Friday, September 24, 2004

EmergingPortfolio.com: Investors fuel up EM and developed market equity funds

Investors fuel up EM and developed market equity funds

Investors pumped a net $1.52 billion into developed and emerging markets equity funds tracked by EmergingPortfolio.com Fund Research (EPFR) in the week ending September 15. Rising share prices globally, lower oil prices and solid economic data that was not too strong as to spark worries of rapid monetary tightening helped to encourage investors back into equity funds after six straight weeks of outflows. And the continuing rally in emerging markets debt helped the Emerging Market Bond Funds to their sixth straight week of net inflows.

EPFR tracks equity funds with $1.06 trillion in assets on a weekly basis and fixed income funds with assets of $97 billion. The firm collects flows and allocations data directly from about 7,000 funds with $3 trillion in assets registered in the world’s major fund domiciles, including the US, Luxembourg, Ireland, UK, Caymans, Guernsey, etc. As a result, EPFR’s asset coverage of international developed and emerging market fund groups is the largest and most diverse among fund trackers and more accurately represents global institutional investor sentiment.
Equity Fund Flows*Cumulative 2004 net fund flows by fund category to Sept 15

The combined Emerging Market Equity Funds tracked by EPFR with $106.6 billion of total assets received $349.2 million of fresh money. And even the diversified Global Emerging Markets (GEM) Funds enjoyed inflows for the first time since the week ending July 7. These funds took in $109 million from investors, reducing their year to date outflows to $5.38 billion. Asia ex-Japan Equity Funds enjoyed their fourth straight solid week of interest from capital sources by taking in an additional $154.8 million. These funds have received $528.7 million in the last four weeks, increasing YTD total net inflows to $3.3 billion, or nearly 13% of their beginning of year total assets. Latin America Equity Funds have received net inflows for five straight weeks and the week’s $20.2 million of inflows gives the fund group net inflows of $5.6 million so far this year while EMEA Equity Funds have received inflows for seven weeks running and are the flows leader among EM equity funds in percentage terms: the $1.6 billion of YTD inflows amounts to 19.6% of their total assets.

The runaway fund group leader in terms of total value of inflows are the Global/International Equity Funds. The 1,150 funds tracked by EPFR with $246.7 billion of assets have absorbed $11.2 billion of new money so far this year, representing a little more than 5% of their total assets at the beginning of 2004.

The YTD leaders in percentage terms are the Japan Equity Funds, with net inflows of a whopping $8.87 billion, or 54.4% of their beginning of year total assets. These 205 funds with $27.8 billion in assets tracked weekly by EPFR saw outflows of $39 million in the latest week. It was a modest loss considering the previous week these funds took in $325 million of new money.

US Equity Funds received net inflows for the first time in seven weeks, taking in $847.3 million of net investor contributions during the week. EPFR tracks 2,150 US Equity Funds with $609 billion in assets on a weekly basis. YTD these funds have taken in only $902 million of net inflows.

As European share prices have hit 10-week highs and the euro has held its ground against the dollar, investors have seen fit to squirrel away some money into the Europe Equity Funds for two consecutive weeks. These funds took in $109.2 million in the latest week but have had outflows of $838.5 million year to date.

A surge in the supply of emerging markets debt during early September did nothing to depress the appetite of investors for this asset class. The 249 dedicated Emerging Markets Bond Funds tracked by EPFR posted net inflows for the sixth straight week as nearly $2.4 billion worth of new issues from Brazil, Turkey and the Philippines hit global markets.

For the week ending September 15 the EPFR-tracked EM bond funds - which currently have $17 billion worth of assets under management - took in $33 million. Since August 5 these funds have pulled in a net $322 million and inflows on a year to date basis stand at $516.9 million.

Furthermore, strong demand for the higher quality debt that these funds rotated into during April and May was reflected in their portfolios, which posted a collective gain for the seventh straight week. During that run the value of the fund’s collective portfolios has climbed by $690 million.

Emerging markets debt continues to benefit for the current perception that US interest rates, and hence the return on safer US debt instruments, will not rise rapidly in the foreseeable future. As a result, investors have shifted their attention back to the higher yields available in the emerging markets.

Improving fundamentals in key markets, confirmed by a slew of ratings upgrades, has made it easier for investors to swallow the risk that comes with this asset class. Venezuela and Brazil are the latest countries to have their credit ratings upgraded. Russia aside, the recent political, policy and macroeconomic news has been supportive. Brazil (strong GDP growth), Turkey (efforts to converge on EU membership), Venezuela (post-referendum stability) and India (better than expected 2004-05 budget) have all contributed to the generally positive sentiment.Finally, Global Bond Funds tracked by EPFR posted net inflows of $143.7 million, their seventh straight week of net investor contributions. These 252 funds with $81 billion in assets have enjoyed net inflows of $3.58 billion so far this year, amounting for 4.9% of their total assets.

Thursday, September 23, 2004

September 23 Philippine Stock Market Daily Review: Low Interest Landscape Fuels Foreign Buying

September 23 Philippine Stock Market Daily Review

Low Interest Landscape Fuels Foreign Buying

Oops, while yesterday’s chart formation and market internals emitted negative signals leading this analyst to forecast a possible retracement today, apparently foreign money anteed up on their holdings of local equity assets even as Wall Street succumbed to a sharp decline last night. This underscores the folly of short term forecasting.

In the past newsletters we have noted of two salient factors that may lead foreign money’s attraction to Philippine Equity assets; first the low interest rate environment. Yesterday marked another threshold low for US 10 year note, from Bloomberg “U.S. Treasuries rose, pushing the yield on the 10-year note below 4 percent for the first time since April”. Despite the US Fed’s reserve third rate hike this year, the rally in governments bond prices globally signal the imminent top of the rate increases. Hence the proclivity of international fund managers to eye on markets with high-risk high-yield potentials and with low correlation to the US markets. Second, the disconnect with the US financial markets, today’s fierce rally in spite of Wall’s Street’s morose outlook in its equity markets simply highlights the Philippine Market’s independence from the major global bourses. As of the moment, the Phisix is one of the minority gainers among the Asian bourses, including Pakistan and China’s Shanghai. While one day does not make a trend the recent gamut of divergences has slowly been molding.

Foreign money controlled trading activities that accounted for 56.79% of the today’s aggregate output and soaked up on the local equities assets to the tune of P 132.257 million. Naturally, the concentration of the sprightly accumulations were on the blue chips. Of the 8 major cap issues 6 posted capital fluxes from overseas investors with the meat going to the Property heavyweights, SM Primeholdings (+1.61%), and Ayala Land (+1.56%). PLDT (+3.0%), which had been sold down for the past three sessions by portfolio money, posted a reversal and is the third largest recipient from investors abroad. Only Globe Telecoms (-1.38%) and Ayala Corp (unchanged) registered negligible outflows. Obviously, the correction in Globe Telecoms was more than offset by the gains of PLDT. PLDT together with the key property heavyweights and San Miguel B (+1.43%) also on foreign buying buoyed the Phisix by 14.68 points or .85% for the fourth straight session. The rest of the field except for Globe Telecoms were neutral for the day.

Market breadth showed the bulls ahead of the bears by a slim margin 33 to 30. Moreover, industry indices were tilted towards the bears as declining indices (Banking and Finance, Mining and the ALL index) edged out advancing indices (Commercial Industrial and Property) by 3-2 with the Oil index unchanged. However, foreign money bought more issues than it sold in the broadmarket.

The figures above tells us that:

First foreign portfolio money are manifestly are becoming more bullish.

Second, the locals, whom have evidently slowed on their rotational buying binges in the general market, has limited their actions to a few issues and sold the broadermarket hence the tight advance decline differentials. Today’s darling is Gokongwei’s Digitel (+13.43%) the only major telco player whose share prices have lagged its contemporaries for over a year.

Lastly, in spite of all of the headline ‘fire and brimstone’ outlook on the local economy, the Phisix has managed to outperform major market as the US. Could this be a sign that investors have discounted the Philippine economic conundrum or does it show that the seemingly flagging US economy is in a more critical condition than ours, hence the aggressive inflow?

"Economic death" for the Philippines in two years without new taxes: Arroyo

"Economic death" for the Philippines in two years without new taxes: Arroyo

MANILA, (AFP) - President Gloria Arroyo warned that the Philippines risked a "painful economic death" within two years unless taxes are raised to avert a feared debt default.

In a statement printed in the Philippine Star newspaper, she urged the country to "suffer the pain now and experience the gains two years hence (rather) than postpone the pain and die a painful economic death two years from now."

Popular opposition is posing a key stumbling block to Arroyo's bid to balance the national budget through increased taxes.

The eight-month budget deficit rose to 111.1 billion pesos (1.98 billion dollars) in August, compared to the full-year ceiling of 198 billion pesos or 4.2 percent of the gross domestic product (GDP), the finance department said Tuesday.

On Monday Fitch Ratings warned Manila of a potential sovereign credit downgrade if no tax measures were passed by year's end. Manila's government securities are now two notches below investment grade.

"The government cannot subsist on borrowed funds all the time ... (because) the interest payments will catch up with us," Arroyo said.

"If we remain in denial and refuse to take our situation seriously, the world may just impose the truth upon us. When that time comes, the Philippines would be the financial pariah of the world."

A survey by Manila-based Pulse Asia polling organisation last week found that 78 percent of Filipinos "see no need to impose new taxes as long as the government strengthens its tax collection efforts."

Arroyo said the government needed 180 billion pesos more in annual revenues to ease the burden on government debt, which she said stood at 71 percent of GDP -- the third highest in Asia.

She has asked Congress to pass a series of tax laws that would raise at least 80 billion pesos a year.

House of Representatives Speaker Jose de Venecia warned last week, however, that his colleagues were likely to pass only four bills this year and that the extra income would be up to 60 billion pesos short of the target.

Bear, Stearns and Co. analyst John Stuermer said recent sovereign issues by the Philippines showed it "still has fluid access to the capital markets and that press comments comparing the Philippines with Argentina are grossly exaggerated."

However, "the persistence of a budget deficit in a range of 4.0-5.0 percent of GDP is steadily raising the overall public sector debt burden and will make public debt management an increasingly difficult task without more meaningful fiscal reform."

Stuermer predicted that Arroyo would have a hard time getting reform measures passed by Congress despite winning a fresh mandate in the May presidential elections.

He also criticized her government for its reluctance to discuss its borrowing requirements "on a total public-sector basis" instead of just the requirements of the national government budget.

He estimated Manila's financing requirements this year at 3.3 billion dollars, including bonds issued by the loss-making state utility National Power Corp.

Arroyo said that while the economy grew at a respectable 6.2 percent clip in the first half and the government has not defaulted on its obligations, the situation "can deteriorate as fast as we are building our precious and hard-earned gains."


Yahoo Asia: China overtakes United States as top destination for foreign investment

China overtakes United States as top destination for foreign investment

GENEVA (AFP) - China overtook the United States as a top global destination for foreign direct investment (FDI) in 2003 while the Asia-Pacific region attracted more investment than any other developing region, a UN report said.

China's strong manufacturing industry helped the country attract FDI last year worth 53.5 billion dollars, compared with 52.7 billion in 2002, the United Nations Conference on Trade and Development (UNCTAD) said in its annual report on investment flows.

Meanwhile, foreign investment in the United States, traditionally the largest recipient of such money, plunged by 53 percent last year to reach 30 billion dollars, the lowest level in 12 years, according to data from UNCTAD's World Investment Report 2004.

Flows to the Asia-Pacific region as a whole rebounded over the year to 107 billion dollars from 94 billion in 2002 driven by strong economic growth and a better investment environment, the agency said.

China was expected to continue to attract foreign companies, analysts said.

"According to our analysis, FDI in China has not peaked although their economic growth rates have fallen," UNCTAD economist James Zhan told journalists.

The outbreak of deadly Severe Acute Respiratory Disease (SARS) only had a marginal downward effect on investment activity as Asia emerged from the decline in foreign investment it had experienced since 2001, the report noted.

"Prospects for a further rise in foreign direct investment flows to Asia and the Pacific in 2004 are promising," UNCTAD's Deputy Secretary General, Carlos Fortin, said in a statement.

But the distribution of the new wealth was uneven across the region, with most of the money -- 72 billion dollars -- concentrated in north-east Asia.

Flows to south-east Asia rose 27 percent to 19 billion dollars, while the south merely received six billion dollars in FDI.

Resource-rich central Asia recorded 6.1 billion and 4.1 billion dollars flowed into the west.

The manufacturing sector remained the dominant factor that pulled investment into China, but a rise in investment in the services industry was noted elsewhere in line with the global trend, UNCTAD said.

Services, including finance, tourism, telecommunications and information technology, formed a growing proportion of foreign direct investment stock in the region -- up to 50 percent in 2002, the most recent figure available, from 43 percent in 1995, UNCTAD said.

UNCTAD said the growing tendency to shift some business activities overseas to places where labour costs are low but the workforce is skilled helped to raise the region's profile.

Asian companies were also growing in power and reach as investors in other regions, according to the Geneva-based agency.

China and India were joining Malaysia, South Korea, Singapore and Taiwan as sources of foreign direct investment, it said.

Asian firms, such as Hutchinson Whampoa of Hong Kong, Singapore's Singtel and Samsung of South Korea, again dominate the UNCTAD list of the top companies from the developing world.

Buttonwood of the Economist:The bond markets speak

The bond markets speak
Sep 21st 2004 From The Economist Global Agenda

Growth is slowing, inflationary dangers are subsiding and interest rates are near their peak. That, at least, is the message from bond markets around the world

IN TRUTH, there should be few duller things in life than investing in government bonds, a matter of clipping the coupons and getting the principal back upon maturity. Only marginally more exciting, in other words, than the M25 on a Friday afternoon or Haydn’s early string quartets. Yet government-bond markets the world over have been strangely fascinating in recent weeks because they have been rising sharply when in times past they would have fallen with a thud. After all, the price of oil is again barrelling upwards and the Federal Reserve—setter, for better or worse, of the world’s risk-free rate of interest—is raising that rate. The benchmark federal funds rate went up again on Tuesday September 21st, to 1.75%, the third increase this year. But the yield on ten-year Treasuries has dropped to a whisker over 4%; on Bunds, their German counterparts, to roughly the same level; and on Japanese Government Bonds to under 1.5%.

To be sure, there are some distorting factors driving Treasury bond prices higher and yields lower. Buying by Asian central banks, and the Bank of Japan (BOJ) in particular, is one of them. In a spree that lasted until March this year, the BOJ comfortably bought more dollars (on behalf of the finance ministry) than anyone else in history, and plonked the proceeds in Treasuries. Though it has now stopped these dollar purchases, it still has plenty of cash in the bank ($122 billion at the end of August) that it wants to invest in higher-yielding Treasuries. In both July and August, it bought $15 billion of Treasuries. Still, given the huge size of the Treasury market, such purchases probably only account for a small fraction of the fall in yields. Whether you agree with it or not, the message from the bond markets is clear: global growth is slowing, inflationary risks are transient and falling, and interest rates are nearing their peak.

The fall in Treasury yields has been as dramatic as it has been unexpected, to most investors at least. Ten-year yields peaked in the middle of June at 4.9%, and have ratcheted down ever since. Indeed, the bear market in bonds for the past year or so has really only consisted of two sharp sell-offs: from the middle of June until early September last year, and from the middle of March this year until the middle of June. Both sell-offs were caused largely by better-than-expected jobs numbers, and if anything look to be as much of an aberration as the employment reports that caused them. Despite the inflationary scare earlier this year, bond prices have actually risen in more weeks over the past year and a half than they have fallen.

That is decidedly odd. For short-term interest rates in America are still strikingly low. Real rates—that is, adjusted for inflation—are, in consequence, still negative. Very negative, in fact. Consumer-price inflation in America is currently about 3%, which makes real interest rates around -1.25%. The number-crunchers at Goldman Sachs have found that since the early 1960s, the real Fed funds rate tended to fall to just below zero at the trough of interest-rate cycles, and then rose to a couple of percentage points above it within a year. This time round, the real Fed funds rate only fell to nothing a year after the trough of the cycle at the end of 2001, and has averaged about -1.5% ever since. Monetary policy, in other words, is still very loose. If the past is a guide, and assuming that inflation remains where it is, the Fed funds rate would need to rise to 3.5-4% to bring real rates back in line.

Yet the futures market thinks that the Fed will put up rates by only another half a percentage point or so, to about 2.25%, and then stop. The reason lies in growth and inflation expectations, both of which have been falling. America’s giddy growth rate certainly seems to be slowing. The economy grew by an annualised 2.8% in the second quarter, having grown by 4.5% in the first. It is unlikely to grow much more in the third quarter.

Alan Greenspan, the Fed’s chairman, thinks this only a temporary lull; and the strong performance of equities and corporate bonds recently suggests that investors are giving him the benefit of the doubt. The key therefore seems to be inflation, which is low and getting lower. In August, core inflation—ie, stripping out energy and food—rose by only 0.1% for the third month in a row. And overall inflation will continue to fall too, or so investors think: the inflation expected in ten-year inflation-indexed Treasuries (so-called TIPs) has fallen by six-tenths of a percentage point since June.

To anyone raised in the 1970s, such expectations are astonishing. Oil is now over $46 a barrel, the real Fed funds rate is still negative, the dollar is weak and looks set to get weaker, the budget deficit is climbing to the stars, yet still markets expect inflation to fall. It seems to defy logic.

Yet logic there is. The high oil price is a tax on America, or indeed on any other country that doesn’t pump more of the stuff than it consumes. But it can be passed on to consumers in higher prices, or lower growth, or both. The market seems to have decided that it is being passed on only in the form of lower growth. It is not the only tax that is coming due: by the end of this year, consumers are to be hit by the withdrawal of tax rebates of a more traditional sort. And if growth and demand are slow enough, and competition from manufacturers elsewhere (particularly in Asia) stiff enough, consumer inflation will fall.

That, it seems, is the big change from the 1970s. And given the level of bond yields the world over, it seems to be a global phenomenon. If this is indeed the case, the more surprising thing to Buttonwood’s eye is not the level of government-bond yields, even though much disinflation is taken on trust, but the level of the stockmarket, which seems to ignore it entirely.

Islamic Terrorism: Facing the Realities lifted from Martin Spring's On Target

Islamic Terrorism: Facing the Realities
Martin Spring's On Target Private Newsletter
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A friend has forwarded me this analysis from an anonymous source, whose family “has lived in this region for almost 200 years.” I consider it important enough to report almost in its entirety.
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My remarks refer to the region stretching from Pakistan to Morocco, and its place in world events. It predominantly Arab, predominantly Moslem, but includes many non-Arab and also significant non-Moslem minorities.

I put aside Israel and its own immediate neighborhood because Israel and any problems related to it, in spite of what you might read or hear in the world media, is not the central issue, and has never been the central issue in the upheaval in the region.

The millions who died in the Iran-Iraq war had nothing to do with Israel. The mass murder happening right now in Sudan, where the Arab Moslem regime is massacring its black Christian citizens, has nothing to do with Israel. The frequent reports from Algeria about the murders of hundreds of civilian in one village or another by other Algerians have nothing to do with Israel.

Saddam Hussein did not invade Kuwait, endanger Saudi Arabia and butcher his own people because of Israel. Egypt did not use poison gas against Yemen in the 60s because of Israel. Assad the Father did not kill tens of thousands of his own citizens in one week in El Hamma in Syria because of Israel.

The Taliban control of Afghanistan and the civil war there had nothing to do with Israel. The Libyan blowing up of the Pan-Am flight had nothing to do with Israel. I could go on and on and on.

The root of the trouble is that this entire region is totally dysfunctional, by any standard, and would have be even if Israel had joined the Arab league and an independent Palestine existed for 100 years.

The 22 member countries of the Arab league, from Mauritania to the Gulf States, have a total population of 300 million -- larger than the US and almost as large as the European Union before its recent expansion. They have a land area larger than either the US or all of Europe.

These 22 countries, with all their oil and other natural resources, have a combined GDP smaller than that of Netherlands and Belgium together, and only equal to half of the GDP of California alone. Within this meagre GDP, the gaps between rich and poor are beyond belief, and too many of the rich made their money not by succeeding in business, but by being corrupt rulers.

The social status of women is far below what it was in the Western world 150 years ago. Human rights are below any reasonable standard, in spite of the grotesque fact that Libya was elected to chair the UN Human Rights commission.

According to a report prepared by a committee of Arab intellectuals and published under the auspices of the UN, the number of books translated by the entire Arab world is much smaller than what little Greece alone translates. The total number of scientific publications of 300 million Arabs is less than that of 6 million Israelis.

Birth rates in the region are very high, increasing the poverty, the social gaps and the cultural decline.

And all of this is happening in a region which only 30 years ago was believed to be the next wealthy part of the world. And in a Moslem area which developed, at one point in history, one of the most advanced cultures in the world.

This creates an unprecedented breeding-ground for cruel dictators, terror networks, fanaticism, incitement, suicide murders and general decline.

Almost everybody in the region blames this situation on the United States, Israel, Western civilization, Judaism, Christianity -- on anyone and anything except themselves.

A Totally Disfunctional Environment

There are millions of decent, honest, good people who are either devout Moslems, or not very religious but grew up in Moslem families. They are double victims of an outside world which now develops Islamophobia, and of their own environment, which is totally dysfunctional.

The problem is that the vast silent majority of these Moslems who are not part of the terror and of the incitement, do not stand up against it.

They become accomplices, by omission, and this applies to political leaders, intellectuals, business people and many others. Many of them can certainly tell right from wrong, but are afraid to express their views.

The events of the last few years have amplified four issues, which have always existed, but have never been as rampant as in the present upheaval in the region. These are the four main pillars of the current world conflict, or perhaps we should already refer to it as "the undeclared World War Three.”

► The first element is the suicide murder.

Suicide murders are not a new invention, but they have been made “popular”, if I may use this expression, only lately.

Even after September 11, it seems that most of the Western World does not yet understand this weapon.

It is a very potent psychological weapon. Its real direct impact is relatively minor. The total number of casualties from hundreds of suicide murders within Israel in the last three years is much smaller than those due to car accidents.

September 11 was quantitatively much less lethal than many earthquakes. More people die from AIDS in one day in Africa than all the Russians who died in the hands of Chechnya-based Moslem suicide murderers since that conflict started. Saddam killed every month more people than all those who have died from suicide murders since the Coalition occupation of Iraq.

So what is all the fuss about suicide killings?

It creates headlines. It is spectacular. It is frightening.

It is a very cruel death with bodies dismembered and horrible severe lifelong injuries to many of the wounded. It is always shown on television in great detail. One such murder, with the help of hysterical media coverage, can destroy the tourism industry of a country for quite a while, as it did in Bali and in Turkey.

But the real fear comes from the undisputed fact that no defence and no preventive measures can succeed against a determined suicide murderer.

This has not yet penetrated the thinking of the Western World. The US and Europe are constantly improving their defences against the last murder, not the next one.

We may arrange for the best airport security in the world. But if you want to murder by suicide, you do not have to board a plane in order to explode yourself and kill many people. Who could stop a suicide murder in the midst of the crowded line waiting to be checked by the airport metal detector? How about the lines to the check-in counters in a busy travel period?

Put a metal detector in front of every train station in Spain and the terrorists will get the buses. Protect the buses and they will explode in movie theatres, concert halls, supermarkets, shopping malls, schools and hospitals. Put guards in front of every concert hall and there will always be a line of people to be checked by the guards and this line will be the target, not to speak of killing the guards themselves.

You can somewhat reduce your vulnerability by preventive and defensive measures and by strict border controls, but not eliminate it, and definitely not win the war in a defensive way.

What is behind the suicide murders? Money, power and cold-blooded murderous incitement, nothing else.

It has nothing to do with true fanatic religious beliefs. No Moslem preacher has ever blown himself up. No son of an Arab politician or religious leader has ever blown himself up. No relative of anyone influential has done it.

Wouldn't you expect some of the religious leaders to do it themselves, or to talk their sons into doing it, if this is truly a supreme act of religious fervour? Aren't they interested in the benefits of going to heaven?

Instead, they send outcast women, naive children, retarded people and young incited hotheads. They promise them the delights, mostly sexual, of the next world -- and pay their families handsomely after the supreme act is performed and enough innocent people are dead.

Suicide murders also have nothing to do with poverty and despair. The poorest region in the world, by far, is Africa. It never happens there.

There are numerous desperate people in the world, in different cultures, countries and continents. Desperation does not provide anyone with explosives, reconnaissance and transportation. There was certainly more despair in Saddam's Iraq than in today’s Iraq, and no one exploded himself.

A suicide murder is simply a horrible, vicious weapon of cruel, inhuman, cynical, well-funded terrorists, with no regard to human life, including the life of their fellow countrymen, but with very high regard to their own affluent wellbeing and their hunger for power.

The only way to fight this new popular weapon is identical to the only way in which you fight organized crime or pirates on the high seas: the offensive way.

Like in the case of organized crime, it is crucial that the forces on the offensive be united and it is crucial to reach the top of the crime pyramid. You cannot eliminate organized crime by arresting the little drug dealer in the street corner. You must go after the head of the "family".

If part of the public supports it, others tolerate it, many are afraid of it and some try to explain it away by poverty or by a miserable childhood, organized crime will thrive and so will terrorism.

The United States understands this now, after September 11. Russia is beginning to understand it. Turkey understands it well. I am very much afraid that most of Europe still does not understand it.

Unfortunately, it seems that Europe will understand it only after suicide murders will arrive in Europe in a big way. It will definitely happen. The Spanish trains and the Istanbul bombings are only the beginning.

The unity of the civilized world in fighting this horror is absolutely indispensable. Until Europe wakes up, this unity will not be achieved.

► The second ingredient is words. Or more precisely, lies. Words can be lethal. They kill people.

It is often said that politicians, diplomats ,and perhaps also lawyers and business people, must sometimes lie, as part of their professional life. But the norms of politics and diplomacy are childish in comparison with the level of incitement and total absolute deliberate fabrications, which have reached new heights in the region.

An incredible number of people in the Arab world believe that September 11 never happened, or was an American provocation or, even better, a Jewish plot.

You all remember the Iraqi Minister of Information, Mouhamad Said al-Sahaf, and his press conferences when the US forces were already inside Baghdad. Disinformation at time of war is an accepted tactic. But to stand, day after day, and to make such preposterous statements, known to everybody to be lies, without even being ridiculed in your own milieu, can only happen in this region.

Sahaf eventually became a popular icon in the rest of the world as a court jester, but this did not stop some allegedly respectable newspapers from giving him equal time. It also does not prevent the Western press from giving credence, every day, even now, to similar liars.

If you want to be an anti-Semite, there are subtle ways of doing it. You do not have to claim that the Holocaust never happened and that the Jewish temple in Jerusalem never existed. But millions of Moslems are told by their leaders that this is the case.

When these same leaders make other statements, the Western media report them as if they could be true.

It is a daily occurrence that the same people who finance, arm and dispatch suicide murderers, condemn the act in English in front of western TV cameras, talking to a world audience, which even partly believes them.

It is a daily routine to hear the same leader making opposite statements in Arabic to his people and in English to the rest of the world.

Incitement by Arab TV, accompanied by horror pictures of mutilated bodies, has become a powerful weapon of those who lie, distort and want to destroy everything.

Little children are raised on deep hatred and on admiration of so-called martyrs, and the Western world does not notice it because its own TV sets are mostly tuned to soap operas and game shows.

I recommend to you, even though most of you do not understand Arabic, to watch Al Jazeera, from time to time. You will not believe your own eyes.

But words also work in other ways, more subtle.

A demonstration in Berlin, carrying banners supporting Saddam's regime and featuring three-year old babies dressed as suicide murderers, is defined by the press and by political leaders as a “peace” demonstration. You may support or oppose the Iraq war, but to refer to fans of Saddam, Arafat or Bin Laden as peace activists is a bit too much.

A woman walks into an Israeli restaurant in midday, eats, observes families with old people and children eating their lunch in the adjacent tables and pays the bill. She then blows herself up, killing 20 people, including many children, with heads and arms rolling around in the restaurant.

She is called martyr by several Arab leaders and an “activist” by the European press. Dignitaries condemn the act but visit her bereaved family… and the money flows.

There is a new game in town: The actual murderer is called the military wing, the one who pays him, equips him and sends him is now called the political wing, and the head of the operation is called the spiritual leader.

There are numerous other examples of such Orwellian nomenclature, used every day not only by terror chiefs but also by Western media.

These words are much more dangerous than many people realize. They provide an emotional infrastructure for atrocities. It was Joseph Goebels who said that if you repeat a lie often enough, people will believe it. He is now being outperformed by his successors.

► The third aspect is money.

Huge amounts of money, which could have solved many social problems in this dysfunctional part of the world, are channelled into three concentric spheres supporting death and murder.

In the inner circle are the terrorists themselves. The money funds their travel, explosives, hideouts and a permanent search for soft vulnerable targets.

They are surrounded by a second wider circle of direct supporters, planners, commanders, preachers, all of whom make a living, usually a very comfortable living, by serving as terror infrastructure.

Finally, we find the third circle of so-called religious, educational and welfare organizations, which actually do some good, feed the hungry and provide some schooling -- but brainwash a new generation with hatred, lies and ignorance.

This circle operates mostly through mosques, madrasas and other religious establishments, but also through electronic and printed media that incite. It is this circle that makes sure that women remain inferior, that democracy is unthinkable, and that exposure to the outside world is minimal.

It is also a circle that leads the way in blaming everybody outside the Moslem world for the miseries of the region.

Figuratively speaking, this outer circle is the guardian, which makes sure that the people look and listen inwards to the inner circle of terror and incitement, rather than to the world outside.

Some parts of this same outer circle actually operate as a result of fear from, or blackmail by, the inner circles.

The horrifying added factor is the high birth rate. Half of the population of the Arab world is under the age of 20, the most receptive age to incitement, guaranteeing two more generations of blind hatred.

States Finance Terror

Of the three circles described above, the inner circles are primarily financed by terrorist states like Iran and Syria, until recently also by Iraq and Libya, and earlier also by some of the Communist regimes. These states, as well as the Palestinian Authority, are the safe havens of the wholesale murder vendors.

The outer circle is largely financed by Saudi Arabia, but also by donations from certain Moslem communities in the United States and Europe. And, to a smaller extent, by donations of European Governments to various non-governmental organizations and by certain United Nations organizations, whose goals may be noble, but they are infested and exploited by agents of the outer circle.

The Saudi regime, of course, will be the next victim of major terror, when the inner circle will explode into the outer circle. The Saudis are beginning to understand it, but they fight the inner circles, while still financing the infrastructure at the outer circle.

Some of the leaders of these various circles live very comfortably on their loot. You meet their children in the best private schools in Europe, not in the training camps of suicide murderers.

The Jihad "soldiers" join packaged death tours to Iraq and other hotspots, while some of their leaders ski in Switzerland.

Mrs Arafat, the wife of the Palestinian leader, lives in Paris with her daughter and receives tens of thousands of dollars per month from the allegedly bankrupt Palestinian Authority, while a typical local ringleader of the Al-Aksa brigade, reporting to Arafat, receives only a cash payment of a couple of hundred dollars for performing murders at the retail level.

► The fourth element of the current world conflict is breakdown of respect for civilized values.

The civilized world believes in democracy, the rule of law including international law, human rights, free speech and free press, among other liberties. There are naïve, old-fashioned habits such as respecting religious sites and symbols, not using ambulances and hospitals for acts of war, avoiding the mutilation of dead bodies, and not using children as human shields or human bombs.

Never in history, not even in the Nazi period, was there such total disregard of all of the above as we observe now. Every student of political science debates how you prevent an antidemocratic force from winning a democratic election and abolishing democracy.

Other aspects of a civilized society must also have limitations. Can a policeman open fire on someone trying to kill him? Can a government listen to phone conversations of terrorists and drug dealers? Does free speech protect you when you shout fire in a crowded theatre? Should there be death penalty for deliberate multiple murders?

These are the old-fashioned dilemmas. But now we have an entire new set.

Do you raid a mosque, which serves as a terrorist ammunition storage? Do you return fire, if you are attacked from a hospital? Do you storm a church taken over by terrorists who took the priests hostages? Do you search every ambulance after a few suicide murderers use ambulances to reach their targets? Do you strip every woman because one pretended to be pregnant and carried a suicide bomb on her belly? Do you shoot back at someone trying to kill you, standing deliberately behind a group of children?

Do you raid terrorist headquarters, hidden in a mental hospital? Do you shoot an arch-murderer who deliberately moves from one location to another, always surrounded by children?

All of these happen daily in Iraq and in the Palestinian areas. What do you do? You do not want to face the dilemma. But it cannot be avoided.

Suppose, for the sake of discussion, that someone would openly stay in a well-known address in Teheran, hosted by the Iranian Government and financed by it, executing one atrocity after another in Spain or in France, killing hundreds of innocent people, accepting responsibility for the crimes, promising in public TV interviews to do more of the same, while the Government of Iran issues public condemnations of his acts, but continues to host him, invite him to official functions and treat him as a great dignitary.

Figure out what Spain or France would have done, in such a situation.

The problem is that the civilized world is still having illusions about the rule of law in a totally lawless environment. It is trying to play ice hockey by sending a ballerina ice-skater into the rink or to knock out a heavyweight boxer by using a chess player.

In the same way that no country has a law against cannibals eating its prime minister, because such an act is unthinkable, international law does not address killers shooting from hospitals, mosques and ambulances, while being protected by their government or society.

International law does not know how to handle someone who sends children to throw stones, stands behind them and shoots with immunity, yet cannot be arrested because he is sheltered by a government. Nor how to deal with a leader of murderers who is royally and comfortably hosted by a country which pretends to condemn his acts or just claims to be too weak to arrest him.

The amazing thing is that all of these crooks demand protection under international law and define all those who attack them as war criminals -- with some Western media repeating the allegations.

The good news is that all of this is temporary, because the evolution of international law has always adapted itself to reality. The punishment for suicide murder should be death or arrest before the murder, not during and not after.

After every world war the rules of international law have changed and the same will happen after the present one. But during the twilight period, a lot of harm can be done.

► What can be done about it?

The picture I described here is not pretty. What can we do about it? In the short run, only fight and win. In the long run only educate the next generation and open it to the world.

The inner circles can and must be destroyed by force. The outer circle cannot be eliminated by force. Here we need financial starvation of the organizing elite, more power to women, more education, counter propaganda, boycott whenever feasible, and provide access to Western media, the Internet and the international scene.

Above all, we need a total absolute unity and determination of the civilized world against all three circles of evil.

When you have a malignant tumour, you may remove the tumour itself surgically. You may also starve it by preventing new blood from reaching it from other parts of the body, thereby preventing new "supplies" from expanding the tumour. If you want to be sure, it is best to do both.

But before you fight and win, by force or otherwise, you have to realize that you are in a war, and this may take Europe a few more years. In order to win, it is necessary to first eliminate the terrorist regimes, so that no government in the world will serve as a safe haven for these people.

Iran and Other Remaining Terrorist States

I do not want to comment here on whether the American-led attack on Iraq was justified from the point of view of weapons of mass destruction or any other pre-war argument, but take a look at the post-war map of Western Asia.

Now that Afghanistan, Iraq and Libya are out, two-and-a-half terrorist states remain: Iran, Syria and Lebanon, the latter being a Syrian colony. Perhaps Sudan should be added to the list.

As a result of the conquest of Afghanistan and Iraq, both Iran and Syria are now totally surrounded by territories unfriendly to them. Iran is encircled by Afghanistan, by the Gulf states, Iraq and the Moslem republics of the former Soviet Union. Syria is surrounded by Turkey, Iraq, Jordan and Israel.

This is a significant strategic change and it applies strong pressure on the terrorist countries.

It is not surprising that Iran is so active in trying to incite a Shiite uprising in Iraq. I do not know if the American plan was actually to encircle both Iran and Syria, but that is the resulting situation.

The number one danger to the world today is Iran and its regime.

It definitely has ambitions to rule vast areas and to expand in all directions. It has an ideology, which claims supremacy over Western culture. It is ruthless.

It has proven that it can execute elaborate terrorist acts without leaving too many traces, using Iranian embassies. It is clearly trying to develop nuclear weapons. Its so-called moderates and conservatives play their own virtuoso version of the good-cop versus bad-cop game.

Iran sponsors Syrian terrorism. It is certainly behind much of the action in Iraq. It is fully funding the Hizbulla and, through it, the Palestinian Hamas and Islamic Jihad. It performed acts of terror at least in Europe and in South America and probably also in Uzbekhistan and Saudi Arabia. And it leads a multinational terror consortium which includes, as minor players, Syria, Lebanon, and certain Shiite elements in Iraq.

Nevertheless, most European countries still trade with Iran, try to appease it, and refuse to read the clear signals.

Money: the Life-Blood of Terrorism

To win the war it is also necessary to dry up the financial resources of the terror conglomerate.

It is pointless to try to understand the subtle differences between the Sunni terror of Al Qa’ida and Hamas and the Shiite terror of Hizbulla, Sadr and other Iranian inspired enterprises. When it serves their business needs, all of them collaborate.

It is crucial to stop Saudi and other financial support of the outer circle, which is the fertile breeding-ground of terror.

It is important to monitor all donations from the Western world to Islamic organizations, to monitor the finances of international relief organizations, and to react with forceful economic measures to any small sign of financial aid to any of the three circles of terrorism.

It is also important to act decisively against the campaign of lies and fabrications and to monitor those Western media who collaborate with it out of naivety, financial interests or ignorance.

Above all, we must never surrender to terror. No one will ever know whether the recent elections in Spain would have yielded a different result, if it were not for the train bombings a few days earlier. But it really does not matter. What matters is that the terrorists believe that they caused the result and that they won by driving Spain out of Iraq.

The Spanish story will surely end up being extremely costly to other European countries, including France. In the long run, Spain itself, too, will pay even more.

Is the solution a democratic Arab world? If by democracy we mean free elections but also free press, free speech, a functioning judicial system, civil liberties, equality to women, free international travel, exposure to international media and ideas, laws against racial incitement and against defamation, and avoidance of lawless behaviour regarding hospitals, places of worship and children, then yes, democracy is the solution.

If democracy is just free elections, it is likely that the most fanatic regime will be elected-- the one whose incitement and fabrications are the most inflammatory.

We have seen it already in Algeria and, to a certain extent, in Turkey. It will happen again, if the ground is not prepared very carefully.

On the other hand, a transitional democracy, as in Jordan, may be a better temporary solution, paving the way for the real thing, perhaps in the same way that an immediate sudden democracy did not work in Russia and would not have worked in China.

I have no doubt that the civilized world will prevail. But the longer it takes us to understand the new landscape of this war, the more costly and painful the victory will be.

Europe, more than any other region, is the key. Its understandable recoil from wars, following the horrors of two world wars, may cost thousands of additional innocent lives, before the tide will turn.

Wednesday, September 22, 2004

September 22 Philippine Stock Market Daily Review Correction Looms

September 22 Philippine Stock Market Daily Review

Correction Looms

After a blazing start which saw the Phisix gain by about 1%, profit taking dominated the late day leading the Phisix to close slightly higher by 7.02 points or .42%.

The market was essentially mixed, the gains of the Phisix was underpinned by the marked advances of Globe Telecoms (+3.33%) and property heavyweights Ayala Land (+1.58%) and SM Primeholdings (+1.63%). All three issues posted the largest capital flows from overseas investors. On the other hand, three blue chip issues weighed on the market, namely Ayala Corp (-1.53%), Metrobank (-1.75%) and San Miguel B (-1.42%). The former two were hobbled by foreign selling.

Foreign money once again dictated on the activities of the market accounting for 61.07% of the day’s output. Aside, foreign money posted a net inflow of P 39.260 million (US$ 698,576) even as they sold more issues among the blue chips (4 outflows-3 inflows-1 no transaction) and in the broader market. Since foreign money commanded the pace of the market, 7 of the 9 heavy cap issues (except Metrobank and San Miguel B down 1.42%) made the top ten most active lists with a combined share of 75.5% of today’s output.

Sentiment was generally mixed as declining issues led advancing issues 43 to 37. Meanwhile industry indices were also evenly distributed among gainers and losers. Among the gainers are the Property, Commercial Industrial and the ALL index. The losers list included the Financials, Mining, and Oil. It’s such an irony considering that crude oil prices are now headed for the $47 per barrel level while Petroenergy the only company actively generating oil revenues (among the oil exploration companies) from its African Well was sold down today. Speaks highly of the nature of our investor’s mindset.

Obviously the market was driven no less than the intense foreign interest in Globe and the main property heavyweights even as they sold heavily in PLDT (unchanged) and Bank of the Philippine Islands (unchanged). Globe Telecom appears to have ensnared the leadership mantle from its main rival to assume the market’s frontrunner. Meanwhile foreign interest with property issues continue to provide the supporting to role to the Phisix as local investors seemed to have paused from their recent aggressive buying stance.

The slowdown or the profit taking activities envisaged during the close of the trading session could presage for further declines tomorrow, any dips could be seen as a buying window. Aside, if one would consider the technical picture of the Phisix in Japanese Candlesticks today’s activities appears to limn a ‘shooting star’ pattern which connotes of an interim bearishness in the offing.

Tuesday, September 21, 2004

September 21 Philippine Stock Market Daily Review: A Reprise of Yesterday

September 21 Philippine Stock Market Daily Review

A Reprise of Yesterday

It was much of a reprise of yesterday’s activities characterized by foreign money shoring up the index heavyweights, ergo lifting the index, while the locals were still on a profit taking mood resulting to a mixed broad market.

The Phisix closed higher for the second consecutive session by 18.47 points or 1.09% on moderate volume of P 880.007 million (US $15.658 million) and was the second best performer among the broadly buoyant Asian Bourses next to Taiwan, as of this writing. While the Peso volume turnover on the surface looked impressively sturdy, dissecting the figures show that special block sales and cross trades accounted for 54.61% of today’s output. This means that board transactions, net of the special block sales of Ginebra San Miguel and the cumulative cross transactions, amounted to only P 399.399 million (US $ 7.107 million).

Capital fluxes from foreign money registered a positive P 97.496 million representing about 11.08% of today’s output. Similar to yesterday, ALL index heavyweights accounted for inflows EXCEPT for PLDT (-1.1%). However, the issue that tallied the most influxes was Aboitiz Equity Ventures (+3.03%). Aside, foreign money bought more issues on the broadmarket than it sold and these buying support practically lifted all the INDEX issues again except PLDT, namely Globe Telecoms (+2.94%), Ayala Corp (+4.83%), Metrobank (+3.63%), Ayala Land (+1.61%), Bank of the Philippine Islands (+1.12%) and SM Primeholdings (unchanged). Of course, as your prudent investor-analyst forecasted in his latest newsletter, this we believe, is largely due to refreshed expectations of continued accommodative global monetary policies which provides foreign money institutions opportunity to lever on their investment funds.

On the broadmarket, internals exhibited a mixed sentiment despite the rise of the key benchmark. Declining issues edged advancing issues by 32 to 29, while number of trades for the day continued its fall to 107. On the other hand, industry sub-indices were mostly up led by the Financials (+1.46%), Commercial and Industrial (+1.033%) and the Property index (+.48%), while the Mining (-1.24%) and the ALL (-.12%) index posted declines. The Oil index remained neutral in spite of the fact that crude oil price trades at the $46 per barrel levels.

While we have rightly seen the foreign money plays into the index in the past two sessions what puzzles your analyst is the continued easing of local participation in the market. One enlightening event is that where previously the bulk of foreign money went almost singlehandedly into PLDT, in the past two sessions it has spread among the blue chips giving PLDT the market leader since 2003’s run-up a much deserving rest.

And another observation, the rise in Aboitiz Equity Ventures as noted above has been primarily due to cross transactions (the largest share for today) by a single broker. In other words, about 96.94% or 45.498 million shares (data from citiseconline.com) of the traded shares of AEV were executed by a single broker distributed into four fluctuations which obviously resulted to the 3.03% rise. Any abnormalities, go figure.

Monday, September 20, 2004

September 20 Philippine Stock Market Daily Review Overseas Money Drive Phisix higher

September 20 Philippine Stock Market Daily Review

Overseas Money Drive Phisix higher

Yes the Phisix was up by a nifty 20.86 points or 1.24% alongside our sanguine neighbors, but was least impressive as Peso volume turnover amounted to only P 657.833 million (US$ 11.705 million) with a considerable portion credited to cross trades which accounted for 48% of the today’s output.

Local investors apparently sat on the sidelines as foreign money took up a hefty 61.15% of today’s output. While foreign money accumulated on the broader market as well as in most blue chip issues (6 of 8 issues), the liquidations in PLDT (+1.5%) and First Philippine Holdings (-1.88%) were large enough to register a net outflow of P 57.890 million (US$ 1.030 million) for the day.

Most of the action was seen in the blue chips. Six of the 8 issues, namely PLDT, SM Primeholdings (+1.66%), Ayala Corp (+3.33%), Ayala Land (+3.33%), Globe Telecoms (+1.49%) and Bank of the Philippine Islands (unchanged) where in the top ten most actives and contributed 68.99% of the day’s activities while number of traded issues traded fell to 109 issues quite some distance from last week’s average of 116. This shows that investors abroad took the initiative to drive up the blue chips ergo the index while the locals were dithering.

For the first time in seven sessions we saw the market breadth turn positive. Looks likely that local investors would have the gumption to hit the road in the coming sessions. Watch for it!!!

Saturday, September 18, 2004

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

Thursday, September 16, 2004

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.

Wednesday, September 15, 2004

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.