess credit. This was the one factor in common.

(b) Sometimes the excess-of-credit situation seemed to last years before the bubble broke.

(c) Some outside event, such as a major failure, brought the thing to a head, but the signs were visible many months, and in some cases many years, in advance.

(d) None was ever quite like the last, so that the public was always fooled thereby.

(e) Some panics occurred under great government surpluses of revenue (1837, for instance) and some under great government deficits.

(f) Credit is credit, whether non-self-liquidating or self-liquidating.

(g) Deflation of non-self-liquidating credit usually produces the greater slumps.

Self-liquidating credit is a loan that is paid back, with interest, in a moderately short time from production. Production facilitated by the loan – for business start-up or expansion, for example – generates the financial return that makes repayment possible. The full transaction adds value to the economy.

Non-self-liquidating credit is a loan that is not tied to production and tends to stay in the system. When financial institutions lend for consumer purchases such as cars, boats or homes, or for speculations such as the purchase of stock certificates, no production effort is tied to the loan. Interest payments on such loans stress some other source of income.

Contrary to nearly ubiquitous belief, such lending is almost always counterproductive; it adds costs to the economy, not value. If someone needs a cheap car to get to work, then a loan to buy it adds value to the economy; if someone wants a new SUV to consume, then a loan to buy it does not add value to the economy.

Advocates claim that such loans "stimulate production," but they ignore the cost of the required debt service, which burdens production. They also ignore the subtle deterioration in the quality of spending choices due to the shift of buying power from people who have demonstrated a superior ability to invest or produce (creditors) to those who have demonstrated primarily a superior ability to consume (debtors).

Near the end of a major expansion, few creditors expect default, which is why they lend freely to weak borrowers. Few borrowers expect their fortunes to change, which is why they borrow freely. Deflation involves a substantial amount of involuntary debt liquidation, because almost no one expects deflation before it starts.

Tuesday, May 10, 2005

World Bank Press: "A Paradox for Poor Nations: Inventors Face Big Barriers Where Entrepreneurs Are Most Needed"

A Paradox for Poor Nations: Inventors Face Big Barriers Where Entrepreneurs Are Most Needed
World Bank Press

The World Bank has begun an annual survey cataloging the hazards of starting a business in 145 countries. It discovered that, in many poor nations, heavy regulation and red tape impede enterprise. It takes 153 days to start a business in Mozambique, for example, but two days in Canada. Enforcing a contract in Indonesia can cost more than the contract's actual value; doing the same in South Korea costs just 5.4 percent of a contract's value, reports The Wall Street Journal (05/09).

The Philippines exemplifies the World Bank's central finding, writes the business daily: Poor countries with the greatest need for entrepreneurs to speed growth and create jobs also put the most obstacles in their way. Corruption is a large part of why these bureaucratic logjams persist: The more roadblocks there are, the more opportunities for underpaid government officials to secure kickbacks. But there are other impediments to regulatory overhaul. The World Bank report noted that trade unions prevented Peru from reducing mandatory severance payments, while notaries in Croatia for years have stalled its efforts to simplify procedures to start businesses.

While many other Asian countries have produced successive generations of self-made business leaders since World War II, the people who dominate business and innovation in the Philippines are either foreigners or well-entrenched local business families, frequently led by ethnic-Chinese patriarchs such as beer-and-tobacco tycoon Lucio Tan. With the possible exception of Tony Tancaktiong, founder of the successful Jollibee Foods Corp. fast-food chain, a kind of Philippine McDonald's, few others have joined the country's wealthy elite in decades. The upshot is that the Philippine economy is unusually shallow in terms of vibrant home-grown commercial enterprises. Electronic components made there by foreign companies account for 70 percent of all exports, largely because there are few indigenous products to export except bananas, fish and furniture made from local timber. Former Trade Secretary Cesar Purisima, in an interview before his recent appointment as the Philippines' finance secretary, says the country's business culture is flawed. "Traditionally, Filipinos have sought high-paying jobs in banks and corporations rather than setting out on their own," Purisima says. "We have to try to change that and make it easier for entrepreneurs to emerge."

For the Philippines, excessive regulation and the banking system are two big obstacles to local entrepreneurship. The World Bank's business survey found it took 50 days to establish a new business in the Philippines at a cost of 20 percent of the country's average per capita gross national income. That compares with eight days and 1.2 percent of per capita income in Singapore and 33 days and 6.7 percent in Thailand. And banks here traditionally have been more reluctant to lend to up-and-coming entrepreneurs than banks elsewhere in Asia, economists say. In recent years, the country has also been slow to clean up nonperforming loans originating during Asia's financial crisis in 1997-98, further crimping banks' ability to lend to people who often have little more than their ideas to offer as security.

Sunday, May 08, 2005

Dow Jones to Underperform Relative to Emerging Markets Over the Coming Years

Even with the recent bounce in the US equity markets it is my view that over the coming decade or so they will underperform relative to Emerging Markets.

Dow Jones 200 Year chart courtesy of BCA Research

Looking at the BCA Research 200-year chart, the US Dow Jones Industrial Averages periodically hits critical points and fluctuates within the level for a span of years before advancing. This suggests that returns would likely be in low single digits or even negative. BCA expects the 10,000 to hold gyrate within the decade. Quoting BCA, “This level has been a barrier this decade, and a broad trading range around the 10,000 level should persist for many years. We are cyclically bearish on U.S. equities, and the Dow should drop below 10,000 before a Fed rate pause and lower bond yields provides relief. The longer-term outlook remains uninspiring, because stocks are not cheap, and the post-1981 era of plunging interest rates and rising P/E ratios is mature. Bottom line: equity investors must play the cycles in order to generate decent returns, and our current advice is to stand aside.”

Where money moves where it is treated best, it looks as if emerging market assets would benefit from a US underperformance

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The Cure Is Worse Than The Disease

The Cure Is Worse Than The Disease

``A government that is big enough to give you all you want is big enough to take it all away.” - Barry Goldwater, (1909-1998) ex-US Senator

I would like to point out that in spite of the bunch of incorrigible weenies crying for the scalp of the government, the firming Peso and the buoyant Philippine Stock Market is proving these naysayers wrong, thus far.

Yes, we Filipinos are soooOOOooo endemically fragmented to find pleasure in intrigues and controversies such that a foreign writer once labeled us as having a ‘Damaged Culture’. Why so? Not simply because bad news sells, but in the Philippine setting, perpetual gloom and doom is deeply ingrained in our culture because alot of us try to be self styled improvers.

Like political butterflies that jump from one party to the other, there won’t be satisfaction unless power is bequeathed upon them. As Eric Hoffer wrote in his book the True Believer (p.14), ``A man is likely to mind his own business when it is worth minding. When it is not, he takes his mind off his own meaningless affairs by minding other people's business.' This minding of other people's business expresses itself in gossip, snooping and meddling, and also in feverish interest in communal, national, and racial affairs. In running away from ourselves we either fall on our neighbor's shoulder or fly at his throat.” Yes for a start maybe we should comprehensively identify and accept our shortcomings, and work for the collective betterment instead of simply minding someone else’s business.

Take the case of the recent group of improvers or messiahs agitating for an ouster of the incumbent government. These seditious buttheads offer NO CONCRETE viable alternative programs on how to manage the government yet, in the pursuit of power, they would opt to risk the already tenuous financial position that the country is into.

Let me cite an example, because high energy prices have percolated to the consumer goods and services (headline inflation), they clamor for a repeal of the Oil Deregulation Act and to either reinstitute the defunct Oil Price Stabilization Fund (OPSF) or worst, Nationalize the oil industry to head off higher consumer prices.

They expect the government to takeover the buying and selling functions of oil at prices fixed or predetermined and not on market terms. If oil prices in the world market falls below the pegged levels oil companies then will have to pay the difference so the government could shore up its buffer, and if oil prices moved higher than the pegged prices then the government would have to draw out from its buffer to pay the oil companies. The idea looks theoretically plausible but is predicated upon a stable/less volatile global oil price environment. For if oil prices continue to race higher and the buffer is depleted then the government’s recourse would be, needless to say, to borrow money to cover the buffer.

In effect, they are asking for more government subsidies in an era of RISING oil prices (Crude Oil is in a bullmarket for already about 5 years~ with more to come!!!). This translates to BOATLOADS of ADDITIONAL DEBTS for a country at the throes of an economic ‘crisis’. They are prescribing short term gains (relief) at the cost of the future. It is a case of the ‘cure is worst than the disease’.

3 year Chart of New York’s Crude Oil WTIC

Even while their representative economist acknowledges that India and Indonesia have been undertaking policy changes to lift energy subsidies, their pronounced leader have steadfastly espoused on this feckless government interventions.

Yet, in the same mold they refuse to bite bullet with increased taxes (VAT) while the members of clergy included in the group are staunchly opposed to the MINING Act. Imagine, crying for an ouster of the government on xenophobic grounds, of course, they have not directly said it (albeit outspoken detractors during the recently ratified Mining Act of 1995 last December) but instead used the public’s angst on higher consumer prices to promote their outmoded leftist ideals. Nonetheless, the typical scapegoat of corruption remains as the byword for the touted radical change.

So what solutions do they offer?

On the revenue side, they refuse the direly needed additional Taxation and yet reject access and development to an industry that may uplift and alleviate the country’s economic status.

On the spending side, they espouse on more government subsidies to pacify the public’s present predicament which is a result of an intricate WORLDWIDE phenomenon and NOT of a domestic one, and cries to expand government presence to cleanse itself.

The probable result, La plus ca change, la plus c'est la meme choses. The more things change, the more things stay the same.

In addition, how can they curb the de rigueur culprit the ‘corruption’ malaise when expansive government is one of its major causes? According to economist Christopher Lingle, in his article Graft Goes Hand in Hand With Big Government (also posted at my blogsite)…

``Instead of expanding political power to eradicate corruptive practices, the opposite is needed. An essential problem with corruption is that it most often promotes excessive government power, so reducing political intervention in people's lives is the right direction. A distrust of the private sector and unfettered markets invites regulation by public officials that issue licences and permits. But these monopolistic powers meant to serve citizens create power imbalances that can impose harm on citizens that face incentives to protect themselves through bribery. Instead of moralising to prevent public graft, it is better to undertake legal reform of the institutional infrastructure. A fundamental change in political culture combined with a shift away from granting governments with extensive powers of intrusion can help root out corruption.”

Finally, these self-righteous imbeciles should as well train their guns on the following:

1. US Federal Reserve for expanding credit to an unprecedented scale and its negative real interest rate policy which fueled massive speculative positions globally,

2. The excess printing of paper monies by the collective governments stoking an inflationary environment,

3. The OPEC members for nationalizing their respective oil industries thereby misallocating capital investments that led to the present underinvestments,

4. The Chinese government for adapting a market-based economy (from less than 100,000 cars in 1994 to over 2 million cars 2004),

5. The US dollar-remimbi peg that accelerated an infrastructure and real estate boom thereby increasing demand for oil,

6. The war on terror that has disrupted oil supplies,

7. The Bush administration for the continually loading up the Strategic Petroleum Reserve, and

8. The lawyers and environmentalists for increased regulations on explorations and oil refinery requirements.

Does a change in the administration alter any of these landscapes? I guess not.

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