Forbes.com's Joshua Levine: "If It Works, You Can Break It"

Prudent Investor Says: Instead of continuously yammering and yacking all day long, why don't we consider the Estonian solution...an E-Republic!!!

"If It Works, You Can Break It"
Joshua Levine, 12.20.04
Forbes.com

Since independence in 1991 little Estonia has used a knack for technology and a ravenous appetite for change to make itself a largely wired e-republic.

It proved to be a lucky break for Estonia that the Soviet Union took such pains to dampen any yearnings for freedom in the Baltic States. It meant that Estonian universities were not allowed to offer too many courses in philosophy and the social sciences. Philosophy is a dangerous thing among a patriotic people longing for the brief independence they lost.

What did the Soviets want Estonians to study instead? Computer science, cybernetics, artificial intelligence and information technology. Estonians did much of the software programming and development for the Soviet space program, not to mention the KGB. The Soviets placed one of their most important centers of AI research near the capital city of Tallinn.

Independence came anyway in 1991, of course, but by squelching any budding Tom Paines the Soviets unwittingly helped foster one of the more remarkable post-Soviet success stories. There are only 1.4 million Estonians in a country a little bigger than Holland. Half of it is covered in forest. But beneath the trees Estonia hums. With virtually no outmoded infrastructure to weigh them down, the resourceful Estonians have constructed a kind of e-republic that has already outpaced many of its new, much richer European neighbors.

Internet and mobile phone usage per capita, for instance, is higher in Estonia than it is in France. Over half of all Estonians now pay for their street parking spaces automatically, using their mobile phones. The same system flopped when Estonian Mobile Telephone's technology was marketed in Oslo, which is not exactly backward technologically. And Swedish companies often test ideas first in Estonia, since Estonians are known to have a heartier appetite for change than even the forward-thinking Swedes.

"People like to say, don't touch things that work," says Linnar Viik, who lectures at Tallinn Technical University. "But Estonians like to look behind the thing and wonder whether there's anything we can change about it. In Estonia you might say, if it works, you can break it."

Viik is considered one of the founding fathers of this little e-republic on the Baltic. In the mid-1990s, when Estonia was still determining what it wanted to be when it grew up, Viik figured in Estonia's Tiger Leap program. Tiger Leap was designed to weave computer literacy and IT into the fabric of the new nation, rather than just promoting them as specialized skills for a technological elite. "It was a lucky coincidence for us that we got our independence at a time when the Net was the cheapest, easiest-to-learn data transfer protocol," says Viik. "Developed countries were still depreciating their huge investments in mainframes and couldn't adopt the new technologies as easily as we could."

You can feel Tiger Leap's broad reach as you connect to the Net while filling up at one of Statoil's Wi-Fi-equipped gas stations-just some of the hundreds of Wi-Fi hot spots and wired public Internet access points scattered around the country. According to the latest figures 52% of Estonians use the Net regularly.

The government runs its Thursday-morning cabinet meetings on computer, and it is close to doing away with paper altogether. Sessions that used to take most of a day now take half an hour as ministers politely tap out their comments instead of grandstanding. Next year the official record of government business will no longer be printed on paper, except for a single copy for the archives. It will exist solely on the Web. "If the Internet was reborn as a country, it would be Estonia," United Nations Development Program administrator Mark Malloch Brown has said.

Two years ago Estonia introduced an optional smart ID card that is making documents and money obsolete in a growing range of public and private transactions. An Estonian can use it instead of a passport to travel within the EU, to get on the bus and subway and to file taxes with a card reader attached to his computer (refunds in five days for the electronic filers, several months for the paper filers).

"I rarely sign pieces of paper anymore," says Sten Hansson, the information adviser to the Estonian state chancellery. Hansson is 31 now and has already served in government for ten years. Siim Raie, the 27-year-old director of Estonia's chamber of commerce, just took out a personal home loan without picking up a pen. But this is not just a demographic revolution. Hansson's 84-year-old grandfather just got his smart card.

The government was going to make the smart card mandatory, but the libertarian-minded Estonians always prefer choice to diktat. So far 620,000 out of 800,000 working-age Estonians have asked for one because it makes life easier. It doesn't appear to bother anyone that the chip is gradually ingesting every detail of an Estonian citizen's life. Next up: e-voting and e-police, which will put a driver's entire history of traffic violations on the card's chip.

When Estonia determined that its traditional customs process was keeping it from winning mobile phone assembly projects, it got an e-customs system that cut average processing time from several hours to about 20 seconds today. That proved key to snaring a 4,000-man assembly line from Finnish manufacturer Elcoteq, which might otherwise do that work in China. The Elcoteq plant is fully responsible for 25% of Estonia's manufacturing exports.

Estonia is often lumped together with two other new republics, Latvia and Lithuania, as the so-called Baltic tigers. All three joined the EU in May. All three have thrived since independence and stand in marked contrast to other former Soviet republics for their speed and agility in adapting to the hard realities of capitalism. GDP growth in all three countries is chugging along in the neighborhood of 6% a year, compared with under 2% in the rest of the EU.

Each of the Baltic republics differs markedly from its neighbors in culture and language, however. Estonia looks across the Gulf of Finland for its cultural and linguistic roots. Like the Finns, Estonians can be dour and tend toward an almost pathological industriousness (when they aren't singing, that is: There are 133,000 Estonian folk songs, one of the largest numbers in the world).

This is no Scandinavian welfare state. Top individual taxes in the $10 billion economy are 26% and heading down to 20%, and all reinvested profits are free of corporate income taxes. "To get your primary needs met, you have to do something," says Linnar Viik. "We are a very pragmatic society, which can be quite horrible sometimes. An Estonian might ask what is the efficiency factor of the new museum of modern art."

Old Tallinn stretches out below Hansson's chancellery office atop Toompea, the 9th-century fortified hill at the city's heart. Cobblestones slickened by mist lead down past austere Lutheran churches with stiff spires and squat lemon-colored mansions from Tallinn's prosperous trading past.

The town's medieval echoes have lately reached fresh waves of tourists- 2.7 million last year. This pillar of the old Hanseatic trading league is getting hip. The shops that line the town's fine squares do a brisk trade in hand-knitted sweaters and linen, and its traditional restaurants serve up a mean elk steak. Just as important to Tallinn's coffers are the Finns who hop a 90-minute ferry from Helsinki for bargain booze and affordable prostitutes-the unsurprising windfall from Estonia's low taxes and low wages.

Harder to see are the small workshops where a new generation of software designers is looking to turn Estonia into a kind of Silicon-Valley-with-herring. Within tech-savvy Scandinavia, however, the secret is already out. SEB, the huge Swedish bank, recently moved most of its code-programming operations to Estonia.

Sander Mägi is a typical Estonian go-getter. In 1996 he dropped out of college after his first year to take a programming job with a cable modem company that went bankrupt soon after. In 2000 he joined with Oliver Wihler, a Swiss programmer who had left his job in London for Tallinn's more agreeable lifestyle and shorter commute. "My friends were mystified-they thought I was going to the Balkans," jokes Wihler. The two founded Aqris Software, and introduced RefactorIT in 2002. Refactor basically works like a kind of spreadsheet for programs written in Java code, automatically remodeling an entire application to reflect changes in parts of its code. The benefit here is speed, saving the thousands of man-hours it would take to reprogram manually.

The biggest customer is Zed, a digital content supplier for mobile phones. Small sales have been made to Nokia, Philips and Fujitsu. Aqris has pretty much doubled every year, earning $1 million cumulatively. Last year it made over $400,000 on revenue of $1 million and won an award as Estonia's best technology developer.

"We're obviously not going to compete with India on projects that require hundreds of developers," says Wihler, "nor are we necessarily going to do exactly what we're told to do."

The feisty subversive streak surfaced flamboyantly in the peer-to-peer networks Kazaa and Skype. Kazaa has driven the record industry crazy by letting pc users around the world join forces to share one another's recorded music, free. Skype offers free telephone calls over the Internet.

Under the hood of both products are peer-to-peer engines built in a three-man Estonian garage called Bluemoon, headed by 32-year-old Jaan Tallinn. Tallinn met Kazaa founders Niklas Zennström and Janus Friis when he was writing the software that pays for parking spaces via mobile telephone. All three were working at the time for Sweden's Tele2, a breeding ground for many of the region's entrepreneurs. The trick for Skype was developing a system that allowed each computer to index a wider network of computers than Kazaa does. A technology called Global Index did this, allowing Skype to handle traffic that passed 1.3 million simultaneous users last month. "These guys are the best software developers I have ever seen in my life," says Niklas Zennström. "They're very skillful at problem-solving."

Zennström and Tallinn are already training their peer-to-peer sights on new applications, though neither will say exactly what. It might well be banking, says Linnar Viik, who has seen prototypes of peer-to-peer payment systems, where the network itself manages the customer base, reducing transaction costs to zero.

Estonia's problem now is how to inject enough capital and managerial know-how to bring its Baltic wonder boys to the world stage. "I can see tons of interesting products in Estonia today, but they've stopped their development at €2 million and ten people," says Allan Martinson.

Martinson recently resigned as chairman of MicroLink, which he had transformed from the Dell Computer of Estonia to a diversified IT services company. He has just launched Martinson Trigon Venture Capital. "It's a good time to be in VC in Estonia," he says, "but it remains to be seen whether Estonia can be a truly global player. It's not just about IT, it's about attitude."

Martinson is investing in a company called Oskando, which markets a GPS tracking system for car security. Oskando plans to develop a simple, cheap unit for use in, say, a child's lunch box. The trick is getting the price below $100, which Oskando thinks it can do. "We did some innovative stuff with solar cells," says Martinson. "Estonians are great at finding interesting shortcuts."

With their natural reserve Estonians aren't exactly the world's slickest self-promoters. Word of what's happening up on the Baltic is slowly starting to leak out, however, thanks, in large part, to the hype surrounding Kazaa and Skype. Steve Jurvetson of Silicon Valley VC firm Draper Fisher Jurvetson first did business in Estonia after falling in love with Kazaa. His firm negotiated the deal in December 2003 that made Draper Fisher the largest investor in Skype, and Jurvetson stuck around when he saw Tallinn's entrepreneurial beehive. It didn't hurt that both of Jurvetson's parents are Estonian, although he says that growing up he had little connection to the culture.

Jurvetson has invested in an Estonian company called Egeen, which has the exclusive rights to collect blood samples from Estonian hospital patients. It uses the patient information to conduct clinical studies for pharmaceutical clients all over the world. The Estonian kicker here is an IT database that links all patients throughout the country in real time. This lets Egeen easily and quickly assemble a sample group according to the exact criteria a client needs for a particular study.

"That's the key to why Egeen wins business competing globally with much larger companies," says Jurvetson. "After Skype, we saw tons of opportunities here to follow up. It's like the entire country has this eager, immigrant mentality. Except that in this case they immigrated back to their own country."

Bloomberg: Aluminum Falls Most in 17 Years, Copper Slides on China Concern

Aluminum Falls Most in 17 Years, Copper Slides on China Concern

Jan. 4 (Bloomberg) -- Aluminum prices in London plunged the most in more than 17 years and copper fell on speculation that investors are reducing holdings as Chinese demand for metals slows, halting a yearlong rally.

``There's got to be some sort of shift out of commodities this year,'' Maqsood Ahmed, an analyst at Calyon Financial in London, said in a telephone interview. ``Maybe it's happening sooner than we think.''

Global demand growth for aluminum will slow to 5.3 percent in 2005 from 8.1 percent last year, Barclays Capital said Dec. 16. In China, the world's top copper user, consumption gains will drop to 10 percent from 15 percent in 2004, Barclays said. Metals used in appliances, autos and homes surged last year as demand exceeded mine output and speculative investors bought commodities in a bid for higher returns.

Aluminum for delivery in three months on the London Metal Exchange closed open outcry trading down $168, or 8.5 percent, to $1,800 a metric ton. It was the biggest decline since October 1987. The lightweight metal used in food packaging and construction gained 22 percent in 2004, the most in five years.

Copper fell $254, or 8.1 percent, to $2,895 a ton, its biggest one-day drop since Oct. 13. The metal, used in wiring and plumbing, advanced 37 percent on the exchange in 2004, the biggest riser among seven metals. It traded at a 16-year high of $3,179.5 on Oct. 11.

``There has been selling from funds'' that piled into the metals markets last year, Roy Carson, a trader at Triland Metals in London, said in a telephone interview.

Narrowing Deficit

The prices of oil, gold and base metals have fallen at the start of this year due partly to selling by hedge funds and other speculators who bought amid surging global demand for raw materials in 2004. Commodities priced in dollars also were purchased to protect against the decline of the dollar against other currencies, including the euro and yen.

Other metals on the LME also closed lower. Lead dropped 9.2 percent to $922 a ton, its biggest fall in 15 years. Nickel had its biggest slide in a month, down $1,025 to $14,000. Zinc was down $83, the most in 7-1/2 years, to $1,165. Tin fell $220 to $7,560.

Copper demand in 2005 will rise 4.6 percent to 17.5 million tons, exceeding production by 277,000 tons, Barclays Capital said in its report last month. The deficit in 2004 was 684,000 tons, the bank said. Producers such as Phoenix-based Phelps Dodge Corp. raised output in 2005, narrowing the shortfall.

China, the world's No. 2 user of aluminum, is trying to slow demand growth to avoid inflation. The nation's government limited loans and raised interest rates in 2004.

``We think we have seen the top of the commodity cycle,'' Nick Moore, an analyst at ABN Amro in London, said in a telephone interview. ``We are in the endgame.''

Metal Company Shares

Shares of Pittsburgh-based Alcoa Inc., the world's largest aluminum producer, fell 43 cents, or 1.4 percent, to $30.56 at 12:10 p.m. in New York Stock Exchange composite trading. Montreal-based Alcan Inc. fell 65 cents to C$58.15 ($47.46) on the Toronto Stock Exchange.

Phelps Dodge, the world's No. 2 copper producer, fell $3.65, or 3.7 percent, to $92.24 in New York and has dropped 9.2 percent since they closed on Dec. 29 at $101.55.

``Phelps Dodge has been a leader of the copper market,'' Michael Purdy, vice president at ABN Amro in New York, said in a television interview.

Other metal producers also fell. Shares in Melbourne-based BHP Billiton, the world's largest mining company, closed in London down 4.2 percent to 25.5 pence, the biggest one-day fall since Oct. 13. London-based Anglo American, the world's No. 2 miner, dropped 1.6 percent to 1,212 pence a share. Rio Tinto, the world's No. 3 miner, dropped 3.3 percent to 1,482 pence.

Dollar's Drop

The dollar rose 1.4 percent to $1.3298 versus the euro in London, after trading at a record low of $1.3666 on Dec. 31. The dollar's 7.3 percent drop against the European currency last year made dollar-denominated commodities cheaper for holders of euros.

``Commodities for much of December were matching the dollar blow-for-blow,'' ABN's Moore said. ``There's no reason why that shouldn't continue.''

LME-monitored copper inventory was unchanged at 48,875 tons, the exchange said in a daily report. The total shrank 89 percent in 2004 as consumers withdrew metal from storage.

Speculators increased their net-long position in New York copper futures in the week ended Dec. 28, according to U.S. Commodity Futures Trading Commission data.

``There was very good fund buying last week,'' Robert Barham, a trader at IFX Markets in London, said in a telephone interview.

Speculative long positions, or bets prices will rise, outnumbered short positions by 26,523 contracts on the Comex division of the New York Mercantile Exchange, the Washington- based commission said in its Commitments of Traders report. Net- long positions rose by 3,306 contracts, or 14 percent, from a week earlier.

***
Prudent Investor Says: Endgame? I think not. I have noted presciently in my New Year's outlook that the US Dollar was poised for a massive rebound. Naturally, commodities such as industrial metals whom have risen due to the US dollar's fall, moved inversely to the currency's tracks. Given that the US dollar fell quite sharply late late year, this move was 'on the screen'. The US dollar's plight is hardly a done deal.

Moreover, it seems that US dollar's rebound has coincidentally been baneful to the US markets. Could this simply be the one of the symptoms from the US FEDERAL RESERVE's recent monetary tightening?

New York Times: With Geopolitics, Cheap Oil Recedes Into Past

With Geopolitics, Cheap Oil Recedes Into Past
By JAD MOUAWAD
New York Times

IT was a year that people in the oil markets are unlikely to forget - a year that prices set records, forecasts lost touch with reality, and almost everything that could go wrong, did. It was also a year that politics returned to the oil market.

And the trend is likely to continue this year. While oil prices have declined since October, many of the issues that have vexed the oil industry in 2004 are expected to recur. Cheap oil increasingly looks like a thing of the past.

Through the 1990's, prices were stable, supplies were secure and there was plenty of extra capacity to keep energy costs low and world growth buzzing. At an average of $20 a barrel, oil was viewed as just another commodity.

But then came ethnic and labor troubles in Nigeria; chaos and protests in Venezuela before President Hugo Chávez won a referendum allowing him to stay in power; hardball energy politics in Russia; and the continuing insurgency in Iraq.

While supplies of oil to the world markets were rarely interrupted, the uncertainties created by these events raised crude oil prices in New York by two-thirds this year, to a high of more than $55 a barrel in October. And as energy costs surged, many analysts, traders and politicians woke up to the reality that oil was different from cocoa or coffee.

"Oil is a political commodity," said Robert Mabro, president of the Oxford Institute for Energy Studies, one of the world's foremost energy experts. "Geopolitics is the most fundamental issue if you're looking at oil markets. People seem to have forgotten that since the 1980's."

Of course, this is not the first time that oil and politics have mixed.

Decades ago, militant governments in Iran and Libya, for example, nationalized their oil sectors, forcing American and European companies out and taking charge of their natural resources. Then came the oil embargo and the price shocks of 1973-74 and 1978-81, with long lines for gasoline and steep rises in inflation.

But for the most part, politics had dropped off the energy map since then. In the 1980's, energy experts largely discounted a war between two of the Persian Gulf's top oil producers, Iran and Iraq, because Saudi Arabia and some other OPEC nations could simply crank up their production to make up for losses.

Even the invasion of Kuwait by Iraq in the summer of 1990, and the subsequent embargo on their oil exports, roiled energy markets for only a few weeks.

But in recent years, the oil industry has undergone a fundamental change. While demand has steadily increased each year, the industry's exploration efforts have not kept pace in new discoveries.

Now that worldwide production is running at full speed to meet increased demand, there is no cushion left in the system to weather a potential blow to producers like Iraq, Venezuela, Iran, Russia or Nigeria.

So, once again for oil markets, politics matters.

For instance, said Amy Myers Jaffe, the associate director of Rice University's energy program, Saudi Arabia's oil industry is no longer seen as being impenetrable to terrorist attacks; tensions in the Persian Gulf could swell over Iran's nuclear program; Nigerian factions may erupt in violence; and the fighting in Iraq goes on.

"All kinds of things can affect this market," Ms. Jaffe said, "especially when you're in a razor-thin situation. The only thing that could dramatically alter the outlook is a major economic recession."

The heightened geopolitical risk has translated into higher prices, something analysts call a "risk premium." Crude oil prices have averaged $30 a barrel since 2000, but last year crude oil in New York climbed to an average of $41 a barrel. While energy prices are high, adjusted for inflation they are below the level in March 1981, when crude oil approached $70 a barrel in today's dollars. Still, analysts do not expect prices to fall anytime soon.

High world prices since mid-2002 have helped sustain the economic recovery of Russia, which is raising output, according to the Energy Information Agency of the Department of Energy.

The former Soviet Union, of which Russia is by far the biggest country, is the world's largest producer, the agency says, followed by Saudi Arabia and the United States. The biggest consumers are the United States, which imports over half its needs; China; Japan; and the former Soviet Union, which uses about a third as much as it produces. Leo Drollas, chief economist for the Center for Global Energy Studies in London, expects oil prices to be higher in 2005, on average, than they have been this year. The institute was founded in 1990 by Sheik Ahmed Zaki Yamani, the former Saudi oil minister.

Even oil companies, which are usually extremely conservative about their price outlook, are coming around to that realization. Lord Browne, the chief executive of BP, now sees a new bottom of $30 a barrel for the next few years.

"There is something fundamental holding prices up, whether that's at $45, $40 or $35 a barrel," Mr. Mabro of the Oxford Institute said. "And politics won't improve things. Except if you believe a miracle is going to happen in Iraq."

***

Prudent Investor Says: This article practically demolishes such arguments that the current oil conundrum has been a function of free markets. Oil has fundamentally been the epitome of the collective government’s self-serving interest, ineptitude and inefficiency as much as the fiat money standard. For as long as governments persist to intervene the markets will remain distorted simply due to resource misallocation. And such inefficiencies pave way for unintended consequences as seen in today’s oil prices.

New York Times: Globally, Stocks Are Poised to Advance Further

Globally, Stocks Are Poised to Advance Further
By ERIC PFANNER
International Herald Tribune

LONDON

DESPITE the strongest global economic growth since the 1970's and outsized gains in corporate profits, 2004 was a decidedly ho-hum year for international stock markets, which took their cues from Wall Street. So, what will happen this year if, as expected, growth and profits ease back toward more normal rates?

Stock prices could actually forge ahead solidly, if not spectacularly, market strategists say. Average gains of 10 percent or so are expected globally, and some regions, including Continental Europe, could do a bit better. And if the dollar declines further, as many analysts expect, American investors who put some of their money into overseas securities might do even better, once currencies are converted. It is not that investors are returning to the irrational exuberance of the late 1990's - or even the milder wave of post-bubble optimism that washed over many global markets in 2003. But stocks in some regions remain attractively priced, at least relative to bonds, analysts say.

"We're not gung-ho, we're realistic," said Richard Batty, global investment strategist at Standard Life Investments in Edinburgh. "But markets generally have been pricing in a more pessimistic outlook than we think is warranted."

Many global stock markets finished 2004 above where they started, but not spectacularly so. In Japan, the Nikkei index was up only 7.61 percent, despite an improved economic outlook. Morgan Stanley Capital International's index showed a better gain in Japan - 10.9 percent, and for Americans who converted their yen-based gains into dollars, the rise was 16 percent. In Europe, stocks generally posted slightly larger gains, even as growth continued to be disappointing. In China and in Russia, stocks showed little change at the end of the year, despite strong economic growth. Morgan Stanley Capital International calculated a 2 percent rise for China.

The best performances were in emerging markets that benefited from a surge in commodity prices, particularly in Latin American markets like Mexico and Peru, and in some secondary European markets, including Iceland, Belgium, Norway, Austria, Hungary and Romania. Because of the fall in the dollar that accelerated toward the end of last year, American investors who ventured into foreign stock markets did considerably better than investors who used the local currencies. A local investor in the euro zone, for instance, would have seen gains of only 13.3 percent, based on a Morgan Stanley Capital International index of the region; in dollar terms, the return was 22.4 percent.

Morgan Stanley strategists predict gains of 8 percent in European stocks next year, based on share prices in mid-December. They see solid double-digit gains in Japan, with the Topix index, which finished 2004 at 1,149.63, rising to near 1,300 by the end of this year.

At Lehman Brothers, analysts are less enthusiastic about Japan, but see comparable gains in Europe. With dividends reinvested and including the effects of an additional 5 percent drop in the dollar against the euro, which they predict for this year, gains for American investors in euro-denominated shares could reach double digits. Other analysts, too, point to the euro zone as one of the most promising areas for share price growth.

To be sure, the dollar is one of several variables that make predicting share prices as dicey as ever. If it continues to fall, as many analysts expect, given the size of the United States' current account deficit, that could put upward pressure on inflation, prompting the Federal Reserve to raise interest rates more aggressively than it did in 2004. A weaker dollar could also lead to a renewed increase in oil prices, because oil is traded globally in dollars.

Though oil prices eased in December, ending the year at $43.35 a barrel, after passing $55 in October, a combination of continuing high prices and tighter monetary policy in the United States might slow global economic growth by curbing American demand for imports. Economists generally expect global growth to ease from rates near 5 percent last year to 3.5 percent to 4 percent this year, with a slight uptick in inflation. The combination makes some analysts wary about prospects for global stock markets.

"We've moved from above-trend growth and below-trend inflation to above trend in both," said Tim Bond, a strategist at Barclays Capital here. "That's negative for almost every asset class, except perhaps commodities."

Nonetheless, investors seem to be prepared to give stocks a chance. A Merrill Lynch survey of global fund managers in December showed that 77 percent expected equities to do better than bonds or cash this year. The managers were particularly bearish on bonds, which fall in price when interest rates are on the rise.

Continued strength in corporate earnings should provide some support for share prices, analysts say. Last year, companies in the United States, Europe and even Japan reaped the benefits of several years of cutting costs. As strong economic growth drove demand higher, profits of companies in the MSCI All-Country World index, a broad gauge of global stock prices, were on track for an annual increase of 25 percent, analysts at Morgan Stanley said. This year, they expect less impressive gains of 8 percent, just above the long-term trend of 7 percent.

Given that Europe has borne the brunt of the dollar's slide, with a rising euro making the region's exports less competitive, analysts' relative optimism about European stocks may seem surprising. But euro zone stocks are priced attractively, with price-to-earnings ratios around 14 percent, compared with about 16 percent for stocks globally.

European corporate profits are also expected to hold up fairly well, despite the strong euro. Companies seem to be suffering less than might seem likely, given policy makers' noisy laments about the weak dollar.

There are several reasons for this. European companies, like their American counterparts, have grown extremely frugal about capital expenditures, after the spree of the bubble years. And, particularly in Germany, long known for high labor costs, several big manufacturers have cited the threat of low-wage competition from new European Union members in the east and won concessions from workers.

Overall, hourly labor costs in the euro zone grew by only 2 percent in the third quarter of 2004, compared with a year earlier, the lowest increase since 1998.

"The unions seem to be getting more pragmatic," Mr. Batty said. "They realize things are changing. From a stock market point of view, this is great news."

As always, optimism about Europe needs to be tempered, analysts say. Some worry about the effects of a shift to new international accounting standards, which is required for all publicly traded companies in the European Union by the end of this year. One result could be increased volatility in reported earnings.

And the euro zone economy, which analysts at ABN Amro say will grow by only 1.5 percent this year, after 1.8 percent growth in 2004, could slow even further, particularly if consumer spending continues to stagnate.

Possible weakness in consumer spending could also hurt Britain, which remains outside the euro zone and has enjoyed several years of strength compared with its neighbors. Analysts worry that a boom in housing prices, which has fueled consumer spending, may be over, with prices already easing slightly in recent months. Nevertheless, most analysts are optimistic about the outlook for British stocks, which were rising at the end of last year, bolstered by banking issues.

Many analysts expect the Japanese economy to slow, too, after a solid 2004; Morgan Stanley predicts 0.5 percent growth, after 4 percent last year. That makes many strategists wary about prospects both for Japanese stocks, which have not drawn much strength from improved corporate finances, and the overall economy after more than a decade of recessionlike conditions.

Some analysts, however, see an opportunity in Japan for patient investors. A slowdown in the growth of corporate profits - analysts expect that once the numbers are in for 2004, they will show profit growth of 60 percent - seems inevitable, but it will not prevent a longer-term recovery from taking hold. "We think the market will begin recognizing that Japan has taken the first step toward returning to normal," said Naoki Kamiyama, a strategist at Morgan Stanley, in a note to investors.

Elsewhere in Asia, all eyes remain on China. A mild slowdown in that country's runaway growth rate, and a possible easing of the currency's tie to the dollar, could put pressure on shares, which performed poorly last year. Analysts say other Asian markets, particularly those with heavy exposure to technology stocks, like South Korea and Taiwan, might do better, though.

And other emerging markets, especially those that have benefited from a global surge in commodity prices, could continue to power ahead, strategists say. Many South American markets, for instance, have enjoyed a period of relative political and financial stability, and resource-rich countries like Brazil have fared particularly well.

Over all, said Mr. Bond at Barclays Capital, "equities globally are well placed against bonds, but it will be a year of modest returns."

***
Prudent Investor says: Not so fast there...most of these analysts are talking from the rear view mirror perspectives, in other words using the immediate past as a measure to predict future performances. Caveat, dear readers.

According to several leading multilateral institutions such as the OECD and World Bank, the prospects of slower economic growth for the world are more likely in 2005, as to how much of that could be equated with gains in the global equities and more so in the commodities (some, not all) front is something to be reckoned with, unless of course we could see some foreign currency reserve rich Asian nations picking up the consumer demand and domestic investment slack caused by the anticipated global softening. But of course, economics is not the sole determinant, liquidity is likely a more influential factor. With global Central Banks likely to follow on the footsteps of the US Federal Reserve in its 'measured pace' of monetary tightening, the odds are stacked in favor of a 'lesser' optismistic outlook for the major equities and bond markets compared to these 'mostly' pollyannaish mainstream forecasts.

It will be a challenging 2005 indeed. Care to place your bets?

BBC News: Blog reading explodes in America

Prudent Investor Says: Ahead not only in investments but also in technology apps...

Blog reading explodes in America
BBC News

Americans are becoming avid blog readers, with 32 million getting hooked in 2004, according to new research.

The survey, conducted by the Pew Internet and American Life Project, showed that blog readership has shot up by 58% in the last year.

Some of this growth is attributable to political blogs written and read during the US presidential campaign.

Despite the explosive growth, more than 60% of online Americans have still never heard of blogs, the survey found.

Blogs, or web logs, are online spaces in which people can publish their thoughts, opinions or spread news events in their own words.

Companies such as Google and Microsoft provide users with the tools to publish their own blogs.

Getting involved

The rise of blogs has spawned a new desire for immediate news and information, with six million Americans now using RSS aggregators.

BLOGGING IN AMERICA Blog readership has shot up by 58% in 2004 Eight million have created a blog 27% of online Americans have read a blog 5% use RSS aggregators to get news and other information 12% of online Americans have posted comments on blogs Only 38% of online Americans have heard about blogs

RSS aggregators are downloaded to PCs and are programmed to subscribe to feeds from blogs, news sites and other websites.

The aggregators automatically compile the latest information published online from the blogs or news sites.

Reading blogs remains far more popular than writing them, the survey found.

Only 7% of the 120 million US adults who use the internet had created a blog or web-based diary.

Getting involved is becoming more popular though, with 12% saying they had posted material or comments on other people's blogs. Just under one in 10 of the US's internet users read political blogs such as the Daily Kos or Instapundit during the US presidential campaign.

Kerry voters were slightly more likely to read them than Bush voters.

Blog creators were likely to be young, well-educated, net-savvy males with good incomes and college educations, the survey found.

This was also true of the average blog reader, although the survey found there was a greater than average growth in blog readership among women and those in minorities.

The survey was conducted during November and involved telephone surveys of 1,324 internet users.

Yale Global: China's African Safari

China's African Safari

Besides buying energy and commodities, China is also trying to win hearts and minds in a continent embittered by colonial experience

Paul Mooney

YaleGlobal, 3 January 2005

BEIJING: In the 1960s and 1970s, Chinese engineers were hard at work throughout Africa, constructing stadiums, laying down roads, and building hospitals in the Cold War battle for the hearts and minds of Third World citizens. The politics and revolutionary idealism behind many of these good-will projects faded in the eighties after Beijing became preoccupied with building socialism with Chinese characteristics back home. However, a fast-growing China with a voracious appetite for resources and markets is now back with a vengeance, and it's shaking up Africa's European and American partners.

Almost every African country today bears examples of China's emerging presence, from oil fields in the east, to farms in the south, and mines in the center of the continent. According to a recent Reuters report, Chinese-run farms in Zambia supply the vegetables sold in Lusaka's street markets, and Chinese companies - in addition to launching Nigerian satellites - have a virtual monopoly on the construction business in Botswana.

Between 2002 and 2003, two-way trade climbed 50 percent to US$18.5 billion - the fastest growth China has seen with any geographical area. And trade is tipped to further soar to US$30 billion by 2006.

The last year has seen revolving door visits by officials of the two sides, and China and the United Nations Development Programme (UNDP) jointly established the China-Africa Business Council in November. The organization will support China's private sector in promoting business in Cameroon, Ghana, Mozambique, Nigeria, South Africa and Tanzania.

China's rampant economic expansion - and resulting appetite for raw materials - is the major factor driving the country's long march across the African continent. The second biggest consumer of oil after the United States, China is searching the world for new sources of energy, and Africa is fast becoming an important supplier. To date, China has oil partnerships in Sudan, Chad, Nigeria, Angola and Gabon, and is exploring a potential collaboration in Kenya.

Beijing has pressed history to promote its economic agenda, attempting to win African sympathy by emphasizing the common history of exploitation China and African nations have suffered at the hands of Western colonialists. This is a common theme in the pages of African newspapers, where commentators argue that Western investors exploit Africa, while Chinese companies tend to invest in businesses that are beneficial.

China is also making an effort to win the hearts and minds of the African people, and to extend its political influence.

Still, there is some debate among Africans over whether China is exploiting or benefiting their continent. Chinese are busy developing much-needed African infrastructure: roads and rail lines in Ethiopia, Sudan, and Rwanda; a new hospital in Sudan; a farm and a bridge across the Nile; reclaiming thousands of hectares of farmland in Tanzania. But at what cost?

Moeletsi Mbeki, deputy chairman of the South African Institute of International Affairs, wrote in recently AllAfrica.com that China "is both a tantalizing opportunity and a terrifying threat to South Africa." On the one hand, he said that China was "just the tonic" that mineral-rich but economically-ailing South Africa needs. But he added that exports from China and Hong Kong to his country are double those from Africa and almost double what South Africa exports to China. He called the trade relations between South Africa and China "a replay of the old story of South Africa's trade with Europe."

Said Mbeki: "We sell them raw materials and they sell us manufactured goods with a predictable result - an unfavorable trade balance against South Africa."

He went on to say that most of what Europe and America sells to South Africa are high tech goods that the latter does not produce itself, while imports from emerging Asian countries like China are goods his country is able to produce itself. In September, one of South Africa's largest trade unions threatened to boycott retailers it said were importing cheap Chinese products, which it said had lead to worsening unemployment at home.

In the meantime, however, many African nations are pleased that no political strings are attached to China's friendship - with the obvious exception that they must not recognize Taiwan and must affirm the one China policy. At present, only 7 African nations have relations with Taiwan - one-quarter of the total - and a key part of China's Africa policy is denying Taiwan any greater diplomatic space on the continent.

He Wenping, director of the African Studies Section at the Chinese Academy of Social Sciences in Beijing, says that China and Africa share the view that countries should not meddle in each other's affairs. "We don't believe that human rights should stand above sovereignty," says He. "We have a different view on this, and African countries share our view."

Zimbabwe is a case in point. After Americans and Europeans withdrew from the country due to the government's destructive land reform program and poor human rights record, China stepped in, ready to work with the embattled, and resource-rich, African nation.

During his recent trip to Africa, Wu Bangguo, chairman of China's legislature, spent four days in Zimbabwe, leading a delegation of 100 Chinese businessmen who inked joint venture deals in mining, transportation, communications and power generation. It's no wonder that Emmerson Mnangagwa, speaker of Parliament, is so bullish on China. The official gushed in a state-run Zimbabwean newspaper: "With all-weather friends like the People's Republic of China... Zimbabwe will never walk alone."

Sudan is another example. China National Petroleum Corporation won an oil exploitation bid there in 1995, and when Washington cut ties two years later, the Chinese were ready to fill the void left by retreating Western oil companies. They helped to develop oil fields, built refineries, and laid two oil pipelines. Sudan, which was an oil importer before the Chinese arrived, now earns some US$2 billion in oil exports each year, half of which goes to China, accounting for 5 percent of the country's total imports. China owns a 40 percent stake in the Greater Nile Petroleum Operating Company, the major consortium drilling in Sudan.

But more important for Sudan is Beijing's political support. China has vowed to veto any sanctions imposed against Sudan. When the UN Security Council tabled a resolution in September to punish Sudan for failing to stop atrocities in the troubled western region of Darfur, it was forced to water down the proposal to avoid a Chinese veto. China, Russia, Pakistan and Algeria all abstained in the vote for the weaker resolution that passed by 11-0.

The political scientist He Wenping concedes that China would suffer if sanctions were applied against Sudan, but she says that this is not China's main consideration. "Suppose this happened in another country," she argues. "China would still take the same stand. You can see this from other examples."

Still, international pressure is growing for China to use its political influence to pressure Sudan, which critics say is using its oil dollars to fund the military actions against its black African population in Darfur. Some observers say that China, which relishes its relatively new position as an international mover, will not want to be seen as an obstacle to the solution of the problem in Sudan.

The problem is that while China predicts that the growth of oil consumption will slow sharply next year from the 20 percent rise in 2004, the country still faces continued power shortages. Crude oil imports could hit 150 million tons in 2005, up from 130 million tons this year. Already more than 40 percent of the country's total crude demand is met by imports, and analysts say imports will account for between 50 to 75 percent of its consumption by 2020.

If sanctions were to block oil from Iran and Sudan, China would be forced to scramble to find other sources, which could be problematic. The question is whether or not Beijing is willing to sacrifice oil and its African partnerships to salvage its international image as a responsible global force.

Paul Mooney, a freelance journalist, has been reporting on China for 15 years.

Rights:
© 2004 Yale Center for the Study of Globalization

Myrtle Beach online: China's steel peril may be oversupply

China's steel peril may be oversupply
Rising exports, lower prices could have global effect
By Patrick Barta and Paul Glader
The Wall Street Journal
January 3, 2005

For much of the past two years, China has threatened to foster a world steel shortage with its prodigious appetite for imports of the metal. Now the country has become a net exporter, its domestic demand is slowing and steelmaking capacity is up around the world, sparking concern over global oversupply and tougher times for the industry in the years ahead.

Behind China's shift is a sharp slowdown in the growth of steel consumption at home combined with continued increases in production. As Beijing has worked to cool an overheated economy, the growth in domestic demand for steel recently has been rising only about 5 percent a month compared with year-earlier periods, after average monthly increases of 26 percent in 2002, 2003 and early 2004, according to UBS AG.

Meanwhile, UBS estimates that Chinese steel production will climb 22 percent this year to 268 million tons and grow a further 14 percent next year to 305 million tons. In November, China reported net exports of more than one million metric tons of steel, more than double October's level and a reversal from November 2003, when it was a net importer of nearly three million tons.

China's emergence as a net steel exporter and rising capacity elsewhere highlights how quickly global commodity flows can shift directions. It also raises the question of whether China could as quickly reverse the trend and again squeeze global steel supplies. China in recent years has added so much new production of some raw materials, such as coal and aluminum, that even minor shifts in its economy could force it to dump unneeded supply on to the global marketplace, potentially sending prices down as quickly as they have gone up.

Lower steel prices could be a boon to manufacturers, builders and consumers worldwide, helping to reduce costs in the plant and prices at the cash register. The effect on steelmakers is less rosy, especially in the United States. Although the American steel industry is in better shape, after a wave of bankruptcies and consolidation, to cope with oversupply, the United States would be at a big disadvantage against steelmakers in lower-cost countries. In addition to China, production in lower-cost regions such as India and Eastern Europe has been surging in recent years. And when the dollar's weakness reverses, imports will look more attractive to U.S. customers.

For now, analysts and executives see a clear movement toward rising capacity in China and worldwide, though they disagree on how soon large amounts of new steel will reach the market and how much of a price squeeze global producers face.

Just a few years ago, the steel industry was slogging through a decades-long downturn, caused in part by overcapacity. That changed in 2003 and 2004, as manufacturing picked up worldwide, but especially in China, where construction projects far exceeded expectations. A global squeeze on steel supplies this year led to panic buying that caused steel prices to double and triggered shortages of steel-making raw materials such as iron ore, coking coal and scrap steel.

Now, many governments are using subsidies, loan guarantees and other tools to promote more steel production to capitalize on the increased demand in China and elsewhere. The North American Steel Trade Committee is worried that some 250 million metric tons of new steel capacity are on track to be added in the next five years in a global market that produces about one billion tons annually.

China now exports large amounts of lower-quality steel, of the type used in construction. Supplies of higher-quality steel, of the kind used to make cars and trucks, remain tight - Nissan Motor Co. and Suzuki Motor Corp. both had to temporarily halt production when they couldn't find enough steel in recent weeks. But China has been ramping up its capacity to make more high-quality steel as well.

Excess Chinese steel might not dent world prices right away. But rising Chinese exports would almost certainly affect other markets eventually, stoking competition as steel producers that had sold to China vie for sales elsewhere.

Some steel users say they are already seeing the impact of greater production and slowing demand in Asia. Among them is Pan Australian Resources Ltd., a mining concern based in Brisbane, Australia, that is building a $15 million gold-processing facility in northern Laos. Steel products account for as much as 10 percent of the facility's cost.

When Pan Australian priced the project this summer, suppliers appeared to be padding their estimates in the expectation that steel costs would continue to rise. But now that it is taking delivery of the steel, the company is finding prices are more than 10 percent below estimates.

"It looks like their order books have thinned out, so they need to be more competitive," says Joe Walsh, a Pan Australian spokesman.

And more capacity is on the way. Despite its announced intention to rein in excess steel investment earlier this year, the Chinese government recently approved a $2.5 billion plant expansion for Maanshan Iron & Steel Co., the country's fifth-largest steel producer, to make more steel for cars and home appliances. It also approved a $2 billion expansion for stainless-steel maker Taiyuan Iron & Steel.

State-run media have reported that China's largest steelmaker, Baosteel Group, is considering a $10 billion expansion to build a 10-million-ton-a-year plant in Guangdong province, pending government approval. Baosteel officials declined to comment on the plan. Baosteel has started construction on a stainless-steel plant in Guangdong that would be the biggest stainless-steel processing and distribution center in China when finished.

"It doesn't take too much imagination to look at what's happening in China and say that this is a really serious issue," says Peter Hickson, a steel analyst at UBS in London, who thinks steel prices could fall nearly $200 a ton in 2005. The U.S. industry expects prices for cold-rolled steel, a type commonly used in everything from dishwashers to automobiles, to be about $800 a ton in early 2005. Hickson's bank recently downgraded the global steel sector to "neutral" from "buy," in large part because of worries over China.

Still, some analysts contend that concerns about a steel overhang are premature. Many of the new expansions won't be completed for a long time, and some might not happen at all if steel prices drop and supplies of raw materials remain tight.

"I think there is a little too much concern about announced new capacity," says Dan DiMicco, chief executive officer of Charlotte, N.C.-based Nucor Corp. "You can build steel mills, but you can only run them if you have raw materials."

Kim Soo Jung, a spokeswoman for Posco, the large South Korean steelmaker, says: "We can't say we're not concerned about the increased production volume in China. If they don't stop producing [so much], that will cause overcapacity."

Even so, Posco is considering its own expansions, including a possible $8.4 billion joint venture with Australia's BHP Billiton to build a steel-slab plant in India with capacity for 10 million tons a year. As recently as 2001, Kim says, Posco was the world's biggest producer of steel in terms of volume, but it has lost that status after other steelmakers expanded through a series of mergers. "If we want to continue to be a leader in the industry, we need to expand our capacity," she says.

Chinese officials emphasize that their latest expansions will be aimed at serving the high-grade steel market rather than users of lower-grade construction steel. Wang Xiaoguang, head of the economic operation and development research department at China's State Development and Reform Commission, predicts China's steel output will only increase 10 percent to 15 percent next year, compared with more than 20 percent in recent years.

The United States, for its part, remains a net importer of steel, taking in about 30 million of the 130 million tons of steel it consumes each year. A few companies, such as Nucor and Fort Wayne, Ind.-based Steel Dynamics Inc., have expanded existing capacity this year for certain types of steel. But that additional production roughly offsets steel-making capacity that disappeared from the United States between 2000 and 2003, when almost 40 companies declared bankruptcy.