August 19 Daily Philippine Stock Market Review: Locals Dictate Tempo

August 19 Daily Philippine Stock Market Review: Locals Dictate Tempo

Local buying spurred the Phisix higher by 1.09% or 16.9 points on a lean volume of P 412.311 million (US$ 7.363 million).

Even as foreign net capital flows registered a net inflow of P 24.730 million the nub of today’s buying interest was directed at Ayala Corp (+3.7%) which comprised two-thirds of the firm’s output and about a third of the cumulative net buying. Among the Phisix heavyweights and the broader market, foreign money was mostly bearish, as more issues posted outflows against inflows (6-3 for the heavyweights, 18-8 on the broad market). Aside foreign money constituted only 43.96% of today’s turnover.

Market breadth was obviously bullish despite the thin volume, gainers beat losers by 38 to 27 while industry subindices were all positive led by oil and property issues. Index heavyweights were mostly up led by foreign propelled Ayala Corp., Ayala Land (+3.8%), SM Primeholdings (+1.79%), Bank of the Philippine Islands (+1.23%), San Miguel A (+.86%), PLDT (+.8%) and Globe Telecoms (+.56%) while San Miguel B and Metrobank were unchanged.

Compared to the previous sessions, today’s rally was practically in line with the positive outlook seen in the rest of the Asian region where, as of this writing, 12 of the 15 bourses are up, reflecting yesterday’s robust gains in Wall Street. However, the locals being today’s market driver generated a less than convincing upside performance given the scanty volume. Foreign investors, on the other hand, had reversed their positive stance during the past two days leading to the steep fall of the Phisix while today’s activities still mirrors the cautious and selective posture in terms of accumulations, at the same time reducing their portfolio positions in the broader market. In other words, the locals are bullish and providing the cushion to the market while the foreigners are still slightly bearish. Unless we see a tandem of bullishness from both local and domestic investors, the Phisix is likely to trade in a tight range.

In technical terms, the Phisix bounced off its major support trend line, which was tested yesterday, and thus far had been a healthy manifestation of its year long uptrend.

August 18 The Philippine Stock Market Review: The Exodus Continues

August 18 The Philippine Stock Market Review: The Exodus Continues

Foreign money once again continued to dump local equity assets as the Phisix fell for the second day by a hefty .67% or 10.46 points, as foreign equity portfolio outflows recorded P 132.747 million (US$2.307 million) or equivalent to 28.67% of accrued output. PLDT (-2.35%) posted the largest outflow accompanied by equally intensive outflows in the Property heavyweights SM Primeholdings (-3.44%) and Ayala Land (-1.88%) and in food conglomerate San Miguel B (-1.42%). Of the eight heavyweights only two scored gains, namely Bank of the Philippine Islands (+1.25%) and San Miguel A (+.87%) while the rest posted losses. Metrobank was unchanged.

In technical lingo yesterday’s downside triangle formation break fortified the correction mode of the market. Today, the 50-day moving average support level was taken out with an attempt to breach the major trendline support at 1,553. The current market moves are manifesting ominous sign of market exhaustion. Any further downside pressures that would break the major trend line support level would spell a possible near-term trend reversal. Again, all eyes on PLDT whom has led the market for over a year and a half.

Market’s mood was relatively somber with declining issues slightly ahead of the advancing issues by 34 to 26, although in a much improved state compared to yesterday. Industry indices were mixed with 3 decliners (Commercial-Industrial, Oil and the Property) against 3 advancers (Mining, Financials and ALL index). Foreign money sold more than they bought while today’s trading activities was slanted towards local support of the general market as well as the Phisix components.

Today’s darling has been the International Container Terminals who braved the tide of foreign selling and was the sole major acquisition by foreign interest amounting to about a third of its output. ICT broke out of its long symmetrical triangle consolidation yesterday and was up 9.45%

Asian markets are currently mixed with the Phisix registering the largest decline in the region. We see no fundamental impetus for the sudden turnaround of foreign investors on the domestic market, except for the aspects of correlation to Wall Street. New York’s key benchmarks are currently showing severe oversold positions and are likely to post substantial rallies in the coming sessions, although this may be limited. Hence, if correlation is the subject of the recent declines we may expect the Phisix to ease further from its current levels, unless of course the locals would be able to match the volume of foreign capital and be aggressive enough to stave off the bearish sentiment.

MarketingProfs.com: Six Ways to Increase Marketing ROI

Six Ways to Increase Marketing ROI

by Marcia Jedd

August 17, 2004

Growing companies need to concentrate on what they do best—which, often, isn't marketing.

Worse yet, paid advertising, direct mail, publicity and event sponsorships are only a few of the channels vying for your marketing dollar. Today's information explosion and proliferation of media outlets add to the squeeze on marketing budgets.

Taking cues from consumer marketing and tested marketing strategies, consider these six ways to increasing your marketing return on investment (ROI):

1. Planning. To reap marketing ROI, the cost of entry is a good marketing plan. The plan needs to incorporate your company's mission and sales and marketing objectives. It profiles your markets and target audiences and identifies your marketing tactics.

Marketing tactics are the individual marketing channels and types of advertising, as well as publicity and marketing initiatives, that will best convey your messages to your markets, achieve sales goals and maintain brand awareness.

Remember, the dog wags the tail: affirm marketing and sales objectives, plan strategy, then select marketing tactics. It's an ongoing cycle.

2. Making a market. What new markets can you create for your brand, product or service? Sometimes new products or services happen spontaneously.

In the 1999 movie Office Space, Milton, a harassed office worker, is bothered by coworkers who pilfer his bright red stapler. Swingline turned down a movie tie-in offer by the film's producers because it didn't make such a stapler and wasn't convinced of the demand. Three years later, out of sheer demand, Swingline put its Rio Red Stapler on the market.

There are few rules in making markets. Leading-edge market makers are tomorrow's cash cows.

3. Snooping. Are you missing market openings and marketing opportunities by failing to snoop on your competitors or fish for trends? Use of competitive intelligence (CI) is on the rise, according to CI firm Fuld & Co.

Consider the minimal time investment it takes to monitor your markets and scour databases and industry news sources for trends that influence your markets. The key is trolling for CI regularly and acting appropriately on the information.

Learn from large companies such as Kraft Foods, which recently announced its plan to reduce portion sizes and pull back on marketing to kids in reaction to studies finding rising obesity rates.

Study the competition by investigating the personalities and background of its management. You can then be prepared for and anticipate its next move.

4. Tooting your own horn. Ten years ago, who would have thought that bathroom stalls gas pumps or the sides of trucks would be hot advertising spaces? What traditional and non-traditional media outlets can you leverage to reach your audiences?

Smart use of PR and alternative marketing methods—no longer just paid advertising—maximize your marketing budget to build your brand and market your product or service. A growing range of consumer products are marketed via word-of-mouth marketing, viral marketing or what's known as “buzz” marketing.

You will increase your chances of placement in print and broadcast media when you grease its wheels: provide broad industry information or statistics that the media can use.

5. Web marketing. How robust is your Web site and Web marketing plan? Opt-in email newsletters, blogging and other Web marketing initiatives can overtly or covertly sell your product or service on the Web.

The good news is that the cost of Web development has come down. Dynamic Web sites with predictive features, or an e-commerce Web site with data-capture capability, aren't only for large companies with big budgets. Web-based marketing techniques such as embedded HTML tracking in emails and newsletters show what happens to your messages.

You are only as good as today's Google search, where holders of the top non-paid keyword placement can change by the minute. Make sure to feature content on your site that accurately reflects your business.

6. Measuring. Are you measuring your marketing programs? Can you determine the percentage increase of sales from a direct-mail campaign or the number of leads generated by a specific marketing program?

The ability to track and measure your results matters to your bottom line and the success of your marketing efforts. This counts for failures, too.

If you marketed to 5,000 and you only received one sale, why? Low-quality lists, poorly developed Web sites and other haphazard marketing communications efforts achieve great results only for the lucky. Top marketing vehicles for measurement include Web sites, lead generation programs, events/tradeshows/seminars and print advertising.

What's in your marketing game plan? When you use these six strategies, you stand to maximize marketing return on investment

Marcia Jedd is president of MJ & Associates (www.marciajedd.com).

The Economist: Consuming passions

Consuming passions
Aug 16th 2004 From The Economist Global Agenda
As the American consumer tires, can shoppers in Europe, Japan and China take up the burden?

CAPITALISM is all about getting and spending. In America, where household debts amount to about 115% of disposable income, capitalism is often about spending rather more than you are getting. In recent months, however, American consumers have appeared uncharacteristically hesitant: their spending fell by 0.7% in June and their confidence ebbed last month, according to the University of Michigan's latest survey.

But as Americans acquire new inhibitions about spending, the French are shedding some of theirs. Their spending on manufactured goods surged by 4.2% in June (the biggest leap since the mid-1990s) and their saving rate dropped from 15.8% for the whole of last year to just 15.2% in the first quarter of this year. The French state, famous for intervening on behalf of its favoured companies, has recently stepped in on the side of shoppers. Nicolas Sarkozy, France’s finance minister, has arm-twisted supermarkets into cutting their prices, and part of the interest on consumer loans is now tax-deductible. In the French republic, thrift is now a vice, borrowing a virtue.

Partly as a result, French capitalism, for one brief moment, looks sprightlier than the American variety. According to figures released on Thursday August 12th, French GDP grew by an annual rate of about 3.2% in the second quarter. America grew by just 3% over the same period. France’s performance was not matched by other members of the euro area, however. In Germany, which grew by an annual 2% last quarter, household spending has been flat for a year or more; Italy is slowing; Dutch output actually shrank. The euro area as a whole grew by 2%, slower than in the first quarter. The long-awaited European recovery may have peaked before anyone really noticed it had arrived.

Japan’s recovery, of course, has been much more noteworthy. But it too may have peaked. According to figures released on Friday, the world’s second-largest economy grew at an annual rate of just 1.7% in the second quarter, after posting growth of 6.6% in the first. The yen value of Japan’s output actually fell, thanks to falling prices.

Again, Japan’s consumers may be partly to blame. Their spending, which grew by 4.2% (at an annualised pace) in the first quarter, slowed to 2.5% in the second. But the numbers are apt to mislead, says Richard Jerram of Macquarie Bank. The Japanese authorities have great difficulty stripping out the effect of deflation on their measures of output. As a result, official GDP figures probably overstate growth in the first quarter and understate it in the second. Other indicators are not much better. The household spending report, which expects households to track how much they spend on each of 21 varieties of fish, is simply too onerous and intrusive to be accurate, Mr Jerram says.

However unreliable, the numbers cannot obscure the most important question hanging over Japan’s recovery: can it survive China’s slowdown? Last year, China accounted for almost 80% of Japan’s export growth. But China is overheating—not only in economic terms but quite literally too. The China Meteorological Administration last week warned that temperatures could reach 40ºC in the southern coastal areas. Fans, air conditioners and industrial coolers are putting an intolerable burden on China’s power generators, inflicting blackouts on homes and stoppages on factories. Volkswagen has shut down plants in Shanghai twice in the past month.

Meanwhile, the inflationary dragon has returned. China’s consumer prices, which fell for much of 2002, rose by 5.3% in the year to July. The figures, released last Thursday, will revive troubling memories of a decade ago, when an unsustainable investment boom pushed inflation past 20%. In the spring, the People’s Bank of China said it would raise interest rates if inflation exceeded 5%. That limit has now been breached for two months in a row, and real interest rates, taking into account rising prices, are near zero. Nonetheless, the central bank has stayed its hand. It seems resigned to inflation rising through the third quarter, hoping it will ebb thereafter.

Should the government do more to slay inflation? Perhaps not. Higher food prices, the result of poor harvests, account for much of the inflationary pressure. According to Capital Economics, a consultancy, the best remedy for inflation may be more effective use of agricultural land, not higher interest rates.

For most of its short life, Chinese capitalism has been all about getting and investing. The Chinese invested over $660 billion in fixed assets last year, dotting the country with industrial parks, steel mills and office towers. Qu Hongbin, an economist at HSBC, reckons that about $200 billion-worth of this investment is surplus to requirements. Thus the task for the Chinese authorities is not to restrain the economy so much as to rebalance it, away from investment towards consumption.

To a certain extent, this shift is already taking place. Investment in fixed assets is slowing, while retail sales have been strong. As J.P. Morgan reports, the disposable income of city-dwellers is accelerating, and income per head in rural China is growing at its fastest pace for seven years.

Still, the authorities may be asking rather a lot of the Chinese consumer. Investment accounted for well over 40% of GDP last year. If such an important yet volatile component of Chinese demand were to collapse, could consumption ever compensate? Even if it could, Mr Qu argues, this would be cold comfort for Japan or for any other economy dependent on exports to the Middle Kingdom. What China buys from the rest of the world, after all, are commodities and machinery, not consumer trifles. If its growth were to shift from investment to consumption, its demand for the rest of the world’s products would slump, even if its growth did not slow that much.

The Chinese invest too much, Americans save too little and the Europeans, especially the Germans, could stand to spend more. The fate of the world economy in the year to come depends a lot on how these imbalances are resolved.

August 17 Philippine Stock Market Review: What do they know which we don’t?

August 17 Philippine Stock Market Review: What do they know which we don’t?

A 180-degree turnaround from yesterday, foreign investors stampeded out of the market to afflict heavy losses on the Phisix which closed lower by 28 points or 1.76%. Foreign investors sold P 60.592 million (US $1.08 million) of equity assets a reversal from yesterday’s positive inflow of P 100.161 million (US $1.789 million) selling on all the blue chips except for Ayala Corp (unchanged).

In technical jargon, the Phisix has broken on the downside of the triangle formation (bearish reversal) and currently rests on the 50-day moving average support level, which means that either we see a bounce from the important support levels or we could see the market move lower in the coming sessions as indicated by the breakdown of triangle formation. I think that the balance is tilted towards the latter.

The mostly vibrant Asian bourses are reflecting the spectacular overnight gains in Wall Street with only four bourses (Korea, Taiwan and Jakarta) out of 15 in the Red. The Philippines is the largest decliner thus far.

Again except for Ayala Corp and SM Prime whom were unchanged for the session, the major market cap heavyweights Bank of the Philippine Islands (-2.43%), and Ayala Land (-1.85%) were the largest issues sold by foreign capital, followed by Globe Telecoms (-4.37%), PLDT (-1.92%), Metrobank (1.92%), and San Miguel B (-.71%). Foreign trades accounted for a significant majority of 60.76% of total output.

Today’s bloodbath was actually an extension of yesterday’s bearish market breadth. Declining issues routed advancing issues by 5 to 1 or 69 to 13, all industry indices were in the red with the Mining sector suffering the largest loss (-4.79%), foreigners sold more issues than they bought aside from the outstanding net foreign selling.

Since the Phisix has behaved divergently against Wall Street in the past weeks, could it be that foreign money sold issues locally to shift their investments to regional issues with heavier correlation to the US as the latter has been oversold? There are no adverse domestic developments to pinpoint for today’s carnage. Neither does oil seem to be the factor since crude oil prices have eased from its recent record highs leading to the surge in bourses around the world. One could only speculate on why foreign money suddenly decided to exit from the local market. What do they know which we don’t?

Floyd Norris of New York Times: The Lesson of Iraq High Oil Prices May Not Be Temporary

Lesson of Iraq: High Oil Prices May Not Be Temporary
By FLOYD NORRIS

DID George W. Bush rely too much on diplomacy when he planned the war in Iraq?

The diplomacy in question was not the effort to line up allies for the war, which ended with much of Europe on the sidelines and angry. Instead, it involved what initially appeared to be a diplomatic victory: the quiet promise obtained from Saudi Arabia to step up oil production if necessary to offset a temporary decline in Iraqi oil exports.

That strategy was a good one in the Iraq war run by the first President Bush. As Jeffrey R. Currie, the head of commodities research at Goldman Sachs in London, noted this week, the Saudis at the time were able to offset the temporary loss of exports from both Kuwait and Iraq. There was a brief spike in oil prices when that war began, but they retreated as rapidly as they climbed.

But this time the Saudis have not been able to come up with the oil. They claimed this week to have another 1.3 million barrels a day of available production, but there is widespread doubt they can produce that much now, or even after two new fields go online later this year.

Why not? The international energy business has been starved of major capital investment for two decades, since the price swoon of the early 1980's scared oil companies.

In the 1970's, oil and other commodities were hot, and there was overinvestment in them and in the infrastructure needed to get the commodities to market. ''We got a free ride in the 1980's and 1990's from investment in the 1970's,'' Mr. Currie said.

By the beginning of this decade, the excess capacity was dwindling. But the conviction persisted that high oil prices could never last for long. Even when spot prices did rise, the price of oil for delivery months or years later did not rise very much.

Then Sept. 11 temporarily depressed demand from one oil-consuming sector - the airline industry. That sent prices down and reinforced the belief that there was no real energy problem.

Most oil market commentary still makes it sound as if high prices are a passing phenomenon. Each spike is attributed to the threat of a loss of Iraqi exports, or possible Saudi instability, or Yukos's problems in Russia, even though what is happening there seems unlikely to affect oil production, just to change who profits from it.

But the markets are smelling something different. Oil to be delivered next year now fetches $39 a barrel, and oil to be delivered in 10 years costs almost $35.

The problem is not a lack of oil in the world. The problem is getting the oil to refineries and then to market. The large undeveloped resources are in West Africa, around the Caspian Sea and in Siberia. Two of those areas have issues of political stability and the third has severe weather.

The trend now, Mr. Currie said, is to ''have new oil produced in West Africa, shipped to Asia to be refined, and the product then shipped to North America.''

If he is right, many arguments in Washington have been irrelevant. It does not make much difference whether oil is pumped from the Arctic National Wildlife Refuge in Alaska because a shortage of oil is not the biggest problem. ''The real problem is the shortage of infrastructure to obtain and deliver the commodity,'' Mr. Currie said. ''That seemed to go completely unnoticed until the last six months.'' Neither Europe nor the United States shows any indication of willingness to build new refineries.

Mr. Currie says the oil industry invested about $100 billion a year in the 1990's, a figure that has grown to $150 billion but needs to rise to perhaps $250 billion. Until that investment bears fruit, the world faces both higher prices and the possibility that supply interruptions could have severe effects.

The reality is becoming clear because of Iraq, but Iraq was not the cause, and diplomacy will not make it go away.

Elliot Wave's Pokhlebkin on Euroland's Social Mood: Speed Limit? In Germany?!

Speed Limit? In Germany?!

by Vadim Pokhlebkin

Yes, you heard right. The world famous, bullet-fast, no-speed-limit German Autobahns may soon become just like every other highway -- boring.

According to a recent poll, "the majority of German citizens would welcome the introduction of a sweeping speed limit on Germany's notoriously fast highways," reports the Deutsche Welle.

The proposed new speed limit is 130 kmh. This may seem "fast enough" for most people, but come on... For every speed fanatic, or even for your average, law-abiding car enthusiast who's ever dreamed of someday "opening it up" on the German Autobahn, this is the end of an era. (And dare I say, an abomination.)

Yet for those of us who understand Elliott waves, this news is hardly shocking. Germany has been leading the current bear market in Europe. Now, a vote to slow down the nation’s highways would be a logical consequence of a major social mood downturn that began in Germany back in 2000. This is the “right time” to cap the highway speed in Germany: Speed limits usually get introduced during bear markets and repealed when bullish times return.

For example, in 1974, after the DJIA had been on a losing streak for several years, the U.S. introduced a 55-mph nationwide speed limit -- a move that “institutionalized the nation's depressed pace,” as we put it later. The federal speed limit was only lifted in 1995, after two decades of a rising social mood, stock market, and economy. By the way, Montana was the only state that went to the opposite extreme in 1995 and set no speed limit at all. But as the collective mood in the U.S. began to peak a few years later, in 1999 Montana joined the suit and capped its highway speed at 75 mph.

Another example is Australia. Until 2002, its Northern Territory remained the only place in the world -- besides Germany -- that had no official speed limit. However, in 2002, as the Australian ASX200 continued to fall, the Territory's government made the first step towards speed restrictions and slowed down one of its major highways to 110 kmh.

But let’s get back to Germany. How long will the country stay this sluggish? When will the German stocks wake up from their slumber? When will “Europe’s main economic engine” start revving up again?

August 11 Philippine Stock Market Review

August 11 Philippine Stock Market Review

That 1,600-level is proving to be a stubborn resistance level.

Obviously the Philippine as well as most Asia’s markets have been lifted by the sturdy gains in Wall Street, as US Fed Chair Alan Greenspan raised its short term interbank rates by an anticipated quarter percentage points and forecasted that the “economy nevertheless appears poised to resume a stronger pace of expansion going forward. Inflation has been somewhat elevated this year, though a portion of the rise in prices seems to reflect transitory factors.” The term ‘Transitory’ has been the vogue word of late and poses as a big QUESTION mark as crude OIL has been repeatedly establishing new heights. While the preeminent market mover was projecting an optimistic outlook, sweet crude oil broke past the $45 level the highest ever in New York, in current dollar terms. Oil tycoon T. Boone Picken’s forecast of oil prices hitting $50 per barrel before going down to around $30 but never to go below that level seems to be moving right on the mark.

Well as we mentioned before, it would take foreign money to power the major composite index while the locals drive the broader market. The Phisix is one of the Region’s best performer up by 13.14 points or .83% following Indonesia and Japan. Foreign money was again selectively upbeat scooping up shares of mostly key telecom issues and was a thin majority or 50.08% of today’s trade. Today’s net foreign capital inflow amounted to P 117.158 million or about 14.28% of today’s output.

Sentiment was mostly positive, as advancing issue beat declining issues 43 to 31 while industry sub-indices were all up except for the extractive industries which were hamstrung by profit-taking.

Except for the foreign supported PLDT (-.78%) today’s sole heavyweight in the red, Globe Telecoms (+1.65%), Ayala Land (+1.81%), San Miguel B (+3.61%) and Bank of the Philippine Islands were all up on foreign buying, while the rest, SM Prime, Metrobank and San Miguel A were unchanged.

Questions of whether Sir Greenspan of the US FOMC would continue to raise rates in the face of the recent weak economic data and falling Treasury yields, which have portrayed the US economy as decelerating from its robust past quarters of higher than average growth, has been gaining some ground. Yesterday’s rate hike still falls short of the prevailing inflation levels and a desistance with the normalization of the yield curve plus the declines in the value of the US dollar are fodders for continuing ‘carry trades’ and is seen as beneficial to emerging markets as ours.

We may see a telecom led breakout of the 1,600 levels tomorrow.

Arts as Investments "Where the Blue Chips Fall" by jori finkel

Where the Blue Chips Fall
economist michael moses tracks the high-end art market
by jori finkel

By now everybody knows the story of Picasso ’s Garçon à la pipe, from 1905.Bought by John Hay Whitney in 1950 for a reported $30,000,the Rose Period masterpiece sold for $104 million at Sotheby ’s in May, becoming the world ’s most expensive painting. Sotheby ’s described it as a “haunting and poetic ” portrait of adolescent beauty..Reporters called it “the best investment ” ever made in art..

Think again. Despite its staggering price, the Whitney picture did not generate an earth-shattering financial return, says Michael Moses, an economist at New York University ’s Stern School of Business. He calculates that the painting had a compound annual return of 16.3 percent. Yes, that ’s impressive, surpassing the S&P 500 ’s average return for the same period of 12.1 percent. But it ’s hardly the best investment ever made in art, and not even the best return for your money on a Picasso. According to Moses ’s research on auction results, that honor goes to a small drawing the artist made in 1903,Le vieillard. Purchased at Christie ’s in 1991 for $9,350, it sold two years later at Sotheby ’s for $25,300,making its annual return 64 percent.

Since this line of thought might surprise members of the art world, who are so often dazzled by high price tags, Art & Auction asked Moses to share his data. We asked him to rank the three heavyweights from the May sales —Picasso, Monet and Renoir —in terms of auction performance. Which of these artists has historically posted the best, and worst, returns? Do their works, which so often get labeled “blue-chip,” really resemble the tried-and-true stocks of ge,ibm or Microsoft?

Yes and no, says Moses, who used as his sample 372 works by the three artists that have sold more than once at auction. “Monet, Renoir and Picasso are very much the large-cap stocks of the art world, in that they are the most frequently traded of the truly expensive artists. We couldn ’t have done this study,for example, with Degas or van Gogh,” he says..“But when it comes to financial returns, our three great artists fall somewhat flat. We found that they underperform the art market as a whole.”

While Picasso leads the pack with an annual return of 8.9 percent (see bar graphs on page 51 ),the others lag behind the Mei Moses Art Index, which Moses and his nyu colleague Jian ping Mei developed using repeat auction sales for thousands of different artists. And all three trailed the S&P 500. This reflects a trend that Mei and Moses described in “Art as an Investment and the Underperformance of Masterpieces,” published in the American Economic Review. “The art market, like the stock market,is very democratic,” says Moses.“ If you slice the art market into thirds by purchase price, the works in the top third do not appreciate as much as those from the middle third, and works from the middle third do not appreciate as much as those from the bottom third.” Apparently the most expensive works have already made their way into the canon of art history and have that recognition written into their price tag. Pricey works have less room to grow.

Still, blue-chip art has one wonderfully redeeming feature, which may be best described as staying power. As shown in the bar graph on holding periods, all three artists promise strong returns, as long as you keep the works for several years. Just look at Monet, who posts the lowest average return (2.3 percent) for works sold within 5 years of purchase, but the highest (12 percent)for works sold after 15 years —a dramatic illustration of how art can appreciate over a long holding period. And that speaks to another finding Moses has made: While fine art sold at auction exhibits greater day-to-day volatility than stocks, it roughly matches the performance of the S&P 500 over the long haul.

Some data is ambiguous. Some numbers equivocate. But this much is clear: If you plan to park your money in art, you should make sure time is on your side. Take your cue from John Hay Whitney and hang on to that Picasso as long as you can.

JORI FINKEL IS THE SENIOR EDITOR OF ART +AUCTION

Ishida of Japan Times: Asian currency zone beckons

Asian currency zone beckons
By MAMORU ISHIDA
Special to The Japan Times

There is no doubt that the stable renminbi (RMB) exchange rate, pegged at about 8.25 yuan to the U.S. dollar, has helped China's economic development. It has brought about enormous production capacity in the export industries. Meanwhile, the sharp increase in exports to the United States has prompted America to pressure China to revalue the RMB. Earlier this year, Zhou Xiaochuan, governor of the People's Bank of China, said China planned to improve the mechanism for determining the RMB exchange rate.

Revaluing the RMB vis-a-vis the dollar could be like opening a Pandora's box. As the U.S. trade deficit is unlikely to decline significantly, the U.S. could claim that any revaluation was inadequate and demand further revaluations, as it did with Japan. The market would respond, driving the RMB to fluctuate wildly at the sacrifice of China's economic stability.

Alternatively, China could peg the RMB to a basket comprising the dollar, yen and euro. John Williamson of the Institute for International Economics proposes a respective dollar-yen-euro ratio of 35 to 40 percent, 30 to 35 percent and about 30 percent.

To the extent that fluctuations between the three currencies are offset, fluctuations of the effective exchange rate of the RMB would be reduced.

Some members of the Association of Southeast Asian Nations have already pegged their currencies to their own baskets including the yen and euro. China is reported to be studying a currency basket. If China and ASEAN countries move to a common basket regime, it could lead to a major change in the U.S. economy.

When the twin U.S. deficits kept increasing in the 1980s, Stephen Marris of the Institute for International Economics predicted that investors would one day refuse to lend to the U.S., causing a hard landing for the U.S. economy. That did not happen because the global capital market kept lending to the U.S.

Now, though, Japanese and Chinese monetary authorities have been financing a significant amount of the U.S. current-account deficits by buying dollars in the markets to prevent the yen and RMB from appreciating.

Two events could make further financing of the U.S. current-account deficits difficult: (1) It has already become possible for investors to shift their assets from the U.S. to the euro capital market; and (2) if China and ASEAN countries move to a basket currency regime, a certain portion of their foreign exchange reserves now invested mostly in dollar assets would shift to yen and euro assets.

Depending on the magnitude of such a shift, the supply of capital to finance U.S. current-account deficits would be reduced. That could signal the beginning of the U.S. becoming an ordinary country that cannot enjoy both economic prosperity and military power by piling up foreign liabilities.

Stephen Roach, chief economist at Morgan Stanley, has warned of vulnerability to the world economy, which depends on the U.S. economy, which in turn depends on ever-increasing foreign liabilities. The U.S. current-account deficits must be addressed. A sharp fall in the dollar is inevitable.

Growing Asia would be the only realistic candidate to take over the role of the world's growth engine. Asia would have to depend less on exports to the U.S. and more on regional economic activities. A currency system to reduce exchange risks in trade and investment within Asia would be indispensable. China and ASEAN countries could mark the first step in forming such a system by adopting a joint currency basket.

China could explain to the U.S. that the basket regime would possess flexibility to reflect changing economic fundamentals as well as stability, and that a stable currency zone in Asia would be in the interests of the world economy. The higher the weight of the dollar in the basket, the easier it would be for the U.S. to accept it.

A good time to implement the reform would be when U.S. pressure and the market's speculative waves had subsided as a result of China's economic boom and worsened trade balance. One idea for an interim measure is to allow a wider trading band.

Asia is practically a dollar zone now, as most Asian countries peg their currencies mainly to the dollar. Japanese companies take yen-to-dollar exchange risks even in trade with Asian countries. They would welcome an Asian currency zone that would result in a more mild fluctuation vis-a-vis the yen. In 1998, then-Finance Minister Kiichi Miyazawa recommended a basket currency regime to Asian countries. It is natural for Japan to participate. If an unprepared Japan faces the sharp fall of the dollar predicted by Stephen Roach, it will risk experiencing another lost decade.

Asian political leaders and monetary authorities are speaking frequently of an Asian common currency. Malaysian Prime Minister Ahmad Badawi said in Tokyo that East Asian integration was not a wish but a reality, and that it was not premature to start studying regional currency integration.

Yu Yongding, director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, told a finance ministry's meeting in Tokyo that the three major international currencies in the future would be the dollar, euro and an Asian common currency, and urged China and its neighbors to cooperate to realize it. Officials of The People's Bank of China surprised visiting Japanese politicians by proposing a joint study of an Asian common currency. Obviously, Japan is not prepared.

Japan has a serious disadvantage. In Europe, the trust between German and French political leaders was crucially important in realizing the euro. Such trust does not exist between Chinese and Japanese leaders, as Japan has yet to come to terms with parts of its history.

Suppose an Asian currency zone with China but without Japan was formed. Its economic size would overwhelm Japan in time. According to the CIA's Global Trend, Japan's gross domestic product in 2015, measured by purchasing power parity, will be $4.5 trillion against China's $12 trillion.

It is time for Japan to decide how to live in the community of Asian nations and how to participate in forming an Asian currency zone.

Mamoru Ishida is a guest fellow at the Institute of Asia-Pacific Studies, Zhengzhou University, China, and an adviser to Itochu Corp.
The Japan Times: Aug. 10, 2004

August 10 Stock Market Review

August 10 Stock Market Review

We’re seeing some sideways movement again, but this time in contrast to yesterday, domestic investors were on a profit-taking mood while snowballing foreign accumulation on primarily the telecom sector led the major composite to close little changed. The Phisix inched higher by 1.05 points or .07% on a rather moderate to heavy volume of P 994.864 or $17.765 million on voluminous cross trades of Globe, SM Prime and PLDT which accounted for 51.04% of the total output.

The heavy caps were mixed with more decliners, SMPH (-1.69%), Ayala Land (-1.78%), Bank of the Philippine Islands (-1.21%) and San Miguel A (-.9%) against only two advancers, Globe Telecoms (+2.25%) and PLDT (+.39%) while San Miguel B and Metrobank were unchanged.

Foreign money once again took the significant majority of trades and accounted for 62.2% of total turnover while they remained selectively bullish with inflows amounting to P 107.148 million or US $1.913 million on mostly telecom issues, Jollibee (+1.96%) and DM Consunji (+10%). However, they liquidated positions on SM Prime, Ayala Land, Bank of the Philippine Islands, First Philippine Holdings (unchanged), Meralco (+1.14%) and Petron (-1.85%).

So based on the data above issues, the companies that accounted for substantial foreign money inflows registered mostly gains while those that posted outflows or liquidations registered losses. In other words, foreign money dictated the tempo of today’s trade.

Sentiment was largely mixed with bearish bias as declining issues edged advancing issues 38 to 35 while industry sub-indices were mostly lower except for the Phi-All and the Commercial Industrial index. Apparently after last week’s frenzied speculations on the mining heavyweights, the local investors took the market’s lull as an opportunity to pocket gains from recent trades.

The Asian region reflects the mood of the domestic market with 8 advancers against 7 decliners as of this writing with no significant gains or losses noted except for Singapore’s Strait Times which is down by about one percent. The ambivalence seen in the regional markets highlight on the concerns of today’s US FED meeting which is anticipated to announce a quarter point hike despite the stream of softening US economic data.

Fox News: Saudi Royal Family Faces Troubles

Saudi Royal Family Faces Troubles
Monday, August 09, 2004
By Kelley Beaucar Vlahos

WASHINGTON — Behind a façade of control, the ruling family of Saudi Arabia (search) is in tough shape and teetering on the brink of collapse, a victim of its own corruption and a violent Islamic insurgency at its door, some U.S. experts warn.

"It is a pretty fragile royal family, it's pretty corrupt and it's sitting on some pretty weak legs," S. Enders Winbush, director of the Center for Future Security Strategies (search) with the Hudson Institute, told FOXNews.com.

"The question is, can it do enough soon enough to put off what I suspect will be the inevitable — that at some point it will come apart," he said.

"Anyone who knows anything about the area knows it's not a question of ‘if,' but of ‘when,'" said Bill Lind, a military analyst with the Free Congress Foundation (search). "We need to delay it as much as possible … and think of what to do when it does happen."

Saudi Arabia's record has left open room for concern. Since a series of car bombs in May 2003, militant violence has escalated in the kingdom. This past May, a weekend rampage at two compounds housing offices and homes of expatriates in the city of Khobar left 22 people dead.

In June, American contractor Paul Johnson (search) was very publicly executed by militants in the country. Al Qaeda operatives claimed that Saudi security forces sympathetic to their cause aided in Johnson's abduction, which the government denied. Law enforcement authorities later discovered Johnson's head in a Riyadh home belonging to a suspected high-level terrorist.

Just days ago, armed men shot and killed an Irishman after storming his office in Riyadh.

Nonetheless, last month's release of the Sept. 11 commission report vindicated the Saudi government of any role in the Sept. 11, 2001, terrorist attacks upon the United States. A day before, in a statement distributed by the White House, President Bush used Saudi Arabia as an example of positive progress in the War on Terror.

"[The Saudi government] is working hard to shut down the facilitators and financial supporters of terrorism," read a White House statement from July 21.

"Today, because Saudi Arabia has seen the danger and joined the war on terror, the American people are safer," the release added.

Aware of the pressures on it, the Saudi government has tried to take proactive measures. On Thursday, Saudi security forces arrested Faris al-Zahrani, who is on a list of 26 top wanted militants with suspected links to Usama bin Laden's Al Qaeda group.

In an overnight raid in June, Saudi forces killed the kingdom's top Al Qaeda (search) leader Abid al-Aziz al-Muqran (search) and three other terrorists.

In July, the Saudi government announced it will be holding its first nationwide municipal elections this September. Earlier, it also declared a month-long amnesty to suspected terrorists who turn themselves in.

That did not result in much progress. Near the end of July, the Saudi government announced that upon the expiration of its amnesty, only six would-be terrorists had turned themselves in.

Despite Washington's historically close ties with the ruling royal House of Saud as well as the official White House line, the country, which holds the world's largest oil reserves, is a mess and desperately needs change that will benefit the Saudi people, say the experts who spoke with FOXNews.com.

"We can wish this away all we want. But the reality is getting harder and harder to ignore," wrote former CIA Agent Robert Baer in 2003's "Sleeping with the Devil," which explores the U.S. relationship with the House of Saud and the destructive trajectory the ruling family is on today.

Baer said the billions of dollars spent each year by some 30,000 members of the family, combined with the corruption, debauchery and sporadic funding of Islamic extremist terror groups and mosques in and outside the country, have created a volatile beast that is racing back at them with a vengeance.

"The terrorists who were created by the royal family as a political weapon to control the population and the Islamic world are trying to pull the kingdom backward," said Stephen Schwartz, author of "The Two Faces of Islam: Saudi Fundamentalism and Its Role In Terrorism (2003)."

"Saudi Arabia is at a fork in the road of its history," Schwartz said.

Schwartz said he does not buy into the theory that the government's fall is imminent, but he does call the situation there "a crisis." He said a large middle class is repressed by the strictest of religious law, which bars women from an education and gives them no rights; men are whipped publicly if they don't get to daily prayers on time and people accused of crimes are beheaded in the public square.

The middle class is becoming increasingly restless with the environment in the country, said Schwartz.

"It has happened again and again (in history) — the business class and the elements of the ruling elite get together and merge a transition to normalcy and stability on the road to democratic reform."

But others have said Schwartz's view is too rosy. A large percentage of the ulama — or religious leadership — espouses incendiary anti-Western, anti-royal family rhetoric in schools and mosques across the oppressed country.

That leadership has been bolstered by the war and subsequent instability in Iraq, said Lind. The rhetoric continues to be a tool of Saudi-born Usama bin Laden (search), who remains at large after his orchestration of the Sept. 11 attacks.

"This is all one war," to purify the royal family and the Middle East of the "evil" Western influence, said Lind, who sees the violence in Saudi Arabia as part of a global Islamic insurgency. "When we do a thing like invade Iraq, we are going to have problems on the other parts of the single battlefield our opponents see."

Saudi Arabia's state religious doctrine follows Wahhabite (search) Islamic law, which is the ideology driving the fundamentalist militancy of the Al Qaeda network, according to experts.

Baer and others say Saudi princes have often thrown money at religious leaders — extremists and otherwise — as a way to control them.

"They retain remarkable tools of persuasion," said Jon Alterman, Middle East Program director for the Center for Strategic and International Studies (search). "It's a government walking around with a whole lot of money and they can co-opt a whole lot of people."

Jim Phillips, Middle East expert at the Heritage Foundation (search), said the enormous amount of wealth owned by the royal family could help the government fend off an attempted overthrow.
"They are in a position to forcefully block a coup or a revolt," he said. "There is a rising disenchantment with the royal family, but the Saudis have shown themselves to be more stable than it appears."

Some experts suggest that if the government did implode, the extremists would rush in to fill the vacuum and the United States might have to move in to protect the oil supply in order to keep the world market in balance.

Almost all agree, however, that Iraq, which sits on the kingdom's border, could shift behavior and attitudes in Saudi Arabia. Last month, the two nations re-established diplomatic relations after a 14-year hiatus.

"If Iraq stabilizes, I see some hopeful signs," said Winbush, as the change would provide an attractive democratic model — and economic opportunities — for the Saudi people living in poverty and fear across the border.

"The other wild card of course, is if Iraq goes the other way and it descends into chaos," he said.

"Then I think then you could see the Saudi regime being replaced by what I call 'The Nasties.'"

****

Prudent Investor:

Two significant ramifications: Oil and Filipino Workers.

For chaos to erupt in Saudi Arabia would ripple to the neighboring middle east countries and thus severely affecting global oil supplies and send oil prices spiraling to the high heavens. Consequently, an oil shock would mean a compression of aggregate demand on a global scale, dampen global growth, or possibly induce recessions or even depression or serve as a cassus belli for possible military confrontations.

Filipino overseas contract worker’s exposure to the mid-east is quite significant considering the density of Filipino overseas in the Mid-East is second to that of the US hence, a cataclysmic event such as a civil war in Saudi could send Filipino overseas workers packing homewards, which means lesser dollar remittances, swelling unemployment and larger debts to cover on the deficits.

The insurance to your portfolio: Gold.

August 9 Philippine Stock Market Commentary

August 9 Philippine Stock Market Commentary

The depressed sentiment arising from the steep weekend drop of Wall Street was initially carried over to the Philippine market at the start of the opening bell. However, underlying bullish sentiment by local investors took this as an opportunity to accumulate on the broader market and caused the market to close marginally higher by .09% or 1.36 points.

Among the key heavyweights, PLDT (-.39%) and Property heavyweights Ayala Land (-1.75%) and SM Prime (-1.66%) weighed on the Phisix while Ayala Corp (+1.88%), San Miguel A (+.9%) and San Miguel B (+.73%) lifted the index to its slightly positive showing today. Globe Telecoms, and Banking heavyweights BPI and Metrobank were neutral.

Incidentally, the market cap weightings of the eight blue chips relative to the composite index have substantially been reduced, where once they constituted more than 75% of the composite, today these 8 issues have seen the broader sector of the Phisix gaining momentum hence the decline of their share to only 70%. Put differently, local investors have bought up the other components of the Phisix, whose growth has steadily outpaced that of the heavyweights, resulting to the recent dilution of the share of the heavyweights vis-à-vis the Phisix.

Mr. Market’s mood today was mixed with bullish inclination. While foreign money’s share to output was once again a significant majority (61.41% to accrued output), net foreign capital flow recorded a meager outflow of P 5.885 million on considerable liquidations in BPI, SM Prime and Meralco. However, advancing issues outnumbered declining issues 43 to 27 for a difference of 16, the most in 6 sessions, an obvious mending of Mr. Market’s underlying psychology in the wake of the other week's foreign instigated panic-selloff in the Lopez owned energy companies which almost brought down the house. Moreover, industry sub-indices were mostly up with only the Property and All index down.

Like our market, the Asian region is, as of this writing, trading mixed and looks least affected by Friday’s carnage in New York.

With the continuing bullish underpinnings manifested by the market internals, any positive news or even a no news at all could spark an opportunity for aggressive buying on the broader market by the locals. Hence, barring a market crash in Wall Street or an explosion from a Nuclear suitcase bomb in any part of the world, it looks as if the momentum for the domestic market is tilted in favor of the bulls.

Business Times Asia: Global grey money buoys greenback

Global grey money buoys greenback
Dollar pessimists fail to take this into account, says study
NEIL BEHRMANN
IN LONDON

MONEY laundering, tax and exchange control evasion, and other irregular capital flows are buoying the US dollar and financing a substantial portion of the US current account deficit.

A study by Brendan Brown, London-based head of research at Mitsubishi Securities International, estimates that these 'grey capital inflows' could be accounting for 30-40 per cent of the capital flows that offset the US trade and services deficit.

'Dollar pessimists sounding a state of alarm about the US current account deficit fail to acknowledge the huge flows of funds into the US dollar from grey areas of the world financial system,' he says.

'A proportion of these funds are placed in euro, yen, sterling and Swiss francs, but the bulk remain in dollars and each year steadily finance the American current account deficit.

'In 2003, there was a net flow of funds from the rest of the world to the US of US$550 billion and an estimated US$580 billion this year.'

Around 30-40 per cent or up to US$240 billion of these flows are classified as 'errors and omissions' since they cannot be traced from official sources.

'These huge amounts are 'grey money' from continents such as South and Central America, Africa, parts of Asia and offshore tax havens,' says Mr Brown, who regularly estimates global capital flows.

'The problem in measuring such capital flight is that the errors and omissions item is typically large and volatile for most countries. Thus, any investigation into the hypothesis that hidden global capital sources play a big role in the financing of the mega US current account and savings deficits is unlikely to come up with precise answers.

'Nevertheless, they should be considered by economists and market strategists because the amounts are so large.'

The main identifiable legal sources of net capital outflows in the world that are invested in US dollar securities and also currencies such as the euro, include Japan, US$170 billion; other advanced Asian economies, US$80 billion; China and other Asian developing countries, US$40 billion; Switzerland and Norway, US$70 billion; Middle East oil exporters, US$85 billion; and Russia, US$60 billion.

The unidentified flows include corrupt African and other Third World governments that siphon off tax, international aid and bribes and invest the money with unscrupulous banks.

Then, there are the flows that emanate from drugs, other money laundered funds and false invoicing to mask tax evasion and capital movements from nations with exchange controls.

There are also substantial cash payments for black market trade. Bank notes are generally dollars deposited in secret bank accounts in Switzerland and offshore banking sectors.

Unrecorded flows also include investments by Russians and Middle Eastern investors that wish to hide the identity of their companies in the US, Europe or Asia by registering the names of the businesses in the names of local residents.

These inward investments can be placed in the errors and omissions item of balance of payments, contends Mr Brown. Unrecorded shipping transactions also end up in the errors and omissions item.

The Economist Magazine on OPEC: Pumping All They Can?

Pumping all they can?
Aug 6th 2004

From The Economist Global Agenda

As the oil price rose to a new high of more than $44 a barrel this week, amid concerns about supply, OPEC’s president said the cartel was unable to pump more oil and thus bring down the price. He later contradicted these comments, but observers remain sceptical about OPEC's ability to turn on more taps

ANYONE who expected that the invasion and occupation of Iraq would lead to a sharp decline in the price of oil has been sorely disappointed. Instead of falling, the price has risen sharply, and this week West Texas crude rose above $44 a barrel for the first time since New York’s Nymex exchange started trading oil 21 years ago.

Not only has Iraq’s oil industry, hampered by creaking infrastructure and sabotage, been unable to pump anything like its potential capacity, but supply elsewhere is under pressure too. Last week, it appeared that Yukos, Russia’s biggest oil producer, might be forced to stop production, as part of its ongoing battle with the country’s tax authorities. That fear proved unfounded, but it still appears that some in the Kremlin are bent on destroying Yukos, and oil traders remain nervous.

They are also worried by the apparent impotence of the Organisation of the Petroleum Exporting Countries (OPEC). On Tuesday August 3rd, Purnomo Yusgiantoro, president of OPEC and Indonesia’s oil minister, stunned observers by saying that the cartel would be unable to pump any more oil to alleviate the pressure on prices. “The oil price is very high, it’s crazy,” he said, adding that “there is no additional supply.”

However, he contradicted that statement the next day (most likely after coming under pressure from Saudi Arabia, the leading member of OPEC), claiming that the cartel has around 1m to 1.5m barrels per day (bpd) of spare capacity that it could tap immediately. This, combined with a surprise increase in American gasoline stocks and news that Russian bailiffs would allow Yukos access to its bank accounts to pay workers, helped bring the oil price down by around a dollar. But the price bounced back to a new high on Friday after hardliners in the Russian administration overruled the bailiffs. General scepticism about OPEC's ability to pump any more oil has also put upward pressure on the price.

Like the oil market, the money markets are fretting that the high price could hurt the world economy. Mr Yusgiantoro’s comments sparked a sell-off on America’s stockmarkets, which were already worrying about America’s flagging economic performance—GDP growth slowed to a lower-than-expected 3% in the second quarter, on an annual basis. Alan Greenspan, chairman of the Federal Reserve, has said the high oil price is partly to blame for weakening consumer spending, which fell by 0.7% in June. Dresdner Kleinwort Wasserstein, an investment bank, reckons that half a percentage point could be knocked off American growth in 2006, and 0.7 added to the inflation rate, if oil remains above $40 a barrel.

OPEC’s power has been on the wane since the oil crises of the 1970s, when the cartel was able to triple prices almost overnight by restricting supply to western consumers. Since then, industrialised economies have reduced their dependence on oil, but it is still a crucial commodity, and OPEC still accounts for around 40% of world oil production. Moreover, Saudi Arabia alone accounts for a quarter of the world’s proven oil reserves. It has been able to influence prices simply by turning its taps on and off.

Until recently it was OPEC’s ability to turn the taps off that was in doubt. Members tended to exceed the production quotas set at the cartel’s regular meetings, in the hope that other members, especially Saudi Arabia, would keep to their limits, and thus support the price. The incentive to cheat grew even stronger as non-OPEC suppliers, especially Russia, grew in importance. (Russia’s output has increased by 2m bpd every year for the past three years.) OPEC’s current production of around 30m bpd (including Iraq) is well above its official quota of 26m bpd.

But now it is OPEC’s ability to open the taps further that is in doubt—and at a time when the antics of Russian prosecutors are also raising questions about supply from that country. OPEC’s spare capacity is now thought to be 1-2% of global demand, well under the 4% that is thought necessary in order to influence prices. That gap cannot be closed quickly, since the oil-production business has long lead times and any new oil will take a couple of years at least to come on stream. In his comments on Tuesday, Mr Yusgiantoro hinted that that went for Saudi Arabia as well as the rest of OPEC.

Saudi production in July was 9.25m bpd, well above its 8.45m quota, but below its 10.5m official capacity. Following Mr Yusgiantoro’s comments, Saudi officials insisted they could indeed raise output quickly. Saudi Arabia claims that it has opened two new production plants, at Abu Safah and Qatif, three months ahead of schedule. While these are meant to replace production from older facilities, not to add new output, it is understood that the Saudis are now planning to delay the retirement of older fields in order to help ease the oil price.

In addition to OPEC’s attempts to increase supply, the International Energy Agency also expects non-members to boost output by a combined 1.2m bpd over the coming year, of which around half will be from the former Soviet Union. But that figure is hostage to events in Russia. At 1.7m bpd (more than is pumped from all of Libya’s wells), Yukos’s output makes up 2% of global oil production and thus has a noticeable effect on the price. With Russian officials now attempting to sell the company’s prize subsidiary, Yukanskneftegaz, oil traders are likely to remain jittery.

Another factor adding to nerves in the market is the alert about more attacks from al-Qaeda, issued by America’s homeland-security chief last week. This came as a stark reminder of the dangers facing America (the world’s largest oil consumer) and the instability in the Middle East (home of much of the world’s oil reserves). With this uncertainty likely to continue, OPEC likely to keep brushing up against its capacity limits, and Yukos certain to remain under fire, the world may just have to get used to oil of $40 or more a barrel.

When the lights went out in Xinjiang by ROSEMARY RIGHTER Timesonline

August 03, 2004

When the lights went out in Xinjiang
BY ROSEMARY RIGHTER

Timesonline

IT WAS 39C outside, distinctly cosy inside and would be a lot hotter as the day went on. The lift was not working. The hotel’s emergency generator could, sort of, cool the bedrooms, but not run the lift and cool the public areas as well. Kizil, a dusty town just north of the Taklamakan Desert, has ways of making you understand why Marco Polo took the sea route back rather than retrace this punishing segment of the old Silk Road.

China’s “Develop the West” campaign has barely impinged on this western corner of the country’s northwest, in the great sweeping wildness of Xinjiang. But that made the power cut unexpected. Rich in oil and coal and under-industrialised, Xinjiang is supposed to be one of the few areas of China not affected by the country’s crippling energy crisis, its worst in history.

China is 30-35 gigawatts short of the energy it needs this year, a gap equivalent to four fifths of the energy Britain generates in a year. Chinese towns and cities endured 757,000 brownouts between January and June — even before summer temperatures drove urban demand up by 40 per cent, as offices, factories and millions of increasingly affluent consumers switched on the air-conditioning. Now, in torrid heat, the lights are going out all over China.

Literally, in some apartment blocks, where parents complain children cannot see to do their homework; metaphorically, in the booming heart of Shanghai. The municipality has dimmed lights on the Bund, installed low-energy bulbs in Pudong’s landmark Oriental Pearl TV tower and introduced minimum temperatures for shops, restaurants and government offices. It has sent out inspectors to shut off supply to “low-efficiency, energy-consuming enterprises”, a ban now to be enforced nationwide.

In Beijing, 6,000 factories were recently closed for a week. Some government employees have been sent on holiday. Sales of fuel-guzzling private generators have soared, pushing up demand for fuel oil by 100,000 barrels a day.

Government statements that supplies are adequate, or would be if demand were not out of control, are not going down well. Manufacturers complain that brownouts have depressed production by 20 per cent, just when they need to fill Christmas export orders. They also complain that power still reaches “well-connected” enterprises.

Yet the Chinese authorities have a point: energy demand, like much else in this strange hybrid economy, is out of control, galloping way ahead of domestic capacity, far faster than international markets anticipated and, at 15 per cent a year, three times as fast as government planners anticipated. You can take that as a healthy sign, proof that no power on earth can now suppress Chinese commercialism, or as the grim harbinger of a landing so hard that it could throw global growth off course.

“Oil for the lamps of China” is moving world markets in unexpected ways. Sabotage in Iraq, Yukos-related uncertainty about Russian supplies and awareness that Opec is already pumping close to peak capacity have helped to drive crude prices up 30 per cent to $43.20 a barrel last Friday; but it will be China’s needs that determine long-term trends.

This has happened fast. It is only 11 years since China became a net oil importer, yet last year it overtook Japan to become the world’s second-largest consumer of petroleum products. China accounts for at least 40 per cent of the growth in global oil demand. That may be 50 per cent by the end of this year.

A report issued last week by the US Energy Information Administration shows how the gap between China’s production and consumption has widened since 1980 (see chart). EIA analysts suggest that we ain’t seen nothing yet. Twenty years from now, they predict, China’s consumption will more than double, to 12.8 million barrels per day, and it will be hunting for 9.4 million of these on world markets, nearly three times today’s imports.

This forecast assumes little increase in domestic production — recent finds in Xinjiang and elsewhere are unlikely to do more than compensate for declining output at Daqing and Liaohe, China’s two big established fields. Yet on consumption, EIA projections may even be too modest. So says the Chinese Academy of Engineering itself.

In the next 20 years, China will need as much extra power from all sources as the United States developed in the past half century, it says. One reason for that is obvious. Although China absorbs 10.5 per cent of the world’s energy output, consumption by individual Chinese is little more than a tenth of American levels.
This will change. Go shopping and observe consumers beginning to live the American dream.

They are buying not watches, transistor radios and footpowered sewing machines, but televisions, washing machines, air-conditioners — and cars. Gulp. But there are other reasons for China’s power-guzzling. The first is that China is a horribly inefficient consumer, using 50 per cent more energy per unit of output than even India; its best factories are three times as wasteful as American counterparts.

The second is a massive concentration on four energy-intensive sectors (steel, aluminium, cement and chemicals) which together absorb a third of China’s electricity. In the first half of this year economic growth of 9.7 per cent was accompanied by a 15 per cent surge in demand for power.

A pell-mell construction boom is partly responsible.

Whatever may be done to cool the economy elsewhere, steel and cement factories, as well as building gangs, will be kept busy by Beijing’s preparations for the 2008 Olympics and for Shanghai’s Expo 2010. But the other factor, which I wrote about in this column after visiting China last September, is the phenomenon of “empty growth” — copycat investment in manufacturing and construction, regardless of market demand and quality. Local authorities compete for their “share” of growth by pouring investment into identical industrial parks, “silicon valleys” and “special” development zones.

At the personal level, the cadres are being quite rational, since it is still largely true that promotion depends on glowing production statistics. Besides, it is impossible to be an administrator in China without becoming deeply sceptical about central planning. The country’s energy crisis is very much a case in point. China's five-year plan for 2001-2005 botched almost every aspect of energy planning.

Take fuel oil. The plan called for demand to decline by 2005, as domestic coal replaced oil. So Sinopec and PetroChina, two of China’s three oil giants, duly cut fuel oil production. Coal — the unwashed, sulphur-belching kind — is still king in China, providing three-quarters of its electricity, and it was in oversupply. But coal has to be delivered, and China’s railways can handle only 100,000 freight cars, a third of demand. Power stations ended up so short that last month the Government requisitioned 5,000 extra freight cars and announced emergency plans to shift coal by coastal ships. As for fuel oil imports, they have doubled since 2002.

Similar misjudgments were made over refining capacity and over electricity, where the plan halted construction of fuel-burning power plants. Official forecasts of consumption in 2005 were realised last year, two years ahead of schedule. And, because too low a priority was given to completing a national grid, as well as the West-to-East hydropower network and gas pipelines, power cuts will plague China for at least two more years.

The danger now is overreaction the other way. China is bingeing on power plant construction, building 130 gigawatts of new capacity. It is scouring the world for guaranteed oil supplies (the reason, in case you wondered, why President Hu Jintao paid a call on Gabon last February); it is seeking deals in the Caspian, Kazakhstan, Indonesia and Latin America. It is pressing Russia hard to route a proposed new Siberian pipeline from Angarsk via Daqing in Gansu Province, rather than to Nakhodka, as the Japanese would prefer.

The one thing China will not do, it appears, is open up its energy markets to foreign multinationals. It will take their money, through limited IPOs, but give them no voice as partners. So official plans will continue to call the tune, not profitability. In energy, there will be no “new economic model”. And China, not America, will be the energy glutton of tomorrow.

Indiana Jones and the China crusade-The Guardian interviews Market maven Jim Rogers

Indiana Jones and the China crusade

Jim Rogers, investment guru; co-founder of Quantum Fund with George Soros

Nils Pratley
Saturday July 3, 2004
The Guardian

The American dollar is a flawed currency and will collapse in value before the end of the decade, taking with it the prosperity of the American nation. Investors should be buying commodities - platinum, lead, wheat, sugar, oil, the sort of assets that haven't been fashionable for a quarter of a century or more. While you're at it, teach your children to speak Mandarin, the coming language of the 21st century. And don't encourage them to do an MBA: "Tell them to be a farmer and do a real job."

Such advice, if given by your regular financial adviser, would probably provoke a complaint to the ombudsman. The speaker, though, is Jim Rogers, a legendary Wall Street name. The Indiana Jones of finance - a nickname earned by virtue of two round the world trips in the name of grass-roots investment research - has become a multimillionaire by backing such views with hard cash.

In 1973, Rogers and George Soros founded Quantum, one of the first and most successful hedge funds. In Britain, the Quantum Fund is best known for making £1bn by selling sterling ahead of Britain's exit from the exchange rate mechanism on Black Wednesday in 1992, but Rogers' contribution came before then. He helped Quantum to return a 4,000% gain in its first 10 years and departed in 1980, staying a year longer than he had intended only because 1979 had been so profitable - he predicted the stock market crash of that year.

The "poor boy from Alabama" whose first job was picking up bottles at baseball games at the age of five, retired at the age of 37 a very wealthy man. He set about managing his own fortune and travelling the world, projects that have become virtually indistinguishable over the years. In the early 90s, Rogers travelled 65,000 miles roving the world by motorbike and related the tale in his first book, Investment Biker. Last year, he completed a second, Adventure Capitalist, which was the result of an even more ambitious journey: a three-year, 150,000 mile journey by custom- built Mercedes across 116 countries with his girlfriend, who became his wife along the way - in Henley-on-Thames, of all places.

Snake burger

Like the earlier book, it is part anecdote - what it's like to eat snake; what happened when he forgot about the bottle of vodka in the boot when trying to enter Saudi Arabia - but the heart is commonsense investment analysis built on firsthand observations. His philosophy is that you learn about a country from talking to brothel owners and black marketeers rather than government ministers.

In conversation, Rogers rattles along in similar style. He punctuates everything with American-style full disclosure of his personal holdings - "I'm short Citibank, incidentally," he will interject into a dissection of the rotten heart of the American stock market - and delights in challenging received wisdom. His central argument is that a new bull market has started that will match the fireworks seen in the dotcom-fuelled stock markets of the late 90s. This time, though, the bull market will be in commodities not shares. Rogers' reasoning is straightforward: raw materials are running out.

"There has been no great oil discovery in the past 35 years," he argues. "The North Sea has peaked. Alaska is in decline. Mexico is in decline. All these great oilfields are in decline. To anybody who thinks I am lying about this, I would ask: where is the oil going to come from?

China bull

"Mines deplete. Wells deplete. It's supply. In the 1970s, we had horrible economies around the world, but commodities skyrocketed despite those horrible economies because there was no supply. That is happening again."

How high is high? The nature of all bull markets, he argues, is that prices go higher than anybody would have imagined possible. "Nobody could ever have thought that Cisco could go to $75 [it had been $5 a few years earlier]. Who would have thought in the 1970s that oil could go to $40 a barrel - it was $2 a barrel in the 1960s," he says.

"Sugar in 1966 was 1.4 cents per pound. In 1972 - six years later - sugar was 66 cents. Who could have conceived that? For decades, it had done between one and five cents. If you had said in 1966 that it would go up 47 times they would have made you certifiably insane. But it happened."

Hand in hand with this faith in the value of commodities is a long-term confidence in China, whose appetite for raw materials has already fuelled a strong rise in commodity prices in the past 18 months. All the best capitalists live in communist China, he argues, and overseas Chinese are returning with their capital and expertise. He has employed a Chinese nanny for his one-year-old daughter. Mandarin will be the most important language in his child's lifetime, he thinks.

But even this China bull predicts a major economic slowdown there, with accompanying political unrest, very soon. In this, he is not wholly out of the line with the consensus thinking - City economists are currently debating whether China's landing, after a decade of extraordinary growth, will be hard or soft. Rogers' view is that it will be very hard, but will also represent a golden investment opportunity.

"I remind you of the last two times that China had to cut back an overheated economy," he says. "In the late 80s, it led to Tiananmen Square when things got out of control and the second time was in the mid-90s, when they had to devalue their currency. Sometime this year or next you will see headlines in the Guardian, 'Turmoil in China'. At that point, you buy all the China you can and all the commodities you can because that will be bottom of the consolidation in commodities and consolidation in China."

Buying in the face of prevailing hysteria is a principle that has served Rogers well over the years. Crisis in China - however serious it looks at the time - will merely mark the end of the first leg of this new bull market, he thinks.

"Remember," he enthuses, "that the second leg is wonderful, and the third leg is spectacular. In the fourth leg, there is dancing in the streets and in the fifth leg people are hysterical and everything is skyrocketing every day. We are nowhere near the second leg, much less the third, fourth and fifth legs."

His bearishness on the US dollar is predicated on economic fundamentals, notably the balance of payments. Alan Greenspan, the chairman of the Federal Reserve and Rogers' bogeyman-in-chief, has been printing money on an unprecedented scale and President George Bush has been spending it just as rapidly.

"The US owes the world $8 trillion," he argues. "We are the world's largest debtor nation by a factor of many times and our foreign debts are increasing by $1 trillion every 21 months. That's terrifying.

Dollar demise

"People need to understand about this major change in the world and about the demise of the US dollar. The US dollar is going the way that sterling went as it lost its place as the world's reserve currency. I suspect there will be exchange controls in the US in the foreseeable future. It will be a complicated and difficult currency."

Not that Rogers is a fan of many currencies. He says he has stakes in a dozen but has "no confidence in any of them". He expects the euro to fail eventually but holds some anyway because he judges it to be less flawed than the dollar. For the record, his daughter's assets are held in Swiss francs and gold, silver and platinum coins.

Unlike his old partner, Soros, who has devoted part of his vast fortune to opposing Bush's election campaign, Rogers stands wholly outside the political fray. He calls the US-led invasion of Iraq a "horrible, horrendous, unbelievable mistake", but thinks the Democratic candidate, John Kerry, would make his own mistakes. "They wouldn't be politicians if they knew what they were doing," he says, far from flippantly.

The balance of payments, and the looming dollar crisis, make the election result irrelevant, he argues: "Whoever is elected president is going to have serious problems in 2005-06. We Americans are going to suffer."

The CV
Born 1942, Alabama
Education Yale; Balliol College, Oxford
Career US army; co-founder, Quantum Fund; professor of finance, Columbia University Graduate School of Business
Family Married to Parker Paige with a daughter
Interests Henley royal regatta

August 4 Philippine Stock Market Review TELECOMs Boosts Market

August 4 Philippine Stock Market Review TELECOMs Boosts Market

Threats of record high levels of crude oil prices apparently rattled and unnerved the US Markets and the skittishness have now permeated into the Global bourses including those of Asia, where only FOUR among the 15 indices in the region are contradictorily manifesting gains. These outliers include the emerging markets of China, Pakistan, South Korea and the Philippines whose composite index or the Phisix climbed 10.88 points or .7% on foreign accumulations into the top telecom issues, PLDT and Globe.

While foreign capital remained a minority in today’s moderate-to-heavy Peso volume turnover valued at P 869.617 million (US$ 15.531 million), its share to total output constituted only 47.21%. Net foreign accumulation accounted for P 116.305 million (US$ 2.077 million) or 13.37% of today’s cumulative turnover even as foreign investors sold more issues than it bought by almost 2 to 1 in the broader market. Furthermore, the mixed market sentiments seen in the foreign money activities was likewise shared by the general market as advancers edged out decliners by a tightrope thin 30 to 29, which we had accurately forecasted yesterday, and industry subindices were largely on the black with only the Banking and Finance index lower for the day.

Although the distribution of capital flows from overseas investors was even at four apiece, among index heavyweight issues, the load of these money inflows were soaked by Globe Telecoms (+2.87%) and PLDT (+2.8%) whose combined output represents 53.91% of today’s turnover, while Property heavyweights Ayala Land (+1.82%) and SM Primeholdings (+3.51%) recorded minor inflows. The rest of the heavyweights, Bank of the Philippine Islands (-1.21%), Metrobank (-1.92%), San Miguel B (-1.43%) and Ayala Corp (-1.85%), reported net outflows.

Meralco B (+3.48%) recorded its second straight day of recovery after last Friday and Monday’s excruciating fall, while affiliate First Philippine Holdings (+3.26%) posted its first day of technical rebound following the mass exodus of foreign investors in the past three successive days. Both issues still reported hefty foreign outflows despite today’s rally meaning that foreign investors have placidly liquidated their positions in a much-tempered manner.

The pressure from the recent sell-offs has gradually abated though its shadows lurk in the market’s backdrop. Foreign selling in the broader market, aside from the Lopez group, was noticeably heavy in the banking and finance sector, of which 6 of the actively traded issues reported outflows and 5 of these posted declines leading its index lower by 1.4%.

Again telecom issues remain as the pillar of the local market, as foreign money, the acknowledged drivers of our index have focused squarely on the sector, almost single-handedly. While we note of ancillary buying in the property sector, the volume for its upkeep is still significantly wanting.

One area of concern is today’s broad sector selloff in the banking and finance industry wherein 6 of the most actively traded issues were all unloaded by foreign investors. Of the 6, 5 posted declines which eventually encumbered on its sector’s index to close lower by 1.4%. It is quite evident that any slowdown in the telecom sector could accelerate equity dispatch by foreign money on the other key blue chips if these momentum are to be sustained, or simply, we could see further downward pressures in the other blue chip companies if the foreign driven-rally in telecom sector tapers off.

The greatly reduced sales pressures in the Lopez owned energy stocks could mean that the foreigners have opted to gradually unload or have nearly exhausted their inventories for liquidation, this can only be established in the coming days if the current levels hold or serves as a floor to the recent panic.

As for the moment, the selloffs in the Lopez-owned energy group have basically been offset by the massive accumulations in the telecom sector, which has rendered the market practically neutral in terms of the market breadth, except that relative to the market cap, the weightings of the telecom issues has lent a bullish tone to the index.

Again on the bright side, the animated trading activities by the local investors has provided a pivotal framework for the market in its entirety to move higher barring another major shock. Today’s massive accumulation by foreign capital is expected to persist in the near term, given the recent breakout in Globe Telecoms, and the accelerating momentum by PLDT to test its recently established highs. A largely improved market breadth should also indicate a bottom for the recently battered Lopez group of energy companies and its recovery should provide the necessary impetus for the Phisix to breach the 1,600-psyclogical resistance level.









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August 3 Philippine Stock Market Review: The Selling Abates

August 3 Philippine Stock Market Review: The Selling Abates

Selling persisted in today’s activities though on a much-mitigated basis. The object of the last two trading day’s panic, Meralco B finally rebounded by 6.17%, after losing almost as much as 29% in the previous TWO sessions. While Meralco stakeholder, First Philippine Holdings, fumbled anew for the third straight session albeit on a moderated basis by 1.07% on renewed heavy foreign outflow, the Lopez owned natural gas processing energy company contracted by as much as 22% during the past three sessions as the issue touched today’s low of P 22.25 per share, a 5-month level.

The marginal gains of the top telecom issues, PLDT and Globe helped cushion today’s composite index decline of 2.44 points or .16% but was unable to lift the index to positive territory due to the losses of four heavyweights namely San Miguel B (-2.11%), Ayala Corp (-1.81%), Bank of the Philippine Islands (-1.2%) and SM Primeholdings (-1.07%) while San Miguel local shares, Ayala Land and Metrobank were unchanged.

Domestic investors supported today’s market, as overseas capital remained dumbfounded by the latest ruling by the Court of Appeals against Meralco that sent foreign money scouring to the exit doors. Foreign trades constituted about 46% of today’s output while overseas capital recorded a net outflow of P 82.769 million (US $1.478 million) on moderate volume of P 567.414 million (US$ 10.132 million) the outflows were mostly directed at Meralco, First Philippine Holdings and SM Prime even as foreign investors sold more than they bought in the broader market.

Sentiment was mixed with bearish undertones as declining issues edged out advancing issues by 39 to 33, while major sub-indices were majority on the red against only two gainers, the Commercial Industrial Index and the Mining Index which has showed extraordinary resilience and has been approaching its January heights, largely on Manila Mining speculations.

Thus far the Phisix belongs to the minority decliners in the Asian region alongside China, Malaysia, Japan and Thailand while the ten other indices are in surprising green following the rebound in Wall Street, apparently unmoved by yesterday’s threats of the RECORD OIL prices and TERROR scare. Well, CRUDE OIL as of this writing is now at over $44 per barrel!

After three sessions of disgorging Philippine equity assets, the market breadth or market sentiment seems to be on the mend. The difference from the number of advancing issues to declining issues has narrowed meaningfully and could presage for a better advance-decline breadth tomorrow (a probable rally) depending on the persistence of the foreign outflow on the Lopez owned issues. The outflow from Meralco seems to be easing while the intensity of the outflow in First Philippine Holdings is almost at Friday’s level. If local investors could cover the remaining inventories to be liquidated by foreign institutions, who should by now have regained sanity, then we could probably see a sideways movement with bullish bias for the index. As for Meralco and FPH, expect a bearish near term trend as these issues attempt to find a base after the most recent carnage.

Finally, the actions of WALL STREET could provide us some directions despite the low correlation between our markets. So far, US equities have largely ignored the headline news, which are predominantly glum and has moved positively, although one major concern is that rising OIL Prices is on a roll and will continue to haunt investors like scarecrow on the field. Does the recent movements reflects a “Wall of worry” for the US markets to climb or a technical rally due for a selloff?

August 2 Philippine Stock Market Review: And THE CARNAGE Continues

August 2 Philippine Stock Market Review: And THE CARNAGE Continues.

During the early trading session, PLDT opened higher in an obvious attempt to buoy the market and the composite index higher but was evidently thwarted by the intense flurry of wave after wave of foreign led selling on Meralco (-13.82%) that practically resulted to a broad market bloodletting. During the mid-session PLDT (-1.2%) succumbed to the tenacity of the bears and found itself mired in losses until the trading close.

I might have spoken so soon in my latest newsletter that based on the recent internal market developments, the market WOULD probably ASSUAGE OR EVEN REVERSE the hemorrhaging sentiment seen in the Lopez-owned energy companies Meralco and First Philippine Holdings (-6.06%) which resulted from Friday’s shocking adverse reports. Although I did mention that in the interim the probability of selling pressures would continue, the intensity of today’s butchery was unexpected and even more distressing than on Friday to require a revaluation of the market’s internals.

Yes, misery loves company and upon looking at the region’s bourses, ONLY THREE, India, SRI Lanka and Australia, of the Asia’s 15 indices are trading slightly higher with Thailand’s SET closed probably on holiday. The probable culprit of the dreary outlook~ crude oil prices hitting a high of $43.92 per barrel!

In the domestic front, ONLY GLOBE Telecoms (+.58%) managed to defy the overwhelming bearish outlook among the blue chips with seven of the 9 issues posting losses that dragged the Phisix lower by 1.28% or 20.23 points, the third biggest loser in the region after Korea and Taiwan. Aside from PLDT, SM Prime (-3.3%), Metrobank (-1.88%), Ayala Land (-1.78%), Ayala Corp down (-1.78%), Bank of the Philippine Islands (-1.19%), and San Miguel A (-.86%) were all in the red while San Miguel B was unchanged.

NET Foreign selling was a massive P 142.846 million or US$ 2.551 million on moderate to heavy peso volume turnover of P 712.037 million or US $12.715 million. Foreign share to trade outstanding was at 58.01%. The fiery liquidations were practically concentrated on MERALCO, PLDT and First Philippine Holdings, which represented substantial percentages to their output, 73.01%, 36.39%, 56.16%, respectively. Among the blue chips, aside from PLDT, SM Prime and Metrobank recorded modest to minor outflows while BPI, AC and Ayala Land reported minor inflows, this of course is aside from Globe Telecoms which posted heavy inflows.

Market sentiment was generally bearish with decliners upstaging advancers by 46 to 19 or a ratio of over 2 to 1 while in terms of industry sub-indices, except for the mining index all other indices were lower for the day. Number of traded issues was at the threshold 100 level.

Today’s activities were a COMPLETE turnaround from Friday’s foreign bullishness that capped on the declines. Although the selloffs were limited to THE MARKET LEADERS, particularly Meralco and PLDT, the broad market felt the heat of the ferocious liquidations and caved in to the intense bearish pressure resulting to the hefty declines of the composite index. While technically speaking the chart of the Phisix seems to be out of danger, the failed breakout and the considerable damage in the market internals are things to keep a close eye on. One day does not make a trend.

Oil and Politics

Oil and Politics
Steve H. Hanke,
08.16.04, 12:00 AM ET

Reserves are not fixed. Proven reserves in 1971: 612 billion barrels. Since then the world has produced 767 billion--and still has 1,028 billion left.

Every president since Richard Nixon has asserted that we are running out of oil. Meaning: We are sitting ducks for those who brandish the oil weapon. To keep the evildoers at bay, the government must adopt policies that ensure our energy independence. Both George W. Bush and his challenger John Kerry worship at this altar. And why not? How many elections have been lost by blaming foreigners for an impending crisis and promising a quick fix?

Despite their cynicism about politicians, most people actually believe that mineral resources, including oil, are doomed to disappear. It's obvious: Start with a given stock of provisions in the cupboard, subtract consumption and eventually the cupboard will be bare.

But what is obvious is often wrong. We never run out of minerals. At some point it just costs too much to produce them profitably. In the 19th century the big energy scare was in Europe. Most thought Europe was running out of coal. That doomsday scenario never materialized. Thanks to a plethora of substitutes, the prices that European coal could fetch today are far below its development and extraction costs. Consequently, Europe sits on top of billions of tons of worthless coal.

Once economics enters the picture, the notion of fixed reserves becomes meaningless. Reserves are not fixed. Proven oil reserves, for example, represent a warehouse inventory of the expected cumulative profitable output, not a fixed stock of oil thought to be in the ground.

When thinking about oil reserves, we must also acknowledge another economic reality: Oil is sold in a world market in which every barrel, regardless of its source, competes with every other barrel. Think globally, not locally. When we do, the dwindling reserves dogma becomes nonsense. In 1971 the world's proven oil reserves were 612 billion barrels. Since then the world has produced 767 billion barrels. We should have run out of reserves five years ago, but we didn't. In fact, today's proven reserves are 1,028 billion barrels, or 416 billion barrels more than in 1971.

How could this be? Thanks to improved exploration and development techniques, costs have declined, investments have been made and reserves have been created. The sky is not falling.

If oil reserves aren't the problem, what is? The real problem is our oil policies. We inadvertently give aid and succor to OPEC, the world's clumsy oil cartel. That has been especially true since Nov. 13, 2001, when President George W. Bush announced that the U.S. would fill the Strategic Petroleum Reserve to capacity. Mightn't this plan have a little something to do with the rise in the price of oil, from $22 then to $40 now?

The economics of crude oil inventories provides the key to unlocking this mystery. The net cost of carrying inventories is equal to the interest rate, plus the cost of physical storage, minus the "convenience yield." The convenience yield is driven by the precautionary demand for the storage.

When the convenience yield is zero, a market is in "full carry," future prices exceed spot prices and inventories are abundant. Alternatively, when the precautionary demand for oil is high, spot prices are strong and exceed future prices, and inventories are unusually low. When the President ordered the reserve to be filled, the spot and future oil prices were in rough balance. Since then the spot prices shot up and have exceeded future prices (until recently) by a wide margin, indicating scarce private inventories. Indeed, private oil inventories fell to a 29-year low on Jan. 23, 2004.

The oil price run-up and scarcity of private inventories can be laid squarely at the White House's door. Since Nov. 13, 2001 private companies have been forced to compete for inventories with the government. Fortunately, it appears that, barring "events," the oil price surge has run its course. Spot and future prices are once again in rough balance, and private inventories are up by 14.9% over their January lows.

The pain of higher oil prices could have easily been avoided if George W. Bush had followed his father's lead. On Jan. 16, 1991, the day the first Gulf war began, George H.W. Bush ordered a drawdown of the government's reserve. The results were dramatic: The spot price of oil fell from $32.25 per barrel to $21.48 in one day. More important, the positive spread between spot and four-month future prices also fell, from $5.90 per barrel to $1.65, indicating a higher comfort level with the adequacy of private inventories.

The lesson is clear: We have an oil weapon, too. The strategic reserve should be used to bloody OPEC's nose, not to prop up a cartel.