Keep an eye on it
Jul 8th 2004
From The Economist print edition
After a buoyant start to the year, the dollar seems headed for a tumble
THERE was a time, not long ago, when economists and those who dabble in the foreign-exchange market could find scarcely a good thing to say about the dollar. Last year, John Snow, America's treasury secretary, even managed to transform his country's long-standing strong-dollar policy into a weak-dollar one. All this greatly irritated Europeans, especially; as the euro rose, international meetings of the great and the good were dominated by cross discussions about the beleaguered buck. Newspapers, including this one, were full of gloomy headlines suggesting that the greenback would, indeed should, fall farther.
So it did, for a while: by early January, the dollar was worth a quarter less, in trade-weighted terms, than it had been two years before. But when everyone is betting that a market will go one way, it often goes the other. By mid-May, the dollar had risen by 8%, bucked up, as it were, by the Bank of Japan, which bought ¥14.8 trillion ($138 billion) of foreign exchange in the first quarter, almost all of it dollars, in comfortably the largest-ever act of intervention by a central bank. Then, quietly, the dollar started to drop. By July 6th, it had fallen by 4.3% from its high. Not surprisingly, perhaps: the dollar's prospects look even worse now than they did last year.
The dollar's recent decline may seem puzzling, for it began while expectations were mounting that the Federal Reserve was about to put up interest rates. The decline has continued since those expectations were confirmed on June 30th. Rising interest rates, you might have thought, would halt any such decline.
That is true only up to a point. As the American economy brought forth jobs in the spring, and the markets started to expect that the Fed would increase rates sooner rather than later, the dollar was boosted. A prime reason was that traders who had previously borrowed greenbacks in order to exchange them for other, higher-yielding currencies now needed to buy them back in a hurry. Lately, however, softer economic data have sown the idea that the Fed might not have to raise rates so far and fast after all. That has done the dollar no favours in recent days.
In the longer term, though, higher interest rates may be a curse for the dollar, not a blessing. To see why, look at that large and growing thing that goes under the name of America's current-account deficit. A country's current-account essentially comprises two things: the trade balance and net income from foreign investments. America runs a trade deficit that in April amounted to $48.3 billion, up from $46.6 billion in March. This alone implies an annual deficit pushing $600 billion, or 6% of GDP. The current-account deficit would be greater still if America did not make more money on its investments abroad than foreigners earn in the United States.
That it makes a profit is odd, because it has net foreign liabilities (ie, the value of Americans' assets abroad is less than that of foreign claims on America). According to the Department of Commerce's Bureau of Economic Analysis, net liabilities amounted to 24% of GDP last year. America has an investment-income surplus because yields are much lower at home than abroad. All things equal, says Goldman Sachs, a yield of 6% on ten-year Treasuries would add 1% of GDP to the current-account deficit within a few years.
Economists fret about America's current-account deficit because it is a measure both of America's ability (or inability) to save and its attractiveness to foreign investors. The country's heady growth of recent years has relied on foreigners' willingness to invest there: Americans, in effect, spend other people's money. That need not matter when the sums are small, but it does when they are large and getting larger. Most economists believe that at some point the dollar will need to get cheaper, maybe much cheaper, to encourage foreigners to finance the deficit. That point may be at hand.
There are two weighty pieces of evidence to support this view. The first is that America started this latest recovery much deeper in hock to the rest of the world than it did previous ones, says John Llewellyn, the chief economist at Lehman Brothers. As the chart overleaf shows, America has usually started to pull out of recession with its current account roughly in balance. This time, it began with a deficit of 3.2% of GDP. Because growth tends to increase the deficit—America has sucked in imports and borrowed more—the deficit has widened. “I can easily imagine it going to 7% and beyond,” says Mr Llewellyn.
The second piece of evidence comes from investors' behaviour. Some say that the deficit is not a problem, but simply reflects foreigners' boundless desire to invest in a vibrant economy. This may have been true once, but not any more. Net foreign direct investment (FDI) was negative, to the tune of $155 billion, in the past 12 months, says Goldman Sachs. This ought to be no surprise: in the first quarter returns on FDI in America were 5.5%, while those on FDI abroad were 11.7%.
In recent years, the current-account deficit has instead been financed by (less stable) portfolio flows into stocks and bonds. In the past year, three-quarters of such investment in America has gone into bonds. The biggest buyers have been Asian central banks, trying to keep their currencies from rising too swiftly against the dollar (or maintaining a fixed rate, in China) and parking the money in Treasuries.
But this intervention has had a cost: inflation. Because the central banks bought the dollars with newly minted local currency, inflationary pressures have risen throughout Asia. This is fine for Japan, which has deflation, but not for its neighbours. Intervention thus seems to have stopped; even Japan turned off the tap in March. The central banks might, of course, wade back in if their currencies rose too much. But given the risk of inflation, it would be brave to bet on this. And if they do not buy the buck, who will?
Friday, July 09, 2004
July 9 The Philippine Stock Market Review
July 9 The Philippine Stock Market Review
Local investors were on selling spree as the Philippine equity market resumed its consolidation. The 30 company composite bellwether slipped a slight on .19% or 3.01 points as three index heavyweights decliners, namely Metrobank (-1.81%), SM Primeholdings (-1.61%) and San Miguel foreign or B shares (-1.42%) pounded on the sole advancer Ayala Corp (+1.81%). Ayala Land, Globe Telecoms, San Miguel local or A shares, Bank of the Philippine Islands and PLDT closed unchanged.
Declining issues led advancing issues 44 to 27, while industry indices were all in the red except for the mining index, portraying a broad market sell off in today’s trading. Aside, foreign capital saw more liquidations than accumulations although net foreign capital reported a positive P 36.149 million of inflows mostly due to the large acquisitions PLDT shares. Foreign trading activities contributed nearly three-fourths or 74.5% of today’s aggregate output, which suggests that foreign buying on select issues buoyed the market as most local investors reduced their portfolio positions or stayed on the sidelines.
The most conspicuous losers were the oil issues represented by its index that dived by a horrid 11.05%. Oriental Petroleum the index’s largest market cap crumbled by 9.09% while its Foreign or B shares collapsed by 13.04%. Philodrill, the second largest component of the index, saw its local shares stumble by 9.09% while its foreign shares crashed by 18.51%. Both of these companies are participants in the latest oil drilling project the Service Contract 41 led by the US energy company UNOCAL consortium at the Sandakan Basin in the Sulu Sea. Basic Consolidated another key participant likewise saw its shares shrivel by 11.76%. The frenetic selling could probably be due to insider information on the status of the oil drilling. This could be interpreted as a possible negative find in its second well, the Rhino-1. Curiously though, while the drilling has yet to hit its desired depth, as of July 7th, according to the DOE, “gas readings of 67,200 ppm or 336 units and 74,600 ppm or 382 units were encountered while drilling the well at a measured depth of 4,500 and 4,454 feet, respectively”, since these are engineering data and beyond our ambit of expertise for discernment, by the market’s response to the news, it may be well assumed that the disclosure probably signifies insufficient or non-commercial quantity of gas finds. However, once again, the targeted distance has yet to be reached by the consortium.
Local investors were on selling spree as the Philippine equity market resumed its consolidation. The 30 company composite bellwether slipped a slight on .19% or 3.01 points as three index heavyweights decliners, namely Metrobank (-1.81%), SM Primeholdings (-1.61%) and San Miguel foreign or B shares (-1.42%) pounded on the sole advancer Ayala Corp (+1.81%). Ayala Land, Globe Telecoms, San Miguel local or A shares, Bank of the Philippine Islands and PLDT closed unchanged.
Declining issues led advancing issues 44 to 27, while industry indices were all in the red except for the mining index, portraying a broad market sell off in today’s trading. Aside, foreign capital saw more liquidations than accumulations although net foreign capital reported a positive P 36.149 million of inflows mostly due to the large acquisitions PLDT shares. Foreign trading activities contributed nearly three-fourths or 74.5% of today’s aggregate output, which suggests that foreign buying on select issues buoyed the market as most local investors reduced their portfolio positions or stayed on the sidelines.
The most conspicuous losers were the oil issues represented by its index that dived by a horrid 11.05%. Oriental Petroleum the index’s largest market cap crumbled by 9.09% while its Foreign or B shares collapsed by 13.04%. Philodrill, the second largest component of the index, saw its local shares stumble by 9.09% while its foreign shares crashed by 18.51%. Both of these companies are participants in the latest oil drilling project the Service Contract 41 led by the US energy company UNOCAL consortium at the Sandakan Basin in the Sulu Sea. Basic Consolidated another key participant likewise saw its shares shrivel by 11.76%. The frenetic selling could probably be due to insider information on the status of the oil drilling. This could be interpreted as a possible negative find in its second well, the Rhino-1. Curiously though, while the drilling has yet to hit its desired depth, as of July 7th, according to the DOE, “gas readings of 67,200 ppm or 336 units and 74,600 ppm or 382 units were encountered while drilling the well at a measured depth of 4,500 and 4,454 feet, respectively”, since these are engineering data and beyond our ambit of expertise for discernment, by the market’s response to the news, it may be well assumed that the disclosure probably signifies insufficient or non-commercial quantity of gas finds. However, once again, the targeted distance has yet to be reached by the consortium.
CATO Institute: Good as Gold
Good as Gold
by Gerald P. O'Driscoll, Jr.
Gerald P. O'Driscoll, Jr., former vice president of the Federal Reserve Bank-Dallas, is a senior fellow at the Cato Institute.
"It is not easy to be born again." H. David Willey, a retired official with the New York Fed, framed the central problem confronting advocates of a return to a gold standard: how to effect a rebirth of gold. The occasion was a recent conference at the American Institute for Economic Research (AIER), nestled in the Berkshire Mountains of Western Massachusetts.
For 70 years, AIER has advocated a return to the classical gold standard, one in which gold coin actually circulates. What is surprising, however, is that a diverse group of academics, businessmen, and investors-- including at least our retired officials of the Federal Reserve System--gathered at AIERs campus to seriously discuss an issue with no apparent policy traction.
Inflation has been benign for a decade. We have been on the Greenspan standard, which until recently has been viewed "as good as gold." Chairman Greenspan's recent suggestion to bankers that the Fed might need to move aggressively to combat inflation called that conviction into question.
Financial markets have been fretting for some time about inflation. In a nation at war, the federal budget is bloated by a "guns and butter" policy of a president with an ambitious domestic agenda coupled with a forward defense posture. Monetary policy has been expansionary. Oil prices are setting records, at least in nominal terms, and there is a serious threat of further supply disruptions.
In short, many of the problems confronting Ronald Reagan when he took office as the nation's 40th president in 1981 are now present or anticipated. The Reagan administration is the last time a gold standard was seriously considered. In 1981, Congress agreed to an increase in the U.S. quota to the International Monetary Fund on the condition that a gold commission be appointed Senator Jesse Helms crafted that compromise.
Professor Anna J. Schwartz, who served as staff director of the U.S. Gold Commission, provided a concise history of the deliberations of that commission. The commission was highly politicized; the Fed was adamantly opposed to a return to gold; and the Reagan administration never backed a gold option. The commission issued an inconclusive report to Congress on March 31, 1982.
Gold proponents have long been critical of Professor Schwartz for having been hostile to gold, a charge she vigorously denied at the conference. Indeed, she buoyed the spirits of gold adherents by saying that it was time once again to seriously look at the operation of the gold standard.
There was consensus among the participants at the AIER gold conference on two points. First, monetary reform comes only as a consequence of economic and financial crisis. No one wished for such a crisis, but some feared we may be on the cusp of one. Second, the price at which gold and the dollar were pegged would be critical for the success or failure of any return to gold.
On the second point, there was no agreement on a figure for the peg. In a paper provocatively titled "Will the Gold in Ft. Knox be Enough?" Professor Lawrence H. White argued that, at a price of $400 per ounce of gold, there would be more than enough gold reserves for a return to the gold standard. Other participants suggested a much higher price would be required.
On the first point, Lee Hoskins, a former president of the Cleveland Fed, articulated the concerns of many. The central bank is once again behind the policy curve. The federal funds rate, the short-term interest rate at which commercial banks borrow from each other and which the Fed targets, is too low - perhaps two hundred basis points (two percentage points) too low.
The Fed has signaled that it will follow a gradualist approach to raising the federal funds rate. If past is prologue, then what economists call the "equilibrium" interest rate will rise more rapidly than the Fed ratchets up the funds rate. (The equilibrium interest rate is one at which is there is no inflationary pressure.) If that occurs, inflation will accelerate. The answer to Professor White's question might then become more than an academic exercise.
by Gerald P. O'Driscoll, Jr.
Gerald P. O'Driscoll, Jr., former vice president of the Federal Reserve Bank-Dallas, is a senior fellow at the Cato Institute.
"It is not easy to be born again." H. David Willey, a retired official with the New York Fed, framed the central problem confronting advocates of a return to a gold standard: how to effect a rebirth of gold. The occasion was a recent conference at the American Institute for Economic Research (AIER), nestled in the Berkshire Mountains of Western Massachusetts.
For 70 years, AIER has advocated a return to the classical gold standard, one in which gold coin actually circulates. What is surprising, however, is that a diverse group of academics, businessmen, and investors-- including at least our retired officials of the Federal Reserve System--gathered at AIERs campus to seriously discuss an issue with no apparent policy traction.
Inflation has been benign for a decade. We have been on the Greenspan standard, which until recently has been viewed "as good as gold." Chairman Greenspan's recent suggestion to bankers that the Fed might need to move aggressively to combat inflation called that conviction into question.
Financial markets have been fretting for some time about inflation. In a nation at war, the federal budget is bloated by a "guns and butter" policy of a president with an ambitious domestic agenda coupled with a forward defense posture. Monetary policy has been expansionary. Oil prices are setting records, at least in nominal terms, and there is a serious threat of further supply disruptions.
In short, many of the problems confronting Ronald Reagan when he took office as the nation's 40th president in 1981 are now present or anticipated. The Reagan administration is the last time a gold standard was seriously considered. In 1981, Congress agreed to an increase in the U.S. quota to the International Monetary Fund on the condition that a gold commission be appointed Senator Jesse Helms crafted that compromise.
Professor Anna J. Schwartz, who served as staff director of the U.S. Gold Commission, provided a concise history of the deliberations of that commission. The commission was highly politicized; the Fed was adamantly opposed to a return to gold; and the Reagan administration never backed a gold option. The commission issued an inconclusive report to Congress on March 31, 1982.
Gold proponents have long been critical of Professor Schwartz for having been hostile to gold, a charge she vigorously denied at the conference. Indeed, she buoyed the spirits of gold adherents by saying that it was time once again to seriously look at the operation of the gold standard.
There was consensus among the participants at the AIER gold conference on two points. First, monetary reform comes only as a consequence of economic and financial crisis. No one wished for such a crisis, but some feared we may be on the cusp of one. Second, the price at which gold and the dollar were pegged would be critical for the success or failure of any return to gold.
On the second point, there was no agreement on a figure for the peg. In a paper provocatively titled "Will the Gold in Ft. Knox be Enough?" Professor Lawrence H. White argued that, at a price of $400 per ounce of gold, there would be more than enough gold reserves for a return to the gold standard. Other participants suggested a much higher price would be required.
On the first point, Lee Hoskins, a former president of the Cleveland Fed, articulated the concerns of many. The central bank is once again behind the policy curve. The federal funds rate, the short-term interest rate at which commercial banks borrow from each other and which the Fed targets, is too low - perhaps two hundred basis points (two percentage points) too low.
The Fed has signaled that it will follow a gradualist approach to raising the federal funds rate. If past is prologue, then what economists call the "equilibrium" interest rate will rise more rapidly than the Fed ratchets up the funds rate. (The equilibrium interest rate is one at which is there is no inflationary pressure.) If that occurs, inflation will accelerate. The answer to Professor White's question might then become more than an academic exercise.
Thursday, July 08, 2004
World Bank: In Latin America, Civil Society Mobilizes Against Corruption
In Latin America, Civil Society Mobilizes Against Corruption. Transparency International estimates that bribes represent 10 percent of the value of public contracts in Latin America, reports Le Figaro (France). In central America, from Guatemala to Panama, the population is increasingly expressing its exasperation with the endemic phenomenon of corruption.
Salvador is currently rocked by the Anda affair, the French daily explains. The director of Anda, the national company in charge of the distribution of water, was arrested on charges of embezzlement of $6.1 million. Alfonso Portillo, ex-president of Guatemala, is under investigation for the creation of fourteen bank accounts in Panama and the embezzlement of $50 million in public funds. And Arnoldo Aleman, Nicaragua’s president between 1997 and 2002, was condemned to 20 years in prison for having organized a financial bridge between fifteen ministries and Panama, through which transited $97.2 million.
Meanwhile, the World Bank notes that corruption can cut a country’s GDP growth by 0.5 to 1 point. According to Transparency International’s annual Global Corruption Report, Honduras scored the lowest in 2003 with a score of 2.3 (out of 10, meaning complete transparency). Guatemala scored 2.4, Nicaragua 2.6, Panama 3.4, lower than Mexico’s 3.6 and Brazil’s 3.9 scores. Jaime Lopez, director of the association “Probidad,” based in Salvador, explains the paradox : “When a Brazilian politician embezzles $50 million, he doesn’t affect the economic stability of his country. In Central America, the impact is much stronger - $50 million is the budget of a ministry. A scandal like that of Anda in Salvador, compromised the production of drinkable water for a fourth of the country’s population.” The daily explains that an additional problem is that given the small size of the Central American states, corruption networks tend to melt into each other, as the Aleman affair demonstrates. This internationalization invalidates national audits.
Meanwhile, in a related piece, Le Figaro writes that in Mexico, corruption is costing more than national education. The World Bank estimates that corruption is engulfing 9 percent of Mexico’s GDP, compared to the 6.8 percent dedicated to national education. But Eduardo Romero-Ramos, director of the government’s anti-corruption program, explains that the situation has been getting better since 1997. He cites examples of an initiative the government is taking to curb corruption: by giving greater access to new technologies to the population, the government hopes to reduce the number of encounters between individuals and officials, and hence the temptation of bribery.
Furthermore, thanks to the adoption of a law on transparency one year ago, any citizen can access the government’s internet portal and request justifications of the government’s expenditures. This operation was funded by loans from the World Bank, amongst other lending bodies.
As for the financing of political parties, legislation is gradually limiting candidates’ access to private funds. Romero-Ramos points out that Federal Electoral Commission condemned Mexican President Vicente Fox’s party to very high fines for the irregularities in the financing of his campaign.
Salvador is currently rocked by the Anda affair, the French daily explains. The director of Anda, the national company in charge of the distribution of water, was arrested on charges of embezzlement of $6.1 million. Alfonso Portillo, ex-president of Guatemala, is under investigation for the creation of fourteen bank accounts in Panama and the embezzlement of $50 million in public funds. And Arnoldo Aleman, Nicaragua’s president between 1997 and 2002, was condemned to 20 years in prison for having organized a financial bridge between fifteen ministries and Panama, through which transited $97.2 million.
Meanwhile, the World Bank notes that corruption can cut a country’s GDP growth by 0.5 to 1 point. According to Transparency International’s annual Global Corruption Report, Honduras scored the lowest in 2003 with a score of 2.3 (out of 10, meaning complete transparency). Guatemala scored 2.4, Nicaragua 2.6, Panama 3.4, lower than Mexico’s 3.6 and Brazil’s 3.9 scores. Jaime Lopez, director of the association “Probidad,” based in Salvador, explains the paradox : “When a Brazilian politician embezzles $50 million, he doesn’t affect the economic stability of his country. In Central America, the impact is much stronger - $50 million is the budget of a ministry. A scandal like that of Anda in Salvador, compromised the production of drinkable water for a fourth of the country’s population.” The daily explains that an additional problem is that given the small size of the Central American states, corruption networks tend to melt into each other, as the Aleman affair demonstrates. This internationalization invalidates national audits.
Meanwhile, in a related piece, Le Figaro writes that in Mexico, corruption is costing more than national education. The World Bank estimates that corruption is engulfing 9 percent of Mexico’s GDP, compared to the 6.8 percent dedicated to national education. But Eduardo Romero-Ramos, director of the government’s anti-corruption program, explains that the situation has been getting better since 1997. He cites examples of an initiative the government is taking to curb corruption: by giving greater access to new technologies to the population, the government hopes to reduce the number of encounters between individuals and officials, and hence the temptation of bribery.
Furthermore, thanks to the adoption of a law on transparency one year ago, any citizen can access the government’s internet portal and request justifications of the government’s expenditures. This operation was funded by loans from the World Bank, amongst other lending bodies.
As for the financing of political parties, legislation is gradually limiting candidates’ access to private funds. Romero-Ramos points out that Federal Electoral Commission condemned Mexican President Vicente Fox’s party to very high fines for the irregularities in the financing of his campaign.
July 8 The Philippine Stock Market Review
The Phisix continued with its sideways movement as the declines of the FOUR major index heavyweights led to the Philippine benchmark index to close marginally lower by .18% or 2.92 points. Streaking hot PLDT finally saw some reprieve and closed 1.2% lower today accompanied by declines in Ayala Land down by 1.75%, Bank of the Philippine Islands lower by 1.17% and San Miguel foreign or B shares likewise lower by .71%. Cushioning the declines were advances in SM Primeholdings up by 1.63% and Metrobank higher by 1.85%. Globe Telecoms, Ayala Corp and San Miguel local shares closed unchanged for today.
The two major Telecom issues accounted for more than half or 54% of today’s output, although it seems that today’s stock darlings, a carry over from yesterday, were the still the cement issues led by Bacnotan Consolidated (surged by 29.29%), and Union Cement Corp (soared by 15%) on continued speculations arising from the recent buyout deals.
Market breadth indicated overall bearishness as decliners led advancers 38 to 21, while industry indices were mostly down except for the oil and banking and financing indices and lastly foreign money registered a puny P 3.369 million worth of outflows.
Moreover, foreign participation relative to today’s total output increased to about 70% while overseas investors bought one more company than it sold by 14 to 13, these suggests that foreign money had mixed sentiment over today’s trading activities and were cautiously positioning in select issues.
The load of today’s foreign selling was still directed to GLO, with Meralco B and Ayala Land among the top companies that recorded the largest outflows. On the other hand, SM Primeholdings one of today’s index heavyweight winners registered the largest inflows from foreign capital while Union Cement and First Philippine Holdings were also among the top shopping items for foreign investors.
Our market seems to reflect the sentiments of the region which as of these writing are mostly trading lower. Except for Pakistan whose remarkable gains upstages all the bourses in the region, India, Australia and Thailand are the other minor gainers whom defied the rather glum outlook.
It does seem that local investors, whom were the market movers for the past sessions over the week, were less active in today’s trades and were mostly on the selling side of the trade equation.
The major composite benchmark index has been attempting to encroach the 1,600-level barrier during the past sessions but has met considerable selling. One probable reason for the apparent inability to push beyond the said resistance level is that local investors have been unable to muster the sufficient force to drive the other index heavyweights higher. The market’s current “animal force” has been the foreign driven PLDT while the other heavyweights have variably performed. Local investors have seemingly been content to push second and third tier issues instead, which again highlights the namby-pamby speculative proclivities by most of the local investors.
The two major Telecom issues accounted for more than half or 54% of today’s output, although it seems that today’s stock darlings, a carry over from yesterday, were the still the cement issues led by Bacnotan Consolidated (surged by 29.29%), and Union Cement Corp (soared by 15%) on continued speculations arising from the recent buyout deals.
Market breadth indicated overall bearishness as decliners led advancers 38 to 21, while industry indices were mostly down except for the oil and banking and financing indices and lastly foreign money registered a puny P 3.369 million worth of outflows.
Moreover, foreign participation relative to today’s total output increased to about 70% while overseas investors bought one more company than it sold by 14 to 13, these suggests that foreign money had mixed sentiment over today’s trading activities and were cautiously positioning in select issues.
The load of today’s foreign selling was still directed to GLO, with Meralco B and Ayala Land among the top companies that recorded the largest outflows. On the other hand, SM Primeholdings one of today’s index heavyweight winners registered the largest inflows from foreign capital while Union Cement and First Philippine Holdings were also among the top shopping items for foreign investors.
Our market seems to reflect the sentiments of the region which as of these writing are mostly trading lower. Except for Pakistan whose remarkable gains upstages all the bourses in the region, India, Australia and Thailand are the other minor gainers whom defied the rather glum outlook.
It does seem that local investors, whom were the market movers for the past sessions over the week, were less active in today’s trades and were mostly on the selling side of the trade equation.
The major composite benchmark index has been attempting to encroach the 1,600-level barrier during the past sessions but has met considerable selling. One probable reason for the apparent inability to push beyond the said resistance level is that local investors have been unable to muster the sufficient force to drive the other index heavyweights higher. The market’s current “animal force” has been the foreign driven PLDT while the other heavyweights have variably performed. Local investors have seemingly been content to push second and third tier issues instead, which again highlights the namby-pamby speculative proclivities by most of the local investors.
Wednesday, July 07, 2004
July 7 The Philippine Stock Market Review
July 7 The Philippine Stock Market Review
Rampaging PLDT once again lifted the Philippine benchmark index, the Phisix near its psychological 1,600 resistance level (less than two points away) to close up .47% or 7.44 points. PLDT up 2.04% was supported by gains from SM Primeholdings higher 1.66% and counterbalanced the declines seen in other index heavyweights such as Metrobank declined by 1.81%, Ayala Corp lower 1.78% and San Miguel foreign or B shares down .7%. The other index heavyweights as Bank of the Philippine Islands, Globe Telecoms, San Miguel local or A shares and Ayala Land closed unchanged for the day. These eight index heavyweights constitutes more than 75% of the Phisix benchmark, meaning that most of the index’s moves are determined by the price changes of the 8 largest publicly listed companies.
Inflows of foreign capital to PLDT was an astounding 80% of the firms output and has practically imbued the largest chunk of overseas investments which recorded a net P 20.541 million for the entire market today.
Market sentiment despite closing higher had a generally bearish backdrop, decliners led advancers 39 to 24, while companies that registered foreign capital outflows were more than inflows by 18 to 15, and lastly, on per industry index, only the PLDT led commercial and industrial index and the property index accounted for gains while three indices the Banking and Finance, the extractive industries, oil and mining posted losses.
Our market’s performance probably mirrors that of the region as most of our neighboring bourses are now trading mixed on moderate levels, meaning that gains or losses are not substantial and could be construed as in consolidation, except for the sizable drop in Sri Lanka.
Cement companies were today’s top gainers as Bacnotan Consolidated hit the 50% ceiling after declaring a P 9 special cash dividend which represents 36.36% of its closing price at P 24.75. The frenetic buying of Bacnotan spilled over Union Cement up 42.85% and Republic Cement higher 31.03%. Recent news reports that Bacnotan Consolidated and Phinma sold their combined 51% stake at Union Cement to Cemco Holdings for $214 million.
Rampaging PLDT once again lifted the Philippine benchmark index, the Phisix near its psychological 1,600 resistance level (less than two points away) to close up .47% or 7.44 points. PLDT up 2.04% was supported by gains from SM Primeholdings higher 1.66% and counterbalanced the declines seen in other index heavyweights such as Metrobank declined by 1.81%, Ayala Corp lower 1.78% and San Miguel foreign or B shares down .7%. The other index heavyweights as Bank of the Philippine Islands, Globe Telecoms, San Miguel local or A shares and Ayala Land closed unchanged for the day. These eight index heavyweights constitutes more than 75% of the Phisix benchmark, meaning that most of the index’s moves are determined by the price changes of the 8 largest publicly listed companies.
Inflows of foreign capital to PLDT was an astounding 80% of the firms output and has practically imbued the largest chunk of overseas investments which recorded a net P 20.541 million for the entire market today.
Market sentiment despite closing higher had a generally bearish backdrop, decliners led advancers 39 to 24, while companies that registered foreign capital outflows were more than inflows by 18 to 15, and lastly, on per industry index, only the PLDT led commercial and industrial index and the property index accounted for gains while three indices the Banking and Finance, the extractive industries, oil and mining posted losses.
Our market’s performance probably mirrors that of the region as most of our neighboring bourses are now trading mixed on moderate levels, meaning that gains or losses are not substantial and could be construed as in consolidation, except for the sizable drop in Sri Lanka.
Cement companies were today’s top gainers as Bacnotan Consolidated hit the 50% ceiling after declaring a P 9 special cash dividend which represents 36.36% of its closing price at P 24.75. The frenetic buying of Bacnotan spilled over Union Cement up 42.85% and Republic Cement higher 31.03%. Recent news reports that Bacnotan Consolidated and Phinma sold their combined 51% stake at Union Cement to Cemco Holdings for $214 million.
Prudent Investor Comments on Businessworld's SEC urges bourse to sell derivatives, other products
SEC urges bourse to sell derivatives, other products
In order to boost profitability
By JENNEE GRACE U. RUBRICO, Senior Reporter
The Philippine Stock Exchange (PSE) can start selling derivatives and other products to boost its profitability, an official of the Securities and Exchange Commission (SEC) said.
The official said the bourse should start looking beyond the products it is currently selling and "discover" if derivatives would sell.
Derivatives are highly complicated tools mainly used to hedge against financial risks. They are so named because they derive their value from the price of an underlying asset such as bonds, common stocks, currencies or an index.
A holder of this kind of security can buy or sell an underlying security or commodity at some point in the future for a predetermined price. If the price of the underlying security or commodity moves in the right direction, the owners of the derivative make money; otherwise, they lose money.
Derivatives include stock options, interest rate swaps, futures, foreign exchange forwards or options, and credit default swaps.
Earlier, SEC Chairman Lilia R. Bautista suggested the PSE expand its products to include products sold by overseas bourses.
At present, the local exchange sells equities -- namely stocks, warrants, and Philippine deposit receipts -- and trading data. The exchange has also been selling small denominated treasury bonds, but these are set to mature this month.
"It's about time that they [PSE] consider selling derivatives they will only discover whether or not there is a market for this if they try to sell the products," the SEC official said.
She said other stock exchanges sell such products, but did not specify what kind of derivative products the PSE should sell.
An official of the PSE said the bourse is currently not selling derivative products.
But she said that rules for listing exchange-traded funds and real estate investment trust (REIT) are being studied.
A real estate investment trust is typically a closed-end investment trust that trades on an exchange and uses the pooled capital of investors to purchase and manage income properties. Equity REITs primarily own commercial real estate, such as shopping centers, apartments and industrial buildings.
Exchange-traded funds are similar to mutual funds, but are traded like stocks. They represent a basket of securities that are traded on an exchange.
The stock exchange is looking at ways of increasing its profitability and is currently working with a consultant that was tapped by the Asian Development Bank (ADB) to come up with ways to make the bourse an "earning exchange."
The consultant was tapped by the ADB as part of the technical assistance package it extended to strengthen the Philippine financial market, improve the PSE corporate governance, and identify steps to enhance the bourse' profitability profile to attract both local and foreign investors and eventually diversify ownership of the exchange.
***
The Prudent Investor:
The SEC has allowed the Philippine Stock Exchange to boost its profitability by expanding its product ranges to include that of the derivatives, Exchange Trade Funds, Real Estate Investment Trust (REIT) and others. While the intention to allow for a wide range of products to market to the public is ideal, what seems to be amiss is the fundamental cause of the underdevelopment of the Philippine Capital Markets.
Principally, the dynamics of the Capital markets are simply basic economics; demand and supply. An elementary representation of the capital market is the Stock Market, which simply is about equity. Companies raise capital through the market via the traditional route the initial public offering or the secondary offering or through the non-traditional route via backdoor, mergers and/or acquisitions. Moreover, the stock exchange functions to allow the market to value publicly listed companies as measured by the movements of its share prices.
The Philippine Stock Exchange, according to its website, “PSE traces its roots from the country's two former bourses: the Manila Stock Exchange (MSE) and the Makati Stock Exchange (MkSE). Founded in March 1927, the MSE was the first stock exchange in the Philippines and one of the oldest in the Far East.” While it is one of the oldest market in the Far East the harsh reality is that it remains as one of the smallest in the world in terms of market capitalization and in volume turnover.
In terms of market capitalization, the Phisix Composite Index is about $ 20 billion, while the entire Philippine Market excluding the International Insurance giants Manulife and Sunlife shares is about $25 billion. Neighboring Indonesia has a market cap of about $ 49 billion, while the Philippines only leads that of Pakistan, Sri Lanka and Vietnam.
In terms of volume turnover, for the first semester of the year, the Phisix averaged $12.865 million a day with foreign investors taking up 62.2% of the daily output. In other words, overseas investors invest more than Filipinos whose investments constitute only about $ 4.862 million a day or P 273 million a day. Yet the volume cited above includes the Special Block Sales which are negotiated special sales but are also reported as part of the market’s turnover. In comparison to our neighbors, Indonesia trades at no less than $100 million a day or even Argentina whose turnover is incrementally better than ours at least $15 million a day.
Simple arithmetic will tell you that if an average volume for a local investor, retail and institutional, would be around P 100,000 or about $ 1,800 per investor, this would translate to 2,730 investors. In 20 trading days a month assuming that an investor trades only once a month would mean 54,600 investors a month. Also assuming that an investor trades only once a year would mean an annualized 655,200 investors. Since the above assumptions limits investors to enter once a year, and is very restrictive the annualized figure would probably show a considerably lower stock market penetration level probably around the 300,000 level or lower.
The Philippines is said to have a population of about 82 million people. Five percent of these are reportedly the wealthy class or 4.1 million elite people, given the above figures, it is noteworthy that less than 10% of them are even invested in the stock market. Yet in perverse manner news reports show that some 1 million investors saw their investments of more than P 100 billion dissipate or lost to the recent pyramiding scams.
Question is why the low penetration level of the stock market? Could the poor turnover be attributed to fear arising from direct experience of loss? Or could distrusts emanating from the past anomalies be the factor that led to continued investor cynicism of the local stock market? Or could it be due to misplaced notions/impressions or the lack of information of the mechanics of stock market investing? In short, could demand be stimulated if these issues were promptly addressed? Or is it because of the lack of supply of investible instruments?
Considering that since the financial crisis in 1997, no Peso denominated assets appreciated despite the continued expansion of our money supply, where have all the money gone?
If the stock market is the elementary representation of the capital markets, of which local investors are seen as averse to invest, how will investors deal with even more complex markets as the derivatives, REIT’s, ETFs other products that came about as byproducts of mature markets?
Volume is the key to the diversification of product lines, when volume hardly exists supply side solutions are most likely bound to fail. Furthermore, lean volumes with loose controls are prone to manipulations like the defunct Manila International Futures Exchange (MIFE) experience.
If the SEC truly wants to augment the PSE’s profitability it should reform the stock market’s framework to that of global standards, in addition, institute parallel programs such as cross border listings, as the Mexico experience, or consider an intensive marketing program to tap the overseas Philippine workers and migrants to invest locally, as the Pakistan experience.
In order to boost profitability
By JENNEE GRACE U. RUBRICO, Senior Reporter
The Philippine Stock Exchange (PSE) can start selling derivatives and other products to boost its profitability, an official of the Securities and Exchange Commission (SEC) said.
The official said the bourse should start looking beyond the products it is currently selling and "discover" if derivatives would sell.
Derivatives are highly complicated tools mainly used to hedge against financial risks. They are so named because they derive their value from the price of an underlying asset such as bonds, common stocks, currencies or an index.
A holder of this kind of security can buy or sell an underlying security or commodity at some point in the future for a predetermined price. If the price of the underlying security or commodity moves in the right direction, the owners of the derivative make money; otherwise, they lose money.
Derivatives include stock options, interest rate swaps, futures, foreign exchange forwards or options, and credit default swaps.
Earlier, SEC Chairman Lilia R. Bautista suggested the PSE expand its products to include products sold by overseas bourses.
At present, the local exchange sells equities -- namely stocks, warrants, and Philippine deposit receipts -- and trading data. The exchange has also been selling small denominated treasury bonds, but these are set to mature this month.
"It's about time that they [PSE] consider selling derivatives they will only discover whether or not there is a market for this if they try to sell the products," the SEC official said.
She said other stock exchanges sell such products, but did not specify what kind of derivative products the PSE should sell.
An official of the PSE said the bourse is currently not selling derivative products.
But she said that rules for listing exchange-traded funds and real estate investment trust (REIT) are being studied.
A real estate investment trust is typically a closed-end investment trust that trades on an exchange and uses the pooled capital of investors to purchase and manage income properties. Equity REITs primarily own commercial real estate, such as shopping centers, apartments and industrial buildings.
Exchange-traded funds are similar to mutual funds, but are traded like stocks. They represent a basket of securities that are traded on an exchange.
The stock exchange is looking at ways of increasing its profitability and is currently working with a consultant that was tapped by the Asian Development Bank (ADB) to come up with ways to make the bourse an "earning exchange."
The consultant was tapped by the ADB as part of the technical assistance package it extended to strengthen the Philippine financial market, improve the PSE corporate governance, and identify steps to enhance the bourse' profitability profile to attract both local and foreign investors and eventually diversify ownership of the exchange.
***
The Prudent Investor:
The SEC has allowed the Philippine Stock Exchange to boost its profitability by expanding its product ranges to include that of the derivatives, Exchange Trade Funds, Real Estate Investment Trust (REIT) and others. While the intention to allow for a wide range of products to market to the public is ideal, what seems to be amiss is the fundamental cause of the underdevelopment of the Philippine Capital Markets.
Principally, the dynamics of the Capital markets are simply basic economics; demand and supply. An elementary representation of the capital market is the Stock Market, which simply is about equity. Companies raise capital through the market via the traditional route the initial public offering or the secondary offering or through the non-traditional route via backdoor, mergers and/or acquisitions. Moreover, the stock exchange functions to allow the market to value publicly listed companies as measured by the movements of its share prices.
The Philippine Stock Exchange, according to its website, “PSE traces its roots from the country's two former bourses: the Manila Stock Exchange (MSE) and the Makati Stock Exchange (MkSE). Founded in March 1927, the MSE was the first stock exchange in the Philippines and one of the oldest in the Far East.” While it is one of the oldest market in the Far East the harsh reality is that it remains as one of the smallest in the world in terms of market capitalization and in volume turnover.
In terms of market capitalization, the Phisix Composite Index is about $ 20 billion, while the entire Philippine Market excluding the International Insurance giants Manulife and Sunlife shares is about $25 billion. Neighboring Indonesia has a market cap of about $ 49 billion, while the Philippines only leads that of Pakistan, Sri Lanka and Vietnam.
In terms of volume turnover, for the first semester of the year, the Phisix averaged $12.865 million a day with foreign investors taking up 62.2% of the daily output. In other words, overseas investors invest more than Filipinos whose investments constitute only about $ 4.862 million a day or P 273 million a day. Yet the volume cited above includes the Special Block Sales which are negotiated special sales but are also reported as part of the market’s turnover. In comparison to our neighbors, Indonesia trades at no less than $100 million a day or even Argentina whose turnover is incrementally better than ours at least $15 million a day.
Simple arithmetic will tell you that if an average volume for a local investor, retail and institutional, would be around P 100,000 or about $ 1,800 per investor, this would translate to 2,730 investors. In 20 trading days a month assuming that an investor trades only once a month would mean 54,600 investors a month. Also assuming that an investor trades only once a year would mean an annualized 655,200 investors. Since the above assumptions limits investors to enter once a year, and is very restrictive the annualized figure would probably show a considerably lower stock market penetration level probably around the 300,000 level or lower.
The Philippines is said to have a population of about 82 million people. Five percent of these are reportedly the wealthy class or 4.1 million elite people, given the above figures, it is noteworthy that less than 10% of them are even invested in the stock market. Yet in perverse manner news reports show that some 1 million investors saw their investments of more than P 100 billion dissipate or lost to the recent pyramiding scams.
Question is why the low penetration level of the stock market? Could the poor turnover be attributed to fear arising from direct experience of loss? Or could distrusts emanating from the past anomalies be the factor that led to continued investor cynicism of the local stock market? Or could it be due to misplaced notions/impressions or the lack of information of the mechanics of stock market investing? In short, could demand be stimulated if these issues were promptly addressed? Or is it because of the lack of supply of investible instruments?
Considering that since the financial crisis in 1997, no Peso denominated assets appreciated despite the continued expansion of our money supply, where have all the money gone?
If the stock market is the elementary representation of the capital markets, of which local investors are seen as averse to invest, how will investors deal with even more complex markets as the derivatives, REIT’s, ETFs other products that came about as byproducts of mature markets?
Volume is the key to the diversification of product lines, when volume hardly exists supply side solutions are most likely bound to fail. Furthermore, lean volumes with loose controls are prone to manipulations like the defunct Manila International Futures Exchange (MIFE) experience.
If the SEC truly wants to augment the PSE’s profitability it should reform the stock market’s framework to that of global standards, in addition, institute parallel programs such as cross border listings, as the Mexico experience, or consider an intensive marketing program to tap the overseas Philippine workers and migrants to invest locally, as the Pakistan experience.
Tuesday, July 06, 2004
Bloomberg's Andy Mukherjee: India Gets Serious About Paring Budget Deficit
July 6 (Bloomberg) -- India's new government has given a strong hint that its annual budget on Thursday may turn out to be the country's much-awaited first step on the long, arduous -- and ultimately rewarding -- road to fiscal prudence.
On Friday, the finance ministry vowed to cut the budget deficit by 0.3 percent of gross domestic product annually. The pledge has been included in a law, the Fiscal Responsibility and Budget Management Act, which came into force yesterday.
There's more. If by mid-year, the deficit is more than 45 percent of the annual target, the government will be required to take corrective action, and make a statement in parliament. From April 1, 2006, the government can't borrow from the central bank.
For investors, who have driven down the Sensex stock index by 17 percent this year, and caused 10-year bond yields to rise as much as two-thirds of a percentage point, it's the first good news since a communist-supported alliance came to power in May, raising concerns of higher public spending, bigger budget gaps, lower sovereign ratings, and costlier capital for companies.
Standard & Poor's made it clear as early as May 31 that the government had no choice. ``The 2004 budget,'' the rating company said, ``will be the litmus test of either fiscal consolidation or the continuation of India's parlous fiscal record.''
Why are investors and credit rating companies making such a big deal of the deficit when the Indian economy grew 8.2 percent in the first quarter of this year, a rate second only to China's 9.8 percent among the world's top 20 economies?
Deficit Poses Risks
For an appreciation of the risks, recall India's 1991 balance-of-payment crisis, when the country's foreign currency reserves were almost depleted.
In the year to March 31, 1991, the combined budget deficit of India's federal and provincial governments was 9.4 percent of GDP. Today's situation is no different. The total deficit for the year ended March 2004 is expected to have been 9.1 percent. Meanwhile, the government's indebtedness has risen: Public debt now equals 77 percent of GDP, versus 62 percent in 1991.
What may be preventing another crisis is that unlike in the mid-1980s, when India started running large current account deficits possibly as a result of high budget deficits, the country now has the comfort of a record current account surplus, thanks, largely to booming software exports. India now has foreign exchange reserves that can pay for 19 months of imports.
Many economists say that a developing country like India should run a small current account deficit, and finance it by foreign capital. A current account surplus and rising foreign currency reserves are signs an undervalued domestic currency may be curbing private consumption and investment.
Drag on Rupee
However, for the authorities to allow the rupee to appreciate, the budget deficit must narrow. Else, we could again see a crisis of confidence among investors. There's already some nervousness that a part of the unprecedented $22.7 billion of capital inflows into India last year may reverse once the U.S. Federal Reserve raises interest rates further.
Thus, by adopting the Fiscal Responsibility law days before the budget, Finance Minister P. Chidambaram may be seeking to lessen investor concerns, and at the same time laying the foundation for higher economic growth.
The promise is ``likely to reassure jittery investors,'' says Rajeev Malik, an economist at J.P. Morgan Chase & Co. in Singapore. The federal government's deficit in the year to March 31, 2005, will be brought down to 4.2 percent of GDP, from 4.5 percent in the previous 12 months, Malik estimates.
Investors' attention will shift to the mechanics of how Chidambaram will meet his goal. Will he focus on the numerator of the deficit ratio, or take refuge in the denominator? In other words, will the government's debt sales reduce? Or will economic growth coupled with quickening inflation increase the nominal GDP, so that the deficit ratio falls even with higher borrowings?
Bond Market
The difference will matter to the bond market.
``A modest rise in the borrowing program has already been discounted,'' S.P. Prabhu, head of fixed-income research at IDBI Capital Market Services Ltd., a primary dealer in Mumbai, said on Saturday. ``However, if the rise in the borrowing program is large, concerns of oversupply of paper will dominate the sentiment,'' Prabhu said in a research note to clients.
If the finance minister is serious about keeping a tight rein on borrowings, the only option before him is to raise tax revenue. A surcharge on personal and corporate income taxes to finance education is widely expected, as is a plan to raise the tax rate on banking, railway, insurance and other services.
It'll be interesting to see how Chidambaram proposes to increase -- in the eight remaining months of the current fiscal year -- revenue from services, which account for more than half of GDP and yield just 3 percent of the government's total taxes.
The finance minister has set himself a tough target. If he fails, ``it will be a loss of credibility for him,'' says Saumitra Chaudhuri, economic adviser at New Delhi-based credit rating company ICRA Ltd. ``It would be difficult to explain why the targets can't be met in the first year itself.''
On Friday, the finance ministry vowed to cut the budget deficit by 0.3 percent of gross domestic product annually. The pledge has been included in a law, the Fiscal Responsibility and Budget Management Act, which came into force yesterday.
There's more. If by mid-year, the deficit is more than 45 percent of the annual target, the government will be required to take corrective action, and make a statement in parliament. From April 1, 2006, the government can't borrow from the central bank.
For investors, who have driven down the Sensex stock index by 17 percent this year, and caused 10-year bond yields to rise as much as two-thirds of a percentage point, it's the first good news since a communist-supported alliance came to power in May, raising concerns of higher public spending, bigger budget gaps, lower sovereign ratings, and costlier capital for companies.
Standard & Poor's made it clear as early as May 31 that the government had no choice. ``The 2004 budget,'' the rating company said, ``will be the litmus test of either fiscal consolidation or the continuation of India's parlous fiscal record.''
Why are investors and credit rating companies making such a big deal of the deficit when the Indian economy grew 8.2 percent in the first quarter of this year, a rate second only to China's 9.8 percent among the world's top 20 economies?
Deficit Poses Risks
For an appreciation of the risks, recall India's 1991 balance-of-payment crisis, when the country's foreign currency reserves were almost depleted.
In the year to March 31, 1991, the combined budget deficit of India's federal and provincial governments was 9.4 percent of GDP. Today's situation is no different. The total deficit for the year ended March 2004 is expected to have been 9.1 percent. Meanwhile, the government's indebtedness has risen: Public debt now equals 77 percent of GDP, versus 62 percent in 1991.
What may be preventing another crisis is that unlike in the mid-1980s, when India started running large current account deficits possibly as a result of high budget deficits, the country now has the comfort of a record current account surplus, thanks, largely to booming software exports. India now has foreign exchange reserves that can pay for 19 months of imports.
Many economists say that a developing country like India should run a small current account deficit, and finance it by foreign capital. A current account surplus and rising foreign currency reserves are signs an undervalued domestic currency may be curbing private consumption and investment.
Drag on Rupee
However, for the authorities to allow the rupee to appreciate, the budget deficit must narrow. Else, we could again see a crisis of confidence among investors. There's already some nervousness that a part of the unprecedented $22.7 billion of capital inflows into India last year may reverse once the U.S. Federal Reserve raises interest rates further.
Thus, by adopting the Fiscal Responsibility law days before the budget, Finance Minister P. Chidambaram may be seeking to lessen investor concerns, and at the same time laying the foundation for higher economic growth.
The promise is ``likely to reassure jittery investors,'' says Rajeev Malik, an economist at J.P. Morgan Chase & Co. in Singapore. The federal government's deficit in the year to March 31, 2005, will be brought down to 4.2 percent of GDP, from 4.5 percent in the previous 12 months, Malik estimates.
Investors' attention will shift to the mechanics of how Chidambaram will meet his goal. Will he focus on the numerator of the deficit ratio, or take refuge in the denominator? In other words, will the government's debt sales reduce? Or will economic growth coupled with quickening inflation increase the nominal GDP, so that the deficit ratio falls even with higher borrowings?
Bond Market
The difference will matter to the bond market.
``A modest rise in the borrowing program has already been discounted,'' S.P. Prabhu, head of fixed-income research at IDBI Capital Market Services Ltd., a primary dealer in Mumbai, said on Saturday. ``However, if the rise in the borrowing program is large, concerns of oversupply of paper will dominate the sentiment,'' Prabhu said in a research note to clients.
If the finance minister is serious about keeping a tight rein on borrowings, the only option before him is to raise tax revenue. A surcharge on personal and corporate income taxes to finance education is widely expected, as is a plan to raise the tax rate on banking, railway, insurance and other services.
It'll be interesting to see how Chidambaram proposes to increase -- in the eight remaining months of the current fiscal year -- revenue from services, which account for more than half of GDP and yield just 3 percent of the government's total taxes.
The finance minister has set himself a tough target. If he fails, ``it will be a loss of credibility for him,'' says Saumitra Chaudhuri, economic adviser at New Delhi-based credit rating company ICRA Ltd. ``It would be difficult to explain why the targets can't be met in the first year itself.''
Bloomberg: Brazil Stock Market Has 1st Foreign Outflow in Year
July 5 (Bloomberg) -- Brazil's stock market, the largest in Latin America, had its first outflow of foreign capital in June in more than a year as investors anticipated higher U.S. interest rates would damp demand for Brazilian equities.
The Sao Paulo stock exchange reported 572 million reais ($189 million) of foreign capital moved out of the market in June as international investors bought 5.723 million reais in shares and sold 6.295 million reais worth, according to its Web site. The Bovespa hasn't had an outflow since May 2003.
Investors such as Urban Larson at Baring Asset Management cut back holdings in Brazil before the U.S. Federal Reserve on June 30 raised its benchmark lending rate to 1.25 percent from 1 percent. Brazil's benchmark Bovespa stock index, the world's second-best performer last year after China, has dropped about 7 percent in dollar terms this year.
``We reduced our assets in Brazil gradually over the last few months as we expected the market to underperform in a tightening cycle of rates in the U.S.,'' said Larson, who helps manage about $250 million in Latin American equities at Baring Asset Management in Boston. Brazil's stock market has a value of $212 billion compared with $160 billion for Mexico's, according to Bloomberg data. Brazil is among developing nations that rely on funding from international bondholders and may have to pay higher borrowing rates because of rising rates in the U.S., the Bank for International Settlements said in June.
Brazil's Debt Brazil has $400 billion of government debt, more than any other developing nation.
Net Servicos de Comunicacao SA, the country's largest cable television operator, was the worst performer on the Sao Paulo stock exchange last month, falling 17 percent. The Sao Paulo-based company, which has made only one quarterly profit in more than nine years, is in talks with creditors after defaulting on $870 million of bonds in December 2002.
Telefonos de Mexico SA, Mexico's largest fixed-line telephone company, said on June 28 it may buy as much as 60 percent of Net Servicos. As part of the transaction, Net Servicos would sell as many as 1.83 billion new voting and non- voting shares.
The Bovespa index rose 12 percent in dollar terms in June, after falling the previous two months, as government data showed the economy pulling out of last year's recession. Bank lending increased by the most in at least 18 months in May and Brazil's unemployment rate fell from a three-year high. The nation's trade surplus surged to a record $3.8 billion in June.
Growth Forecast
The government forecasts the economy will expand 3.5 percent this year. ``If you look at Brazil in isolation it looks great,'' Larson said. ``If you look in the global context there are more causes for concern.''
The Bovespa index today rose 0.5 percent to 21,670.29.
The pullout from Brazil's stock market may have been overdone ahead of the Fed's decision on rates said Adriano Fontes, who helps manage about 1.2 billion reais of stocks and bonds at Arx Capital Management in Rio de Janeiro.
``There was more defensive behavior from investors at the beginning of the month with doubts on what the Fed would do,'' Fontes said. ``But the good mood came back with the improving economic numbers.''
Brazilian companies also are beginning to tap equity markets for financing, with the first initial public offerings in more than two years. On May 26, Natura Cosmeticos SA, Brazil's biggest cosmetics company, started trading at the exchange in the first IPO in Brazil since Cia. De Concessoes Rodoviarias, a Brazilian toll road operator, listed shares in February 2002.
Gol Linhas Aereas Inteligentes SA, Brazil's third-largest airline, and America Latina Logistica, Latin America's largest railroad operator, both started trading in June.
The Sao Paulo stock exchange reported 572 million reais ($189 million) of foreign capital moved out of the market in June as international investors bought 5.723 million reais in shares and sold 6.295 million reais worth, according to its Web site. The Bovespa hasn't had an outflow since May 2003.
Investors such as Urban Larson at Baring Asset Management cut back holdings in Brazil before the U.S. Federal Reserve on June 30 raised its benchmark lending rate to 1.25 percent from 1 percent. Brazil's benchmark Bovespa stock index, the world's second-best performer last year after China, has dropped about 7 percent in dollar terms this year.
``We reduced our assets in Brazil gradually over the last few months as we expected the market to underperform in a tightening cycle of rates in the U.S.,'' said Larson, who helps manage about $250 million in Latin American equities at Baring Asset Management in Boston. Brazil's stock market has a value of $212 billion compared with $160 billion for Mexico's, according to Bloomberg data. Brazil is among developing nations that rely on funding from international bondholders and may have to pay higher borrowing rates because of rising rates in the U.S., the Bank for International Settlements said in June.
Brazil's Debt Brazil has $400 billion of government debt, more than any other developing nation.
Net Servicos de Comunicacao SA, the country's largest cable television operator, was the worst performer on the Sao Paulo stock exchange last month, falling 17 percent. The Sao Paulo-based company, which has made only one quarterly profit in more than nine years, is in talks with creditors after defaulting on $870 million of bonds in December 2002.
Telefonos de Mexico SA, Mexico's largest fixed-line telephone company, said on June 28 it may buy as much as 60 percent of Net Servicos. As part of the transaction, Net Servicos would sell as many as 1.83 billion new voting and non- voting shares.
The Bovespa index rose 12 percent in dollar terms in June, after falling the previous two months, as government data showed the economy pulling out of last year's recession. Bank lending increased by the most in at least 18 months in May and Brazil's unemployment rate fell from a three-year high. The nation's trade surplus surged to a record $3.8 billion in June.
Growth Forecast
The government forecasts the economy will expand 3.5 percent this year. ``If you look at Brazil in isolation it looks great,'' Larson said. ``If you look in the global context there are more causes for concern.''
The Bovespa index today rose 0.5 percent to 21,670.29.
The pullout from Brazil's stock market may have been overdone ahead of the Fed's decision on rates said Adriano Fontes, who helps manage about 1.2 billion reais of stocks and bonds at Arx Capital Management in Rio de Janeiro.
``There was more defensive behavior from investors at the beginning of the month with doubts on what the Fed would do,'' Fontes said. ``But the good mood came back with the improving economic numbers.''
Brazilian companies also are beginning to tap equity markets for financing, with the first initial public offerings in more than two years. On May 26, Natura Cosmeticos SA, Brazil's biggest cosmetics company, started trading at the exchange in the first IPO in Brazil since Cia. De Concessoes Rodoviarias, a Brazilian toll road operator, listed shares in February 2002.
Gol Linhas Aereas Inteligentes SA, Brazil's third-largest airline, and America Latina Logistica, Latin America's largest railroad operator, both started trading in June.
July 6 The Philippine Stock Market Review
After a rather soft opening the Philippine benchmark index, the Phisix, firmed during late trading to end the day higher by 1.02 points or .06%.
PLDT resumed its upbeat momentum up .4% but this time aided by gains from the banking heavyweights Metrobank up 1.85% and Bank of the Philippine Islands higher 1.19%. San Miguel shares moved in opposite directions as its Foreign and Local shares slumped by a nasty 2.73% while its local shares strengthened by .86%. In short the big drop of San Miguel B shares were offset by the gains of its local or ‘A’ shares combined with the gains of BPI, Metrobank and PLDT which resulted to the slight gain of the major composite index. In the 30-company (listed as 33 due to the B shares) composite index 11 advanced, 7 declined while 15 were unchanged.
Market breadth remained cautiously bullish as advancers beat decliners by 35 to 29, while among the industry sub indices, three recorded gains (Banking and Finance, Phi-ALL and Mining) against three decliners (Commercial and Industrial, Oil and Property Index).
Foreign money posted a slim net inflow of P 13.134 million on selective buying. Once again the meat of these money flows were directed to PLDT while moderate inflows were seen in First Philippine Holdings, Ayala Land and Megaworld Corp. However, in the broader market overseas money sold more issues than they acquired, hence the phrase ‘selective buying’. Foreign trades accounted for 53% of the accrued turnover.
This has been the 13th straight session that the Philippine bourse traded more than the 100-issue threshold, beating the June and July 2003 levels, which if you recall was the period whence the 2003 rally commenced. Considering the premise that most investors are likely to hold on to a losing stock rather than to sell them, trading the broader market means more buying than selling. Well in support of this thesis, during the said period June 18 to date, the market has climbed 3.31%. Advancers beat decliners 472 to 322 with an average trade of 108 issues a day. Moreover, foreign inflow was a paltry P 183.201 million with foreign trades accounting for a slight majority 53.54% of total output. Remember the propulsion to last year’s run had been foreign moolah, today we are seeing local investors anteing up and substituting the palpable declines from foreign capital. No, the issue of declining foreign investments are not due to internal concerns as cynics would like to put but it on global monetary and fiscal developments. (Read more on the supplemental posting below).
Finally, the general sentiment seen in today's market activities could probably be in line with that of our neighbors, most of the region’s bourses are up with sharp advances seen in Indonesia (post election), Taiwan and Singapore. The only decliners in the region, as of this writing, are New Zealand, SRI Lanka and Japan.
PLDT resumed its upbeat momentum up .4% but this time aided by gains from the banking heavyweights Metrobank up 1.85% and Bank of the Philippine Islands higher 1.19%. San Miguel shares moved in opposite directions as its Foreign and Local shares slumped by a nasty 2.73% while its local shares strengthened by .86%. In short the big drop of San Miguel B shares were offset by the gains of its local or ‘A’ shares combined with the gains of BPI, Metrobank and PLDT which resulted to the slight gain of the major composite index. In the 30-company (listed as 33 due to the B shares) composite index 11 advanced, 7 declined while 15 were unchanged.
Market breadth remained cautiously bullish as advancers beat decliners by 35 to 29, while among the industry sub indices, three recorded gains (Banking and Finance, Phi-ALL and Mining) against three decliners (Commercial and Industrial, Oil and Property Index).
Foreign money posted a slim net inflow of P 13.134 million on selective buying. Once again the meat of these money flows were directed to PLDT while moderate inflows were seen in First Philippine Holdings, Ayala Land and Megaworld Corp. However, in the broader market overseas money sold more issues than they acquired, hence the phrase ‘selective buying’. Foreign trades accounted for 53% of the accrued turnover.
This has been the 13th straight session that the Philippine bourse traded more than the 100-issue threshold, beating the June and July 2003 levels, which if you recall was the period whence the 2003 rally commenced. Considering the premise that most investors are likely to hold on to a losing stock rather than to sell them, trading the broader market means more buying than selling. Well in support of this thesis, during the said period June 18 to date, the market has climbed 3.31%. Advancers beat decliners 472 to 322 with an average trade of 108 issues a day. Moreover, foreign inflow was a paltry P 183.201 million with foreign trades accounting for a slight majority 53.54% of total output. Remember the propulsion to last year’s run had been foreign moolah, today we are seeing local investors anteing up and substituting the palpable declines from foreign capital. No, the issue of declining foreign investments are not due to internal concerns as cynics would like to put but it on global monetary and fiscal developments. (Read more on the supplemental posting below).
Finally, the general sentiment seen in today's market activities could probably be in line with that of our neighbors, most of the region’s bourses are up with sharp advances seen in Indonesia (post election), Taiwan and Singapore. The only decliners in the region, as of this writing, are New Zealand, SRI Lanka and Japan.
ANATOLE KALETSKY: The only way is up for interest rates and inflation
The only way is up for interest rates and inflation
ANATOLE KALETSKY
business.timesonline.co.uk
MIGHTY rivers begin from the tiny trickle of a single source. In this spirit, we can identify the minuscule quarter-point increase in interest rates announced yesterday evening by the US Federal Reserve Board as the start of a new economic era and the end of a trend that has lasted a generation, dominating global finance and economics for the past 23 years.
Starting in June 1981, when the US interest rates fell from a 20th-century high 19 per cent, each successive cyclical peak in interest rates was lower than one before, as was each cyclical trough.
This declining trend in interest rates has continued through three recessions and two economic expansions, through stock market crashes and bubbles, through property booms and busts. But yesterday, this 23-year sequence of declining highs and lows came to an end.
The Fed’s decision to increase its rate to 1.25 per cent marked the symbolic start of a new era, since the chances that interest rates will fall back to 1 per cent rates or below must be very small.
And this change in trend is not just a symbolic or theoretical matter. Its impact will be felt across the world. The global financial markets are more integrated than ever and even for British businesses and borrowers the imminent change in US financial conditions could be more significant than any decision that the Bank of England takes. US monetary policy still largely determines global inflation and liquidity conditions, has a major influence on currency valuations, stock market and oil prices, as well as setting the psychological background for the decisions of the Bank of England and the European Central Bank.
Its most important effects will be to focus attention on disconcerting issues which finance ministers, central bankers and investors have recently done their best to downplay or ignore: the likelihood of much higher interest rates in the near future; and the deteriorating outlook for global inflation in the long term.
Now that the Fed has started raising interest rates, investors will have to acknowledge that this upward trend has a long way to go. Given that the powerful surge of growth in the American economy after the Iraq war has ended and inflation’s slow but steady increase in the past few months, it is clear with the benefit of hindsight that US interest rates should never have fallen as low as they did. And having cut interest rates to 1 per cent last June — at a time when the economy was already booming — the Fed should have raised them much faster than it did. But what is even clearer is that US interest rates are now far below the appropriate level for this stage of the economic cycle and will need to rise much farther and faster than financial markets currently assume.
In Britain, the Bank of England assumes that interest rates will have to rise to 5 per cent to get to a neutral level, which neither stimulates nor restrains the economy. If so, then US rates will have to rise well above 5 per cent before they start to rein-in growth and inflation. American consumers are less indebted than their British counterparts, US house prices are lower and the US economy has a higher rate of population growth — all of which implies that America should be less sensitive to rising interest rates than Britain and that controlling the economy should require higher rates.
At present the American markets are expecting only a modest increase in rates — from 1 per cent yesterday to 2.25 per cent by the end of the year and around 3.5 per cent in mid-2005. If interest rates next year rise instead to be 5 per cent or higher, investors, politicians and central bankers will be in for some shocks.
The exceptionally low US rates of the past two years have contributed to the extreme weakness of the dollar and the unwelcome strength of the euro and the pound. They have also encouraged a tremendous amount of debt-financed speculation. Investors have borrowed dollars to invest in anything from euros and yen to rand and shares in China and Brazilian bonds.
As interest rates rise, these leveraged speculations will be unwound, with potentially disruptive effects on many economies and financial markets. More fundamentally, the low level of US interest rates has aggravated the biggest long-term danger facing the world economy: a revival of inflation. In fact, the combination of an ultra-lax monetary policy with a rapidly falling dollar has created a situation which is more and more reminiscent of the great inflation which started with the US Government pursuing an expansionary Keynesian guns-and-butter and easy money policy in the mid-1960s, as the Vietnam War gathered pace.
In America today there are seven separate trends all pointing to higher prices and excess leverage in ominous ways reminiscent of the 1960s: first and foremost, a lax monetary policy, with a central bank dedicated to creating jobs, rather than stabilising prices; second, ballooning budget deficits; third, a falling currency; fourth, a hugely expensive war, financed by printing money; fifth, protectionism; sixth, a soaring oil price; seventh, a spendthrift President, who may be a right-wing Republican, but is spending money like a left-wing Democrat. In normal times, any one of these “seven deadly sins” might be sufficient to push up inflation. All seven operating together would be a sure-fire recipe for prices to take off.
This does not mean that the US will return to the rapid inflation of the 1970s and 1980s — 10 per cent or even 5 per cent inflation is unlikely, partly because markets and central bankers have not completely forgotten the lessons of the 1960s and 1970s, but mainly because there is so much more competition and global trade. But even a modest increase — say from 2 per cent inflation to 3 or 4 per cent — would have a major impact on the world economy.
For a start it would damage the credibility of the Fed, and by association, of other central banks around the word. Under Alan Greenspan, the Fed has become the most powerful and respected financial institution of all time. But this reputation will suffer as investors and politicians realise that they have been misled by it. Only four months ago Mr Greenspan declared in his annual report to Congress that the Fed expected US inflation this year to average between 1 and 1.25 per cent and that the risks to this forecast were mostly in a downward direction. Instead, inflation is now running at 2.5 per cent, with higher figures probably ahead. The Fed should be quickly raising interest rates to at least the neutral level of 5 per cent. Yet all indications are that Mr Greenspan will tighten only gently, at least until after the November presidential election is out of the way. Mr Greenspan will soon stand accused not only of misjudging the inflation outlook, but also of delaying remedial treatment to protect President Bush.
Moreover, the cyclical pressures for rising inflation will soon be aggravated by an even more powerful long-term trend: the growing demand for social spending. In the coming decades huge additional demands for non-productive expenditures will be imposed on the US and global economies. While the war against terrorism is the obvious one which attracts the most attention (just as the Vietnam War did in the 1960s and 1970s), the far more important pressures will come in the long-term from demographic ageing and the growing power of the grey lobby to demand public financing of unfounded pensions and healthcare. This is in many ways analogous to the growth of the welfare state and the Great Society in the 1960s. The ever-growing demands of ageing populations will impose a greater burden on the US economy, as well as the economies of Europe and Japan, than any previous social programme or war.
If history is any guide, politicians and voters will decide that inflation is the only way to spread the burden of these ever-growing social costs. If so, then the trend of interest rates and inflation will continue to point upwards for years, or even decades, to come.
ANATOLE KALETSKY
business.timesonline.co.uk
MIGHTY rivers begin from the tiny trickle of a single source. In this spirit, we can identify the minuscule quarter-point increase in interest rates announced yesterday evening by the US Federal Reserve Board as the start of a new economic era and the end of a trend that has lasted a generation, dominating global finance and economics for the past 23 years.
Starting in June 1981, when the US interest rates fell from a 20th-century high 19 per cent, each successive cyclical peak in interest rates was lower than one before, as was each cyclical trough.
This declining trend in interest rates has continued through three recessions and two economic expansions, through stock market crashes and bubbles, through property booms and busts. But yesterday, this 23-year sequence of declining highs and lows came to an end.
The Fed’s decision to increase its rate to 1.25 per cent marked the symbolic start of a new era, since the chances that interest rates will fall back to 1 per cent rates or below must be very small.
And this change in trend is not just a symbolic or theoretical matter. Its impact will be felt across the world. The global financial markets are more integrated than ever and even for British businesses and borrowers the imminent change in US financial conditions could be more significant than any decision that the Bank of England takes. US monetary policy still largely determines global inflation and liquidity conditions, has a major influence on currency valuations, stock market and oil prices, as well as setting the psychological background for the decisions of the Bank of England and the European Central Bank.
Its most important effects will be to focus attention on disconcerting issues which finance ministers, central bankers and investors have recently done their best to downplay or ignore: the likelihood of much higher interest rates in the near future; and the deteriorating outlook for global inflation in the long term.
Now that the Fed has started raising interest rates, investors will have to acknowledge that this upward trend has a long way to go. Given that the powerful surge of growth in the American economy after the Iraq war has ended and inflation’s slow but steady increase in the past few months, it is clear with the benefit of hindsight that US interest rates should never have fallen as low as they did. And having cut interest rates to 1 per cent last June — at a time when the economy was already booming — the Fed should have raised them much faster than it did. But what is even clearer is that US interest rates are now far below the appropriate level for this stage of the economic cycle and will need to rise much farther and faster than financial markets currently assume.
In Britain, the Bank of England assumes that interest rates will have to rise to 5 per cent to get to a neutral level, which neither stimulates nor restrains the economy. If so, then US rates will have to rise well above 5 per cent before they start to rein-in growth and inflation. American consumers are less indebted than their British counterparts, US house prices are lower and the US economy has a higher rate of population growth — all of which implies that America should be less sensitive to rising interest rates than Britain and that controlling the economy should require higher rates.
At present the American markets are expecting only a modest increase in rates — from 1 per cent yesterday to 2.25 per cent by the end of the year and around 3.5 per cent in mid-2005. If interest rates next year rise instead to be 5 per cent or higher, investors, politicians and central bankers will be in for some shocks.
The exceptionally low US rates of the past two years have contributed to the extreme weakness of the dollar and the unwelcome strength of the euro and the pound. They have also encouraged a tremendous amount of debt-financed speculation. Investors have borrowed dollars to invest in anything from euros and yen to rand and shares in China and Brazilian bonds.
As interest rates rise, these leveraged speculations will be unwound, with potentially disruptive effects on many economies and financial markets. More fundamentally, the low level of US interest rates has aggravated the biggest long-term danger facing the world economy: a revival of inflation. In fact, the combination of an ultra-lax monetary policy with a rapidly falling dollar has created a situation which is more and more reminiscent of the great inflation which started with the US Government pursuing an expansionary Keynesian guns-and-butter and easy money policy in the mid-1960s, as the Vietnam War gathered pace.
In America today there are seven separate trends all pointing to higher prices and excess leverage in ominous ways reminiscent of the 1960s: first and foremost, a lax monetary policy, with a central bank dedicated to creating jobs, rather than stabilising prices; second, ballooning budget deficits; third, a falling currency; fourth, a hugely expensive war, financed by printing money; fifth, protectionism; sixth, a soaring oil price; seventh, a spendthrift President, who may be a right-wing Republican, but is spending money like a left-wing Democrat. In normal times, any one of these “seven deadly sins” might be sufficient to push up inflation. All seven operating together would be a sure-fire recipe for prices to take off.
This does not mean that the US will return to the rapid inflation of the 1970s and 1980s — 10 per cent or even 5 per cent inflation is unlikely, partly because markets and central bankers have not completely forgotten the lessons of the 1960s and 1970s, but mainly because there is so much more competition and global trade. But even a modest increase — say from 2 per cent inflation to 3 or 4 per cent — would have a major impact on the world economy.
For a start it would damage the credibility of the Fed, and by association, of other central banks around the word. Under Alan Greenspan, the Fed has become the most powerful and respected financial institution of all time. But this reputation will suffer as investors and politicians realise that they have been misled by it. Only four months ago Mr Greenspan declared in his annual report to Congress that the Fed expected US inflation this year to average between 1 and 1.25 per cent and that the risks to this forecast were mostly in a downward direction. Instead, inflation is now running at 2.5 per cent, with higher figures probably ahead. The Fed should be quickly raising interest rates to at least the neutral level of 5 per cent. Yet all indications are that Mr Greenspan will tighten only gently, at least until after the November presidential election is out of the way. Mr Greenspan will soon stand accused not only of misjudging the inflation outlook, but also of delaying remedial treatment to protect President Bush.
Moreover, the cyclical pressures for rising inflation will soon be aggravated by an even more powerful long-term trend: the growing demand for social spending. In the coming decades huge additional demands for non-productive expenditures will be imposed on the US and global economies. While the war against terrorism is the obvious one which attracts the most attention (just as the Vietnam War did in the 1960s and 1970s), the far more important pressures will come in the long-term from demographic ageing and the growing power of the grey lobby to demand public financing of unfounded pensions and healthcare. This is in many ways analogous to the growth of the welfare state and the Great Society in the 1960s. The ever-growing demands of ageing populations will impose a greater burden on the US economy, as well as the economies of Europe and Japan, than any previous social programme or war.
If history is any guide, politicians and voters will decide that inflation is the only way to spread the burden of these ever-growing social costs. If so, then the trend of interest rates and inflation will continue to point upwards for years, or even decades, to come.
Monday, July 05, 2004
New York Times: China Is Filtering Phone Text Messages to Regulate Criticism
China Is Filtering Phone Text Messages to Regulate Criticism
By JOSEPH KAHN
BEIJING, July 2 - China has begun filtering billions of telephone text messages to ensure that people do not use the popular communication tool to undermine one-party rule.
The campaign, announced on Friday by the official New China News Agency, comes after text messages sent between China's nearly 300 million mobile phone users helped to expose the national cover-up of the SARS epidemic last year. Text messages have also generated popular outrage about corruption and abuse cases that had received little attention in the state-controlled media.
It is a sign that while China has embraced Internet and mobile phone technology, the government has also substantially increased its surveillance of digital communications and adopted new methods of preventing people from getting unauthorized information about sensitive subjects.
This week, government officials began making daily inspections of short-message service providers, including Web sites and the leading mobile phone companies. They had already fined 10 providers and forced 20 others to shut down for not properly policing messages passing through their communication systems, the news agency said.
The dispatch said the purpose was to stop the spread of pornographic messages and false or deceptive advertising as well as to block illicit news and information.
All such companies are being required to install filtering equipment that can monitor and delete messages that contain key words, phrases or numbers that authorities consider suspicious before they reach customers. The companies must contact the relevant authorities, including the Communist Party's propaganda department, to make sure they stay in touch with the latest lists of banned topics, executives in the industry said.
Although text messaging is still in its infancy in the United States, it has become a primary means of communication in China. Chinese mobile phone users sent 220 billion text messages in 2003, or an average of 7,000 every second, more than the rest of the world combined, China Telecom data shows.
Many people with mobile phones like text messaging because it is quieter and less expensive than making phone calls. Messages can also be sent to multiple people at once and, at least until recently, were considered too unimportant or technologically difficult to monitor.
The authorities have become increasingly attuned to the threat posed by mobile messaging, as it has become not only a convenient way to talk and gossip, but also a competitor in the news business.
Phone messaging is faster and easier than using chat sites on the Web, which have also become forums to disseminate information and opinions. China had already taken steps to monitor Web sites more carefully and had arrested several dozen "cyberdissidents" for posting articles or expressing views on the Internet that the authorities deemed unacceptable.
New regulations on messaging appear to have been phased in during recent weeks. Some mobile phone users said they had had trouble sending ordinary text messages around the 15th anniversary of the June 4, 1989, crackdown on democracy demonstrations in Beijing, perhaps because of tighter policing of the service.
One user said that messages he sent that included the numbers 6 and 4 close together were never delivered, perhaps because they were screened as a possible reference to the date of the crackdown.
Wang Hongwei, a 25-year-old air-conditioning technician in Beijing, said he got up to 100 text messages every day - from friends, colleagues and news sites. He said he had found the service slower and less reliable recently, although he had not heard of the new monitoring orders.
"I don't think there's any justification for filtering every single message," he said. "The government should not be deciding what people say to each other."
Industry experts say message filtering technology is relatively straightforward, much like programs to block junk e-mail. The challenge is to provide robust software that can process enormous volumes of text messages without reducing their efficiency.
"You can filter as much as you like, just like a list of words," said Wang Yuanyuan, a sales manager at Venus Info Tech, which sells filtering software to Chinese messaging service providers.
She said the new rules would lead to heavy demand for her company's product.
"I think with the new rules the government will be expecting service providers to govern their content in a more regularized way, and this is what our system can do," she said.
By JOSEPH KAHN
BEIJING, July 2 - China has begun filtering billions of telephone text messages to ensure that people do not use the popular communication tool to undermine one-party rule.
The campaign, announced on Friday by the official New China News Agency, comes after text messages sent between China's nearly 300 million mobile phone users helped to expose the national cover-up of the SARS epidemic last year. Text messages have also generated popular outrage about corruption and abuse cases that had received little attention in the state-controlled media.
It is a sign that while China has embraced Internet and mobile phone technology, the government has also substantially increased its surveillance of digital communications and adopted new methods of preventing people from getting unauthorized information about sensitive subjects.
This week, government officials began making daily inspections of short-message service providers, including Web sites and the leading mobile phone companies. They had already fined 10 providers and forced 20 others to shut down for not properly policing messages passing through their communication systems, the news agency said.
The dispatch said the purpose was to stop the spread of pornographic messages and false or deceptive advertising as well as to block illicit news and information.
All such companies are being required to install filtering equipment that can monitor and delete messages that contain key words, phrases or numbers that authorities consider suspicious before they reach customers. The companies must contact the relevant authorities, including the Communist Party's propaganda department, to make sure they stay in touch with the latest lists of banned topics, executives in the industry said.
Although text messaging is still in its infancy in the United States, it has become a primary means of communication in China. Chinese mobile phone users sent 220 billion text messages in 2003, or an average of 7,000 every second, more than the rest of the world combined, China Telecom data shows.
Many people with mobile phones like text messaging because it is quieter and less expensive than making phone calls. Messages can also be sent to multiple people at once and, at least until recently, were considered too unimportant or technologically difficult to monitor.
The authorities have become increasingly attuned to the threat posed by mobile messaging, as it has become not only a convenient way to talk and gossip, but also a competitor in the news business.
Phone messaging is faster and easier than using chat sites on the Web, which have also become forums to disseminate information and opinions. China had already taken steps to monitor Web sites more carefully and had arrested several dozen "cyberdissidents" for posting articles or expressing views on the Internet that the authorities deemed unacceptable.
New regulations on messaging appear to have been phased in during recent weeks. Some mobile phone users said they had had trouble sending ordinary text messages around the 15th anniversary of the June 4, 1989, crackdown on democracy demonstrations in Beijing, perhaps because of tighter policing of the service.
One user said that messages he sent that included the numbers 6 and 4 close together were never delivered, perhaps because they were screened as a possible reference to the date of the crackdown.
Wang Hongwei, a 25-year-old air-conditioning technician in Beijing, said he got up to 100 text messages every day - from friends, colleagues and news sites. He said he had found the service slower and less reliable recently, although he had not heard of the new monitoring orders.
"I don't think there's any justification for filtering every single message," he said. "The government should not be deciding what people say to each other."
Industry experts say message filtering technology is relatively straightforward, much like programs to block junk e-mail. The challenge is to provide robust software that can process enormous volumes of text messages without reducing their efficiency.
"You can filter as much as you like, just like a list of words," said Wang Yuanyuan, a sales manager at Venus Info Tech, which sells filtering software to Chinese messaging service providers.
She said the new rules would lead to heavy demand for her company's product.
"I think with the new rules the government will be expecting service providers to govern their content in a more regularized way, and this is what our system can do," she said.
July 5: The Philippine Stock Market Review
PLDT once again cushioned the Philippine benchmark, the Phisix, which closed little changed, from the generally bearish market bias that pervaded today’s trading activities. Bolstered by foreign investors whom injected P 85 million worth of capital representing 73% of the company’s traded output, PLDT was the sole winner among the major heavyweights adding 2.09% to the company’s market cap. Rival Globe Telecoms, San Miguel B and Ayala Corp were the major decliners that weighed on the index while San Miguel A, banking heavyweights Metrobank and Bank of the Philippine Islands, and Property heavyweights SM Primeholdings and Ayala Land closed unchanged.
Domestic investors dominated today’s trading accounting for about 63% of today’s turnover with declining issues leading advancing issues by 41 to 29. Foreigners reported a net buying of P 65.492 million with a substantial majority of the inflows concentrated on PLDT. This suggests that local investors were on a selling mode probably due to profit taking from sectors that posted substantial gains.
Among the industry indices the PLDT driven Commercial and Industrial Index and the Sunlife and Manulife dominated Phi-All index were today’s gainers, while the extractive industries the oil and mining indices, as well as Banking and Finance and the Property Indices closed lower.
PLDT’s rise in New York last Friday, defied the bearish general sentiment in Wall Street, and practically the same mien was replicated in today’s trading activities.
Domestic investors dominated today’s trading accounting for about 63% of today’s turnover with declining issues leading advancing issues by 41 to 29. Foreigners reported a net buying of P 65.492 million with a substantial majority of the inflows concentrated on PLDT. This suggests that local investors were on a selling mode probably due to profit taking from sectors that posted substantial gains.
Among the industry indices the PLDT driven Commercial and Industrial Index and the Sunlife and Manulife dominated Phi-All index were today’s gainers, while the extractive industries the oil and mining indices, as well as Banking and Finance and the Property Indices closed lower.
PLDT’s rise in New York last Friday, defied the bearish general sentiment in Wall Street, and practically the same mien was replicated in today’s trading activities.
Saturday, July 03, 2004
Forbes on Outsourcing: Cashing In On Savings
Cashing In On Savings
Kerry A. Dolan, 07.01.04, 5:10 PM ET
SAN FRANCISCO - The public backlash against moving jobs overseas has died down of late. But the offshoring of specific functions by financial services companies is moving full steam ahead, according to a new report out this week.
More than 80% of the world's largest banks, insurance companies, investment banks and brokerages have undertaken initiatives to move jobs out of their home bases, says Deloitte Research. The study found, in the last year, a 38% increase in the number of financial firms that have moved activities offshore for the first time. And the large financial institutions that have yet to offshore anything are seriously considering it, the report concludes.
Some of the world's biggest financial players, including American Express (nyse: AXP - news - people ) and the GE Capital unit of General Electric (nyse: GE - news - people ), have moved jobs like call centers and software development for a number of years. Others, like Mellon Financial (nyse: MEL - news - people ) and Bank of America (nyse: BAC - news - people ), are more recent converts to the trend. Bank of America just opened its first offshore "back-office" center in India in late May this year.
In the same survey a year ago, only 29% of institutions surveyed by Deloitte had moved operations offshore. This year 67% have already done so, and another 13% are planning to move at least some operations offshore. The big players are embracing offshoring more wholeheartedly than smaller financial institutions, according to Deloitte.
The primary reason for most offshoring is cost savings. The top 100 global financial services institutions--those with market capitalizations exceeding $10 billion--will send approximately $210 billion of their cost base overseas, saving an average $700 million per institution by 2005, the survey concludes.
Given the Fed's recent move to raise interest rates and the expectation of more hikes to come, savings from offshoring look even more attractive to lending institutions in search of new ways to boost the bottom line. The principal activities being moved overseas are IT services, software development, call centers and back-office work.
India ranked as by far the top destination for offshoring activities. "India is winning eight out of ten new deals," says Peter Lowes, U.S. leader of Deloitte Consulting's outsourcing practice. "It's developed the critical mass and the necessary infrastructure. The system in India is now a much more well-oiled machine."
India's large supply of educated workers, as well as tax deals offered by the Indian government, are important incentives. Many financial firms are not even evaluating other countries, says Lowes. However, the Philippines and Malaysia follow India as destinations of choice.
A growing number of firms--40%--are choosing to set up "captive" operations offshore, rather than outsource activities to a third party. One reason, says Lowes, is that global firms are already comfortable managing operations--and risk--in overseas locations. Such a move is a greater challenge for smaller financial firms.
Deloitte's second annual Global Offshore Survey, called "The Titans Take Hold," was based on responses from 43 financial institutions, 60% of which are U.S. based, with the remainder in Europe. It included 13 of the top 25 financial institutions in the world by market capitalization.
******
The Prudent Investor's view: In answer to Morgan Stanley economist Mr. Lian's dour outlook on the Philippines (article posted earlier), the prospects of outsourcing as presented above by the Forbes magazine, could be one of the possible growth corridors which could help spur the Philippine economy. This would be only possible if government is cognizant of its potentials and works on ensuring the viability, conduciveness and competitiveness of the industry players, as well as, retool the local labor force to meet the required standards.
Moreover, if there were any economic models that the Philippines should possibly try to emulate given its litany of disadvantages such as low savings and inadequate investments, low-value added exports, weak government finance and burdensome debts, vulnerable government institutions, poor infrastructure, low inflows of FDI and dependency on consumption, possibly the Indian paragon of a domestic services sector led growth strategy could be the rightful answer to our plaguing woes.
India’s economic infirmities in some ways parallel that of the Philippines, while on the other hand, India’s strengths, namely, well educated workforce, IT competency and English proficiency are by no means strangers to the Philippine labor force. The key to curbing the brain drain or the intellectual hemorrhage would be to harness these skills to attract offshoring service contracts. The offshoring/outsourcing phenomenon is by large an offshoot of the globalization efforts linked by the web-based platform and other IT enabled services. All that is required of the Philippines is to focus on attaining its competitiveness in an industry with exploding potentials.
Kerry A. Dolan, 07.01.04, 5:10 PM ET
SAN FRANCISCO - The public backlash against moving jobs overseas has died down of late. But the offshoring of specific functions by financial services companies is moving full steam ahead, according to a new report out this week.
More than 80% of the world's largest banks, insurance companies, investment banks and brokerages have undertaken initiatives to move jobs out of their home bases, says Deloitte Research. The study found, in the last year, a 38% increase in the number of financial firms that have moved activities offshore for the first time. And the large financial institutions that have yet to offshore anything are seriously considering it, the report concludes.
Some of the world's biggest financial players, including American Express (nyse: AXP - news - people ) and the GE Capital unit of General Electric (nyse: GE - news - people ), have moved jobs like call centers and software development for a number of years. Others, like Mellon Financial (nyse: MEL - news - people ) and Bank of America (nyse: BAC - news - people ), are more recent converts to the trend. Bank of America just opened its first offshore "back-office" center in India in late May this year.
In the same survey a year ago, only 29% of institutions surveyed by Deloitte had moved operations offshore. This year 67% have already done so, and another 13% are planning to move at least some operations offshore. The big players are embracing offshoring more wholeheartedly than smaller financial institutions, according to Deloitte.
The primary reason for most offshoring is cost savings. The top 100 global financial services institutions--those with market capitalizations exceeding $10 billion--will send approximately $210 billion of their cost base overseas, saving an average $700 million per institution by 2005, the survey concludes.
Given the Fed's recent move to raise interest rates and the expectation of more hikes to come, savings from offshoring look even more attractive to lending institutions in search of new ways to boost the bottom line. The principal activities being moved overseas are IT services, software development, call centers and back-office work.
India ranked as by far the top destination for offshoring activities. "India is winning eight out of ten new deals," says Peter Lowes, U.S. leader of Deloitte Consulting's outsourcing practice. "It's developed the critical mass and the necessary infrastructure. The system in India is now a much more well-oiled machine."
India's large supply of educated workers, as well as tax deals offered by the Indian government, are important incentives. Many financial firms are not even evaluating other countries, says Lowes. However, the Philippines and Malaysia follow India as destinations of choice.
A growing number of firms--40%--are choosing to set up "captive" operations offshore, rather than outsource activities to a third party. One reason, says Lowes, is that global firms are already comfortable managing operations--and risk--in overseas locations. Such a move is a greater challenge for smaller financial firms.
Deloitte's second annual Global Offshore Survey, called "The Titans Take Hold," was based on responses from 43 financial institutions, 60% of which are U.S. based, with the remainder in Europe. It included 13 of the top 25 financial institutions in the world by market capitalization.
******
The Prudent Investor's view: In answer to Morgan Stanley economist Mr. Lian's dour outlook on the Philippines (article posted earlier), the prospects of outsourcing as presented above by the Forbes magazine, could be one of the possible growth corridors which could help spur the Philippine economy. This would be only possible if government is cognizant of its potentials and works on ensuring the viability, conduciveness and competitiveness of the industry players, as well as, retool the local labor force to meet the required standards.
Moreover, if there were any economic models that the Philippines should possibly try to emulate given its litany of disadvantages such as low savings and inadequate investments, low-value added exports, weak government finance and burdensome debts, vulnerable government institutions, poor infrastructure, low inflows of FDI and dependency on consumption, possibly the Indian paragon of a domestic services sector led growth strategy could be the rightful answer to our plaguing woes.
India’s economic infirmities in some ways parallel that of the Philippines, while on the other hand, India’s strengths, namely, well educated workforce, IT competency and English proficiency are by no means strangers to the Philippine labor force. The key to curbing the brain drain or the intellectual hemorrhage would be to harness these skills to attract offshoring service contracts. The offshoring/outsourcing phenomenon is by large an offshoot of the globalization efforts linked by the web-based platform and other IT enabled services. All that is required of the Philippines is to focus on attaining its competitiveness in an industry with exploding potentials.
Morgan Stanley's Daniel Lian: Pivotal Elections in Southeast Asia
Pivotal Elections in Southeast Asia
Daniel Lian (Singapore)
Three Southeast Asian countries held elections this year. After the general election in Malaysia, concluded in March, Indonesia went to the polls in April to elect a new national legislature and local governments and the Philippines elected a new president and half the Senate in May. Indonesia is also scheduled to vote for a new president in July. These are pivotal elections as they usher in new economic and political leadership that will affect future economic development and improved political stability in Southeast Asia.
On June 24, the Philippine Congress declared President Gloria Macapagal Arroyo the winner of the May 10 election. Ms. Arroyo secured a six-year unambiguous mandate, thus ending her “indirect ascent” to the presidency – as in the prior 3½ years she had assumed the presidency from former President Estrada after he was overthrown in January 2001. On July 5, Indonesia will, for the first time, directly elect its president from a pool of five candidates.
Challenging Social-Economic and Geopolitical Risks
The Indonesian and the Philippine elections are pivotal. Both have large populations – 219 million and 82 million, respectively, and their combined population is more than three quarters of the almost 400 million people in the five ASEAN economies. Both face considerable economic and geopolitical risks, and both are “non-investment grade,” with lowest rankings on various economic metrics among the “market-oriented” economies in East Asia. Relative economic underdevelopment, the inequitable distribution of income and wealth, high unemployment and poverty, coupled with poorly developed institutions and deep-rooted rent-seeking behavior by governments, corporates and other elites create considerable problems.
Social discontent and geopolitical challenges are evident in both economies, and in some instances, this has led to the establishment of radical Islamic movements. There are about 210 million Muslims in the five major Southeast Asia economies. In Indonesia, they are 184 million, or 85% of the estimated 219 million population, but in the Philippines a much smaller 7 million, or 9% of the 82 million population. I believe governments need to deal with the level of discontent among the underprivileged in both economies to avoid disillusionment with the established secular democracies and reduce the appeal of radical Islamic groups.
Economic Challenges
The new leaderships in Indonesia and the Philippines must confront considerable economic challenges.
(1) Skin-deep industrialization and the fallacy of China-trade induced prosperity: While both economies have pursued FDI-driven mass manufacturing export orientation and are fairly successfully in generating export growth, their manufacturing production base and exports remain extremely low value-added and are vulnerable to competition from China and other low-cost economies.
While many point to the recent surge in two-way trade between both countries and China, as well as the robustness in intra-Sino-Southeast Asian trade, as the prelude to a mutually beneficial and symbolic structural relationship, I believe the optimism is misplaced. The economic reality is that China cannot be a major growth factor for both countries, in my view. Exports to China accounted for only 6.2% of Indonesia’s merchandise exports and 6% of Philippines in 2003. Also China does not actively invest in both countries.
China’s substantially enlarged two-way trade and growing deficits with ASEAN in the past few years suggest neither economic advantage nor strength in the ASEAN traded sector. In my view, this signals that Southeast Asia is rapidly losing its traditional export markets to China, while at the same time surviving by exporting parts to China to fulfill the world’s appetite for Chinese goods on terms drawn up by multinational corporations. The rapidly growing two-way trade and Chinese trade deficits are increasingly characterized by China buying more mass-manufactured parts (heavily concentrated in IT-related sectors) and primary products (agriculture, commercial crops and commodities) from ASEAN.
(2) Consumption dependency and inadequate saving and investment: Both Indonesia and the Philippines persistently have the lowest national saving and domestic capital formation rates in the region. FDI trends have also been the most negative among East Asia peers in recent years.
While I have consistently endorsed a more balanced dual track model to boost domestic demand and balance excessive dependence on high saving, wasteful government and crony corporate-led investment, and the “lack of pricing power” for mass-manufactured exports, both economies are not saving or investing enough. While they should pursue more second track development to engineer structural resilience in domestic demand, the correct route is through more productive investment rather than consumption.
(3) Weak government finance and heavy debt: A major reason for inadequate saving and investment rates, other than capital and intellectual capital flight, and a poor political economy, is their structurally weak government finance positions and the concomitant excessive public and external debt burden. Other East Asia governments have considerable debt but also possess significant assets and large foreign reserves.
(4) The lack of a well-thought out rural platform and long-term economic development strategy: I believe both economies have few prospects to win the global FDI game in the near future, and thus the low-value generic mass manufacturing export model will not bring sufficient economic growth and prosperity. It is thus critical for policymakers to establish a well thought out rural development platform to better leverage their vast and less developed rural sector – Indonesia’s population is 58% rural and the Philippines is 41%. Both economies also need to map out a long-term development blueprint with a strengthened platform to address the long-term needs of the urban poor, and the resource, SME and the government and corporate sectors.
In my view, Thailand’s dual-track development strategy has a lot of relevance for both of these largely agrarian economies.
Political-Economy and Other Structural Impediments
The challenges confronting both economies stretch beyond economic parameters. In my view, the leaders in both countries must strive to overcome two common structural impediments:
(1) Ineffective government institutions vs. an institutionalized rent-seeking complex: In both countries, public institutions are not strong and there is a well-entrenched rent-seeking complex that dominates the corporate and government spheres, leaving most of the population without much economic or social mobility.
(2) Capital and intellectual capital flight: Substantial domestic savings are overseas and the top echelons of talent are not serving the domestic economies and institutions.
Bottom Line: Rural Development Platform
The presidential election just concluded in the Philippines, and the presidential election that is set to unfold in Indonesia are pivotal for two of the less developed economies in Southeast Asia. Both countries face substantial social, economic and geopolitical risks. The primary economic challenges are that both economies have attained only skin-deep industrialization and are overly dependent on consumption for growth as both nations lack savings and investment. The low-saving and investment trap is in no small part due to weak government finances and a heavy debt burden. Beyond economic parameters, both economies face the common impediments of a strong institutionalized rent-seeking complex, ineffective public institutions, and severe capital and intellectual capital flight.
In my view, both economies have few prospects of winning the global FDI game in the near future and concomitantly the low-value generic mass manufacturing-based export model will not bring sufficient economic growth and prosperity that are desperately needed to circumvent low growth, high debt and poverty traps. It is thus critical for their policymakers to establish a well thought out rural development platform to better leverage their vast but underprivileged and less developed rural sectors. Both countries also need to map out a long-term development blueprint with a strengthened platform to address the long-term needs of the urban underprivileged, resources, SMEs, and the government and corporate sectors.
Daniel Lian (Singapore)
Three Southeast Asian countries held elections this year. After the general election in Malaysia, concluded in March, Indonesia went to the polls in April to elect a new national legislature and local governments and the Philippines elected a new president and half the Senate in May. Indonesia is also scheduled to vote for a new president in July. These are pivotal elections as they usher in new economic and political leadership that will affect future economic development and improved political stability in Southeast Asia.
On June 24, the Philippine Congress declared President Gloria Macapagal Arroyo the winner of the May 10 election. Ms. Arroyo secured a six-year unambiguous mandate, thus ending her “indirect ascent” to the presidency – as in the prior 3½ years she had assumed the presidency from former President Estrada after he was overthrown in January 2001. On July 5, Indonesia will, for the first time, directly elect its president from a pool of five candidates.
Challenging Social-Economic and Geopolitical Risks
The Indonesian and the Philippine elections are pivotal. Both have large populations – 219 million and 82 million, respectively, and their combined population is more than three quarters of the almost 400 million people in the five ASEAN economies. Both face considerable economic and geopolitical risks, and both are “non-investment grade,” with lowest rankings on various economic metrics among the “market-oriented” economies in East Asia. Relative economic underdevelopment, the inequitable distribution of income and wealth, high unemployment and poverty, coupled with poorly developed institutions and deep-rooted rent-seeking behavior by governments, corporates and other elites create considerable problems.
Social discontent and geopolitical challenges are evident in both economies, and in some instances, this has led to the establishment of radical Islamic movements. There are about 210 million Muslims in the five major Southeast Asia economies. In Indonesia, they are 184 million, or 85% of the estimated 219 million population, but in the Philippines a much smaller 7 million, or 9% of the 82 million population. I believe governments need to deal with the level of discontent among the underprivileged in both economies to avoid disillusionment with the established secular democracies and reduce the appeal of radical Islamic groups.
Economic Challenges
The new leaderships in Indonesia and the Philippines must confront considerable economic challenges.
(1) Skin-deep industrialization and the fallacy of China-trade induced prosperity: While both economies have pursued FDI-driven mass manufacturing export orientation and are fairly successfully in generating export growth, their manufacturing production base and exports remain extremely low value-added and are vulnerable to competition from China and other low-cost economies.
While many point to the recent surge in two-way trade between both countries and China, as well as the robustness in intra-Sino-Southeast Asian trade, as the prelude to a mutually beneficial and symbolic structural relationship, I believe the optimism is misplaced. The economic reality is that China cannot be a major growth factor for both countries, in my view. Exports to China accounted for only 6.2% of Indonesia’s merchandise exports and 6% of Philippines in 2003. Also China does not actively invest in both countries.
China’s substantially enlarged two-way trade and growing deficits with ASEAN in the past few years suggest neither economic advantage nor strength in the ASEAN traded sector. In my view, this signals that Southeast Asia is rapidly losing its traditional export markets to China, while at the same time surviving by exporting parts to China to fulfill the world’s appetite for Chinese goods on terms drawn up by multinational corporations. The rapidly growing two-way trade and Chinese trade deficits are increasingly characterized by China buying more mass-manufactured parts (heavily concentrated in IT-related sectors) and primary products (agriculture, commercial crops and commodities) from ASEAN.
(2) Consumption dependency and inadequate saving and investment: Both Indonesia and the Philippines persistently have the lowest national saving and domestic capital formation rates in the region. FDI trends have also been the most negative among East Asia peers in recent years.
While I have consistently endorsed a more balanced dual track model to boost domestic demand and balance excessive dependence on high saving, wasteful government and crony corporate-led investment, and the “lack of pricing power” for mass-manufactured exports, both economies are not saving or investing enough. While they should pursue more second track development to engineer structural resilience in domestic demand, the correct route is through more productive investment rather than consumption.
(3) Weak government finance and heavy debt: A major reason for inadequate saving and investment rates, other than capital and intellectual capital flight, and a poor political economy, is their structurally weak government finance positions and the concomitant excessive public and external debt burden. Other East Asia governments have considerable debt but also possess significant assets and large foreign reserves.
(4) The lack of a well-thought out rural platform and long-term economic development strategy: I believe both economies have few prospects to win the global FDI game in the near future, and thus the low-value generic mass manufacturing export model will not bring sufficient economic growth and prosperity. It is thus critical for policymakers to establish a well thought out rural development platform to better leverage their vast and less developed rural sector – Indonesia’s population is 58% rural and the Philippines is 41%. Both economies also need to map out a long-term development blueprint with a strengthened platform to address the long-term needs of the urban poor, and the resource, SME and the government and corporate sectors.
In my view, Thailand’s dual-track development strategy has a lot of relevance for both of these largely agrarian economies.
Political-Economy and Other Structural Impediments
The challenges confronting both economies stretch beyond economic parameters. In my view, the leaders in both countries must strive to overcome two common structural impediments:
(1) Ineffective government institutions vs. an institutionalized rent-seeking complex: In both countries, public institutions are not strong and there is a well-entrenched rent-seeking complex that dominates the corporate and government spheres, leaving most of the population without much economic or social mobility.
(2) Capital and intellectual capital flight: Substantial domestic savings are overseas and the top echelons of talent are not serving the domestic economies and institutions.
Bottom Line: Rural Development Platform
The presidential election just concluded in the Philippines, and the presidential election that is set to unfold in Indonesia are pivotal for two of the less developed economies in Southeast Asia. Both countries face substantial social, economic and geopolitical risks. The primary economic challenges are that both economies have attained only skin-deep industrialization and are overly dependent on consumption for growth as both nations lack savings and investment. The low-saving and investment trap is in no small part due to weak government finances and a heavy debt burden. Beyond economic parameters, both economies face the common impediments of a strong institutionalized rent-seeking complex, ineffective public institutions, and severe capital and intellectual capital flight.
In my view, both economies have few prospects of winning the global FDI game in the near future and concomitantly the low-value generic mass manufacturing-based export model will not bring sufficient economic growth and prosperity that are desperately needed to circumvent low growth, high debt and poverty traps. It is thus critical for their policymakers to establish a well thought out rural development platform to better leverage their vast but underprivileged and less developed rural sectors. Both countries also need to map out a long-term development blueprint with a strengthened platform to address the long-term needs of the urban underprivileged, resources, SMEs, and the government and corporate sectors.
Friday, July 02, 2004
Elliot Wave's Folsom: Why Do Most Investors Fail to Act on What They Know?
Why Do Most Investors Fail to Act on What They Know?
by Robert Folsom
You really can't overemphasize the danger each individual presents to his or her own portfolio. Even the relative few investors who sense this danger may not truly understand it. Consider the following truism:
Fear is stronger than greed, which is why financial markets fall more rapidly than they climb.
Most investors will say the sentence above is common knowledge. But, if so, why then do most investors fail to act on what they know?
The failure I have in mind is the behavior toward risk, namely: The average investor is risk-averse toward a known gain, but is risk-seeking toward a certain loss.
When a stock goes up in price, individuals will sell too soon, especially when that stock has outperformed the broader market. They avoid risk by locking in the gain. When a stock goes down, individuals won't sell soon enough, especially when that loser has underperformed the market. They assume the risk of even deeper declines, rather than choose to cut their certain losses.
Study after study bears out this truth, both in controlled experiments and in the data reflecting the actual gains and losses of real investors. Published results from firms like Dalbar Financial and Vanguard consistently show that, over the past 20 years, individual investors and mutual fund shareholders have had average returns that are half (at best) of the annual returns of the broader stock market.
This sad tale of underperformance tells itself in many ways. Dalbar's data shows that equity fund investors held their shares less than 30 months on average, with fixed-income shareholders averaging about 34 months.
One assumes that 30 to 34 months is long enough for an investor to realize that a given fund isn't "hot" any more, and that it's time to look for the next hot one, only to repeat the self-destructive cycle again.
The phenomenon has appeared in markets from metals to tech stocks to commodities to overseas stock indexes, etc., ad nauseam.
What's more, these same studies and surveys also show that most investors are overconfident in the decisions they make. Put another way, they don't even know that they are their own worst enemy.
Market prices move in recognizable patterns: Those patterns can also reveal specific price levels that help confirm the direction of the trend, or identify the time to step aside. Respecting the price, pattern and trend is the first step toward discipline, instead of yielding to emotions. Learn the patterns, and you'll starve the emotional beast.
Robert Folsom
Elliott Wave International
by Robert Folsom
You really can't overemphasize the danger each individual presents to his or her own portfolio. Even the relative few investors who sense this danger may not truly understand it. Consider the following truism:
Fear is stronger than greed, which is why financial markets fall more rapidly than they climb.
Most investors will say the sentence above is common knowledge. But, if so, why then do most investors fail to act on what they know?
The failure I have in mind is the behavior toward risk, namely: The average investor is risk-averse toward a known gain, but is risk-seeking toward a certain loss.
When a stock goes up in price, individuals will sell too soon, especially when that stock has outperformed the broader market. They avoid risk by locking in the gain. When a stock goes down, individuals won't sell soon enough, especially when that loser has underperformed the market. They assume the risk of even deeper declines, rather than choose to cut their certain losses.
Study after study bears out this truth, both in controlled experiments and in the data reflecting the actual gains and losses of real investors. Published results from firms like Dalbar Financial and Vanguard consistently show that, over the past 20 years, individual investors and mutual fund shareholders have had average returns that are half (at best) of the annual returns of the broader stock market.
This sad tale of underperformance tells itself in many ways. Dalbar's data shows that equity fund investors held their shares less than 30 months on average, with fixed-income shareholders averaging about 34 months.
One assumes that 30 to 34 months is long enough for an investor to realize that a given fund isn't "hot" any more, and that it's time to look for the next hot one, only to repeat the self-destructive cycle again.
The phenomenon has appeared in markets from metals to tech stocks to commodities to overseas stock indexes, etc., ad nauseam.
What's more, these same studies and surveys also show that most investors are overconfident in the decisions they make. Put another way, they don't even know that they are their own worst enemy.
Market prices move in recognizable patterns: Those patterns can also reveal specific price levels that help confirm the direction of the trend, or identify the time to step aside. Respecting the price, pattern and trend is the first step toward discipline, instead of yielding to emotions. Learn the patterns, and you'll starve the emotional beast.
Robert Folsom
Elliott Wave International
July 2 Philippine Stock Market Review
PLDT’s upsurge is truly an incredible phenomenon. After breaking past its May 26th resistance levels at 1,160, the Philippines largest market cap is now on its way to test its July 13th 1999 or a 5-year high level of 1,275. Moreover, PLDT has long been buttressed by massive capital infusion from foreigners; as of today’s trade it is the largest recipient of foreign money, offsetting the enormous outflows seen in Globe Telecoms. PLDT’s continued winning streak (+1.70%) plus Globe Telecom’s local support (+.59%) have basically cushioned the Phisix’s decline by only 2.96 points or .19%. PLDT’s spectacular rise stoically comes in the face of the huge declines seen in the key US benchmarks where it is also traded.
FOUR of the index heavyweights cumbered on the Philippine 30-company bellwether, Ayala Corp (-1.72%), BPI (-1.17%), Ayala Land (-1.72%) and SM Primeholdings (-1.63%). San Miguel local and foreign shares as well as Metrobank closed unchanged.
Aside from PLDT which recorded the most foreign inflows, minor inflows were seen in First Philippine Holdings and Benpres Corp. Meanwhile, huge outflows by overseas investors were seen in Ginebra San Miguel (-3.57%) and Globe Telecoms as well as minor outflows in BPI and Ayala Land.
Like what I’ve noted on yesterday, trading activities by local investors have ostensibly been growing, even as foreign participation seems to be on a decline. Today’s modest peso volume turnover of P 645 million saw domestic investor’s activities account for 51.6% of the total trades, this comes in the light of a cumulative net foreign selling to the tune of P 38.362 million.
The Market’s general sentiment had a slight bearish backdrop as declining issues edged out advancing issues by a slim 34 to 31 while the number of traded issues came at 110 for its 10th consecutive session above the 100’s. This reinforces our view that the activities of local investors are gradually picking up as more issues are being traded.
On a per industry basis, most of the major indices posted declines, namely the mining, property, banking and finance and the ALL Share index, led by MFC (-.89%) and SLF (-2.5%), shadowing the steep drop of the US markets. On the other hand, the commercial-industrial index led by the telcos as well as the oil index posted gains. Incidentally, the gains from the oils sector could probably be imputed to PSE’s disclosure that the UNOCAL consortium has uncovered traces of gas in their ongoing drilling project at the Sulu Sea.
Finally, regarding our observations of the recent notable declines of foreign activities in the Philippine market, as opined in numerous occasions on my weekly newsletters, this phenomenon could be viewed on a regional scale and is most likely associated with the issue of rising US interest rates and its ramifications, particularly from the unwinding of the so-called ‘Carry Trades’. Noted globetrotting analyst, Chris Wood of the CLSA in his recent report, as quoted by David Fuller of fullermoney.com provides for a wider perspective:
As one of the most underdeveloped bourse in the world, local buying should enable the Philippine market to progress from its current level even if the foreign players would slowdown due to the abovestated reasons. Of course, there are other considerations such as economic and corporate fundamentals, investor psychology and sentiment, money flows, technicals and hosts of other variables in play, however, in contrast to that of our neighbors specifically the so called ASEAN-5 crisis affected countries, as categorized by the Institute of International Finance, whom have practically recouped or are trading near their 2000 levels, the Philippines has been the region’s laggard, practically due to the local investor’s inertia or aversion to the market which currently trades at a huge discount from the said levels.
AS the Economist noted, the Philippines has the world’s most undervalued currency based on its Big Mac Index as of its May 27th table, this likewise mirrors the state of its domestic equity market being the region’s tailender.
FOUR of the index heavyweights cumbered on the Philippine 30-company bellwether, Ayala Corp (-1.72%), BPI (-1.17%), Ayala Land (-1.72%) and SM Primeholdings (-1.63%). San Miguel local and foreign shares as well as Metrobank closed unchanged.
Aside from PLDT which recorded the most foreign inflows, minor inflows were seen in First Philippine Holdings and Benpres Corp. Meanwhile, huge outflows by overseas investors were seen in Ginebra San Miguel (-3.57%) and Globe Telecoms as well as minor outflows in BPI and Ayala Land.
Like what I’ve noted on yesterday, trading activities by local investors have ostensibly been growing, even as foreign participation seems to be on a decline. Today’s modest peso volume turnover of P 645 million saw domestic investor’s activities account for 51.6% of the total trades, this comes in the light of a cumulative net foreign selling to the tune of P 38.362 million.
The Market’s general sentiment had a slight bearish backdrop as declining issues edged out advancing issues by a slim 34 to 31 while the number of traded issues came at 110 for its 10th consecutive session above the 100’s. This reinforces our view that the activities of local investors are gradually picking up as more issues are being traded.
On a per industry basis, most of the major indices posted declines, namely the mining, property, banking and finance and the ALL Share index, led by MFC (-.89%) and SLF (-2.5%), shadowing the steep drop of the US markets. On the other hand, the commercial-industrial index led by the telcos as well as the oil index posted gains. Incidentally, the gains from the oils sector could probably be imputed to PSE’s disclosure that the UNOCAL consortium has uncovered traces of gas in their ongoing drilling project at the Sulu Sea.
Finally, regarding our observations of the recent notable declines of foreign activities in the Philippine market, as opined in numerous occasions on my weekly newsletters, this phenomenon could be viewed on a regional scale and is most likely associated with the issue of rising US interest rates and its ramifications, particularly from the unwinding of the so-called ‘Carry Trades’. Noted globetrotting analyst, Chris Wood of the CLSA in his recent report, as quoted by David Fuller of fullermoney.com provides for a wider perspective:
“It has gone on for long enough now that it requires some more explanation. GREED & fear is referring to Asia ex-Japan's relative underperformance vis-Ã -vis the S&P 500 and the MSCI AC World Index. The MSCI AC Asia ex-Japan Index has fallen by 17.1% since peaking on 13 April, while the S&P500 has risen by 1.3% and the MSCI AC World Index has fallen by 1.2% over the same period (see Figure 1). One explanation for this has clearly been the move out of "risky" assets and the associated unwinding of the dollar carry trade. But the recent underperformance of economically sensitive Asia is also likely an early signal that global growth momentum has peaked. This is also what is suggested by the OECD leading indicators. It is also suggested by recent news in the tech sphere of a peaking out in demand for certain hot consumer electronics products, a trend which is likely to result in rising inventories.”
As one of the most underdeveloped bourse in the world, local buying should enable the Philippine market to progress from its current level even if the foreign players would slowdown due to the abovestated reasons. Of course, there are other considerations such as economic and corporate fundamentals, investor psychology and sentiment, money flows, technicals and hosts of other variables in play, however, in contrast to that of our neighbors specifically the so called ASEAN-5 crisis affected countries, as categorized by the Institute of International Finance, whom have practically recouped or are trading near their 2000 levels, the Philippines has been the region’s laggard, practically due to the local investor’s inertia or aversion to the market which currently trades at a huge discount from the said levels.
AS the Economist noted, the Philippines has the world’s most undervalued currency based on its Big Mac Index as of its May 27th table, this likewise mirrors the state of its domestic equity market being the region’s tailender.
Thursday, July 01, 2004
July 1 Philippine Stock Market Review
Today’s trading activities marked an impressive display of optimism mainly led by our local investors. The key Philippine equity market benchmark, the Phisix, climbed a modest .9% on significantly expanded volume of P 830.25 million, almost double the daily average of the last two trading sessions.
Local investors dominated the trading activities, accounting for 53% of cumulative peso turnover, even as foreign moolah posted positive inflows worth P 20.892 million. Market breadth was lopsidedly in favor of the Bulls as advancing issues clobbered declining issues by 56 to 15, or by a ratio of more than 3 to 1. In other words, while foreigners shopped on select heavyweights, local investors bought up the broadmarket.
FOUR of the eight index heavyweights chalked up gains for the day, led by foreign propelled buying on PLDT shares (+2.17%), followed by locally supported Globe Telecoms (+1.82%), Ayala Corp (+1.75%) and San Miguel (+.86%). Ayala Land, Metrobank and SM Primeholdings closed unchanged while Bank of the Philippine Islands (-1.16%) was the sole heavyweight issue that was in the red.
Aside from PLDT, foreigners scooped up shares of Ayala Corp, Ayala Land, First Philippine Holdings and Petron. On the other hand, capital outflow from overseas investors were recorded in GLOBE Telecoms, Ginebra San Miguel, Meralco B, Bank of the Philippine Islands, Equitable Bank and ABS-CBN Preferred Shares.
Except for the banking and financial sector index, all other major indices recorded gains for the day. The Small and Medium Exchange index was unchanged.
What was quite palpable in today’s activities was that the local investors dabbled with the second tier issues or in the market player’s jargon the so-called ‘trader’s stocks’. Based on percentage growth and liquidity of the issues, today’s best performers were Empire East (+16.67%), followed by DMCI Holdings (+14.28%), C & P Homes (+14.28%) and Metro Pacific (+10.71%). All of these second tier issues are mostly in the real estate related industries, which as of today have outperformed their heavyweight counterparts who were unchanged, except for Megaworld (+ 1.75%).
The US Federal Reserve, as anticipated, has raised its overnight lending rate, which has been pegged since June of last year to its lowest level since 1958. The quarter percentage point hike marks the FED’s first rate increase since May 2000 and was among the June 30th most sought after especially by the investing world. The global markets have so far responded with equanimity. The Asian markets are trading mixed as of this writing.
In the domestic arena, foreign activities have notably been pared down, although they have still been on the long side of the trade which apparently are now geared towards select issues, in contrast to last year’s conspicuous broad market buying. However, what seems to be a positive development is that local investors have gradually taken up the slack left by the aggressive buying of overseas investors. The local bullish optimism could underpin the ‘transition or honeymoon rallies’ seen in each of the government turnover that the Philippines had since 1986.
Local investors dominated the trading activities, accounting for 53% of cumulative peso turnover, even as foreign moolah posted positive inflows worth P 20.892 million. Market breadth was lopsidedly in favor of the Bulls as advancing issues clobbered declining issues by 56 to 15, or by a ratio of more than 3 to 1. In other words, while foreigners shopped on select heavyweights, local investors bought up the broadmarket.
FOUR of the eight index heavyweights chalked up gains for the day, led by foreign propelled buying on PLDT shares (+2.17%), followed by locally supported Globe Telecoms (+1.82%), Ayala Corp (+1.75%) and San Miguel (+.86%). Ayala Land, Metrobank and SM Primeholdings closed unchanged while Bank of the Philippine Islands (-1.16%) was the sole heavyweight issue that was in the red.
Aside from PLDT, foreigners scooped up shares of Ayala Corp, Ayala Land, First Philippine Holdings and Petron. On the other hand, capital outflow from overseas investors were recorded in GLOBE Telecoms, Ginebra San Miguel, Meralco B, Bank of the Philippine Islands, Equitable Bank and ABS-CBN Preferred Shares.
Except for the banking and financial sector index, all other major indices recorded gains for the day. The Small and Medium Exchange index was unchanged.
What was quite palpable in today’s activities was that the local investors dabbled with the second tier issues or in the market player’s jargon the so-called ‘trader’s stocks’. Based on percentage growth and liquidity of the issues, today’s best performers were Empire East (+16.67%), followed by DMCI Holdings (+14.28%), C & P Homes (+14.28%) and Metro Pacific (+10.71%). All of these second tier issues are mostly in the real estate related industries, which as of today have outperformed their heavyweight counterparts who were unchanged, except for Megaworld (+ 1.75%).
The US Federal Reserve, as anticipated, has raised its overnight lending rate, which has been pegged since June of last year to its lowest level since 1958. The quarter percentage point hike marks the FED’s first rate increase since May 2000 and was among the June 30th most sought after especially by the investing world. The global markets have so far responded with equanimity. The Asian markets are trading mixed as of this writing.
In the domestic arena, foreign activities have notably been pared down, although they have still been on the long side of the trade which apparently are now geared towards select issues, in contrast to last year’s conspicuous broad market buying. However, what seems to be a positive development is that local investors have gradually taken up the slack left by the aggressive buying of overseas investors. The local bullish optimism could underpin the ‘transition or honeymoon rallies’ seen in each of the government turnover that the Philippines had since 1986.
The Economist: America: the world's biggest hedge fund
America: the world's biggest hedge fund
Jun 29th 2004
From The Economist Global Agenda
Are markets about to start panicking about the dollar again—with good reason?
YOU, dear reader, along with everyone else from Tokyo to Tallahassee, will be casting your gaze towards Washington this week, to see how large will be the puff of smoke emanating from the Federal Open Market Committee. Airwaves will be filled and forests felled with discussions, learned and otherwise, parsing the utterances of the members of that august committee of interest-rate setters, and particularly those of its chairman, Alan Greenspan, for clues as to how fast interest rates will rise in coming months. Precious few eyes, it is safe to aver, will be on an annual survey of America’s net investment position released on Wednesday June 30th by the Department of Commerce’s Bureau of Economic Analysis (BEA). But since everyone knows what the Fed will decide on the same day, Buttonwood wonders whether the BEA’s is not the more important statistic coming out of Washington this week, since it will provide reasons aplenty why the dollar has further—a lot further, perhaps—to fall.
Last year and earlier this year, if memory serves, financial markets were abuzz with talk of the dollar’s dismal prospects, perhaps even its imminent collapse. There was much discussion of America’s humungous twin deficits (its budget deficit and current-account deficit); fuming about Asian central banks trying to stop their currencies rising against the dollar (though less fuming about how their purchases kept down long-term interest rates); and raging about how none of this was sustainable. The dollar, most right-thinking people agreed, needed to drop, though in an orderly fashion so as not to scare off those nice Asian central banks who had bought squillions of dollars’ worth of Treasury bonds. Buttonwood himself even weighed in with a few less-than-cogent thoughts, and discussed the advantages of America as a holiday destination with his daughters. Naturally, the dollar went up, and talk about it doing otherwise has dwindled to vanishing point.
Perhaps that is why, in recent weeks, the greenback has begun to slide again, while gold has staged a comeback to $400 an ounce. Since mid-May, the dollar has fallen by 4% on a trade-weighted basis. On the face of it, this seems peculiar. The dollar has started to fall again even as the chatter about interest-rate rises has got louder. Naively, you might expect a currency whose interest rates are about to rise to go up, not down. One explanation why the reverse has been the case is that the Fed has been late in stamping on inflationary pressures, so real interest rates—ie, adjusted for inflation—are falling even as nominal rates are expected to rise. There might, however, be another explanation: that rising rates will make an already awful current-account deficit worse still, and that markets are again starting to realise that the only way in which this can be corrected in the long term is by a sharply lower dollar.
The current account essentially comprises two things: the trade balance and overseas investment income. America’s trade deficit is bad and getting worse, even though the dollar has fallen by 23% from its recent high in February 2002. A $46.6 billion trade deficit in March had risen to $48.3 billion in April. In the absence of a net surplus from foreign investment, notes Jim O’Neill, the chief international economist at Goldman Sachs, this would mean a current-account deficit for the year of more than $600 billion, or getting on for 6% of GDP. No problem, say the more sanguine: America has long been able to finance its large and growing deficit because it is such a wonderful place in which to invest.
There are, however, a couple of snags with this argument. The first is that Americans find foreign climes more attractive to invest in than foreigners regard America: net foreign direct investment (FDI) has amounted to minus $155 billion over the last 12 months. And who can blame them? Returns on FDI into America were 5.5% in the first quarter, compared with returns of 11.7% on American firms’ foreign investment. Nor is this an aberration: the returns in America have been consistently lower for many years.
This gap has been plugged by portfolio flows (investment in such things as stocks and bonds) but of late the overwhelming majority of these have been due to foreign central banks, particularly Asian ones, trying to stop their currencies rising against the dollar, and buying Treasuries as a by-product of this intervention. Foreign central banks now hold $1.2 trillion of Treasury bonds. As growth and inflation rise in Asia (or in Japan’s case, as deflation eases), the arguments for intervening look much shakier. Japan, indeed, seems almost to have stopped wading into the foreign-exchange markets. Foreign central banks are, moreover, starting to fret about the amount that they hold in dollars. None of this bodes well for the dollar’s future value.
Nor does the net income that America makes on foreign investment. In the first quarter, this surplus amounted to almost 0.5% of GDP. This seems extraordinary, for reasons that have everything to do with the BEA’s annual survey. In 2002, America had net foreign liabilities of almost 23% of GDP and by the end of last year this figure had probably risen to 25-30%. Despite that, the country still managed to make more money from investing abroad than it had to pay to foreigners, for the simple reason that American investors’ domestic financing costs were so much lower than their overseas returns. In other words, says Mr O’Neill, the United States is like a giant hedge fund, borrowing huge wodges of cheap money at home and then investing it in higher-yielding foreign assets.
Which is where we return to the subject of higher interest rates. When interest rates go up, this net surplus on America’s investment income will turn into a deficit. A yield on ten-year Treasury bonds of 6%, says Goldman Sachs, would in the space of a few years add 1% of GDP to the current-account deficit, solely through higher interest charges. Whether or not yields reach such giddy heights depends mainly on two things: how much inflation is actually picking up; and foreigners’ continued willingness to supply the giant hedge fund known as the United States of America with cheap finance. Still, Mr O’Neill, for one, thinks it “virtually impossible to be a structural bull on the dollar”. Buttonwood finds it virtually impossible to disagree. His pony-mad younger daughter is enthralled by the idea of a holiday on a dude ranch.
Jun 29th 2004
From The Economist Global Agenda
Are markets about to start panicking about the dollar again—with good reason?
YOU, dear reader, along with everyone else from Tokyo to Tallahassee, will be casting your gaze towards Washington this week, to see how large will be the puff of smoke emanating from the Federal Open Market Committee. Airwaves will be filled and forests felled with discussions, learned and otherwise, parsing the utterances of the members of that august committee of interest-rate setters, and particularly those of its chairman, Alan Greenspan, for clues as to how fast interest rates will rise in coming months. Precious few eyes, it is safe to aver, will be on an annual survey of America’s net investment position released on Wednesday June 30th by the Department of Commerce’s Bureau of Economic Analysis (BEA). But since everyone knows what the Fed will decide on the same day, Buttonwood wonders whether the BEA’s is not the more important statistic coming out of Washington this week, since it will provide reasons aplenty why the dollar has further—a lot further, perhaps—to fall.
Last year and earlier this year, if memory serves, financial markets were abuzz with talk of the dollar’s dismal prospects, perhaps even its imminent collapse. There was much discussion of America’s humungous twin deficits (its budget deficit and current-account deficit); fuming about Asian central banks trying to stop their currencies rising against the dollar (though less fuming about how their purchases kept down long-term interest rates); and raging about how none of this was sustainable. The dollar, most right-thinking people agreed, needed to drop, though in an orderly fashion so as not to scare off those nice Asian central banks who had bought squillions of dollars’ worth of Treasury bonds. Buttonwood himself even weighed in with a few less-than-cogent thoughts, and discussed the advantages of America as a holiday destination with his daughters. Naturally, the dollar went up, and talk about it doing otherwise has dwindled to vanishing point.
Perhaps that is why, in recent weeks, the greenback has begun to slide again, while gold has staged a comeback to $400 an ounce. Since mid-May, the dollar has fallen by 4% on a trade-weighted basis. On the face of it, this seems peculiar. The dollar has started to fall again even as the chatter about interest-rate rises has got louder. Naively, you might expect a currency whose interest rates are about to rise to go up, not down. One explanation why the reverse has been the case is that the Fed has been late in stamping on inflationary pressures, so real interest rates—ie, adjusted for inflation—are falling even as nominal rates are expected to rise. There might, however, be another explanation: that rising rates will make an already awful current-account deficit worse still, and that markets are again starting to realise that the only way in which this can be corrected in the long term is by a sharply lower dollar.
The current account essentially comprises two things: the trade balance and overseas investment income. America’s trade deficit is bad and getting worse, even though the dollar has fallen by 23% from its recent high in February 2002. A $46.6 billion trade deficit in March had risen to $48.3 billion in April. In the absence of a net surplus from foreign investment, notes Jim O’Neill, the chief international economist at Goldman Sachs, this would mean a current-account deficit for the year of more than $600 billion, or getting on for 6% of GDP. No problem, say the more sanguine: America has long been able to finance its large and growing deficit because it is such a wonderful place in which to invest.
There are, however, a couple of snags with this argument. The first is that Americans find foreign climes more attractive to invest in than foreigners regard America: net foreign direct investment (FDI) has amounted to minus $155 billion over the last 12 months. And who can blame them? Returns on FDI into America were 5.5% in the first quarter, compared with returns of 11.7% on American firms’ foreign investment. Nor is this an aberration: the returns in America have been consistently lower for many years.
This gap has been plugged by portfolio flows (investment in such things as stocks and bonds) but of late the overwhelming majority of these have been due to foreign central banks, particularly Asian ones, trying to stop their currencies rising against the dollar, and buying Treasuries as a by-product of this intervention. Foreign central banks now hold $1.2 trillion of Treasury bonds. As growth and inflation rise in Asia (or in Japan’s case, as deflation eases), the arguments for intervening look much shakier. Japan, indeed, seems almost to have stopped wading into the foreign-exchange markets. Foreign central banks are, moreover, starting to fret about the amount that they hold in dollars. None of this bodes well for the dollar’s future value.
Nor does the net income that America makes on foreign investment. In the first quarter, this surplus amounted to almost 0.5% of GDP. This seems extraordinary, for reasons that have everything to do with the BEA’s annual survey. In 2002, America had net foreign liabilities of almost 23% of GDP and by the end of last year this figure had probably risen to 25-30%. Despite that, the country still managed to make more money from investing abroad than it had to pay to foreigners, for the simple reason that American investors’ domestic financing costs were so much lower than their overseas returns. In other words, says Mr O’Neill, the United States is like a giant hedge fund, borrowing huge wodges of cheap money at home and then investing it in higher-yielding foreign assets.
Which is where we return to the subject of higher interest rates. When interest rates go up, this net surplus on America’s investment income will turn into a deficit. A yield on ten-year Treasury bonds of 6%, says Goldman Sachs, would in the space of a few years add 1% of GDP to the current-account deficit, solely through higher interest charges. Whether or not yields reach such giddy heights depends mainly on two things: how much inflation is actually picking up; and foreigners’ continued willingness to supply the giant hedge fund known as the United States of America with cheap finance. Still, Mr O’Neill, for one, thinks it “virtually impossible to be a structural bull on the dollar”. Buttonwood finds it virtually impossible to disagree. His pony-mad younger daughter is enthralled by the idea of a holiday on a dude ranch.
Bloomberg: Fed Raises Rate to 1.25%, Maintains `Measured' Pace
Fed Raises Rate to 1.25%, Maintains `Measured' Pace (Update5)
June 30 (Bloomberg) -- Federal Reserve policy makers raised the U.S. benchmark interest rate by a quarter-point to 1.25 percent and reiterated that further increases can come at a ``measured'' pace, as long as inflation remains ``relatively low.''
The first increase since May 2000 came on a unanimous vote, a sign that no Federal Open Market Committee member saw enough of an inflation threat to seek a more aggressive move. Economic developments that threaten stable prices may cause them to change their gradual approach to raising rates, the policy makers said.
``With underlying inflation still expected to be relatively low, the committee believes that policy accommodation can be removed at a pace that is likely to be measured,'' members of the FOMC said in a statement following their two-day meeting in Washington. ``Nonetheless, the committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.''
The Fed is changing course after a year of holding the overnight bank lending rate at the lowest since 1958 to ward off deflation and revive a job market that lagged after the 2001 recession. Thirteen cuts took the rate from 6.5 percent in January 2001 to 1 percent last June, the fastest plunge in Alan Greenspan's 16-year tenure as chairman. The U.S. has added 1.2 million jobs this year and some inflation gauges have risen.
``Although incoming inflation data are somewhat elevated, a portion of the increase in recent months appears to have been due to transitory factors,'' the statement said. The FOMC said the risks to growth and inflation for the next few quarters are ``roughly equal.''
Market Reaction
The benchmark 10-year Treasury note gained almost 7/8 of a point after the announcement, pushing the yield down 11 basis points to 4.58 percent, the lowest since May 5, at 5:15 p.m. in New York. The yield on two-year notes, among the most sensitive to Fed moves, fell 14 basis points to 2.67 percent after rising by almost a full percentage point this year.
Today's pledge to ``respond to changes in economic prospects as needed'' was foreshadowed in Greenspan's June 8 comments to an international monetary conference in London. At that time he said the Fed is ``prepared to do what is required'' should inflation exceed the Fed's forecasts.
``The statement is exactly as it should be,'' said John Roberts, head of trading in inflation-linked U.S. bonds at Barclays Capital Inc. in New York. ``They specifically gave themselves flexibility to act as they see fit and made it clear they will do what it takes to maintain price stability.''
Forecasts
The U.S. central bank is trying to raise rates to a level that allows for economic growth with low inflation, without disrupting the economy or investors as in 1994, economists said. The increase has extra sensitivity in an election year, as President George W. Bush faces criticism about his handling of the economy from Democrat John Kerry, a Massachusetts senator.
A 25-basis point increase was expected by 138 of 143 economists surveyed by Bloomberg News, and 22 of 23 of Wall Street's largest bond firms had predicted the Fed would maintain its call for ``measured'' rate increases. Investors had interpreted the language, adopted in May, as signaling a series of 25 basis point increases.
The fed funds rate influences borrowing costs for consumers and businesses, from mortgages to auto loans. Citigroup Inc., Bank of America Corp. and J.P. Morgan Chase & Co., the three biggest U.S. banks, raised their prime lending rates to 4.25 percent from 4 percent following the Fed move. Wells Fargo & Co., Wachovia Corp. and other lenders also raised their prime rates to 4.25 percent.
Some executives said the Fed increase simply ratifies that demand is strong and welcomed the move to keep the economy from overheating. ``The economy is getting better and it needs to get better at a nice, gradual rate,'' said Charles O. Holliday Jr., chairman and chief executive of DuPont Co., the second-biggest U.S. chemical maker, in an interview. ``It doesn't need to soar up because then it soars down too fast.''
Companies
The rate increase also may bolster the balance sheet of U.S. manufacturers such as Delphi Corp., the world's largest auto-parts maker, by reducing their pension and health-care liabilities, which are projected based in part on long-term rates. A quarter- point increase, for example, could cut each liability by $300 million, said Delphi Treasurer Pamela Geller.
``We'll feel a little bit in our short-term borrowings, but that will be dwarfed by the benefit to the balance sheet,'' Geller said.
Futures contracts on the federal funds rate show traders expect the U.S. central bank to raise rates by a full percentage point between now and December, or an average of 25 basis points over the next four Fed meetings, consistent with a ``measured pace,'' economists said.
``Unless we get a surprise, we'll see another quarter-point increase on Aug. 10,'' said Robert ``Tim'' McGee, chief economist at U.S. Trust Corp. in New York. ``The Fed has likely begun the process of raising rates up to as much as 3 percent by the middle of next year.''
Greenspan Era
In the past decade Greenspan, who became chairman in 1987 and was confirmed for a fifth term this month at age 78, always started tightening cycles with a 25-basis point move. On average during his tenure, the central bank has raised the benchmark eight times in the first year of each cycle.
Policy makers raised the so-called fed funds rate an average of 2.67 percentage points in six to 12 steps during three rate- increase phases since 1987, each lasting 11-12 months.
While inflation is rising in government measures and in private surveys, Greenspan this month told the Senate Banking Committee that inflation is ``not likely to be a serious concern.''
The personal consumption expenditures price index, a measure closely monitored by the Fed, rose 0.5 percent in May, the largest rise since September 1990, and is up 2.5 percent over 12 months. Minus food and energy, the index is up 1.6 percent since May 2003, within a range of stable prices defined by some Fed officials.
Inflation Measures
The Labor Department this month said the rate of core consumer price increases slowed to 0.2 percent in May from 0.3 percent in April. Wage costs, which tend to lag inflation, are rising more slowly. Unit labor costs rose at a 0.80 percent annualized rate in the first quarter, down from a 1.7 percent rate in the last year's final quarter.
For now, Greenspan is predicting weakening of commodity prices, somewhat slower U.S. economic growth, and international competition that will help control inflation for goods and services. That was reflected in today's statement that some measures of inflation have been ``transitory.''
`Transitory'
So far, the data have partly confirmed those forecasts. Crude oil prices have fallen about 16 percent from a record close of $42.33 per barrel on June 1. Orders for goods made to last at least three years dropped for a second month in May, suggesting corporate spending may be moderating. An index of growth for Chicago-area businesses fell more than expected in June as orders and production slowed, the National Association of Purchasing Management-Chicago said today.
Other indicators remain strong. Low-cost financing helped push consumer spending up 1 percent in May, the biggest gain since October 1, and sales of previously owned homes rose to a record 6.8 million annual pace that month.
Inflation remains tame in Europe as well, and Japan continues to grapple with declining prices.
Inflation in the dozen euro nations slowed in June, easing pressure on the European Central Bank to raise interest rates as the economic recovery gathers pace. Japan's consumer prices excluding fresh food fell 0.3 percent in May. The Bank of Japan's Tankan index measuring optimism for large manufacturers probably rose to 17 this quarter, the highest since Japan's asset bubble burst in 1991, according the median forecast in a Bloomberg poll.
Bush and Greenspan
President Bush reappointed Greenspan to a fifth term as Fed chairman and the Senate confirmed him June 18. Greenspan's Fed has raised interest rates in previous election years as well, and Bush's advisers say markets are well-prepared for the change.
``As the economy grows and jobs are being created, I think it's always expected that a rate increase would be part of that strengthening in the economy,'' White House spokesman Scott McClellan said. `` It is a reflection of our strong economy that these things might happen.''
The Fed raised the benchmark in 1988, when the current president's father, George H.W. Bush, beat Democratic nominee Michael Dukakis. The rate also rose in 2000, when the current president beat Democratic nominee Al Gore.
Election Year
The first President Bush blamed his 1992 loss to Bill Clinton in part on the Greenspan Fed's failure to lower interest rates enough to boost growth. Officials from the current administration said that they too expect interest rates to rise.
Greenspan increased his visits to the White House in recent years, according to Fed documents. Last year, he met with White House personnel 68 times, versus 55 in 2002 and 37 times in 2001.
In the latest New York Times/CBS News poll, 40 percent of adults surveyed approved of how Bush is handling the economy and 52 percent disapproved. The survey of 1,053 adults was taken June 23-27.
In addition to today's benchmark interest rate decision, the Fed board also voted unanimously to approve requests by all 12 Fed banks for an increase in the discount rate. The rate, which the Fed charges banks for direct loans, rose a quarter-point to 2.25 percent.
To contact the reporter on this story: Craig Torres in Washington
at ctorres3@bloomberg.net
To contact the editor of this story:
Kevin Miller at kmiller@bloomberg.net
Last Updated: June 30, 2004 19:34 EDT
June 30 (Bloomberg) -- Federal Reserve policy makers raised the U.S. benchmark interest rate by a quarter-point to 1.25 percent and reiterated that further increases can come at a ``measured'' pace, as long as inflation remains ``relatively low.''
The first increase since May 2000 came on a unanimous vote, a sign that no Federal Open Market Committee member saw enough of an inflation threat to seek a more aggressive move. Economic developments that threaten stable prices may cause them to change their gradual approach to raising rates, the policy makers said.
``With underlying inflation still expected to be relatively low, the committee believes that policy accommodation can be removed at a pace that is likely to be measured,'' members of the FOMC said in a statement following their two-day meeting in Washington. ``Nonetheless, the committee will respond to changes in economic prospects as needed to fulfill its obligation to maintain price stability.''
The Fed is changing course after a year of holding the overnight bank lending rate at the lowest since 1958 to ward off deflation and revive a job market that lagged after the 2001 recession. Thirteen cuts took the rate from 6.5 percent in January 2001 to 1 percent last June, the fastest plunge in Alan Greenspan's 16-year tenure as chairman. The U.S. has added 1.2 million jobs this year and some inflation gauges have risen.
``Although incoming inflation data are somewhat elevated, a portion of the increase in recent months appears to have been due to transitory factors,'' the statement said. The FOMC said the risks to growth and inflation for the next few quarters are ``roughly equal.''
Market Reaction
The benchmark 10-year Treasury note gained almost 7/8 of a point after the announcement, pushing the yield down 11 basis points to 4.58 percent, the lowest since May 5, at 5:15 p.m. in New York. The yield on two-year notes, among the most sensitive to Fed moves, fell 14 basis points to 2.67 percent after rising by almost a full percentage point this year.
Today's pledge to ``respond to changes in economic prospects as needed'' was foreshadowed in Greenspan's June 8 comments to an international monetary conference in London. At that time he said the Fed is ``prepared to do what is required'' should inflation exceed the Fed's forecasts.
``The statement is exactly as it should be,'' said John Roberts, head of trading in inflation-linked U.S. bonds at Barclays Capital Inc. in New York. ``They specifically gave themselves flexibility to act as they see fit and made it clear they will do what it takes to maintain price stability.''
Forecasts
The U.S. central bank is trying to raise rates to a level that allows for economic growth with low inflation, without disrupting the economy or investors as in 1994, economists said. The increase has extra sensitivity in an election year, as President George W. Bush faces criticism about his handling of the economy from Democrat John Kerry, a Massachusetts senator.
A 25-basis point increase was expected by 138 of 143 economists surveyed by Bloomberg News, and 22 of 23 of Wall Street's largest bond firms had predicted the Fed would maintain its call for ``measured'' rate increases. Investors had interpreted the language, adopted in May, as signaling a series of 25 basis point increases.
The fed funds rate influences borrowing costs for consumers and businesses, from mortgages to auto loans. Citigroup Inc., Bank of America Corp. and J.P. Morgan Chase & Co., the three biggest U.S. banks, raised their prime lending rates to 4.25 percent from 4 percent following the Fed move. Wells Fargo & Co., Wachovia Corp. and other lenders also raised their prime rates to 4.25 percent.
Some executives said the Fed increase simply ratifies that demand is strong and welcomed the move to keep the economy from overheating. ``The economy is getting better and it needs to get better at a nice, gradual rate,'' said Charles O. Holliday Jr., chairman and chief executive of DuPont Co., the second-biggest U.S. chemical maker, in an interview. ``It doesn't need to soar up because then it soars down too fast.''
Companies
The rate increase also may bolster the balance sheet of U.S. manufacturers such as Delphi Corp., the world's largest auto-parts maker, by reducing their pension and health-care liabilities, which are projected based in part on long-term rates. A quarter- point increase, for example, could cut each liability by $300 million, said Delphi Treasurer Pamela Geller.
``We'll feel a little bit in our short-term borrowings, but that will be dwarfed by the benefit to the balance sheet,'' Geller said.
Futures contracts on the federal funds rate show traders expect the U.S. central bank to raise rates by a full percentage point between now and December, or an average of 25 basis points over the next four Fed meetings, consistent with a ``measured pace,'' economists said.
``Unless we get a surprise, we'll see another quarter-point increase on Aug. 10,'' said Robert ``Tim'' McGee, chief economist at U.S. Trust Corp. in New York. ``The Fed has likely begun the process of raising rates up to as much as 3 percent by the middle of next year.''
Greenspan Era
In the past decade Greenspan, who became chairman in 1987 and was confirmed for a fifth term this month at age 78, always started tightening cycles with a 25-basis point move. On average during his tenure, the central bank has raised the benchmark eight times in the first year of each cycle.
Policy makers raised the so-called fed funds rate an average of 2.67 percentage points in six to 12 steps during three rate- increase phases since 1987, each lasting 11-12 months.
While inflation is rising in government measures and in private surveys, Greenspan this month told the Senate Banking Committee that inflation is ``not likely to be a serious concern.''
The personal consumption expenditures price index, a measure closely monitored by the Fed, rose 0.5 percent in May, the largest rise since September 1990, and is up 2.5 percent over 12 months. Minus food and energy, the index is up 1.6 percent since May 2003, within a range of stable prices defined by some Fed officials.
Inflation Measures
The Labor Department this month said the rate of core consumer price increases slowed to 0.2 percent in May from 0.3 percent in April. Wage costs, which tend to lag inflation, are rising more slowly. Unit labor costs rose at a 0.80 percent annualized rate in the first quarter, down from a 1.7 percent rate in the last year's final quarter.
For now, Greenspan is predicting weakening of commodity prices, somewhat slower U.S. economic growth, and international competition that will help control inflation for goods and services. That was reflected in today's statement that some measures of inflation have been ``transitory.''
`Transitory'
So far, the data have partly confirmed those forecasts. Crude oil prices have fallen about 16 percent from a record close of $42.33 per barrel on June 1. Orders for goods made to last at least three years dropped for a second month in May, suggesting corporate spending may be moderating. An index of growth for Chicago-area businesses fell more than expected in June as orders and production slowed, the National Association of Purchasing Management-Chicago said today.
Other indicators remain strong. Low-cost financing helped push consumer spending up 1 percent in May, the biggest gain since October 1, and sales of previously owned homes rose to a record 6.8 million annual pace that month.
Inflation remains tame in Europe as well, and Japan continues to grapple with declining prices.
Inflation in the dozen euro nations slowed in June, easing pressure on the European Central Bank to raise interest rates as the economic recovery gathers pace. Japan's consumer prices excluding fresh food fell 0.3 percent in May. The Bank of Japan's Tankan index measuring optimism for large manufacturers probably rose to 17 this quarter, the highest since Japan's asset bubble burst in 1991, according the median forecast in a Bloomberg poll.
Bush and Greenspan
President Bush reappointed Greenspan to a fifth term as Fed chairman and the Senate confirmed him June 18. Greenspan's Fed has raised interest rates in previous election years as well, and Bush's advisers say markets are well-prepared for the change.
``As the economy grows and jobs are being created, I think it's always expected that a rate increase would be part of that strengthening in the economy,'' White House spokesman Scott McClellan said. `` It is a reflection of our strong economy that these things might happen.''
The Fed raised the benchmark in 1988, when the current president's father, George H.W. Bush, beat Democratic nominee Michael Dukakis. The rate also rose in 2000, when the current president beat Democratic nominee Al Gore.
Election Year
The first President Bush blamed his 1992 loss to Bill Clinton in part on the Greenspan Fed's failure to lower interest rates enough to boost growth. Officials from the current administration said that they too expect interest rates to rise.
Greenspan increased his visits to the White House in recent years, according to Fed documents. Last year, he met with White House personnel 68 times, versus 55 in 2002 and 37 times in 2001.
In the latest New York Times/CBS News poll, 40 percent of adults surveyed approved of how Bush is handling the economy and 52 percent disapproved. The survey of 1,053 adults was taken June 23-27.
In addition to today's benchmark interest rate decision, the Fed board also voted unanimously to approve requests by all 12 Fed banks for an increase in the discount rate. The rate, which the Fed charges banks for direct loans, rose a quarter-point to 2.25 percent.
To contact the reporter on this story: Craig Torres in Washington
at ctorres3@bloomberg.net
To contact the editor of this story:
Kevin Miller at kmiller@bloomberg.net
Last Updated: June 30, 2004 19:34 EDT
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