The Economist: OPEC’s liquidity trap

OPEC’s liquidity trap
Sep 17th 2004

From The Economist Global Agenda

At its meeting in Vienna, OPEC, the oil-exporters’ cartel, has raised its production quotas by 1m barrels per day. But oil will flow no more freely than before

ONLY the words of Alan Greenspan, chairman of the Federal Reserve, attract closer scrutiny than the hints and whispers of oil ministers and officials from the Organisation of the Petroleum Exporting Countries (OPEC). Fed-watchers must wait until September 21st for another interest-rate announcement to pore over. But the OPEC cartel has provided plenty of words in recent days for its followers to hang on.

Last week, the oil minister from the United Arab Emirates said that OPEC was likely to consider raising the formal production quotas it sets for its members, in response to an oil price that has remained stubbornly above $40 per barrel. At the weekend, other OPEC delegates contradicted him, saying a rise in quotas was unlikely and a cut in production was quite possible before next spring. But at its meeting in Vienna on Wednesday September 15th, OPEC announced that it would raise its quotas by 1m barrels per day (bpd), to 27m bpd, with effect from November 1st. It also decided to meet again sooner than scheduled, agreeing to reconvene in Cairo on December 6th.

If OPEC’s signals are even harder to read than Mr Greenspan’s at the moment, it may be because the cartel finds itself in a position the central banker would dread. When Mr Greenspan sets his target for the federal funds rate, he can be sure it will be met. But when OPEC announces an output quota, it can be quite confident the target will be missed—the cartel is currently exceeding its official limit by as much as 2m bpd. Even worse, OPEC’s oil output is now almost as high as it can go. Raising quotas may thus have no discernible effect on production.

Cartels exist to place artificial constraints on supply. But the constraints on today’s oil supply are all too real. OPEC’s members, excluding Iraq, produced 27.5m bpd in August, according to the International Energy Agency (IEA), which advises oil-consuming nations. The most they could sustain with their current capacity is just 27.8m bpd, the IEA says. Only Saudi Arabia is said to have much spare oil ready to pump, but no one knows exactly how much, how quickly it could be brought to market, or indeed how marketable this sulphur-heavy variety of crude would be.

With supplies stretched this tight, any disruption or disturbance can move the oil price: the insurrectionist sabotage of pipelines in Iraq, the court-ordered sabotage of the Yukos oil company in Russia, or the meteorological sabotage wreaked by Hurricane Ivan in the Mexican Gulf. News of another fall in America’s stocks of crude added almost a dollar to the oil price during trading on Wednesday, leaving OPEC rather upstaged.

The organisation’s current willingness to lift quotas counts for less than its hesitance to invest in new wells and fields. The number of wells drilled by cartel members last year fell by 6.5% from the year before, according to an OPEC report. The cartel has thus far rebuffed most offers from the world's big oil companies to tap its underexploited oilfields. In Vienna, the oil companies pressed their suit with renewed urgency, arguing that OPEC members must let them in now if they are to meet the world's much-expanded demand for oil in ten years' time. OPEC ministers were unmoved.

This reluctance is partly explained by fear: members recall the lessons of the early 1980s, when overcapacity in the industry threw the cartel into disarray, and of the Asian financial crisis, when fear of a deep world recession prompted OPEC to pump too much oil. Complacency is also a factor. OPEC’s nationalised oil companies make their exploration and drilling decisions on fiscal, not commercial, principles. As long as their oil revenues are keeping the government’s budget in surplus, they see no need to expand. Opening up to the oil majors might bring extra investment and cash, but, as Ali al-Naimi, the Saudi oil minister, said on Thursday, “At these prices we don't need it.”

The situation should improve this year and next. Two new oilfields in Saudi Arabia will be ready to pump 800,000 bpd by the end of September, according to the kingdom’s oil minister. These new developments were commissioned to replace ageing facilities elsewhere, the retirement of which may now be postponed. Both Kuwait and Algeria will also inflate OPEC’s supply cushion by the end of the year, according to their oil ministers.

But the new fields and wells touted on Wednesday will still fall short of what is needed to restore OPEC’s power over the oil price. By its own calculations, it would now need more than 3m bpd of spare capacity to function as a genuine swing producer, able to hold the price down as well as push it up. Until then, the physical limits on OPEC’s oil production will bite before the cartel’s quotas do.

If supply does not catch up with it, oil demand may falter—high prices tend to have that effect. The world economy is already slowing. China’s demand for oil, 6.5m bpd in the second quarter, is forecast to slip to 6.3m in the third, according to the IEA. America’s petrol consumption, seasonally adjusted, fell by about 200,000 barrels a day between April and July. The soft patch America’s economy is currently suffering is due “in large measure” to the steep rise in energy prices, Mr Greenspan has said. He has also given warning that the future balance between supply and demand in the oil market will remain “precarious”. OPEC-watchers, tired of poring over the cartel’s empty pronouncements, should perhaps mark the Fed chairman’s words instead.

New York Times: U.S. multinationals shift their tax burden

U.S. multinationals shift their tax burden

David Cay Johnston

NYT Monday, September 13, 2004

Profit taken in offshore havens rose 68% over 3 years, report finds

From 1999 to 2002, U.S. multinational corporations increased profits taken in no-or low-tax countries by 68 percent, while sharply reducing profits taken in Britain, Germany and other countries where they engage in substantial business activity, according to a report scheduled to be published Monday in the journal Tax Notes.

In 2002, U.S. companies took $149 billion of profits in 18 tax haven countries, up from $88 billion in 1999, according to Tax Notes, which analyzed the most recent data available from the U.S. Commerce Department. This was triple the 23 percent increase in total offshore profits earned by American multinationals during the same period.According to Commerce Department data not cited in the study, U.S. companies took 17 cents of each dollar of worldwide profits in tax havens in 2002, up from 10 cents in 1999. Analysis of the data in Tax Notes shows that for each dollar of profit taken in Luxembourg in 1999, Americans corporations took $4.56 of profit in 2002. The figure for Bermuda was $2.96; for Ireland, $2.01, and for Singapore, $1.72. For Britain and Germany, each dollar of profit taken in 1999 fell by 2002 to 67 cents and 46 cents respectively.

The study was conducted by Martin Sullivan, a former international tax specialist at the Treasury Department. Tax Notes is a nonprofit journal that reports on tax systems worldwide. Sullivan wrote in his Tax Notes report that the dramatic rise in profits taken in tax havens like Bermuda had no relationship to economic activity there. U.S. firms took $25.2 billion in profits in Bermuda in 2002, yet total revenues there were only $34.3 billion, according to Commerce Department data. That 58 percent of offshore profits are now taken in tax havens marks “a seismic shift in international taxation,” Sullivan said, because “subsidiaries of U.S. corporations now generate profits mainly in tax havens rather than in locations in which they conduct most of their business." Sullivan noted in an interview that in 1991, when he first seriously examined the issue, only a small portion of profit was taken in tax havens. While he has written previously that concern about job creation shifting outside the United States is overblown, he said that the torrent of profits now taken in tax havens may indicate that future job growth by U.S. companies will shift offshore. “There is no question but that the use of tax havens to lower tax rates makes investing offshore more lucrative” than investing in the United States, he said, and “tilts investment offshore.” The figures also show how Congress, by eroding the capacity of the Internal Revenue Service to enforce the tax laws, and by approving laws and treaties that favor the use of tax havens, is shifting the burden of taxes from multinational companies on to individuals and purely domestic companies. Some members of Congress, Sullivan said, will take comfort in his findings because “they believe in tax sabotage, the idea that we don't care if the IRS can't enforce the laws because it means less taxes.”

Bruce Bartlett, a Republican critic of the tax system whose writings are closely followed in Washington, said the data raise questions about fairness between domestic and multinational companies.

“It's an obvious violation of the principle of horizontal equity for two businesses or individuals with similar economic circumstances to pay significantly different tax rates,” he said. However, he said, while techniques that shift profits to tax havens “involve pushing the law to its limit” they are currently legal, and corporate officials are obligated by law to pay as little tax as possible. Taking profits in tax havens “is a consequence of the increasing mobility of capital and the existence of sovereign nations with different tax systems,” Bartlett said. "There isn't much of anything that can be done about this,” he said, saying the country should debate scrapping the corporate income tax and adopting a European-style value added tax. While corporations often complain that they are doubly taxed on foreign profits, Congress gives companies a dollar-for-dollar credit for taxes paid in foreign countries, which in practice is a subsidy for offshore investment. If this foreign tax credit were replaced with a tax only on profits earned in the United States corporate income taxes would rise by $7 billion annually, studies have shown. Congress also allows perpetual deferral of taxes on profits earned offshore - but only if they are not returned to the United States, a practice that critics say encourages job creation overseas to the detriment of American workers.

The New York Times

September 16 Philippine Stock Market Daily Review Profit Taking Continues!!!

September 16 Philippine Stock Market Daily Review

Profit Taking Continues!!!

As indicated in last September 14’s Daily Market outlook “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.”…we are seeing the market approach, in fact, touched the first retracement level, during the day’s intraday activities.

Profit-taking activities continue to hound the market and were mostly concentrated on the blue chips as the Phisix closed 14.22 points or .83% lower on moderate volume of P 647.699 million (US$ 11.545 million). Foreign selling dictated today’s market performance which registered P 97.129 million (US$ 1.731 million) worth of outflows representing about 15% of the day’s cumulative turnover and was centered mostly on heavy caps PLDT (-1.45%) and San Miguel B (-2.14%) and also in second tier Phisix component issues as Equitable Bank (unchanged) and Union Cement (-5.21%). Meanwhile industry sub-indices were mostly down except for the Mining Issues which was primarily buoyed by trades in Manila Mining Local A (+14.28%) and Foreign B (+5.88%) Shares. Moreover, market breadth showed marginally higher declining issues than advancing issues, 38 to 35.

Our informal second tier market leaders succumbed to correction mood and were either down, Metro Pacific (-1.85%) and Piltel (-1.78%) or unchanged, DMC. While the accumulations rotated to second tier property issues, such as C & P (+9.75%) and Empire East (+5.88%) as well as in Manila Mining issues.

In sum, since Tuesday’s profit taking activities today’s action was largely credited to overseas money while local investors were seemingly providing support to some select issues, as the advance-decline differentials has improved for the past two days. Hence my outlook in the market will remain as indicated yesterday “First we may see in the coming sessions the revival of broadmarket activities rather than in the blue chips, meaning that the Phisix could still founder over the interim with corrections from the major protagonists (PLDT and GLO) or see them move sideways although the thrust of the activities will center on the second and third liners. Second, the other possible move will be a resumption of buying activities in both the blue chips and the second liners, although my inclination is for the former. The buying window is starting to open so grab it while you can!”

Institute for International Economics: The Risks Ahead for the World Economy by C. Fred Bergsten

The Risks Ahead for the World Economy
C. Fred Bergsten
Institute for International Economics
Article by invitation for The Economist
September 9, 2004
© Institute for International Economics.

Five major risks threaten the world economy. Three center on the United States: renewed sharp increases in the current account deficit leading to a crash of the dollar, a budget profile that is out of control, and an outbreak of trade protectionism. A fourth relates to China, which faces a possible hard landing from its recent overheating. The fifth is that oil prices could rise to $60 to $70 per barrel even without a major political or terrorist disruption, and much higher with one.

Most of these risks reinforce each other. A further oil shock, a dollar collapse, and a soaring American budget deficit would all generate much higher inflation and interest rates. A sharp dollar decline would increase the likelihood of further oil price rises. Larger budget deficits will produce larger American trade deficits, and thus more protectionism and dollar vulnerability. Realization of any one of the five risks could substantially reduce world growth. If two or three, let alone all five, were to occur in combination then they would radically reverse the global outlook.

There is still time to head off each of these risks. Decisions made in America immediately after this year's elections will be pivotal. China, the new growth locomotive, is key to resolving the global trade imbalances and must play a central role in future. Action by a number of other countries will be essential to maintain global growth and to avoid deeper oil shocks and new trade restrictions.

The most alarming new prospect is another sharp deterioration in America's current account deficit. It has already reached an annual rate of $600 billion, well above 5 percent of the economy. New projections by my colleague Catherine Mann suggest it will now be rising again by a full percentage point of GDP per year, as actually occurred in 1997-2000. On such a trajectory, the deficit would exceed $1 trillion per year by 2010.

There are three reasons for this dismal prospect. First, American merchandise imports are now almost twice as large as exports; hence exports would have to grow twice as fast as imports merely to halt the deterioration. (In the past, such a relationship occurred only after the massive fall experienced by the dollar in 1985-87.) Second, economic growth is likely to remain faster in America than in its major markets and higher incomes there increase demand for imports much faster than income growth elsewhere increases demand for American exports. Third, America's large debtor position (it currently is in the red by more than $2.5 trillion) means that its net investment income payments to foreigners will escalate steadily, especially as interest rates rise.

Of course, it is virtually inconceivable that the markets will permit such deficits to eventuate. The only issue is how they are to be averted. An immediate resumption of the gradual decline of the dollar, as in the period 2002-03, cumulating in a fall of at least another 20 percent, is needed to reduce the deficits to sustainable levels.

If delayed much longer, the dollar's inevitable fall is likely to be much larger and much faster. Moreover, much of the slack in America's product and labor markets will probably have disappeared in a year or so. Sharp dollar depreciation at that stage would push up inflation and macroeconomic models suggest that American interest rates could even hit double digits.

The situation would be still worse if future increases in energy prices and the budget deficit compound such developments, as they surely could. The negative impact would also be much greater in other countries because of their need to generate larger and faster domestic demand increases in order to offset declining trade surpluses.

Fears of a hard landing for the dollar and the world economy are of course not new. The situation is much more ominous today, however, because of the record current account deficits and international debt, and the high probability of further rapid increases in both. The potential escalation of oil prices suggests a parallel with the dollar declines of the 1970s, which were associated with stagflation, rather than the 1980s, when a sharp fall in energy costs and inflation cushioned dollar depreciation (but still produced higher interest rates and Black Monday for the stock market). Paul Volcker, former chairman of the Federal Reserve, predicts with 75 percent probability a sharp fall in the dollar within five years.

The prospects for the budget deficit and trade protectionism further darken the picture. Official projections score the fiscal imbalance at a cumulative $5 trillion over the next decade but exclude probable increases in overseas military and homeland-security expenditures, extension of the recent tax cuts and new entitlement increases proposed by both presidential candidates. This deficit could also approach $1 trillion per year, yet there is no serious discussion of how to restore fiscal responsibility, let alone an agreed strategy for reining in runaway entitlement programs (especially Medicare).

The budget and current account deficits are not “twin”. The budget in fact moved from large deficit in the early 1990s into surplus in 1999-2001, while the external imbalance soared anew. But increased fiscal shortfalls, especially with the economy nearing full employment, will intensify the need for foreign capital. The external deficit would almost certainly rise further as a result.

Robert Rubin, former secretary of the Treasury, also stresses the psychological importance for financial markets of expectations concerning the American budget position. If that deficit is viewed as likely to rise substantially, without any correction in sight, confidence in America's financial instruments and currency could crack. The dollar could fall sharply as it did in 1971-73, 1978-79, 1985-87, and 1994-95. Market interest rates would rise substantially, and the Federal Reserve would probably have to push them still higher to limit the acceleration of inflation.

These risks could be intensified by the change in leadership that will presumably take place at the Federal Reserve Board in less than two years, inevitably creating new uncertainties after 25 years of superb stewardship by Mr. Volcker and Alan Greenspan. A very hard landing is not inevitable but neither is it unlikely.

The third component of the “America problem” is trade protectionism. The leading indicator of American protection is not the unemployment rate, but rather overvaluation of the dollar and its attendant external deficits, which sharply alter the politics of trade policy. It was domestic political, rather than international financial, pressure that forced previous administrations (Nixon in 1971, Reagan in 1985) aggressively to seek dollar depreciation. The hubbub over outsourcing and the launching of a spate of trade actions against China are the latest cases in point. The current account and related budget imbalances may not be sustainable for much longer, even if foreign investors and central banks prove willing to continue funding them for a while.

The fourth big risk centers on China, which has accounted for over 20 percent of world trade growth for the past three years. Fuelled by runaway credit expansion and unsustainable levels of investment, which recently approached half of GDP, Chinese growth must slow. The leadership that took office in early 2003 ignored the problem for a year. It has finally adopted a peculiar mix of market-related policies, such as higher reserve requirements for the banks, and traditional command-and-control directives, such as cessation of lending to certain sectors. The ultimate success of these measures is highly uncertain.

Under the best of circumstances, China's expansion will decelerate gradually but substantially from its recent 9 to 10 percent pace. When the country cooled its last excessive boom after 1992, growth declined for seven straight years. A truly hard landing could be much more abrupt and severe. Either outcome will, to a degree, counter the inflationary and interest-rate consequences of the other global risks. But a slowdown, and especially a hard landing, in China would sharply reinforce their dampening effects on world growth.

The fifth threat is energy prices. In the short run, the rapid growth of world demand, low private inventories, shortages of refining and other infrastructure (particularly in America), continued American purchases for its strategic reserve and fears of supply disruptions have outstripped the possibilities for increased production. Hence prices have recently hit record highs in nominal terms. The impact is extremely significant since every sustained rise of $10 per barrel in the world price takes $250 billion to $300 billion (equivalent to about half a percentage point) off annual global growth for several years. Mr. Greenspan frequently notes that all three major postwar recessions have been triggered by sharp increases in the price of oil.

My colleague Philip Verleger concludes that this lethal combination could push the price to $60 to $70 per barrel over the next year or two, perhaps exceeding the record high of 1980 in real terms. Gasoline prices per gallon in America would rise from under $2 now to $2.60 in 2006. Prices would climb even more if political or terrorist events were further to unsettle production in the Middle East, the former Soviet Union or elsewhere.

The more fundamental energy problem is the oligopolistic nature of the market. The OPEC cartel in general, and dominant supplier Saudi Arabia in particular, restrict supply in the short run and output capacity in the long run to maintain prices far above what a competitive market would generate. They do not always succeed and indeed have suffered several sharp price falls over the past three decades. They are often unable to counter excessive price escalation when they want to, as at present.

Primarily due to the cartel, however, the world price has averaged about twice the cost of production over the past three decades. The recent price above $40 per barrel compares with production charges of $15 to $20 per barrel in the highest-cost locales and much lower marginal costs in many OPEC countries. This underlying problem also looks likely to get worse, as the Saudis have talked openly about increasing their target range from the traditional $22 to $28 per barrel to $30 to $40.

There is a high probability that one or more of these risks to global prosperity and stability will eventuate. The consequences for the world economy of several of them reinforcing each other are potentially disastrous. All five risks can be avoided, however, or their adverse effects at least substantially dampened, by timely policy actions. The most important single step is for the president of the United States to present and aggressively pursue a credible program to cut the federal budget deficit at least in half over the coming four years and to sustain the improvement thereafter. This will require a combination of spending cuts, revenue increases, and procedural changes (including the restoration of PAYGO rules in Congress), as well as rapid economic growth.

Such a program would maximize the prospects for maintaining solid growth in America and the world by avoiding the crowding out of private-sector investment and by reducing the likelihood of higher interest rates. It would represent the best insurance against a hard landing via the dollar by buttressing global confidence in the American economy. It should be feasible, having been more than accomplished during the 1990s. Its absence would virtually assure realization of at least some of the interrelated global risks within the next presidential term.

America and its allies must also move decisively on energy. Sales from their strategic reserves, which total about 1.3 billion barrels (including 700 million in the United States), would reverse the recent price increases for at least a while and demonstrate a willingness to counter OPEC. For the longer run, America must expand production (including in Alaska) and increase conservation (especially for motor vehicles). Democrats and Republicans must together take the political heat of establishing a gasoline, carbon, or energy tax that will limit consumption, help protect the environment, and reduce the need for future military interventions abroad.

The most effective “jobs program” for any American administration and the world as a whole, however, would be an initiative to align the global oil price with levels that would result from market forces. America should therefore seek agreement among importing countries (including China, India, and other large developing importers as well as industrialized members of the International Energy Agency) to offer the producers an agreement to stabilize prices within a fairly wide range centered at about $20 per barrel.

Consumers would buy for their reserves to avoid declines below the floor of the range and sell from those reserves to preserve its ceiling. A sustained cut of $20 per barrel in the world price could add a full percentage point to annual global growth for at least several years. The resultant stabilization of price swings would avoid the periodic spikes (in both directions) that tend to trigger huge economic disruption. Producers would benefit from these global economic gains, from their new protection against sharp price falls, and from trade concessions that could be included in the compact to help them diversify their economies.

China must also play a central role in protecting the global outlook. Fortunately, it can resolve its internal overheating problem and contribute substantially to the needed global rebalancing through the single step of revaluing the renminbi by 20 to 25 percent. Such a currency adjustment would simultaneously address all of China's domestic troubles: dampening demand (for its exports) by enough to cut economic growth to the official target of 7 percent, countering inflation (now approaching double digits for intercompany transactions) directly by cutting prices of imports, and checking the inflow of speculative capital that fuels monetary expansion.

A sizeable renminbi revaluation is also crucial for global adjustment because much of the further fall of the dollar needs to take place against the East Asian currencies. These have risen little if at all, although their countries run the bulk of the world's trade surpluses. China has greatly intensified the problem by maintaining its dollar peg and riding the dollar down against most other currencies, further improving its competitiveness. Other Asian countries, from Japan through India, have thus intervened massively to keep their currencies from appreciating against the dollar (and, with it, against the renminbi). This has severely limited correction of the American deficit and thrown the corresponding surplus reduction on to Europe and a few others with freely flexible exchange rates. China should reject the US/G-7/IMF advice to float its currency, which is far too risky in light of its weak banking system and could even produce a weaker renminbi, and opt instead for a substantial one-shot revaluation. It should in fact take the lead in working out an “Asian Plaza Agreement” to ensure that all the major Asian countries make their necessary contributions to global adjustment.

Countries that undergo currency appreciation, and thus face reductions in their trade surpluses, will need to expand domestic demand to sustain global growth. China need not do so now because it must cool its overheated economy. But the other surplus countries, including Japan and the euro area, will have to implement structural reforms and new macroeconomic policies to pick up the slack. America and the surplus countries should also work together to forge a successful Doha Round, renewing the momentum of trade liberalization and reducing the risks of protectionist backsliding.

The global economy faces a number of major risks that, especially in combination, could throw it back into rapid inflation, high interest rates, much slower growth or even recession, rising unemployment, currency conflict, and protectionism. Even worse contingencies could, of course, be envisaged: a terrorist attack with far larger economic repercussions than September 11 or a sharp slowdown in American productivity growth, as occurred after the oil shocks of the 1970s, that would further undermine the outlook for both economic expansion and the dollar.

Fortunately, policy initiatives are available that would avoid or minimize the costs of the most evident risks. America will be central to achieving such an outcome, and the president and Congress will have to decide in early 2005 whether to address these problems aggressively or simply avert their eyes and hope for the best, taking major risks with their own political futures as well as with the world economy. China will have to play a new and decisive leadership role. The major oil producers and the other large economies must do their part. The outlook for the global economy for at least the next few years hangs in the balance.

Reuters: Asia Faces Bird Flu Crisis of Unprecedented Scale

Asia Faces Bird Flu Crisis of Unprecedented Scale
Tue Sep 14, 2004 07:01 AM ET

SHANGHAI (Reuters) - Asia faces an outbreak of unprecedented proportions as it grapples with avian influenza, which the World Health Organization warns could develop into a pandemic unless detection and prevention methods are improved.

Health officials from across the region raised alarm bells Tuesday over bird flu, which WHO officials said had claimed 28 lives in the region.

They argued that increased collaboration between countries and more study was needed to combat the virus, which resurfaced in July in Thailand, Malaysia, Indonesia, Vietnam and China and dampened Asian demand for grain.

"This outbreak is historically unprecedented. Its infectious agents don't respect international boundaries," Shigeru Omi, regional director for the WHO's Western Pacific Region, told member-state delegates gathered in Shanghai.

The WHO has said the virulent virus was circulating more widely in the region than originally believed -- particularly worrisome because humans lack immunity to it.

A huge flow of people, goods and foods around Asia and lax animal husbandry practices have been cited as prime concerns.

The region "still had a long way to go in terms of preparedness," said WHO official Hitoshi Oshitani, the regional adviser for surveillance and response. Although avian flu is very infectious in birds, it does not spread easily among humans. There is a danger, however, that an avian virus mixes with a human one and forms a new disease.

Malaysia, which detected three new cases in a northern state over the weekend, said it had strengthened infectious disease surveillance and drawn up a rapid response plan.

It suggested countries around the region adopt a common framework to prepare for a potential national pandemic, a representative said.

Singapore suggested wider use of vaccinations, an option Thailand is strongly considering.

"The outbreak of Asian influenza in the region is potentially more dangerous than SARS and we should not ignore a pandemic arising from this," the Singapore representative said, referring to the deadly flu-like Severe Acute Respiratory Syndrome.

"We cannot wait for a pandemic to appear before us. Rapid vaccine development is necessary and needed urgently."

Bird-flu stricken Thailand is likely to make a decision on whether to vaccinate fowl this week, as thousands of chicken farmers demanded Monday that the government maintain its ban on bird flu vaccines.

The farmers said European customers would balk at eating vaccinated chickens because of sensitivities about chemical residues in their food.

Thailand was the world's fourth-largest chicken exporter until the disease halted exports to Japan and Europe.

September 15 Philippine Stock Market Review: Second Stringers Point To Market’s Recovery

September 15 Philippine Stock Market Review:

Second Stringers Point To Market’s Recovery

I’m just feeling kindda lucky, as the market seems to move right in the direction as we anticipated. Thus far, the Phisix is clearly headed for the targeted support levels indicated yesterday. Although today’s activities make us wonder if the Phisix will decline further as market internals signal that local investors are starting to jump back into the market. Informal market leaders the second stringers led by Metro Pacific (+3.84%), Pilipino Telephone (+5.66%) and DM Consunji (+3.88%) have conjointly been reanimated today matched by a mending of the advance decline differentials which was surprisingly neutral for today, after three consecutive sessions of decline!!! Although number of issues have evidently been reduced to 110 from last week’s average of 126 per day, meaning that today’s mixed broadmarket activities were categorized into select accumulations on second liners while the blue chips persisted with its profit-taking mode after a brisk advance during the previous week.

On the other hand while foreign money posted slight inflows of P 9.564 million relative to today’s lean volume of P 582.183 million, they bought more issues in the broadermarket by a ratio of 2 to 1. Foreign money still commanded the activities in the market having a slight majority of 52.97% of today’s turnover.

Yes, the Phisix was down by 11.37 points or .66%, but this was mostly due to the corrections seen in ONLY three heavyweights namely, market pillar PLDT (-1.08%), playing catch up Globe Telecoms (-2.39%), and Bank of the Philippine Islands (-2.19%), whom has provided the nub of the growth of the Phisix in these latest rally. Only Metrobank closed higher by 1.85% while the rest of the field, San Miguel A and B shares, SM Primeholdings, Ayala Land and Ayala Corporation, were neutral.

What does this imply? First we may see in the coming sessions the revival of broadmarket activities rather than in the blue chips, meaning that the Phisix could still founder over the interim with corrections from the major protagonists (PLDT and GLO) or see them move sideways although the thrust of the activities will center on the second and third liners. Second, the other possible move will be a resumption of buying activities in both the blue chips and the second liners, although my inclination is for the former.

The buying window is starting to open so grab it while you can!

Reuters: Spreading slums may boost extremism-UN agency

Spreading slums may boost extremism-UN agency
13 Sep 2004

GMTSource: Reuters

By Emma Graham-Harrison

BARCELONA, Sept 13 (Reuters) - Extremism is likely to flourish in the world's rapidly spreading slums if governments do not tackle the poverty that fuels it, a senior United Nations official said at the start of a forum on urban life on Monday.

UN-Habitat Executive Director Anna Tibaijuka issued the warning before a report due to be launched by her agency on Tuesday, "The State of the World's Cities".

The number of slum dwellers will double to nearly two billion by 2030. Cities overall will grow at a similarly explosive rate, Tibaijuka said, reaching nearly five billion people by 2030 from 2.9 billion in 2001.

The growth of cities will be partly due to immigration, which could exacerbate urban tensions if no efforts were made to smooth integration, she said.

"The risks are that we see more (cultural) differences; we are bound to see more extremism because of desperation," she told Reuters at the start of the World Urban Forum.

"The poor are not terrorists, but the hopelessness in which people find themselves can create conducive conditions for criminals to manipulate the situation," she added.

Tibaijuka hopes the report will encourage governments to invest in slums and work on solutions to the simmering problems.

"These crises are processes, not events," she said.

Tibaijuka also said world trade rules needed to take more account of the needs of the poor, and called for tight regulation of privatised companies providing basic services like water or refuse collection.

ECONOMICS FOR THE WEAK

As well as highlighting a widening rich-poor gap, the "State of the World's Cities" report attacked the argument that unfettered trade is a sure route to wider developing-world prosperity and warned of a "race to the bottom" as companies seeking cheaper labour shift capital and jobs across borders.

Tibaijuka said economists needed to ensure they based their economic policy on basic moral values.

"You cannot develop peace and prosperity on the rules of the strong ... the weak are embroiled in surviving, there is no capacity for real, serious engagement," Tibaijuka said.

The report also warned that private companies providing basic services could be torn between shareholders' demands for profits and the needs of impoverished slum dwellers. Tibaijuka called for firm controls.

"We need the private sector ... (but) privatisation without regulatory capacity is corruption. If you privatise where there is no regulation, either you don't know what you are doing or there are ulterior motives," she said.

Praful Patel, head of the World Bank delegation to the World Urban Forum, defended the free trade policies that the global lender often advocates.

"Our studies indicate a different kind of finding. There are specific cases of trade liberalisation that hurt ... countries that did not follow through," he told Reuters.

"However where taken to the full length it always works."

Many of the world's least developed regions, where much of the urban growth will take place, focus more on boosting economies to help citizens climb out of poverty than halting pollution. Environmental concern is considered a luxury the poor cannot afford, Tibaijuka said.

"Poverty is the biggest polluter. If you go into slums these are places where solid waste, waste water, you name it, diseases running rampant. In pursuit of protecting the environment we must first protect the people," she said.

On a positive note, the World Urban Forum gave an award to Lebanese Prime Minister Rafik al-Hariri for rebuilding the ruins of Lebanon after a devastating civil war.

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.