Washington Post: U.S. Wants to Cancel Poorest Nations' Debt

U.S. Wants to Cancel Poorest Nations' Debt
Other Countries Concerned Proposal May Leave Global Lenders Short of Money
By Paul Blustein
Washington Post Staff Writer
Tuesday, September 14, 2004

Bush administration officials are advancing a plan to cancel billions of dollars in debt owed by some of the world's poorest countries, a move that could boost the United States' image abroad but which institutions like the World Bank fear could leave them strapped for cash.

The plan, disclosed by members of aid groups and government officials, would dramatically increase previous debt relief programs for at least 27 poor nations such as Uganda, Bolivia and Ethiopia.

The Treasury Department, which is putting the plan forward for discussion at a meeting in Paris this week, contends that the current approach has been too slow and piecemeal to truly free those nations from the burden of repaying money borrowed from the World Bank, International Monetary Fund and other global lenders. The Treasury is also proposing that for very poor countries, all future IMF and World Bank assistance come in the form of grants rather than loans.

The initiative, which would require broad support from the 184 member nations of the IMF and World Bank to be implemented, is getting a frosty reception from the governments of other rich countries and from the staffs of the lending institutions. Some critics oppose such drastic debt relief for certain countries as unwise and unfair to other indebted nations that don't qualify. Other opponents contend that the administration is trying to accomplish debt relief on the cheap, without imposing any direct cost on U.S. taxpayers, by fobbing off the cost on institutions like the World Bank, whose aid-giving ability may as a result be curtailed.

No matter whether the proposal is enacted, its impact, both political and economic, could be significant. It may help Washington secure support for its efforts to forgive most of Iraq's debt, because nations such as France have rejected granting more generous terms to Baghdad than to other, poorer nations.

Moreover, if, as some administration officials hope, President Bush takes a strong position on the emotionally charged debt issue, he may burnish his image both at home and overseas as a "compassionate conservative," winning plaudits from groups normally on the liberal end of the spectrum.

Marie Clarke, national coordinator for the Jubilee USA Network, a leading advocate of Third World debt forgiveness, said in a statement yesterday that her group was "very encouraged to hear that the U.S. Treasury Department is apparently pushing for full multilateral debt cancellation."

Officials from several government agencies confirmed the basic elements of the Treasury plan. They spoke only on condition that they be granted anonymity because of the sensitivity of the proposal. A Treasury spokesman, Tony Fratto, who was in Paris yesterday with John B. Taylor, the undersecretary for international affairs, declined to comment.

Clarke noted that the Treasury plan for 100 percent debt forgiveness first surfaced in June during the Group of Eight summit in Georgia. At that time, it was opposed by a number of U.S. policymakers from outside Treasury, but sources said that since then Treasury officials have garnered greater backing from other elements of the administration.

"We had heard from the White House . . . that one of their big concerns was whether they would receive applause for taking this kind of action," Clarke said, adding that Jubilee USA has "been working around the country" with many religious groups to galvanize enthusiasm for the plan.

A complete debt write-off would be much more generous than the terms currently being granted to 27 countries under the Heavily Indebted Poor Countries initiative. The HIPC plan, which was launched in 1996 and expanded in 1999, is aimed at reducing the countries' obligations to a manageable level, set as a multiple of their exports.

Currently, HIPC is saving the 27 countries about $900 million a year in debt payments, according to figures compiled by DATA, the group started by the Irish rock star Bono to advocate for Africa. But those countries are still paying about $800 million annually.

The IMF and World Bank have acknowledged that the HIPC program has failed to reduce most poor countries' debts to "sustainable" levels.

But even strong advocates of debt relief are worried that the Treasury plan would in effect reduce the help that poor countries get, particularly if the World Bank is unable to give as much aid as before. Sources said that the British government has strongly urged that an initiative like Treasury's should go forward only if rich nations somehow cover the cost of forgiving World Bank loans.

A spokeswoman for the British Treasury noted that in a July speech, Chancellor of the Exchequer Gordon Brown endorsed greater debt write-offs, but added: "To achieve this, let us accept that we need to develop a new financing vehicle."

© 2004 The Washington Post Company

Wolfensohn: Prune red tape to spur growth in poor countries

Prune red tape to spur growth in poor countries
By JAMES WOLFENSOHN
Business Times - 10 Sep 2004

A YEAR ago, the World Bank Group published the Doing Business report, measuring for the first time the burdensome regulations and weak property rights in many poor countries that stifle the growth of a vibrant business sector.

With the publication this week of the second Doing Business report, we can see that significant changes have been occurring in the developing world over the past 12 months in this critical area.

For example, the number of new businesses founded in Ethiopia last year leapt by almost 50 per cent. It may seem a miracle, but the reason is no mystery: the Ethiopian government cut the cost of setting up a new business by nearly 80 per cent, or about four years' salary. Turkey and Morocco also simplified their procedures and saw the number of start-ups grow by around 20 per cent.

Obviously, making it easier for entrepreneurs to start new businesses is good for growth. The same seems to be true for the other activities the report tracks, which include trading property, ease of hand allowing the use of collateral to get credit. It should come as no surprise that countries with streamlined, efficient regulation of these areas enjoy higher growth.

What is less obvious, but just as important, is that inefficient regulations hurt vulnerable people. In too many of the 145 countries covered by our research, restrictive laws exclude women and young workers from the labour market.

Unrealistically high minimum wages mean that unskilled workers can only work in the informal sector - the black market - without paying taxes or enjoying any protection. Attempts to enforce jobs for life make employers very reluctant to take a chance on new workers, especially women.

In contrast, countries with more flexible rules have many more women in the private sector workforce and much lower youth unemployment.

Stronger property rights also benefit the poor. For example, when creditors have stronger legal rights, they provide more loans. Everybody benefits, but the effect is larger and more significant for the smallest firms.

Similarly, when countries provide efficient property registration, all types of firms report that their rights are better protected, but small firms enjoy the greatest benefits.

Many countries aspire to protecting the poor, but it is a myth that heavy, bureaucratic regulations achieve this goal. Norway, Sweden, Denmark or Finland are all on our list of the twenty countries with the simplest business regulation. They regulate where it counts: protecting property rights and providing social services.

They have found that workers, investors and even the tax authorities can all be looked after without reams of red tape.

Nor are efficient regulations the exclusive preserve of rich countries. Lithuania, Slovakia, Botswana and Thailand are also on our top 20 list.

This year's Doing Business report shows that countries like India, Poland, Slovakia and Colombia found ways to simplify business regulations, strengthen property rights, or make it easier for businesses to raise capital.

We have also discovered and documented dozens of proven reforms which have worked for rich and poor countries alike. Ethiopia's dramatic success was achieved by abolishing an unnecessary requirement to publish notices of incorporation in the newspapers.

Tanzania's bankruptcy courts work much better now they are staffed with specialist judges. Thailand now allows entrepreneurs to start business without paying in minimum capital. Most of these reforms quickly pay for themselves - and for lower taxes or better public services.

Since the solutions are sometimes so simple, it is frustrating to see that businesses in the poorest developing countries face three times the administrative costs and nearly twice as many bureaucratic procedures and delays than their counterparts in the industrialised countries.

In effect, the countries that most need entrepreneurs to create jobs and boost growth - the poorest countries - put the most obstacles in their way.

For people striving to start or grow a business, last year was a good year in the 58 countries which measurably improved some aspect of their business environment. It is just a shame that not more of the 58 were poor countries, rather than rich countries fine-tuning systems which already work well. We hope that the poor countries which have demonstrated simple, successful reforms become a lesson and an inspiration to many others.

Strong property rights - and effective, simpler regulation - do not arise from miracles, of course.

They occur when countries measure their red tape, sharpen their reform scissors, and clear the way for average citizens to participate in the economic life of the nation.

The writer is president of the World Bank.
Copyright © 2004 Singapore Press Holdings Ltd. All rights reserved.

MSNBC/Newsweek:The Rich Hit the Road-Wealthy Koreans no longer feel welcome at home

The Rich Hit the Road

Wealthy Koreans no longer feel welcome at home
By B. J. Lee
Newsweek

Sept. 20 issue - Lee Hye Yung, 32, is one of the many wealthy South Koreans who now believe their future lies in another country. Her husband's job at a technology company was becoming increasingly insecure. Korea's high-pressure school system was getting to their two kids. So the Lees recently sold their posh Seoul apartment for $500,000 and will settle in New Brunswick, Canada, later this month. "We are dreaming of a comfortable life in a large and beautiful house there," says Lee. "We really don't have any reservations about leaving Korea."

Wealthy South Koreans are voting with their feet against the government of President Roh Moo Hyun, which has encouraged populist attacks on the upper classes. Business elites are leading the exodus, fearful that Roh's pro-union stands will undermine their livelihoods. Those who cannot move overseas are often spending large sums to buy houses or businesses in places like Los Angeles, New York or Shanghai as a safe means of parking their money for retirement—which has, in turn, inspired a government crackdown on illegal capital flight. "The overall anti-business and anti-rich atmosphere in Korean society is accelerating capital flight," says economist Jo Ha Hyun at Seoul's Yonsei University. "The money drain is hurting Korea's already sluggish economy."

The numbers tell the story. During the first half of this year, money transfers by Koreans resettling overseas rose 24 percent from a year earlier to $867 million, and the amount of money sent to overseas relatives rose 15 percent to $5.8 billion. And those are just the legal transfers that the central bank can record.

This exodus is a shock to a newly developed nation like South Korea, which for years restricted foreign travel and money transfers in order to harness savings and capital to the job of building industry at home. Seoul began to ease those restrictions with the rising wealth of the past decade, and today the caps limit spending on overseas education at $100,000 per student, and on money transfers to overseas relatives at $10,000 per year.

To dodge the rules, some business people channel money through front companies or under false names. During the first six months of 2004, illegal foreign-exchange transactions are estimated by the government to have totaled $1.2 billion, up five times from the same period last year. In June financial regulators launched a probe into such transactions that led to the announcement last Wednesday of charges against 124 people for various violations, and the investigation is still underway.

Some investors are seeking a refuge from the bearishness Roh has inspired. South Koreans are sitting on an estimated $300 billion in idle cash, because the Seoul stock market is stagnant and interest rates on bonds are the lowest in recent memory. Foreign real estate seems to be the haven of choice.

The outflow of funds is big enough to boost prices in the major expat Korean communities. Around Koreatown in Los Angeles, prices for homes and such businesses as gas stations or liquor stores have doubled in the past three years. New Star Realty & Investment, the largest Korean-run real-estate agency in the United States, with 25 offices in southern California, has seen average annual growth of 15 percent since 2001 and expects to sign contracts worth $1.7 billion this year. Its Korean-language Web site gets 5,000 hits a day, with more than half from Korea. "We are flooded with inquiries from customers in Korea," says CEO Chris Nam. But according to New Star's Seoul branch, only one in 10 inquiries leads to a buy, because the agency refuses to broker lawbreaking deals.

There are plenty of those. In Los Angeles, real-estate agents say, Koreans are buying up big mansions, office buildings and even golf courses with illegal cash transfers. Those flows are reportedly the main reason five L.A. banks that cater to Koreans saw their combined assets surge 20 percent, to $6 billion, last year. In Shanghai, prices in the ritzy Gubei area have doubled since 2002 largely because of demand from Korean businessmen, says Gang Yun Jo, a Korean resident of the city. "It is difficult to find legally purchased property," he says. Koreans avoid filing the reports Seoul requires of foreign-property buyers because they often result in tax probes.

The rich increasingly feel like social outcasts at home. The ruling Uri Party is full of young liberal leaders who tend to view all wealthy business people as corrupt beneficiaries of South Korea's decades of authoritarian government. The Democratic Labor Party, which recently won its first National Assembly seats, would go further, slapping a "wealth tax" on people with extensive assets. "Rich people are sometimes treated as thieves," says economist Jo. "It is natural they want to move to where they are more respected." And right now, that means out of South Korea.

© 2004 Newsweek, Inc.

September 14 Philippine Stock Market Daily Review: Finally, the Pause.

September 14 Philippine Stock Market Daily Review: Finally, the Pause.

The much awaited correction finally came into being, as the Phisix fell by 41.17 points or 2.34%, and is Asia’s outlier (with most bourses up) and worst performer. The Phisix has moved independently from its neighboring bourses since last week’s stellar performance and today’s decline is nothing more than a cyclical correction from an interim overheated market. The correction phase is expected to continue in the coming sessions with probable intermittent bounces in between. Our target or buying windows are at the 1,684 (38.2% fibonnacci retracement) and 1,657 (50% retracement) levels. Moreover we expect the broader market to signal signs of recovery first coupled with the subdued intensity of selloffs. The advance-decline differentials have experienced a deterioration for the past two sessions and paved way for today’s massive correction.

Naturally being in a corrective mode, the ambient signs of profit taking was evident; declining issues whacked advancing issues by more than 3 to 1, industry sub-indices were mostly in the red led by the Commercial and Industrial (-2.56%), Property (-2.34%), Banking and Finance (-.94%), and Oil Index (-1.2%) while the Mining Index (+.33%) and ALL shares (+.41%) defied the bearish landscape. Moreover, foreign money who dominated today’s activities was slightly bearish and registered net outflow of P 7.375 million with marginally more companies sold than bought by overseas investors.

In the past 2 sessions too, aside from the deteriorating pattern of the market breadth, noticeably foreign participation in the market has once reverted to foreign money’s dictates, meaning that local investors were already in a profit taking mood since the past two sessions with only foreign money coming into the bearish stance today!! In other words, foreign money lagged the locals.

Although what seems to be enlightening is that like any classic correction after an episode of buying orgies, is that today’s correction comes in a sharply reduced volume.

Finally, as your analyst previously forecasted the market is poised for a strong last quarter run, based on seasonal strength, historical ‘new administration honeymoon’ patterns, cyclical shift and lastly a bullish technical picture. Any further retracements to the abovementioned levels are buying windows that would enable us to position for the highly probable yearend run.

EmergingPortfolio.com: Tide turning for emerging markets bond funds

EmergingPortfolio.com: Tide turning for emerging markets bond funds
September 7, 2004

Dedicated emerging markets bond funds posted net inflows for the fourth week running as fears about the pace and scope of US interest rate hikes continue to moderate.The 249 funds tracked by Boston-based Emerging Portfolio Fund Research (EPFR) have taken in $235.6 million over the past four weeks.

When combined with five straight weeks of positive performance, their total assets under management have nudged up to $16.74 billion. These recent trends stand in sharp contrast to the period between April 7 and August 4, when the funds posted net outflows 15 out of 17 weeks as investors pulled out $1.22 billion. Overall, however, the funds have posted collective net inflows of $428 million since the beginning of the year.

Events in the US continue to be the biggest driver of this asset class. Expectations that US interest rates could reach 4% by year’s end have recently given way to predictions of two more 0.25% hikes and a 1.75% base rate going into 2005. As a result, the higher returns offered by emerging markets debt have regained some of their luster - especially since the underlying fundamentals in many key markets are positive.

Among the markets that are attracting attention and money are Brazil (recovery picking up steam), Turkey (supportive review by the IMF), Venezuela (oil revenues) and the Philippines (new government). This interest is reflected in the average weightings of EPFR-tracked funds. Venezuela’s weighting is currently 6.1% compared to 3.6% in August, 2003, while Brazil’s weighting climbed from 16.8% in July to 18.1% as of August.

The rally is still being held back by reservations about Russia, where the government’s prosecution of Yukos continues to highlight the risk that comes with investing in emerging markets. Russia’s average weighting in EPFR-tracked funds is currently 13.9%, down from 17.2% at the beginning of last year. Russian fundamentals, however, remain sound and several fund managers expect that issues later this year will get a favorable reception.

Going forward, several large issues are expected to hit the market in the next two months, among them sovereign issues from Brazil, Mexico, China, Colombia Turkey and the Philippines and corporate issues from Russia, Thailand and Brazil.

Tax-News.com: Hedge Funds Return To Asian Markets

Hedge Funds Return To Asian Markets,

by Carla Johnson,

Investors Offshore.com,

London

06 September 2004

Major US hedge funds which deserted Asian markets during financial crises in the late 1990s are returning, according to industry reports, driven by the weight of new money that has poured in during the last 18 months, seeking better returns than can be got in the West, where arbitrage openings have dried up as stock markets go sideways. Also Asian securities markets are less heavily researched than those in the US and Europe, so that stocks may trade below their actual value, offering arbitrage opportunities for hedge funds and other investors.

Hong Kong and Singapore are the favourite destinatons. Both are tax-friendly, and both have established hedge fund sectors. Singapore has the more friendly legislation, but Hong Kong is trying hard to catch up.

Top names such as Tudor Investment Corp, FrontPoint Partners, Rohatyn Group and Everest Capital are mentioned as front-runners in the move to Asia, and often such firms try to acquire local talent as they move in. Tudor is said to have lured two local fund managers who founded Pagoda Advisors of Singapore less than a year ago, persuading them to return $150m to their investors and join Tudor to begin again.

Hedge funds' previous major involvement in Asia ended in tears - at least for the region - as they made out like bandits on massive currency flows during the 1990s. Famously, Malaysia's Mahathir Mohammed called hedge-fund manager George Soros a "moron", while Soros said Mahathir was a menace to his country. Not surprisingly, the Soros Foundation is remaining tight-lipped about whether it is returning to Asia, like so many of its peers.

September 9 Philippine Stock Market Review: Deceleration

September 9 Philippine Stock Market Review: Deceleration

The torrid rise of the Phisix for the 7th consecutive session has brought about a month to date gains of a phenomenal 10.13%. For the week alone the Philippine benchmark is up 6.88% inclusive of today’s .66% or 11.47 points gain.

Compared against yesterday’s exceptional record-breaking performance, the broader market, while still on an uptick has manifested signs of deceleration as seen by the narrowing advance decline ratio (yesterday’s almost 7 to 1 vis-à-vis today’s 2 to 1). Moreover, the market leaders seen previously in Metro Pacific (-10.16%), DM Consunji (-5.5%) and Piltel (-3.57%) has started to undergo profit-taking activities, which apparently confirms yesterday’s slowdown.

Select blue chips issues buoyed by foreign take-up were the primary cause to the Phisix’s rise. Foreign money regained command of the market as foreigner’s share of activities accounted for 51.28% of the today’s trades. Foreign money registered P 198.060 million of inflows directed mostly to choiced blue chips issues such as Bank of the Philippine Islands (+3.39%), Globe Telecoms (+1.5%), PLDT (+1.09%), Ayala Land (unchanged) and SM Primeholdings (-1.56%), although Ayala Corp (unchanged) and Metrobank (unchanged) likewise registered minor inflows.

Industry indices still manifest broad sector optimism although the best gainers were the extractive industries led by the Oil (+5.98%) and Mining (+3.72%) and the Finance (+2.46%) indices. Only the property index posted a decline.

With the market leaders apparently on a decline, compounded by the narrowing advance decline ratio and lastly the switching of investor interest to oil and mining issues may imply that an imminent correction is most probably due soon (next week). While tomorrow may yet register a positive output by the Phisix the probability is that this would be rather subdued with a largely mixed broad market sentiment. Otherwise, the bulls would be in a short-term furlough.

September 7 The Philippine Stock Market Daily Review: Collective Exuberance

September 7 The Philippine Stock Market Daily Review: Collective Exuberance

Wow, this is simply incredible!! Our projections of a baby bull due to the historical honeymoons, seasonal strength, technical breakout and most importantly the stockmarket cycle swings, seems to be unfolding right before our very eyes. In addition, even our prescriptions of how the market would rise (foreign buying on the blue chips and local buying on the broadmarket) are simply falling into place. Moreover, our supplications for a broader blue chip rally to compliment the one and a half year market leader PLDT emerged.

The Phisix rose to its highest level for the year at 1,671.26 a level seen last in February of 2001. Today’s robust gains of 38.22 points or 2.34% comes on the heels of a dramatically improved volume of P 1.195 billion or (US$ 21.291 million) and makes the Philippines bourse as Asia’s best performer for the day.

It was combined exuberance from local and foreign investors with the former dictating today’s trade. Foreigners scooped up Philippine equity assets centered mostly on the blue chips and registered a net inflow of P 368.167 million (US$ 6.563 million) that accounted for about 38% of today’s output. Notwithstanding foreign bullishness was pervasive as they bought more shares than they sold on the broader market.

Advancing issues beat declining issues by 2.5 to 1 while industry indices were all up led by the Property (+3.37%) sector followed by the Mining (+3.24%), Oil (+3.11%), Commercial Industrial (+2.34%), the All index (+.84%) and the Banking and Finance (.78%) index in view of the bullish ambiance.

As mentioned above foreign money found their way into the major blue chip issues such as San Miguel B (-.7%) were a significant cross trade accounted about 97% of the firms turnover, followed by PLDT, Globe Telecoms (+5.0%) Ayala Land (+5.26%) and Ayala Corp (+6.89%). It is one of the rare occasions to see Globe Telecoms upstage PLDT. The banking heavyweights BPI (unchanged) and Metrobank (+4.0%) recorded slight outflows together with SM Prime (+1.72%).

Second and third tier issues were the object of local investors speculative activities among the top gainers for the day are Acesite Philippines +47.45%, Mining issues Benguet Corp +40.62%, Omico Mining +30% and Abra +20%, Imperial Resources +26.31%, Edsa Property Holdings +20%, Pacifica +18.18, East Asia Power +16.66%, Metro Pacific +16% and Macro Asia Corp +15%.

In technical terms, we have seen two gaps in four sessions where it has yet to be established if these gaps represent ‘breakaway’ and ‘continuation’ gaps sequences or if would be subject to a closure in the coming sessions. Another is that based on channel trend lines today’s spike of the Phisix brings the benchmark index fast approaching the channel resistance levels at the 1,690s-level. Twice this year, I have noticed that for every record high the Phisix hit, it managed to retrace or correct (Jan-Mar, Apr-May) by about 10% before resuming its climb, if the Phisix would repeat the same pattern then the likely scenario is for the index to retreat to 1,520’s level after touching the 1,690’s before again establishing its year end record levels. Well that is IF it does follow the pattern. Other than that, we can only say the market internals continue to signal strong optimism from local investors which should provide a floor to any forthcoming profit taking activities.

Buttonwood of the Economist.com: "Growing Pains"-Asian Stockmarkets Look Attractive

Growing pains
Sep 2nd 2004

From The Economist Global Agenda

Emerging economies’ stockmarkets, especially those in Asia, look attractive

OUR emotional responses to the world—how we react to other people and events—are largely shaped in early childhood. Changing these responses, however destructive they are, is hard. It is, however, possible. Likewise, emerging markets, as Buttonwood has commented before, are shaped by their own, usually miserable, pasts—a big reason, of course, why they are still emerging. Think of China and Russia and their decades of communist rule. But change they can. Russia has thrown off its communist yoke; China has been dabbling with a perestroika of sorts. The question is whether such change is in the right direction; and if so how quick it is. Also, just as important is whether investors are rewarded for taking the risk of buying assets in such economies, when both the pace and direction is uncertain. Ponder, if you will, the example of the Russian government and its treatment of Yukos.

Domestic investors in the emerging economies themselves, long dogged by unstable regimes and disastrous economic policy, are of course very interested in the answers to these questions. If they did not have strong qualms about the risks and rewards of investing at home, they would hardly be investing so much of their hard-earned savings in US Treasury bonds that yield a sniff over 4% (thereby financing America's huge current-account deficit). But investors from rich countries are also interested, for the good reason that expected risk-adjusted returns in their domestic markets are now so low. Where, when public pension systems are so strained and unreliable and likely to become more so as their populations age—the subject of last week’s central bankers’ shindig at Jackson Hole, Wyoming—should they pop their cash? The answer increasingly given by many is emerging-market equities. And perhaps to the surprise of those who think this column merely a font of scepticism, Buttonwood is inclined to agree.

After putting in a performance last year of which even Michael Phelps would have been proud (had he been a country, the American swimmer would have come 16th in the Olympic medals table), emerging-market equities have had a rough few months. The MSCI emerging-market index peaked in early April and then, well, sank. In part, this was because investors became convinced that inflation in the rich world (and the emerging part, too) was about to take off and thus that central banks, the Fed not least, would have to increase interest rates sharply.

But their pasts also caught up with many a market. In Russia, for example, there were worries that if the government was able to use the courts to go after Yukos, one of the country’s biggest oil companies, then no one was safe. In India, the newly elected coalition government had to seek the support of the communists, who are not known for their reformist credentials. China seemed about to suffer one of its periodic busts, the severity of which could be predicted only by the height of the euphoria in the preceeding burst of enthusiasm from investors worldwide for the Middle Kingdom. And if China sneezed, an epidemic seemed likely to afflict the rest of Asia. In fact, thanks to a combination of cheap valuations, robust foreign flows, and stimulative monetary policy, Asian shares look likely to bob up quicker than most.

In 2002, foreign investors only popped $300m, net, into emerging stockmarkets, according to the Institute of International Finance. Last year, that had risen to over $27 billion, the highest in seven years; and this year the IIF expects the number to reach $33 billion or so, though it expects flows to Asia, which almost doubled last year, to fall. Alas, its calculations were published in April, just as stockmarkets peaked and foreigners headed for the exits. Its predictions have presumably been reduced since then. But better, surely, to be invested in assets that have been shunned than those that everyone loves and, almost by definition, already owns. And there are good reasons to suppose that emerging stockmarkets will start to look decidedly attractive again to those that have fled, if only because almost everything else looks so pug ugly.

For one thing, the interest-rate cycle seems to be turning. Rising interest rates, or at least the threat of them both in American and in many emerging countries, have cast a pall. But given ample evidence of a slowdown, the Fed is unlikely to be in a hurry to put up rates very fast or very much, even though they are, by historical standards, ludicrously low. With the probable exception of China, central banks in some emerging markets already seem to be cutting. South Korea, South Africa and Hungary have all reduced rates in recent weeks.

Possibly, it is true, these rate reductions are cause for worry, since they reflect economic weakness, in Asia not least. Stockmarkets in Taiwan (another candidate for a rate-cut) and South Korea have also been battered by weak demand for their high-tech exports. Profits growth has stalled. While oil-exporting countries have gained from a strong oil price (though not necessarily investors in their oil companies: see Yukos), oil importers have suffered—and most of Asia falls into the latter camp. The higher oil price has added up to $100 billion to non-Japan Asia’s oil bill compared with last year, according to Credit Suisse First Boston.

On the other hand, China does not seem headed for a bust, not for now at any rate. Nor does Japan, though growth there is slowing. As long as these two carry on growing, there is every reason to think that companies elsewhere in the region should continue to prosper. The big question for the world economy is whether Asia can detach itself, and take over leadership, from a slowing United States. A punt on Asian assets—which have anyway provided much of the world’s growth in recent years—is in essence a bet that it can. Assuming, that is, that America doesn’t fall through the floor.

Moreover, current emerging-market valuations do not need to be bailed out by rapidly rising profits in the same way that they do on Nasdaq, to reach, at random, for one example. They are, in fact, quite cheap, especially in Asia, which should provide comfort even if America slows and its stockmarkets fall. The price/earnings ratio for emerging markets as a whole is now just over 12—about half its level in 1994, when the Fed was last tightening rates, and getting on for a historical low. On present expectations for next year’s profits, South Korea’s stockmarket has a p/e multiple of just six.

The Bank Credit Analyst, an independent research company, suggests a longer-term reason for the attractiveness of Asian shares: the region’s companies are making more money. The Asian crisis of the late 1990s shattered elements of the Asian growth model, which had relied on size for its own sake, and put the money generated by rising productivity into the hands of consumers. But profits as a percentage of GDP and returns on equity have risen sharply since the crisis, as a result of restructuring and a focus on profitability. Only when the pain gets bad enough, it seems, will economies, like people, change.

Daniel Lian of Morgan Stanley on the Philippines: Upgrading Growth and Upping the Ante on Reform

Upgrading Growth and Upping the Ante on Reform
Daniel Lian (Singapore)

Upgrading 2004 Growth to 5.6%

The Philippine economy has performed better than we expected in the first half of this year. After a 6.5% year-on-year expansion in 1Q04, it grew a further 6.2%, bringing first-half expansion to 6.3%. This is considerably better than the 4.7% growth rate achieved in 2003. The key driver of growth remains private consumption—it represented three-quarters of growth in 1H04 as household spending was buoyed by a pickup in export earnings and overseas workers’ remittances as well as election spending—but both investment and exports are also helping growth. Despite our belief that the economic deceleration is already well under way in the third quarter, we are raising our full-year 2004 GDP growth forecast from 4.5% to 5.6%, anticipating a second-half growth rate of only 4.9%.

Upping the Ante on Reform

We have consistently viewed President Gloria Arroyo and her administration as a pro-restructuring government (Still No Magic, August 27, 2002). However, reform has proved to be extremely difficult to implement by Ms. Arroyo. This is perhaps due to the fact that her ascent to the Presidency in January 2001 was without a direct electoral mandate. In consequence, it has become difficult for her administration to institute administrative reform against oligarchies such as the Catholic Church, landlords, and big business interests. Despite a fresh mandate, her razor-thin margin of victory and a continued deterioration in the fiscal environment mean Ms. Arroyo must deliver effective reform in time to dispel doubts about her legitimacy and win the confidence and support of the nation. We are thus not surprised that Ms. Arroyo is upping the ante on reform. A recent report by economists at the University of the Philippines said the country faces economic collapse in two to three years unless the government curbs its deficit spending and reduces debt by adopting a package of revenue- and cost-saving measures. In response to the report, the President issued an alert on August 23 that the Republic is in the midst of a fiscal crisis and urged the people to be prepared to make sacrifices for the good of the nation. In our view, Ms Arroyo’s comments about the precarious state of public finances are clearly designed to help mobilize support for her planned tax increases, a critical first step of her reform.

Strengthening Fiscal Sector the Critical First Step

Putting strengthening of the fiscal sector at the top of the policy agenda is indeed the right move for Ms. Arroyo, in our opinion. The Philippines’ number one structural economic malaise remains its weak fiscal sector. The financially strapped government has caused a significant drag on the country’s saving rate, which, in turn, has slowed capital formation and economic growth. 1) Large budget deficit and rapidly rising public debt—The Philippines has had chronic budget deficits since the 1970s, and since 2000 it has been running budget deficits exceeding 4% of GDP. Outstanding national government debt rose from 65% of GDP in 2000 to some 78% in 2003. By contrast, the two more heavily indebted economies in Southeast Asia—Thailand and Indonesia—experienced balanced budgets and substantial decline in public debt and debt service ratios. 2) Fiscal weakness is structural in nature—Not only is public debt rising rapidly, but the Republic’s fiscal weakness appears to be structural in nature. The rising deficit is used to finance government consumption rather than investment, and more than one-third of government spending is eaten up as interest payments on debt. The tax collection effort ratio (as % of GNP) has declined from an average of 15.6% during the Fidel Ramos era (1992-98) to an average of only 12%. In consequence, government debt as a percentage of revenues now exceeds 500%, substantially more than the country’s indebted Asian peers.

Other Critical Areas of Reform

While fiscal reform is the critical first step, the structural impediments confronting the Republic stretch beyond mere government finances. In our view, Ms Arroyo must engineer an economic strategy and overcome the institutionalized rent-seeking complex that permeates Philippine society. 1) Rural development platform and long-term economic development strategy: We believe the Philippines has few prospects for winning the global FDI game in the near future. The low-value generic mass manufacturing-based export model will not bring sufficient economic growth and the prosperity that are desperately needed to circumvent low growth, high debt, and poverty traps. It is thus critical for policymakers to establish a well thought out rural development platform to better leverage the country’s vast but underprivileged and less developed rural sector—the Philippines’ rural population is 41%. The Republic also needs to map out a long-term development blueprint with a strengthened platform to address the long-term development needs of the urban poor, resources, SMEs, and the government and corporate sectors. In our view, Thailand’s dual-track development strategy has a lot of relevance for a predominantly agrarian-based economy that has experienced only skin-deep industrialization like the Philippines. We believe the Thai dual-track strategy should be emulated based on the Republic’s needs and local conditions. 2) Ineffective government institutions vs. an institutionalized rent-seeking complex: In the Philippines, public institutions are not strong, and there is a well-entrenched rent-seeking complex that dominates the corporate-economic-social-government spheres. The rent-seeking complex is so “powerful” that a substantial part of any economic benefits is appropriated by a few—the oligarchies—leaving most of the population without much economic or social mobility. 3) Capital and intellectual capital flight: A substantial stock of domestic saving resides overseas, and the top echelons of talent are not serving the domestic economy and institutions.

September 3 The Philippine Stock Market Daily Review Put Your Chips Into Play

September 3 The Philippine Stock Market Daily Review:

Put Your Chips Into Play

The Phisix opened the trading day with oomph; gapped up as the three-year threshold resistance levels collapsed under the fiery siege of the rampaging bulls. Sanguine local and foreign investors combined to push the Phisix to close at its highest level in three years at 1,627.96 up today by 13.96 points or .86% on moderate volume of P 747.063 million.

Foreign trades accounted for a little more than a third of the today’s output meaning the local investors were the primary movers of today’s activities. In spite of the local dominated trading, foreign capital registered a massive inflow of P 121.137 million or about 16.21% of today’s output. Most of these inflows were diffused among the heavyweights; 6 of the 8 blue chips recorded significant inflows…PLDT (+.37%), Bank of the Philippine Island (+3.65%), Ayala Land (+3.63%), Ayala Corp (+3.57%), Globe Telecoms (-.55%) and San Miguel B (+1.43%) while SM Primeholdings (-1.72%) and Metrobank (unchanged) were the companies that posted slight liquidations.

Sentiment was generally bullish as advancing issues trumped declining issues by 44 to 37, number of issues traded is at record high of 132, 3 industry indices (Commercial Industrial, Property and Finance) were higher against 2 losers (Mining and the ALL index) and one unchanged (Oil) and foreigners bought the broader market more than it sold, aside from the net positive inflows to the mostly blue chips issues.

In our previous postings and newsletter, we have noted that the market’s uptrend has been a matter of a long term cyclical shift from the decline-bottom to the fledging advance phase. In addition, we have long preached that today’s market is on the verge of fulfilling its cyclical new administration honeymoons as seen since 1986 to even horrid bear market years of 1997 to 2002. Finally, the final quarter of the year has been the seasonal strength of the stockmarket. Unlike in 2003 where foreign money dictated on the Phisix’s rise, today’s monumental breakout comes in the fore of local optimism which was manifestly progressing since the second quarter.

We have also noted that since 2003 and through the most part of 2004, PLDT has been the sole pillar of Phisix’s rise and refreshingly enough today, we saw the other blue chips compliment PLDT. These diffused gains among the heavyweights would definitely provide for a sturdy framework for the latest market’s rise and a most likely continuity. So what else are you waiting for…

Put Your Chips Into Play!

Dr. Marc Faber: The Strong Economy Hook!

The Strong Economy Hook!
August 17, 2004

A few weeks ago, I accidentally switched my television set over from MTV, which has a calming influence on my mood, to CNBC, which tends to irritate me.

First, there was Elaine Gazarelli telling us that the stock market would go up further based on a strong economy and favorable corporate profits, and that, after a brief correction in the autumn, stocks would rise even further in 2005. Asked which sectors she favored, she replied that high-tech stocks were the most attractive.

Then came a survey of CNBC watchers about which factors were the key drivers for the stock market. Seventy-seven per cent responded that corporate profits were the single most important factor driving stock prices. Feeling enlightened by these deep insights, I then switched back to MTV.

Joe Granville, who became world-famous in the 1970s and whose book New Strategy of Daily Stock Market Timing for Maximum Profit (Prentice Hall, 1976) I highly recommend, had this to say about 'news'.

'Traders and investors get into more trouble and make more expensive wrong decisions by following news than for any other reason. So heavily influenced by the news, the majority get lost in the maze, unable to see what the smart money is doing.'

News is also important to the smart money because they understand the role news plays in the market game, and they can usually act more effectively under the protective cover of news. They know that the news misleads the opposing game players into selling them when the smart money wishes to buy and into buying their stocks when the smart money decides that the time has arrived for distribution.

As a market aid, news is of little or no value in playing the market game successfully. News is generally for suckers. It misleads more often than it guides.

It creates mistimed fears which provoke selling at the wrong time and raises hopes which encourage the buying of stocks at the wrong time. The reason why news has very little relationship to what the market is going to do is simply because the market is moving on tomorrow's news, and thus the current news is a stale factor to the market.

It is the out-of-step timing between news reporting and market action that enables the market game to be played so successfully by the smart money, preying on the public's over-reliance on current news as a guide to what the market is going to do.

Therefore, if you hear daily on CNBC how strong the economy is and that the economic recovery will after the recent lull continue (even if it were true, which is another matter), it may not necessarily lead to higher stock prices, because stocks already went up over the last 18 months and until just recently on the expectation of the current favorable economic news. Granville devotes a paragraph to corporate earnings, entitled 'Earnings - The Big Sucker Play'.

According to him, 'probably no greater deception faces the average market follower than the general overemphasis on corporate earnings as a reliable guide to where the market price of a stock is headed. Yet 99% of all market followers are grounded in the belief that what a company earns is the very guts of what the stock market is all about. They couldn't be more wrong. When a company reports that it earned $4 a share in a given year, it is incontestable a fact, no argument about that." [As we know, the quality of earnings can vary significantly ed. note.]

That fact, however, may be completely irrelevant to what the price of the stock is now going to do. The reason is simple and yet most people give it very little consideration. The fact that the company earned $4 a share is a statement of knowledge up to that moment. It provides no hint whatsoever what the company is going to earn in the future.

Inasmuch as stock prices are on future expectations, what the price of the stock now does has little or no relationship whatsoever to the fact that the company just reported annual earnings of $4 per share.

There lies the greatest deception, entrapping the majority to buy at the wrong time and sell at the wrong time, caught up in the cruelest hoax the market game can play on the innocent, those brought up upon the importance of corporate earnings. Bunk, pure bunk!

According to Granville, the key is to understand that price/earnings ratios are not constant but fluctuate widely.

The very fact that p/e ratios fluctuate points up the poor correlation between earnings and stock prices. A good correlation would be reflected by a near constant p/e ratio. In actual practice, however, we have seen the Dow sell at an overvalued 20 times earnings in the early 1960s which was far short of the Dow peak in early 1973 at 16.5 times earnings, and we have seen the sharply undervalued p/e reading for the Dow in the fall of 1974 at under 6.

The actual figures force us to conclude that the market either overvalues stocks or undervalues stocks. That is no brilliant discovery, but it does underscore the fallacy of earnings. If a stock earns $3 per share and the earnings are increased to $4 a share, the increased earnings provide no clue whatsoever as to whether the market will overvalue or undervalue the improved earnings figure.

Probably the finest work I have ever seen which completely repudiates the importance of corporate earnings in timing stock purchase or sale was published by Arthur Merrill in late 1973. He presented a chart of the Dow Jones Industrial Average against the background of the constantly changing price/earnings ratios and that chart clearly revealed the rhythmical lag in corporate earnings behind the movement of the stock average.

It showed the rise in earnings as the market fell out of bed in 1966, the drop in earnings as the market underwent a strong 1967 recovery, the rise in earnings as the market carved out the plateau 1968 top, the still rising earnings curve as the market plunged in 1969, the great market turn to the upside in 1970 as earnings continued to turn down, the upturn in earnings as the market went into a sharp 1971 correction, the sharper upturn in earnings as the market made the great plateau 1972 top, the still sharper rise in earnings as the market plunged in 1973 and 1974, and the great 1974 upturn in the market as earnings leveled off and started to decline. As an aside, Granville writes also that 'the media is the biggest enemy of the small investor, mostly headlining the wrong news at the wrong times, playing on his misguided reliance on fundamentals and his normal fears and greeds'.

I don't regard the writings of Joe Granville as the ultimate wisdom on stock market cycles, but his book contains many very interesting, yet simple, observations which investors should keep in mind when listening to the news that is broadcasted on CNBC and published in the media.

Moreover, as usually, stocks have the strongest rallies during periods when corporate earnings decline or just begin to turn up. I might add that Bob Hoye (www.institutionaladvisors.com) recently published a table that also shows the frequent diverging performance between corporate earnings and the stock market with the note that 'while earnings themselves may not be inherently dangerous, they can be hazardous to the unwary'.

In particular, I should like to attract our readers attention to the severe bear market years 1973/74 during which the stock market declined by 27% in 1973 and 35% in 1974, but when simultaneously earnings grew by 28% in 1973 and 15% in 1974!

So, while Elaine Gazarelli may be right in her prediction of a strong economy and rising corporate profits, this certainly doesn't necessarily imply higher stock prices, as, in a strong economy scenario, inflation could accelerate and bring about far higher interest rates. I am also very skeptical about her technology stock pick.

First of all, the market action of high-tech stocks doesn't suggest that all is well in the land of extremely rich valuations. A day after Elaine's bullish call on high-tech stocks, contract manufacturers such as Jabil Circuit (JBL) fell out of bed, and subsequently companies such as Intel, Hewlett Packard, Cisco, Veritas Software (VRTS) and IBM all failed to match investors' high expectations.

The problem for most high tech companies is that inventories and account receivables are soaring, while sales are slowing. In addition, it is evident that in 2005 huge new capacities for the production of semiconductors will come on stream in China .

Finally there is one more point that ought to be considered in relation to high-tech companies. In order to make it clear, let us compare a high-tech company with an oil company with large proven oil reserves. If a high-tech company does not invest almost all of, or even more than, its annual profits in R&D, and new technologies and equipment, its final products will be largely obsolete within two years.

In short, most high-tech companies have either no, or only very little, free cash flow that can be distributed to shareholders. By comparison, an oil company with proven reserves (not an exploration company) can curtail its capital spending expenditures considerably and generate significant free cash flow.
In fact, an oil company that took the view that oil prices will rise significantly in future should consider shutting down production entirely and keeping its oil in the ground, rather than selling it for US dollars whose purchasing power is bound to diminish over time.

I imagine that OPEC countries would have been much richer today had they sold half as much oil over the last 30 years or so, instead of selling oil for US dollars, which were then blown away either on poor investments or on expensive weapons purchases. Now, just consider what would happen if a technology company were to shut down production for just one year and then start producing again. All of its products and equipment would be obsolete!

As a result, I am somewhat puzzled by all the investors' hype and obsession with high-tech companies, as well as by the high valuations of high-tech companies, when one considers the obsolescence risk, the inevitable commoditization and resulting price erosion of successful products (cell phones, PCs, printers, etc), and high-tech companies' minuscule level of profits, which don't have to be reinvested in the businesses to ensure their very survival (just to keep up with the rapid technological progress) but are really available for distribution to shareholders.

Therefore, while trading rallies in high-tech stocks are likely to occur from time to time (driven mostly by momentum players), new highs in the NASDAQ Index above the January highs are not very likely.

Still, we have to avoid being overly bearish and selling short stocks too aggressively right now for several reasons. Near term the market is somewhat over-sold and the presidential cycle, which tends to produce a rally starting this August, may come into play. According to Bob Hoye (www.institutionaladvisors.com), Ned Davis Research Inc. has done some excellent work on seasonal, presidential, and decennial stock market patterns that are valuable when assessing the upside potential. Based upon data from 1900 through 2000, the best results occurred when the incumbent Republican Party won the election. The worst results were when the incumbent party lost. The lesson is to be cautious if it looks like a Democratic victory.

According to Bob Hoye, ¨the end of August is the optimum point from which the two patterns begin to deviate. Generally there is an interim high mid-August as the markets go through a period of hesitation leading up to Labor Day. Once the Republican National Convention (Aug 30th to Sept 2nd) is concluded, the market will likely cast its vote as to the outcome of the election.

History has shown that you want to go with whichever trend becomes dominant following Labor Day'. In most election years, a rally got underway sometime in August and, therefore, given the current oversold position of the stock market the near term odds do not particularly favor to be heavily short the stock markets.

Moreover, considering the likelihood that the economy and corporate profits will likely disappoint further, I think that bonds may have begun a medium term bear market rally, which may carry long term bond prices up by another 5% or so.

September 2 Philippine Stock Market Daily Review: Manny Pangilinan Stocks Drives Phisix Higher

September 2 Philippine Stock Market Daily Review:

Manny Pangilinan Stocks Drives Phisix Higher

MVP’s flair for keeping the domestic market enthralled with a gamut of corporate ‘maneuverings’ tales is simply amazing. Investor’s interest in PLDT, Metro Pacific and Pilipino Telephone commanded the market’s attention and comprised about 53% or simply a majority of the day’s output. Moreover, heavyweight PLDT’s superb gains (+2.72%) complemented by Phisix component Metro Pacific’s (+25.71%) superlative price jump drove the Philippine benchmark back to its April highs to breach the psychological resistance of 1,600 and is 6 points away from breaking the 3 year highs of 1,620 established last April, although technically speaking in terms of closing prices the PHISIX which closed higher by 1.33% or 21.26 points is at a record three year high (April’s highest close was at 1,610)!

Asia’s largest gainer for the day was actually a product of collective buying binges by both local and foreign investors. Although foreign capital were the minority (29.54%) of today’s activities, capital inflow from investor’s abroad amounted to P 155.748 million (US$ 2.776 million) representing 24.2% of today’s output! Talk about crisis fears! The gist of the buying was centered on PLDT with foreign moolah taking up 69.25% of the company’s trading activities. However, despite the inflow, foreign investors sold the broader market while constraining acquisitions to selected companies as Ayala Corp (+1.81%), Petron Corp (+5.66%), First Philippine Holdings (+6.12%), Megaworld (+3.63%) and URC (+3.65%). Foreign money took advantage of the bullish sentiment to dispatch Meralco B shares (+2.29%), which have been going on for the eighth successive session.

While PLDT led the Phisix higher, it was backed by other heavyweights as Ayala Corp, Globe Telecoms (+1.70%), Metrobank (+1.01%) and San Miguel A (+.85%) while the rest, Bank of the Philippine Islands, San Miguel B, Ayala Land and SM Primeholdings, were neutral. Of course, the broader index components, such as Metro Pacific, First Philippine Holdings, Meralco, Petron and others were there to compliment.

Sentiment was moderately bullish as advancers beat decliners by 2 to 1, while industry indices showed a mixed performance with 3 gainers (Commercial-Industrial, Mining, Finance) against 3 decliners (oil, property and the ALL shares index).

Among the top 10 major gainers we see two cement issues Republic Cement (ranked first +47.36%) and Southeast Asia Cement (ninth, +12.5%), two telecom lightweights PT&T (eighth, +14.89%) and Liberty Telecoms (fifth, 26.6%) and a hodgepodge of other issues as Imperial Resources (2nd +41.17%), Pacifica (third,+41.17%), Fil-estate Corp (fourth, +40%), Metro Pacific (fifth), East Asia Power (7th,+17.24%) and Omico Mining (tenth+10.52%)

A notable feature of today’s trade is that number of issues traded reached 125 and is the largest in about two years (my record) meaning that local investors have broadened their activities and is a bullish indicator. Despite the Phisix’s breakout, its moderate volume shows of the lack of penetration level from local investors.

Evidently today’s breakout comes in the face of the approaching seasonal last quarter’s strength in the stockmarket, coupled with its cyclical uptrend and the ‘new administration honeymoon’ cycles that are manifestly unfolding. Moreover it does seem even with the spate of ‘crisis’ chatters, market internals continue to point towards a growing bullish psychological framework among the local investors buttressed by selected foreign picks as PLDT.

August 31 Philippine Stock Market Daily Review: August Ennui

August 31 Philippine Stock Market Daily Review: August Ennui

For the last day of the month, the major Philippines Stockmarket benchmark, the Phisix rambled about the entire session to close with a marginal loss down a paltry .58 points or .04% on very light volume of P 381.930 million (US $6.808 million).

In contrast to yesterday’s activities, local investors who took up about the same ratio (two thirds of the day’s trading activities) as yesterdays, were in a slightly bearish state as measured by the dominance of declining issues against advancing issues (39-33). Nonetheless, based on the industry indices and the distribution of gains/loss among the major cap issues or the blue chips, both were evenly mixed with 3 industry indices up (Commercial-Industrial, Mining and Banking and Finance) vis-à-vis 3 indices down (ALL, Property and Oil) while 2 heavy caps gainers (Bank of the Philippine Islands +1.21% and San Miguel A +.86%) against 2 losers (Ayala Land –1.85% and SM Primeholdings –1.72%) while the rest were unchanged.

Foreigners upped the tempo of their acquisitions to post a positive capital inflow in the amount of P 54.208 million or about 14.20% of the day’s aggregate Peso turnover. However, the buying was limited to select issues mainly the telecom heavyweights PLDT and Globe (both unchanged) and to Bank of the Philippine Islands and DM Consunji (unchanged). Meralco B (-1.16%) absorbed the most liquidations from foreigners (6th straight session) followed by Ayala Land, San Miguel B and Metrobank. As measured by the bluechips 4 issues saw inflows against an equal 4 issues that had outflows.

Apparently the month of August lived up to its reputation; a seasonal month of ennui. The Phisix is down by a slim .31% compared to the previous month and posted one of the least declines since 1997.

In the past twenty years the August scorecard including this year has been 8 years up against 12 years down. In essence, for every 3 years the Phisix was up a countervailing four years of losses was recorded, although not sequentially. During the bear market that began in 1997, the month of August scored only a single month-on-month gain in 2000 while recording 7 years of losses which includes the two largest successive August losses in 1997 down by 22.74% and in August 1998 down 25.84%. In other words, August bore the brunt of the selloffs during the bear market and has thus far been adrift in the bottom-advance cycle of the market.

The ennui that August produced was most probably due its seasonal performance relative to its historical movement. And since the market is still on an upslope and remains on its major trendline path, it could safe to construe that the current market movements has been influenced by the seasonal monthly performance, and still is in search for a stimulus to goad the Phisix higher over the yearend.

The Washington Post: Dominicans' Swift Step Into Crisis

Dominicans' Swift Step Into Crisis
Banking Troubles Ruined Country's Envied Economy
By Kevin Sullivan
Washington Post Foreign Service
Friday, August 27, 2004

SANTO DOMINGO, Dominican Republic -- When Sandro Batista smashed his banana truck into a tree in April, leaving him with two hideously shattered legs and a broken arm, his orthopedic surgeon sent his sister shopping.

The country's largest public hospital, Hospital Dario Contreras, didn't have painkillers or the steel pins, screws and plates needed to put Batista's bones back together, or even the blood to get him through the operation. So the surgeon gave Alicia Batista a list and sent her on her way.

"The quality of our medical care has deteriorated tremendously," said Guillermo Garcia Lorenzo, the surgeon who operated on Batista. "A year ago, we had a storeroom filled with everything we needed, but now, nothing."

Batista's ordeal, which cost his family about six times his monthly income as a truck driver, illustrates how quickly this country has been transformed from the envy of Latin American economies into a nation in the midst of its worst economic crisis in decades. Analysts here trace the fall largely to a single event: a banking scandal that last year cost the government $2.2 billion, or about 15 percent of the country's gross domestic product, which sent inflation soaring and severely devalued the peso, the national currency.

The result has been an almost overnight reversal in fortunes in this steamy Caribbean country, a top U.S. tourist destination just east of Cuba that shares the island of Hispaniola with Haiti. What was until recently a dependable bright spot in a region of economic and political uncertainty is now another vulnerable nation on the U.S. front porch.

So many Dominicans are trying to flee the desperate conditions that the U.S. Coast Guard is intercepting far more Dominicans at sea than Cubans or Haitians. Nearly 5,000 Dominicans have been picked up trying to reach the United States since October, compared with 1,748 in the entire year before that and fewer than 200 two years before. Earlier this month, 55 Dominicans died at sea trying to reach Puerto Rico in a small open boat.

After a decade of strong growth, the Dominican economy shrank in 2003 for the first time since 1990. Joblessness is soaring and inflation has averaged 56 percent in the past year, according to the central bank. The peso has lost more than half its value against the dollar, causing deep pain in a nation that imports most of what it consumes. Prices have more than doubled in the past year for food, milk, propane gas for cooking and other daily necessities. Worker strikes and fuel shortages are adding to the sense of paralysis.

The government inherited by President Leonel Fernandez, who was sworn in Aug. 16, is hobbled by nearly $6 billion in foreign debt, making it nearly impossible to provide even the most basic services, from medical supplies at public hospitals to trash pickup.

Power outages lasting up to 20 hours a day are causing growing frustration as the cash-strapped government is unable to provide $400 million in past-due payments to private energy companies. Without reliable power, families are unable to keep food refrigerated or fans running. Traffic lights are dark, babies are often delivered by flashlight at the country's largest maternity hospital, and surgeons at Dario Contreras said they often must stop in the middle of operations when the lights go out.

"The country is drowning," said Jorge Cela, a Jesuit priest who works in the poor neighborhoods of this capital city, where nearly a quarter of the country's 8.8 million people live.

Miguel Ceara-Hatton, an economist with the United Nations Development Program here, said his agency will soon release a report concluding that at least 1 million Dominicans have slipped below the poverty line in the past three years, meaning that close to 5 million people, or nearly 60 percent of the population, live in poverty.

In La Cienaga, a poor riverside neighborhood in the capital where most men hang around the corners waiting for someone to offer them odd jobs, Belgica Amador, 53, said that in the past year or two her life has become "100 percent worse in every way."

She said that the cost of an egg has gone from one peso to five, while the prices of chicken and powdered milk have roughly tripled. She tries to cook several meals at a time to conserve propane, and her power is out about 15 hours a day.

"If you talk to young people here, they all want to get out and go to the United States," Amador said.

Analysts here said the cause of much of the trouble was the collapse and government bailout of Banco Intercontinental SA, then the country's third-largest bank. In September 2002, investigators discovered that the bank had kept two sets of books for more than a decade, covering up massive bad loans and lavish spending.

Bank President Ramon Baez Figueroa was one of the most powerful and flamboyant men in the nation, with a private fleet of yachts, planes and helicopters, and a long record of generous giving to those in power, according to analysts. Central bank investigators discovered that Baez's bank provided a free credit card to the office of then-president Hipolito Mejia, and Mejia often borrowed Baez's jets for presidential trips.

In May 2003 the central bank stepped in and paid $2.2 billion to cover all the bank's deposits. The massive bailout was widely seen as political payback to save the bank's wealthy and well-connected depositors. Ceara-Hatton said that 1 percent of the bank's customers accounted for nearly 80 percent of the deposits and that Mejia's government "decided to save them." No one has been convicted of a crime in the case, and several analysts here said the Dominican justice system is not strong enough to fully investigate a case that involves so many of the nation's political elite.

With the devaluation and economic chaos that resulted from the central bank's decision to flood the market with newly printed pesos, the nation's GDP fell from $21.7 billion in 2002 to $16.8 billion in 2003, according to central bank numbers, and analysts predict a further decline this year.

"They destroyed everything," Ceara-Hatton said. "Everyone in this country is now paying for that decision."

Despite all the grim statistics, many here are optimistic that things could start improving with the inauguration of Fernandez, a lawyer and university professor whose first term as president, from 1996 to 2000, coincided with the country's most robust economic growth in a generation. Fernandez, whose first term was tainted by a scandal involving the disappearance of $100 million in government funds, was barred from seeking reelection by term limits that have since been abolished.

In his inaugural address last week, Fernandez, who defeated Mejia by a landslide in May elections, vowed a new period of government austerity and sharp cuts to the heavy spending, borrowing and government hiring that marked Mejia's term.

"The challenge for Leonel Fernandez is to convince people that the worst is over," said Bernardo Vega, a former Dominican ambassador to the United States and former head of the central bank.

Vega said Fernandez must keep his vows to get spending under control, win passage of a tax-increase package in the National Congress and come to terms with international lenders, including the International Monetary Fund, which suspended payments on a $600 million loan package earlier this year. If he does, Vega said, the country's underlying economic engines -- tourism, more than $2 billion in annual remittances from the 1 million Dominicans in the United States and the assembly-for-export plant sector -- are still powerful enough to drive a recovery.

Tourism to Dominican resorts has never been stronger, bringing in record income in 2003 after a slowdown after the Sept. 11, 2001, terrorist attacks. Tourism officials said at least 860,000 Americans visited the country last year, although most of them went to all-inclusive beach resorts walled off from the reality of daily Dominican life.

"I personally think that in a year or a year and a half, we're going to have a change for the better," Vega said.

But other analysts, and many ordinary Dominicans, don't share Vega's optimism. In an outlying neighborhood of Santo Domingo, Batista sat on his bed, his right leg still held together with an orthopedic contraption of steel braces and screws that his family bought secondhand. He said it was hard to imagine how things are going to get better.

"Poor people are going out of their mind," he said. "It makes no difference if you work, because even if you do, you still can't afford anything."

© 2004 The Washington Post Company

The Economist: The future's a gas

The future's a gas
Aug 26th 2004 From The Economist print edition
Why worry about high oil prices, when a boom in natural gas may be on the way?
EVEN as headlines scream about $50 a barrel oil, energy firms and their investors are becoming increasingly excited about its likeliest replacement: not wind nor wave nor solar power, but gas—or, to be precise, gas that is frozen and transported as liquefied natural gas (LNG). This is expected to become as ubiquitous and crucial to the global economy as petroleum is today. Scenario planners at Royal Dutch/Shell think that gas may surpass oil as the world's most important energy source by 2025.

While oil became increasingly important during the past century, for much of that period natural gas was seen as its ugly stepsister: burnt off or “stranded” when discovered by accident, and rarely sought after. Demand for gas has taken off in recent years, thanks chiefly to its greenness—it burns far cleaner than oil or coal, making it ideal for new power plants from California to China. And burning gas is much less carbon-intensive than burning coal—making it helpfully less easy to blame for global warming.

Until recently, the development of a global gas market has been hindered by one inconvenient fact. Gas is, by definition, gaseous at room temperature; oil is a liquid that can easily be transported. Gas traditionally needed elaborate systems of pipelines to get it from the wellhead to the customer. That meant it was typically used fairly close to where it was produced, shipped at great expense via pipeline—or, more often, simply wasted.

The rise of LNG promises to change that. Put simply, gas can be frozen into liquid form near its source, shipped to market in refrigerated tankers, warmed back into gaseous form on foreign shores and injected into the local pipeline system. Thanks to this technological advance, gas has the potential to be a fungible, global commodity like oil.

True, energy-poor countries such as Japan and South Korea have long relied on a rather clunky form of LNG. But soaring demand for gas has unleashed rapid innovation and investment that is driving down the capital cost of LNG. Tanker ships are getting bigger and more affordable. One-off project planning is giving way to economies of scale. Even so, shipping gas remains much more capital intensive than shipping oil. Building typical 5m tonne “trains” of LNG—which include liquefaction plants, tankers and regasification terminals—can cost $5 billion. Thus, as one senior gas executive puts it, “only a few firms can play in this game.” Still, leading executives now expect the energy industry to invest a massive $100 billion in expanding LNG over the next decade.

This expansion of LNG is being driven by America, the world's largest energy market. As demand for gas has taken off in recent years, North American supply has not kept pace, causing a spike in prices (see chart) that, last year, alarmed even Alan Greenspan, chairman of the Federal Reserve, America's central bank.


America's market is clearly ripe for imported gas. On one estimate, North America's now puny gas imports could soar over the next decade or so to be as large as today's entire global LNG market.

Yet already energy pundits in America are ringing alarm bells about rising gas imports. In particular, they point to three long-standing worries about oil that they now think may be true of gas, too: scarcity, ever-rising prices and oligopoly power.

It has become fashionable to claim that the world is running out of oil and gas. Several alarmist books have just been released, ranging from “The End of Oil” to “Out of Gas”, claiming that the hydrocarbon age is drawing to a close. To the doomsday crowd, the spike in natural gas prices is permanent, the result of scarcity.

From OPEC to OGEC?

This is not the first natural gas “crisis.” In the 1970s, fears of global gas scarcity led many governments to ban the use of gas in electricity generation. Price controls at the wellhead in America held back the development of new supplies. Yet, in fact, there was never a genuine shortage of gas, merely a disincentive for firms to find it. When America deregulated its gas markets in the 1980s, unleashing the incentive to discover and market gas, prices collapsed—and stayed low for more than a decade.

This time prices have soared because—with the exception of Alaska, which is distant from most consumers—North America is indeed running out of gas. Yet the rest of the world is awash in gas. The reason that this was not recognised sooner, says Joseph Naylor, who runs Chevron Texaco's gas efforts, is because “firms simply never looked for gas before.” As energy liberalisation gathers pace, from Spain to South Korea, argues BP's Anne Quinn, “fungible markets will attract supply.”

If scarcity is not a serious worry, what of ever-rising prices? Certainly, there are plenty of experts who expect prices to remain high for many years, even if rising supply pricks today's gas bubble eventually. That is because, with LNG capacity taking years to build, supply will rise slowly. Sara Banaszak of PFC Energy, a consultancy, says that “LNG cannot prick the price bubble in the next 6-8 years.”

Still, it will be surprising if LNG imports do not ultimately lower American gas prices below $5 per mBtu from today's over $6. LNG is usually profitable at $3.50 (BG, a British firm, says it is profitable at $2.50), so there is plenty of incentive to invest in capacity at today's prices—as long as local planning rules and safety fears do not stop LNG terminals being built.

What gives Saudi Arabia power over the oil markets is its massive investment in spare capacity, says David Victor of Stanford University. Indeed, the main reason oil prices are now surging beyond OPEC's control is that the Saudi buffer is precariously low. The capital expenditure needed to build spare LNG capacity is so much larger than that for oil that nobody with any sense will do this. Firms with control over local pipelines may well exercise some market power, argues Mr Victor, but a global gas cartel seems unlikely.

Moreover, gas reserves are in fact more widely dispersed and more abundant than oil reserves. That means that the potential troublemakers, from Iran to Russia, are not guaranteed to attract investment. Rather, Mr Victor and Ms Jaffe agree, western capital will probably flow to those countries with the most investor-friendly policies. That is why Trinidad is being developed as an LNG producer before its turbulent neighbour, Venezuela, and why Qatar is emerging as the Middle-Eastern Goliath of LNG even as massive gas reserves in investor-unfriendly Iran and Saudi Arabia remain largely untapped.

Despite the current optimism, the huge political and financial risks inherent in the LNG business mean that the boom is not yet certain to happen. The capital required is huge, the number of firms with deep enough pockets very small, and the memory of the earlier gas-price collapse induced by America's deregulation is fresh. As Malcolm Brinded of Shell puts it, “our hopes have been dashed before.”

Yet, at today's prices, the potential rewards are fabulous for those firms with the courage, capital and competence needed to complete LNG projects. As Mr Brinded himself concludes, “gas will be the fuel of choice for at least the first half of this century (and) flexible, long-distance supplies of LNG are the key.” Get ready for a $100 billion investment boom, the prelude to the “century of natural gas”.

August 30 Philippine Stock Market Daily Review: Market Inertia

August 30 Philippine Stock Market Daily Review: Market Inertia

Talk about market inertia…investors practically stayed on the sidelines. Just consider: today’s lean volume of P 399.888 million (US$ 7.14 million) incorporates cross transactions to the tune of P 111.447 million ($US 1.99 million) which represents about 28% of today’s trades, meaning that net of cross trades market volume in domestic currency would amount to a scanty P 288.441 million (US$5.15 million). Moreover, even as foreign capital registered an inflow worth P 29.038 (US$ 519,000), foreign trades accounted for about only a third of the aggregate peso turnover, suggesting that local investors were at helm of today’s activities.

Even as the market was in a state of lethargy which is typical during the week’s start, market internals emitted mixed signals with slightly bullish undertones. First, there were more advancing issues than declining issues (40-32) even as industry subindices were mostly in the red (4 up, 2 down) led once again by the Mining Sector. Second, aside from the net foreign buying, which mostly centered on PLDT (about 75% of the company’s trades accounted for foreign support), on the broader market, foreign capital bought more issues than it sold by almost 2 to 1. In other words, in spite of the ‘crisis’ talk foreigners are still infusing capital to the local equity market although on a cautious pace. Lastly the performances of the major market cap issues or the blue chips were evenly mixed with three advancers (PLDT +.39%, SM Primeholdings +1.75%, and Globe Telecoms +.57%) against three decliners (Metrobank –1.96%, Bank of the Philippine Islands –1.43% and San Miguel B –1.43%) and three unchanged (Ayala Corp., San Miguel A and Ayala Land). The relatively mixed output resulted to the slight decline of the Phisix by 1.63 points or .1%. Well, the Phisix is not alone, Asian bourses are, as of this writing, trading mixed.

Some of last week’s best gainers among the second tier Phisix components issues saw brisk activities with most of them posting continued gains for the day, namely Union Cement +5.66%, Ionics Corp +8.25%, Metro Pacific +6.06%, Music Corporation +8.79%. Only DM Consunji declined by 1.92%.

While foreign money remained at the cautious side of the trade, local investors persisted with speculations on the second tier issues that catapulted these to the top 20 most traded issues. Obviously the market awaits a catalyst or a leader for it resume its climb over a ‘wall of worry’.

The Guardian: China's farmers cannot feed hungry cities

China's farmers cannot feed hungry cities

No longer self-sufficient in food, the country today increasingly has to buy abroad, raising global prices

Jonathan Watts in Beijing
Thursday August 26, 2004
The Guardian

China's leaders have raised the alarm about their country's ability to feed itself as rapid development sucks land, water and people from the food-producing countryside into increasingly large and hungry cities.

After a steady fall in grain harvests, the world's most populous nation recently became a net importer of food for the first time in its history, raising domestic political concerns and driving up international prices of wheat, rice and soya.

Hu Jintao, the president, has commissioned studies on food security. The prime minister, Wen Jiabao, has visited a farm to urge peasants to boost production with a warning that grain security is a matter of social stability. Ministers have hurriedly cancelled plans to develop farmland and the agricultural ministry is offering tax incentives to farmers who switch to grain production.

Food security is a visceral issue for a generation that grew up during the famines of the 40s and 50s, when an estimated 40 million people died of starvation largely as a result of the headlong charge towards industrialisation known as the Great Leap Forward.

Although China's hefty foreign exchange reserves make it unlikely that there will be another famine any time soon, elderly leaders have watched with concern as the country's agricultural surplus has disappeared just as the appetites of its increasingly affluent population has grown.

During Mao Zedong's era, every local district was supposed to be self-sufficient in grain, which often necessitated diversion of scarce water resources into arid areas. Now, however, the priority for the water and the land is industrial and urban development.

With economic zones opening up across the country and more than 10 million peasants moving into cities every year, the amount of arable land in China has shrunk by 6.7m hectares (16.75m acres) since 1996.

According to Lin Yueqin, an economic researcher at the China Social Science Academy, the growth of cities is largely to blame for last year's record drop in grain supply.

"Urbanisation has eaten into the size of the nation's arable land. Farmers feel there is little profit to be had from their traditional crops so we've seen a long decline in grain output," he said.

Since 1998's record harvest of 512m tonnes, grain production has fallen every year to just over 400m tonnes.

At the same time, appetites are growing. The 9% annual growth of the economy is pushing up wages and pushing out waistlines. Urbanites are more likely to eat meat - which is fattened on grain - and they are more likely to be fat. According to one study of children in Shanghai, 8% of three- to six-year-olds are obese.

To feed this increasingly hungry population, China has had to look overseas. In the first six months of the year, the value of food imports surged 62% to $14.4bn (£8bn). Although the harvest may improve this year, it is thought unlikely to be enough to match rising demand. Soyabean imports, which doubled last year to 20.3m tonnes, are expected to double again this year. The World Bank forecasts a rise in net grain imports from 14m tonnes next year to 32m tonnes in 2020.

Even rice - the traditional staple - is more likely to come from neighbouring countries. Such is the demand that Thai farmers report entire crops being bought long before har vests. Vietnamese authories blame food-smuggling for a record 20% increase in the price of rice. For the first time, Pakistan is being approached as a rice supplier. In one novel experiment, the Chongqing municipal government is leasing land in Laos to grow food for its urban population.

This has lead to a surge in global food prices. Grain futures are up 30% this year thanks largely to the China factor.

Although Beijing's leaders are concerned that the growing dependence on imports - particularly grain from the US, Canada and Australia - is a strategic vulnerability, many economists argue that it makes sense to import because China must feed 20% of the world's population with only 7% of the planet's arable land.

China can also afford more imported food than in the past. Thanks to a booming manufacturing sector, the country has healthy foreign exchange reserves of $470bn. Most farmers would rather produce high-value, labour-intensive export crops like fruit and mushrooms than wheat and barley, which can be produced more cheaply in the US.

Daily Reckoning: Only Dead Fish Swim With the Stream by Christopher Mayer

Only Dead Fish Swim With the Stream
Christopher Mayer

for the Daily Reckoning

Most people want to buy strong companies with growing sales and expanding markets and a bright future. No one wants to buy a company that has problems to work through, that has been hit with one setback or another and where the near-term outlook is murky and uninviting.

Yet it is in these latter opportunities where the greatest investors have plied their trade and milled their fortunes. Warren Buffett bought The Washington Post in the throes of the 1973 - 74 bear market, when it was struggling. He bought 10% of the company for about $10 million. At the time, the company had revenues of over $200 million. Ten years later, his stake was worth a quarter of a billion dollars.

He bought GEICO when, in his words, "It wasn't essentially bankrupt, but it was heading there." It was one his greatest acquisitions.

Not just Buffett, but scores of wealthy investors have enjoyed incredible returns by buying when other investors were fearful, by seeing through the temporary setbacks.

The greatest investors did not fear to go against the consensus. As writer Malcolm Muggeridge used to say, "Only dead fish swim with the stream."

I've recently completed a book, which brought to mind many of these thoughts on the paradoxical nature of market returns. The book is titled Capital Account: A Money Manager's Reports on a Turbulent Decade 1993 - 2002, and it is edited with an introduction by Edward Chancellor (author of the acclaimed Devil Take the Hindmost). The book collects financial reports written by Marathon Asset Management's partners and delivered to its clients over the boom years. Marathon is an investment advisory firm based in London that manages over $24 billion in assets for institutional investors.

The book was interesting because it illustrates Marathon's unconventional investment style and provides a number of useful ideas and examples of investments that succeeded by bucking consensus opinion.

Consider General Dynamics, a company that Marathon backed in the early 1990s. General Dynamics was in bad shape at the time, suffering from a declining backlog of business in the wake of the Soviet Union's demise.

New management took the company in a different direction in 1991 – by closing or selling unprofitable businesses and buying back its own depressed shares.

The stock of General Dynamics increased six fold between 1990 and 1993, even though its sales were reduced by half.

Yes, sales declined by 50% and the stock rose six fold!

Marathon used the example to highlight a couple of key points regarding their "capital cycle approach" (which we'll get to in a minute). First, investment returns can have less to do with sales and growing markets than they have to do with the efficient allocation of resources.

In this case, the management of General Dynamics took the existing resources of the company and dramatically changed the way those resources were deployed. Instead of frittering them away on unprofitable business lines, management focused on its core business. Even though this involved effectively making the business smaller, investors were rewarded with an outsized gain in the stock price during a relatively short amount of time.

Secondly, Marathon pointed out that General Dynamics benefited from a decline in competition, as money was withdrawn from the defense sector or diverted to other areas and the existing businesses consolidated. As Chancellor writes, "It is better to invest in a mature industry where competition is declining than in a growing industry where competition is expanding."

Marathon has named its approach the "capital cycle approach." The approach is based on a simple yet compelling idea. High returns on capital, or the prospect of high returns on capital in one area of the market, will attract additional investment. This additional investment will put downward pressure on returns in that market.

Think about the Internet bubble. When the Internet was still new, the first few firms in the space commanded large market caps relative to the amount of capital invested in the business or the amount of money required to start the business. As a result, more money kept pouring into dot-com businesses.

Let me give you Chancellor's distillation of this idea, and you will never forget it.

He wrote, "When a hole in the ground costs $1 to dig but is priced in the stock market at $10, the temptation to reach for a shovel becomes irresistible."

Using the capital cycle approach, you would become suspicious when shares are priced on the assumption that existing returns are going to be maintained or improved in light of rapidly expanding new investment and growing capacity in a business or industry. In other words, the approach helps guard against the error of simply extrapolating prior returns into future years. Capital cycle forces you to think about competitive pressures.

The process works in reverse as well. As share prices decline, investment capital moves off to find greener pastures and competition declines. As excess capacity is sweated off, though, returns are likely to improve. Here is where there is opportunity, as share prices in these situations are often priced assuming the pessimistic present conditions are permanent. But as things improve, as the market naturally adjusts, these companies may provide outsized returns for far-seeing investors. General Dynamics did exactly that. Target may be able to do that with Hudson's Bay.

InvestmentRarities: BEST OF KURT RICHEBACHER February 20, 2004

BEST OF KURT RICHEBACHER
February 20, 2004

Our differences of opinion with the bullish consensus about the economic and financial situation in the United States have many reasons. One of them is a radically different apprehension of wealth and wealth creation. America’s policymakers and economists view asset inflation as wealth creation as if this were a self-evident fact. What this asset inflation truly generates is phony collateral for runaway consumer indebtedness, luring the consumer into unprecedented debt excesses. It is phony wealth creation because unlike the real wealth creation through capital investment, both its creation and its use involve no income creation.

This perception of wealth creation, actually, runs completely counter to traditional thinking in economics. It has always been apodictic in economics that there is but one way to create genuine wealth for an economy as a whole, and that is to consume less than current production or income. Wealth creation from the macroeconomic perspective essentially occurs through saving and investment in tangible, income-creating plant, equipment, and commercial and residential buildings.

Guided by the Greenspan Fed, America is practicing a radically different pattern of "wealth" creation. An extremely loose monetary policy forces up asset prices, providing both the impetus and collateral for higher borrowing. Being offered almost limitless credit at rock-bottom interest rates, the consumer responds with a frenzied borrowing and spending binge.

The crucial thing about this new American way of wealth creation is that it takes places entirely outside the national product. Its gist is to inflate asset prices by inflating credit. But what gives it such great dynamics is the conventional practice to value the vast mass of existing shares and houses in line with movement of the price of the last, marginal trade.

It is really like printing wealth.

The crucial concern is the inherent effects of this so-called wealth creation to the economy. Asset inflation by itself has no effects at all. Its economic effects arise only from the associated increase in consumer borrowing and spending. But that has two highly malign effects. An endless escalation of unproductive debt is one. The other is that consumption takes an ever-greater share of GDP. Overconsumption is, really, America’s deep-seated, structural disease, and asset inflation is worsening it.

Grossly distorted economic growth at the expense of saving and investment is one dangerous legacy of America’s asset inflation. The exponential rise in the consumer’s indebtedness in relation to his badly lagging income growth is the other. A savage debt deflation is the inevitable outcome. But this kind of deflation does not lower interest rates. It boosts them. Basically, the Fed has lost control.

CONCLUSIONS:

U.S. economic growth is no longer based on saving and investment. Its essence is that credit excess provides soaring collateral for still more credit excess creating still more asset inflation for still more borrowing and spending excess. It seems like a perpetual motion machine that just goes on cranking out wealth and spending. It is important to see that the true name of this game is bubble-driven growth, and all bubbles end by bursting. America is the next Japan.

August 25 The Philippine Stock Market Review: Dead Cat Bounce?

August 25 The Philippine Stock Market Review: Dead Cat Bounce?

After being spooked by the ‘Crisis’ talk, local investors regained some sensibilities and bargain hunted on the domestic equity market, as officials moved to assuage concerns of the investing public on the country’s ability to meet its debt payments. The Phisix climbed a measly 6.07 points or .39% after yesterday’s brutal thrashing. While your analyst is disinclined to oversimplify the recent events to the market’s short-term movements, the shocking admission by no less than the Philippine President on the gravity of the country’s chronic economic conditions cast a pall on the attractiveness of investments in the country, hence in the short-term the ‘risk’ issue becomes the primordial wall of worry from which the bulls has to climb.

Today’s market activities reflected such skepticism. As we earlier mentioned first to ever react would be foreign investors as lugubrious prospects would increase risk considerations of their portfolio relative to benefits hence any shocking revelations could spur a sudden exodus from the market. While yesterday’s activities manifested a tempered reaction from the foreigners, today we noticed significant volume increase of these liquidations, which amounted to P 71.648 million, or almost equivalent to 11.9% of aggregate volume. Foreign trades constituted 61% of today’s output while selling two times more issue than it bought.

SIX of the eight heavyweights scored a net outflow from foreign capital with the most notable outflow seen in Ayala Corp (unchanged), almost 45% of its output and represents about 50% of the net outflow, joined by moderate selloffs in SM Primeholdings (+1.75%), PLDT (-.39%), and Ayala Land (-1.88%) while Bank of the Philippine Islands (+1.25%) and Metrobank (+2.0%) posted negligible selling. Only Globe Telecoms (unchanged) recorded positive flows from overseas money while San Miguel B (unchanged) had no foreign trades.

Other noteworthy foreign activities are the continuing intensive selling on Filinvest Land (-1.07%) accounting for 75% of its trades, and the modest accumulations in ABS-CBN Preferred shares (unchanged) representing about 17% of its output and First Philippine holdings (+2.06%) about 27.58% of the firms trades.

Sentiment was biased towards the bulls with advancing issues ahead of declining issues by 35 to 20 and the major industry indices were higher led by the rebound of the mining sector while Oil and the property index posted losses.

Yesterday’s major trendline breach was a cause of concern, while today’s rally hardly made a significant headway to regain lost grounds, meaning that today’s run up could be construed as temporary or a dead cat bounce. As gauge, the former support level is now its resistance level and has to be credibly taken out backed by sizable volume. However, with the past two day’s performance of having foreign money taking on the selling side of the trade equation, it would need a lot of firepower from the locals to repulse the seemingly strengthening bears, and to hold or buoy the index from its current levels.

August 24 The Philippine Stock Market Review: A Reign of Fear?

August 24 The Philippine Stock Market Review: A Reign of Fear?

Well with the dirty little word out as officially promulgated by no less than the highest authority of the land…what do you expect? Massacre, Bloodbath carnage…yes, the PHISIX was clobbered by 34.17 points or 2.17% as foreign and local investors stampeded out of the Philippine equity assets to register its biggest loss since the post election May 11 and is the largest decliner among the Asian bourses, as of this writing.

It was a sea of blood out there today as declining issues routed advancing issues by 8 to 1, ALL major subindices hemorrhaged led again by the mining index which fell by 2.82% and foreign money saw an outflow of P 21.847 million. Aside, foreign investors sold slightly more issues than they bought.

Of the nine heavy cap mainstays of the Phisix, 6 issues contributed to the steep decline of the Phisix mostly due to foreign led sell-offs, namely Ayala Corp (-5.46%) Globe Telecoms (-3.46%), Bank of the Philippine Islands (-2.44%), Metrobank (-1.96%), PLDT (-1.56%) and San Miguel B (-1.43%) while the remaining three, Ayala Land, SM Primeholdings and San Miguel A were unchanged.

Aside from the tormented heavyweights foreign money also saw heavy liquidations in Pilipino Telephone (-8.46%) and Union Cement (unchanged), while unassumingly providing support to First Philippine Holdings (-3.0%), ABS-CBN Preferred Shares (-2.43%) and DM Consunji Inc (-7.69%).

Today’s market action calls for us to raise our alert levels to orange, meaning that the Phisix based on its chart has manifested a strong warning reversal signal after having successfully breached its major trendline. Put differently, we have yet to confirm the negative signals emitted today, if it is simply a knee jerk reaction or the onset of the market’s reversal to a declining phase in the immediate term. The sustainability of the critical 1,518-support level should give us a clearer picture where the market is headed for.

Will investors flee the market on thoughts of an Argentina-like upheaval or will they construe that such official acknowledgement of the existing problem, instead of a denial, as government’s resolve to confront the dilemma and stave off a full blown crisis? Today’s market action points toward the former however it remains to be seen how investors would react in the coming days. Will the market's psychology now be enveloped by a reign of fear?