Bloomberg: Microsoft's Gates, World's Richest Man, Bets Against the Dollar

Microsoft's Gates, World's Richest Man, Bets Against the Dollar

Jan. 29 (Bloomberg) -- Bill Gates, the world's richest person with a net worth of $46.6 billion, is betting against the U.S. dollar.

``I'm short the dollar,'' Gates, chairman of Microsoft Corp., told Charlie Rose in an interview in front of an audience of about 200 at the World Economic Forum in Davos, Switzerland. ``The ol' dollar, it's gonna go down.''

Gates's comments reflect the same view as his friend Warren Buffett, the billionaire investor who has bet against the currency since 2002. Buffett said last week that the country's trade gap will probably further weaken the dollar, which fell 21 percent against a basket of six major currencies between January 2002 and the end of last year.

``It is a bit scary,'' Gates said. ``We're in uncharted territory when the world's reserve currency has so much outstanding debt.''

The U.S. is borrowing to finance record budget and trade deficits. Total U.S. government debt stood at $7.62 trillion as of Jan. 27, up 8.7 percent from a year earlier.

Forbes magazine's list of billionaires ranks Gates, 49, No. 1. Buffett, 74, is second, with more than $30 billion. Almost all of it is in Berkshire stock.

The two have been friends for years, taking vacations together and playing online bridge. Gates in December joined the board of Berkshire Hathaway Inc., the investment company that Buffett runs.

China `Change Agent'

The country is importing more than it exports, and the government is funding part of its budget deficit by selling bonds to foreign investors, Buffett said in an interview with CNBC Jan. 19.

``Unless we have a major change in trade policies, I don't see how the dollar avoids going down,'' Buffett said.

Gates described China as a potential ``change agent'' for the next two decades. ``It's phenomenal,'' Gates said. ``It's a brand new form of capitalism.''

His $27 billion foundation in September received approval from China's foreign-currency regulator to invest as much as $100 million in the nation's yuan shares and bonds.

Gates, holder of almost 1.1 billion Microsoft shares with a market value of about $29 billion, also owns about 3,580 Class A shares of Berkshire Hathaway. His personal investment vehicle has reported holding $3 billion worth of stock in 14 companies, including cable provider Cox Communications Inc. and the Canadian National Railway Co.

New York Times:Saudis Shift Toward Letting OPEC Aim Higher

Saudis Shift Toward Letting OPEC Aim Higher
By JAD MOUAWAD

Over the last year, Saudi Arabia has quietly endorsed a shift in strategy that was once championed by only a handful of OPEC's more radical members, like Iran or Venezuela, who were pushing for prices higher than those of the last two decades.

Instead of enforcing what has been OPEC's official policy since March 2000 and defending prices of $22 to $28 a barrel, Saudi Arabia, the group's most powerful member, has acted to nudge the group's reference price closer to $40 a barrel. Along the way, OPEC has grown increasingly fond of high prices, with crude oil trading near last year's records.

While the century-old oil industry has been through a number of boom-and-bust cycles before, OPEC's strategy carries risks. For consuming nations, high oil prices could derail economic growth and plunge the world into lasting recession; for producers, it could mean lower demand for their commodity in the long run as consumers shift to alternative fuels or promote energy-conservation policies.

The shift by the Saudis adds to their uneasy relations with the United States. Based for more than half a century on cheap oil in exchange for security, those relations have not recovered from the aftermath of the terrorist attacks on Sept. 11, 2001.

It also underlines a belief that after the oil shocks of the late 1970's and 1980's, modern economies can better withstand higher oil prices than in the past.

"My view is the world is not suffering, as far as economic growth is concerned, from where prices are today," Ali al-Naimi, Saudi Arabia's oil minister, told Reuters at the World Economic Forum in Davos yesterday. "The price today doesn't seem to be affecting economic growth negatively, and we do not want it to."

OPEC's approach will be discussed this weekend when the Organization of the Petroleum Exporting Countries meets in Vienna to consider whether cuts in production are warranted to fend off a slowdown in demand in the second quarter.

Many OPEC oil ministers, like the current president, Sheik Ahmad al-Fahd al-Sabah of Kuwait, indicated recently that they would leave production unchanged. They estimate that keeping the current level of 27 million barrels a day will not cause prices to fall.

OPEC's policy shift has yet to be made public, but it coincides with an emerging consensus among analysts, traders, and oil companies that prices will be substantially higher in the coming decade than the average of $20 a barrel in the 1990's.

At a time when prices already seem high, oil-producing countries need additional revenue to deal with social and economic problems at home; many have young and rapidly growing populations, with high unemployment and rising public debt. That explains why Saudi Arabia is shifting away from its previous view.

Nordine Ait-Laoussine, a former OPEC secretary general and oil minister from Algeria who now heads a consultancy in Geneva, said, "I don't know if Saudi Arabia has become a price hawk, but for sure, it isn't a price dove anymore."

Last year, OPEC's 11 members - Algeria, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela - received $338 billion in revenue from oil exports, a 42 percent increase from 2003, according to figures compiled by the federal Energy Information Administration. That agency, part of the United States Department of Energy, forecast a 2 percent increase in OPEC revenue for 2005.

Adjusting for inflation and population growth, OPEC's revenue per capita dropped to $600 in 2004, from a high of $1,800 in 1980. For Saudi Arabia, where the population has more than doubled in the last 25 years, per capita revenue has dropped from $22,000 in 1980 to $4,000 last year. "They have higher revenue needs because they have higher spending, especially on security or social services," said Lowell Feld, the senior world oil market analyst with the Energy Information Administration, who compiled the figures.

Paul Horsnell, director of energy research at Barclays Capital in London, said: "What OPEC is going through is a delicate choreography. Everyone recognizes that $20 a barrel is too low a price. All OPEC is doing now is accompanying where the market sees prices going in the future. But there's nothing terribly explicit about it."

When they met in December in Cairo, OPEC ministers were jolted into action by rapidly falling prices. Within weeks, oil traded in New York had tumbled from its $55 a barrel high in October to around $40 a barrel as the group met. OPEC, which supplies a third of the world's oil production and half of the exports, decided to trim its output by one million barrels a day, or 4 percent, to stem the slide.

The strategy worked as prices rebounded. Crude oil futures in New York are up 15 percent since the beginning of the year. On Thursday, crude oil closed at $48.84 a barrel, up 6 cents, on the New York Mercantile Exchange.

"OPEC's actions speak louder than their words," said Lawrence J. Goldstein, president of the PIRA Energy Group, an oil consultancy in New York. "It was not so long ago that Saudi Arabia mentioned $25 as a fair price. But they seem to have dramatically shifted their price to $35 a barrel. They won't admit it because that would have enormous political consequences."

Because transactions on the oil market are priced in dollars, the currency depreciation in the last two years has been one of OPEC's main concerns and a central argument in favor of higher oil prices.

In its last monthly report before Sunday's meeting, OPEC highlighted that issue again. The report said that the benchmark was worth $23.50 if adjusted for inflation and currency fluctuations. That would put it at the low end of OPEC's current price range.

"Their reference price is the OPEC basket and what that represents in terms of purchasing power for them," said Vera de Ladoucette, an analyst with Cambridge Energy Research Associates, an oil consultancy in Paris. "Their alarm bell is $35 for the basket."

To be sure, OPEC alone is not responsible for high prices. Since the beginning of 2002, when the current rally started, a series of unconnected events conspired to push prices up - the war in Iraq, production disruptions in Nigeria, strikes by oil workers in Venezuela and Norway, hardball politics in Russia and a hurricane in the Gulf of Mexico named Ivan.

Still, Saudi officials repeat that their government's policy is to keep oil markets well supplied, not rationed. Crown Prince Abdullah, who has been governing Saudi Arabia since King Fahd suffered a stroke in 1995, said in August that he favored oil prices of $25 to $30 a barrel.

The kingdom took steps last year to nudge prices down, stepping up production to some 10 million barrels a day and accelerating its program to add production capacity.

"Saudi Arabia has concluded that for the first time since the 1970's, an overall expansion in production capacity is justified," Brad Bourland, the chief economist for the Samba Financial Group in Riyadh, wrote in a recent report. He said that Saudi Arabia had increased its capacity to 11 million barrels a day, with the addition of two new fields, Abu Sa'fah and Qatif, and is starting 2005 with excess capacity of about two million barrels a day.

But Saudi officials remain evasive on a timetable for raising capacity. That issue is reflected in the debate over Saudi Arabia's pivotal role in the oil market, according to the Center for Global Energy Studies, a market analysis group.

"Boosting capacity risks undermining oil prices and with them, the kingdom's oil export revenue," the group, founded by Sheikh Ahmed Zaki Yamani, the Saudi oil minister for much of the 1970's and 1980's, said this week. "Better, then, to save the money and seek higher prices, especially as these higher prices show little sign in the short term of undermining global oil demand."

Prudent Investor says...

Bye bye cheap oil!

International Herald Tribune:UN urges global action on U.S. debt

UN urges global action on U.S. debt
By Elizabeth Becker The New York Times
Thursday, January 27, 2005

WASHINGTON The United Nations has urged all major industrial countries, especially Europe and Japan, to help the United States reduce its twin deficits by spurring their own economies to grow faster.

In its report, World Economic Situation and Prospects 2005, the world body said on Tuesday that the twin budget and trade deficits of the United States were throwing the global economy off balance.

It echoed warnings already issued by the International Monetary Fund and other financial institutions in saying that the United States cannot continue to maintain such huge debts.

"What we really need is a major advancement in cooperation among the advanced economies to help the U.S. get out of this problem," said José Antonio Ocampo, the UN under secretary general for economic and social affairs.

The U.S. deficit is a global problem in part because it is the fastest-growing economy among the leading industrial nations and, together with China, is largely responsible for helping pull the world economy out of doldrums.

But whereas China has become an economic engine through its huge growth in manufacturing and exports, the United States has pushed growth by consuming far more goods than it exports, raising concerns about sustainability.

The report said that the world economy grew at a healthy 4 percent rate in 2004 but that the cyclical recovery was now past its peak. Gross world product will grow by 3.25 percent this year, it predicted.

Over all, developing economies including those of China and India are doing better than the industrialized nations, the report said.

That, Ocampo said, is the case despite a "peculiar mix" of high commodity prices, high oil prices and a lack of major disturbances in financial markets.

The U.S. trade deficit is expected to come in at a record $600 billion for 2004. The Bush administration has promised to reduce spending in its new budget and has called on Beijing to revalue the yuan against the dollar to make Chinese exports more expensive, which in turn would help shave the U.S. trade deficit.

But the UN report said the problem was more complicated. Letting the dollar fall could spur U.S. growth and lead to more consumer spending there on foreign goods; but a greater drop in the dollar's value could hurt the economies of Europe and Japan that need to grow in order to buy U.S. exports and help right the trade imbalance.

The U.S. Treasury secretary, John Snow, already plans to ask for immediate help from the wealthiest U.S. trading partners at a meeting next week in London of the finance ministers and central bank governors of the Group of 7 leading industrialized democracies. Snow has said he will tell these countries that if they are concerned about the U.S. deficit, they should purchase more American goods and services.

For their part, the Europeans will argue, instead, that the countries should make a coordinated effort to stop the drop in the dollar, a move that would help spur their own growth but one the administration opposes.

The report urges the major industrial countries to work out a solution that will help the United States reduce its deficits by spurring their own economies to grow faster, especially Japan and the countries of Europe.

Most of the wealthiest European countries have trade surpluses, though not as large as those of China and Japan. The exceptions are Britain, which has a current-account deficit equivalent to 2 percent of its gross domestic product, and Italy, with a deficit of 1.1 percent of GDP.

"The message of our report is that the industrialized countries all have their own problems that will hurt growth," Ocampo said.

"The U.S. has its deficits, while Europe and Japan are slow in recovering. But the most challenging is the U.S. twin deficits."

Forbes.com: "Economist: China Loses Faith in Dollar"

Economist: China Loses Faith in Dollar
Forbes
01.26.2005, 03:25 PM

China has lost faith in the stability of the U.S. dollar and its first priority is to broaden the exchange rate for its currency from the dollar to a more flexible basket of currencies, a top Chinese economist said Wednesday at the World Economic Forum.

At a standing-room only session focusing on the world's fastest-growing economy, Fan Gang, director of the National Economic Research Institute at the China Reform Foundation, said the issue for China isn't whether to devalue the yuan but "to limit it from the U.S. dollar."

But he stressed that the Chinese government is under no pressure to revalue its currency.

China's exchange rate policies restrict the value of the yuan to a narrow band around 8.28 yuan, pegged to US$1. Critics argue that the yuan is undervalued, making China's exports cheaper overseas and giving its manufacturers an unfair advantage. Beijing has been under pressure from its trading partners, especially the United States, to relax controls on its currency.

"The U.S. dollar is no longer - in our opinion is no longer - (seen) as a stable currency, and is devaluating all the time, and that's putting troubles all the time," Fan said, speaking in English.

"So the real issue is how to change the regime from a U.S. dollar pegging ... to a more manageable ... reference ... say Euros, yen, dollars - those kind of more diversified systems," he said.

"If you do this, in the beginning you have some kind of initial shock," Fan said. "You have to deal with some devaluation pressures."

The dollar hit a new low in December against the euro and has been falling against other major currencies on concerns about the ever-growing U.S. trade and budget deficits.

Fan said last year China lost a good opportunity to do revalue its currency, in July and October.

"High pressure, we don't do it. When the pressure's gone, we forgot," Fan said, to laughter from the audience. "But this time, I think Chinese authorities will not forget it. Now people understand the U.S. dollar will not stop devaluating."

Asked how speculation about revaluation could be curbed, he noted that China imposed a 3 percent tariff on Chinese exports.

Some Chinese experts say that perhaps inflation can be reduced this year, "but I'm not that optimistic," Fan said, noting that fuel prices keep rising.

"So maybe China (will) have 4-5 percent inflation in 2005," he said.

Fan, whose nonprofit institute specializes in analyzing the Chinese economy, stressed that the country's development is a long-term process that will take decades, maybe a century.

Since China's economic modernization began over a decade ago, 120 million rural laborers have moved into cities, but another 200 or 300 million people need to move into the cities from the countryside to spur development, he said.

"The income disparity is huge, and income disparity will stay with us for a long time, as long as those 200 to 300 million rural laborers stay in the countryside," Fan said.

Nonetheless, William Parrett, chief executive of Deloitte Touche Tohmatsu, told the panel that Chinese companies are making significant progress in becoming global giants, led by state-owned companies.

"It's probably at least 10 years before the objective of the government of 50 of the largest 500 companies in the world being Chinese" is achieved, he said.

Prudent Investor Says…

Oh no…Don’t you think that the Chinese are getting a little bit more audacious?

Businessworld: Southeast Asia currencies may be next big bet

Southeast Asia currencies may be next big bet

SINGAPORE -- Thailand, Indonesia and the Philippines could see their currencies outperform those of richer Asian neighbors in the coming months as foreign investors fuel a stock market boom on signs of a sustained economic upswing.

The three economies fell off the radar screens of global investors after the 1997 Asian financial crisis. The rise of China and India since the turn of the millennium pushed Southeast Asia further into the shadows.

Not any longer. Leading stock market indices in all three countries have almost doubled in the past two years, even as their currencies weakened or underperformed those of their powerful neighbors South Korea, Taiwan, Singapore and Japan.

Analysts now say it's time for the Southeast Asian currencies to play catch up with, or even outrun, their northern rivals to reflect an improvement in their economies and the confidence investors have shown in the region's companies.

"Our indicators are pointing to an outperformance of the Southeast Asian currencies in the coming months and a stalling of the (north Asian) currencies," said Philip Wee, strategist at Singapore's DBS Bank, Southeast Asia's largest lender.

"Although the dollar looks weak, it's difficult to squeeze out more from north Asian currencies. So the path of least resistance is Southeast Asia. Do the policy makers mind? No!"

The central banks have largely stayed out of the currency markets in the past few months even as their counterparts in South Korea, Taiwan, Singapore and India accumulated tens of billions of dollars -- brought in by foreign investors and local exporters -- to curtail strong gains in their exchange rates.

Some analysts say this intervention could well continue as demand for North Asia's electronics exports slows. That would make currencies of economies boasting resurgent domestic demand -- such as Thailand or Indonesia -- relatively more attractive.

Thailand expects its economy to grow between 5.5% and 6.5% this year. Indonesia is hoping for growth of more than 6%. The Philippine economy, which expanded at its fastest pace in 15 years in 2004, may grow 6.3% this year.

With that kind of growth, Claudio Piron, a currency strategist at JP Morgan Chase, expects the baht to outperform all other Asian currencies, except the Taiwan dollar, in 2005.

"The expected resilience of the baht is explained by two key drivers: an upturn in the domestic investment cycle and continued global growth."

He predicts the baht, already at a 4-1/2-year high, will firm almost 5% to 36.8 per dollar by the end of the year despite losses suffered by Thailand's tourism industry from the Dec. 26 tsunami.

The tsunami wreaked most devastation on Indonesia. In its aftermath, Indonesia attracted billions of dollars in foreign aid and was granted more time to repay government-to-government debt.

The inflows, coupled with the new government's stepped-up efforts to lure back foreign direct investors, are helping to show the rupiah in a new light.

"I particularly like Indonesia; their banks have started lending again," said Wee at DBS Bank.

Doubtless, Southeast Asian nations are far from solving their deep-rooted problems -- widespread poverty, lack of pricing power overseas because of their reliance on low-value-added exports, endemic corruption and bottlenecks to investment.

"I'm long on the baht but I'm not a structural bull for rupiah or the peso," said Bhanu Baweja, a strategist at UBS.

While Baweja agrees that the rupiah and the peso are both undervalued, he does not expect them to outperform because foreign investments are not strong enough. The currencies could get hurt once the United States raises interest rates, he said.

In the case of the Philippines, the government's inability to speed up fiscal reforms led Standard & Poor's this month to cut the country's long-term debt rating by one notch. Yet the government beat its budget deficit target for 2004 and expects to cut the shortfall further this year.

The peso, the best-performing Asian currency so far in 2005, may benefit further from pledges by Chinese firms to invest $1.6 billion in the country's mining industries and from a $1 billion bond that the government plans to price on Wednesday, said Irene Cheung, head of Asian currency strategy at ABN AMRO Bank.

She said stock investors had noted the new optimism about Southeast Asia and it was time currencies reflected that change.

Indonesia's key stock index powered ahead this month to record highs, the Philippine index raced to a five-year high and the Thai stock market benchmark rose to a nine-month high.

"The baht and the peso, two of our favorite currencies, continue to benefit from equity inflows," said Cheung. -- Reuters

The Prudent Investor Says…

I have been writing about this ‘regional currency impetus’ since the last semester of last year. Today, the unfolding developments in favor of the domestic currency are being carried by the mainstream media, which should provide for a psychological boost and reaffirm the emerging trend. And as I have written before, expect capital flows to the domestic economy to accelerate as the trend becomes entrenched.

Financial Times Editorial: Dollar dilemma

Dollar dilemma
Financial Times
Published: January 25 2005 02:00 | Last updated: January 25 2005 02:00

The fate of the dollar rests in the hands of a handful of central bankers in Asia. We have known this for some time. Since the foreign private sector shows insufficient appetite for US assets, the US relies on central bank purchases to fund its current account deficit and the acquisition of foreign assets by US residents. By absorbing the excess supply of dollars these central banks stop their own currencies appreciating against it. This Faustian bargain underpins today's currency prices and trade patterns and sustains global imbalances. Any suggestion that foreign central banks may be losing their hunger for dollars is highly significant.

A new survey suggests that central bankers are beginning to ponder whether it is in their interest to carry on buying dollars. This does not signal a rush for the exits. Much of the rise in the share of reserves held in euros is a valuation effect. Two-thirds say they want to keep the proportion in dollars unchanged this year. Neither Japan nor China - which together hold 40 per cent of the world's reserves - took part in the survey. Yet one-third of those polled did indicate a desire to increase the share of reserves held in euros. Eurozone capital markets are seen as liquid. Not a single respondent wants to hold a greater share in dollars.

It would be surprising if central bankers were not thinking very carefully about what they should be doing. The fall in the dollar has already resulted in big capital losses for those holding large dollar reserves. They risk far bigger losses if the so-far steady decline turns into a rout. The importance of capital loss increases as reserves rise relative to gross domestic product. For example, Malaysia's reserves are now equal to 54 per cent of GDP, up from 34 per cent two years ago.

Could a country with a de facto dollar peg diversify its reserves without appreciating against the dollar? Many assume not. In fact the answer, as so often in international economics, depends on whether the country in question is "small" or "large" in this context. A "small country" with medium-sized reserves, such as Thailand, Malaysia or even India, could continue to absorb surplus dollars on the bilateral currency market, but sell its stock of dollars for euros. The effect would mainly be to push the euro up against the dollar. The central bank's own currency could remain pegged.

A "large country" - Japan or China - could also embark on the same strategy. But the scale of the dollar sales would probably cause a generalised dollar collapse, with private buying disappearing altogether, demanding still greater central bank purchases. The central bank would lose control over domestic money supply, resulting in soaring inflation that would in turn push up the real exchange rate. In practical terms, Japan and China probably cannot diversify to a meaningful extent without letting their currencies rise. So keep an eye on the other Asians. Who will break ranks first?

The Prudent Investor says

This “Armageddon” scenario precisely is what I am afraid of. For the Editorial of the Financial Times, which is a mainstream business outfit, to raise this concern simply reflects the gravity of the imbalances. In other words, in the spectrum of risks, this is not an improbable event. This also implies that in such a case where the Central Bank does ‘lose control over money supply’ means that there could be that risk of a ‘crash’ in the US Dollar based currency system. And as to what money system, in its aftermath, the world will adopt remains virtually uncertain. Yet history has shown that under these circumstances, tangible assets will most likely preside as the transition. Hence precious metals today serve as two purposes, one as commodities and most importantly, as an insurance. Profit from folly and not be a part of it!

Reuters: China Says It Needs Time Before Yuan Adjustment

China Says It Needs Time Before Yuan Adjustment
Tue Jan 25, 2005 11:29 AM ET

BEIJING (Reuters) - China needs more time to prepare for making its currency more flexible, a senior economic official said on Tuesday, pouring cold water on expectations of that long-awaited changes could happen soon.

"China doesn't have conditions to adjust the renminbi (yuan) exchange rate at present," Li Deshui, head of the National Bureau of Statistics, told Reuters in an interview after the bureau's quarterly news conference.

The yen fell 0.5 percent against the dollar and other Asian currencies also were jolted by Li's comments.

Asian currencies have been supported by speculation that the yuan might be revalued early in 2005. Such a move would give Asian currencies more room to rise without making their exports less competitive against China's.

Li is a member of the central bank's monetary policy committee, which plays a vital role in determining interest rates and yuan policy.

He also said there was no immediate need for China to raise interest rates, despite his earlier announcement of faster-than-expected economic growth of 9.5 percent in the year through the fourth quarter.

"Whether we need to raise interest rates will be based on the economic situation. But I can't see any need right now."

In October the central bank raised interest rates by 0.27 percentage point, the first increase in nearly a decade.

A currency change could not happen immediately, Li said.

"Can we achieve such conditions in one or two days? This requires a process," said Li.

"We need a good and feasible plan, and formulating such a plan also needs time."

The comments dented speculation of any imminent policy change, as shown by the Chinese currency derivatives market, where investors bet on the timing and scale of a possible revaluation.

Li's remarks also came ahead of a meeting of the Group of Seven rich nations scheduled for Feb. 4 and 5 that is expected to see officials call for more currency flexibility from China and other Asian countries.

The United States and others have pressed Beijing to allow the yuan, which is pegged near 8.28 to the dollar, to move more freely, saying the current level artificially weak and makes Chinese goods unfairly cheap on world markets.

SPECULATORS WARNED

Li also issued a stern warning to speculators positioned to gain from a possible revaluation.

"Those who hope to make a fortune by speculating on a renminbi revaluation will not succeed in making a profit," he said.

Chinese leaders have insisted they will not embark on reforms as long as speculation is at fever pitch.

Li's comments caused the premium for 1-year non-deliverable yuan forwards to narrow about 6 percent to 3,750 points on Tuesday at 0600 GMT, implying an exchange rate of 7.9 in 12 months' time.

Premier Wen Jiabao said in December that China would move gradually to a flexible currency after taking into account the need for a healthier financial system and economic stability.

Economists have said that the most likely scenario for reform is a slight widening of the yuan's trading band or dropping the dollar peg in favor of a currency basket.

Talk that China may allow the yuan to rise against the dollar has fanned inflows of speculative cash and triggered some Chinese households to convert dollars into yuan.

China's foreign currency reserves rose more than $200 billion last year to nearly $610 billion. But only about $93 billion of that came from the trade surplus and foreign investment. Analysts say the bulk of the remainder was money flowing in from speculators betting Beijing will allow the yuan to rise or re-peg it at a higher level.

Prudent Investor on Mining Misdiagnosis

Prudent Investor says...Caveat!!!

Today, in the business section of the Philippines most prominent broadsheet, a market observer attempted to analyze the mining industry utilizing the traditional financial evaluation tools from where his recommendations where made. I would like to point out that the tools used to evaluate the mining industry abroad have stark nuances to that of the traditional ratios like the frequently used Price-Earnings Ratio. Hence recommendations based on these may be construed as misleading. Find below an excerpt from Investopedia.com on how the Precious Metal industry SHOULD BE evaluated.

Analyst Insight

The price of gold fluctuates on a minute-by-minute basis, so taking a look at the historical price range is the first place you should look. Many factors determine the price of gold, but it really all comes down to supply and demand. Demand typically does not fluctuate too much, but supply shocks can send prices either soaring or into the doldrums.

The difference between production costs and the futures price for gold equals the gross profit margins for mining companies. Therefore, the second place you want to look is the cost of production. The main factors to look at are the following:

*Location - Where is the gold being mined? Political unrest in developing nations has ruined more than one mining company. Developing nations might have cheaper labor and mining costs, but the political risks are huge. If you are adverse to risk (which most of us are) then look for companies with mines in relatively stable areas of the world. The costs might be higher, but at least the company knows what it's getting into.

*Ore Quality - As we mentioned above, ore is mineralized rock that contains metal. Higher quality ore will contain more gold, which is usually reported as ounces of gold per ton of ore. Generally speaking, oxide ores are better because the rock is more porous and therefore easier to remove the gold.

*Mine Type - The type of mine a company uses is a big factor in production costs. Most underground mines are more expensive than open pit mines.

The cost of production is probably the most widely followed measures for analyzing a gold producer. The lower the costs, the greater the operating leverage, which means that earnings are more stable and less volatile to changes in the price of gold. For example, a company that has a cash cost around $175/ounce is, for obvious reasons, in a much better position than one whose cost is $275/ounce. The low-cost producer has much more staying power than the marginal producer. In fact if the price of gold declines below $275/ounce, the higher-cost producer would have to stop producing until the price goes back up. Producers usually publish their cost of production in their annual report; this cost includes everything from site preparation to milling and refining. It, however, doesn't include exploration costs, financing, or any other administrative expenses the company might incur.

Aside from looking at costs, investors should carefully look over revenue growth. Revenue is output times the selling price for gold, so it may fluctuate from year to year. Well-run companies will attempt to hedge against fluctuating gold price through the futures markets. Take a look at the revenue fluctuations over the past several years. Ideally the revenue growth should be smooth. Companies with revenues that fluctuate widely from year to year are very hard to analyze and aren't where the smart money goes.

Investors should keep an eye on debt levels, which are on the balance sheet. High debt puts a strain on credit ratings, weakening the company's ability to purchase new equipment or finance other capital expenditures. Poor credit ratings also make it difficult to acquire new businesses.

As a final caveat (beware), never analyze a precious-metals company based on the price-to-earnings ratio. In general, a high P/E means high projected earnings in the future, but all gold stocks have high P/E ratios. The P/E ratio for a gold stock doesn't really tell us anything because precious metals companies need to be compared by assets, not earnings. Unlike buildings and machinery, gold companies have large amounts of gold in their vaults and in mines throughout the world. Gold on the balance sheet is unlike other capital assets; gold is seen as currency of last resort. Investors are therefore willing to pay more for a gold company because it is the next best thing to physically holding the gold themselves.

There are a few valuation techniques that analysts use when comparing various precious metal companies. The most popular and widely used ratio is market capitalization per ounce of reserves (market cap divided by reserves). This indicates to investors what they are paying for each ounce of reserves--obviously a lower price is better.

Fool.com: Party On, King Coal

Party On, King Coal
By Bill Paul
Fool.com

January 24, 2005

Over the past year, the prices of coal company stocks have surged. Industry leader Peabody Energy (NYSE: BTU) has nearly doubled, while Arch Coal (NYSE: ACI), Consol Energy (NYSE: CNX), and Alliance Resource Partners (Nasdaq: ARLP) have enjoyed nearly as spectacular a run. There have been two successful IPOs -- International Coal and Foundation Coal (NYSE: FCL). Related concerns such as mining equipment manufacturer Joy Global (Nasdaq: JOYG) and Headwaters (Nasdaq: HDWR), a company that turns coal-mining waste into burnable fuel, have also done well.

Coal companies became diamonds in the rough in 2004 because of increasing demand from electric utilities, compounded by forecasts of an impending shortage of natural gas that's expected to put coal in even greater demand. But after a year of such heady stock gains, surely the party's over for old King Coal. Right?

Wrong. Indeed, for some, the party looks to be just getting started.

Street's next catchphrase

Ever heard the phrase "minable coal"? Wall Street loves catchphrases, and I suspect that by year's end, that phrase will be bandied about on Wall Street as shorthand for why coal companies continued to rise in 2005, some by as much as another 50% to 100%.

Minable coal refers to the amount of coal in the ground that is technologically and economically recoverable. While conventional wisdom says that North America still has a 150- to 250-year supply of coal -- making it the so-called Saudi Arabia of coal -- experts say the amount of minable coal is actually a lot less -- perhaps only 50 to 60 years' worth.

America's minable coal reserves are limited in part by the fact that, especially in Appalachia, the remaining coal seams are getting thinner and deeper, making extraction increasingly difficult. Specifically, these thinner, deeper seams can't easily use the giant extraction machines, called longwalls, that have been responsible for rising productivity in underground mines.

Beyond reach

A second major limiting factor is environmental regulations, especially restrictions on disturbing the land, which have effectively put some reserves off-limits. Although the federal government and some state governments are expected this year to impose even harsher regulations on the burning of coal, utilities remain committed to coal for the long term. Given the number of new coal-fired power plants that are expected to be built, America will be consuming coal at a faster and faster rate over the next two decades, and that will further shorten the amount of time our minable coal reserves will last. (Recent forecasts suggest we'll be using about 2.5 to 3 billion tons of coal per year within 15 to 20 years, compared with only about 1.1 billion tons currently.)

To meet this rapidly rising demand in the face of limited minable reserves, prices will have to keep going up -- perhaps to as much as $70 to $80 a ton in Appalachia this year alone, compared with about $50 a ton now. Another positive for coal companies is that some of their minable coal reserves may be grossly undervalued, because they've been on company books for decades. Yet another positive is how electric utilities buy coal. Simply put, utilities have a tendency to leave themselves with too little coal on hand, exposing them to sudden price increases.

Biggest beneficiaries

Not all coal companies will benefit equally this year from the minable-coal story, according to Glenn W. Wattley, an independent financial analyst and coal industry expert. Wattley, whom I used to book to appear on CNBC, says that three companies in particular are poised to rise -- Peabody, Consol, and Arch -- because each has a solid reserve base, plus good contracts and mining capabilities.

Wattley says Consol and Peabody should especially benefit from the mining of more so-called dirty coal, which will occur because utilities are investing heavily in equipment that will enable their power plants to burn dirty coal without polluting the atmosphere. He further adds that Consol looks good also because of its capability for extracting methane gas from coal. Coal-bed methane gas is increasingly being seen as a supplement to America's natural gas reserves.

Asian assistance

As for Joy Global, it stands to benefit because, given the inability of longwalls to reach the thinner, deeper seams, coal companies will likely have to buy more of Joy's other mining equipment to do the same job. Meanwhile, Headwaters should continue to benefit from its technology for recovering and reusing coal waste, which clearly has greater value in a minable coal world.

Peabody, however, could be the best-positioned of all for 2005, in part because of rising demand from Asian steel manufacturers. Nippon Steel's recent announcement that it will buy coking coal for more than $120 a ton from BHP Billiton should help Peabody, which has significant production serving the same Asian market.

Fool contributor Bill Paul, a former Wall Street Journal and CNBC energy reporter, does not own shares in any of the companies mentioned in this commentary. The Motley Fool is investors writing for investors.

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Prudent Investor says

This is a very timely article on coal. Think Semirara. Hmmm. Expanding GLOBAL demand+ rising coal prices+Local coal MONOPOLY= Ballooning Profits. Semirara offering began yesterday and is slated to relist on February 4. For further coal basics I suggest that you read the link above 'diamonds in the rough'

BBC: Central banks 'shunning dollar'

BBC: Central banks 'shunning dollar'

Many of the world's central banks are starting to look to the euro to fill their currency reserves instead of the dollar, a survey suggests.

The poll carried out by Central Banking Publications found 39 nations of the 65 surveyed raising their euro holdings, with 29 cutting back on the US dollar.

The dollar's sharp fall in the face of huge deficits could be one cause of the switch, the report says.

The survey was sponsored by the UK's Royal Bank of Scotland.

Losing ground

The last three months of 2004 saw the dollar slip by 7% against the euro, taking it to repeated all-time lows of more than $1.30.

The US is running a budget deficit of close to $500bn a year, funded largely by China and Japan buying large amounts of US government bonds.

Some economists have suggested that the two could ease their purchases, making it more difficult for the US to support its borrowing.

Similarly, the current account - the difference between the amount of money going out of the US and coming in - is deeply in the red, the result largely of large trade deficits.

Both factors have helped to push the dollar lower. However, the falling dollar does mean that central bank holdings of dollar reserves are losing value.

"Generally, central banks' approach to reserve management is becoming much more active as they search for higher returns," said the authors of the report.

"The euro seems to have come of age."

William Pesek of Bloomberg: Is the Philippines a Buy? Don't Ask Calpers

Prudent Investor says despite all the woes and the prospects of a Calpers pullout according to Bloomberg's analyst William Pesek the Philippines is a buy!!!!!!!!

Is the Philippines a Buy? Don't Ask Calpers
by William Pesek Jr.

Jan. 21 (Bloomberg) -- The Philippines is a buy!

The California Public Employees' Retirement System, the largest U.S. public pension fund, didn't exactly say that this week. Quite the opposite, according to local press reports. Calpers is said to be mulling dropping Asia's No. 12 economy from the list of places in which it invests.

Yet considering Calpers' track record of calling Asian markets, the Philippines may be about to rebound. After all, some traders here don't consider the fund a giant contrarian indicator in Asian markets for nothing.

In early 2002, for example, Calpers pulled out of Indonesia, Malaysia and Thailand, citing concerns about corporate governance, political instability and labor standards. Odd thing, considering Calpers had no qualms investing in companies like WorldCom Inc. and Enron Corp. that proved to be poster-children of bad corporate governance.

The biggest losers weren't the economies Calpers vacated, but its shareholders. Calpers missed out on a 17 percent rise in Thai stocks in 2002 and 117 percent jump in 2003. It also lost out on an 8 percent rise in Indonesian shares in 2002 and a 63 percent increase in 2003. Malaysian shares rose almost 23 percent in 2003.

In 2004, Morgan Stanley Capital International's Asia-Pacific Index, which tracks more than 900 stocks, gained 16 percent. The Dow Jones Industrial Average gained just 3 percent.

Following Calpers

Calpers did reinstate Malaysia in February 2004, in time to benefit from a 14 percent jump in its stock market. The same is true of Indian stocks, which rose more than 11 percent last year. Calpers isn't in Sri Lanka, though. Even after Asia's Dec. 26 tsunami, Sri Lanka stocks are up over 10 percent so far this year.

Investors following Calpers' market calls in Asia may regret it. Piggybacking the strategies of the ``smart money'' is one of the oldest practices in the investment world, and Asia is hardly an exception. Consider what billionaire Warren Buffett's 2003 investments in PetroChina Co., China's No. 1 oil producer, did for its stock (it's up 140 percent).

Now, Calpers is thinking anew about scrapping its Philippine investments. Admittedly, it's hard to fault its investment committee, especially after Standard and Poor's earlier this week cut the country's junk debt rating.

Argentina of Asia

S&P cut the long-term foreign-currency rating to BB- from BB and the local-currency rating to BB+ from BBB- after President Gloria Arroyo failed to get lawmakers to pass tax increases needed to narrow the budget deficit. The foreign-currency rating is now the lowest since June 1993 and puts the Philippines on a par with Brazil, Turkey and Vietnam.

All this gets at why the Philippines is often regarded at the Argentina of Asia. Budget deficits since 1998 increased government debt, which in September rose 17 percent from a year earlier. S&P expects interest payments to account for about 40 percent of government spending this year, up from 22 percent in 1999.

Arroyo was re-elected last year amid pledges to curb debt. Her failure to do so has investors like Desmond Soon, who manages about $200 million of bonds at Pacific Asset Management Ltd. in Singapore, fearing ``serious fiscal problems'' and avoiding Philippine debt.

Looking for Positives

Convincing markets Philippine debt won't spiral out of control is a challenge in the best of times. They have a funny way of remembering when nations declare a moratorium on foreign debt payments, as the Philippines did 20 years ago and Argentina did in 2001. Some wonder if it could happen again in Manila.

It hardly helps that S&P also lowered its debt ratings for some of the largest Philippine companies, including state-owned National Power Corp. and San Miguel Corp. National Power, San Miguel, Philippine Long Distance Telephone Co., Globe Telecom Inc. and Universal Robina Corp. all had their foreign-currency ratings cut to BB-.

Yes, it's quite a feat to find constructive things to say about one of Asia's most fragile economies. Yet now that Calpers may be pulling out, perhaps the Philippine economy and markets have reached a bottom.

If you really search for it, there are some positive things going on in the Philippines. First, the economy may have reached a 15-year high of 6.2 percent last year thanks to growth in the service sector. Faster growth could boost tax revenue.

Bad Loans

Second, the bad-loan ratio at Philippine commercial banks may drop by almost half by year-end as lenders are expected to more than double the sale of loans not paid in at least 90 days, according to central bank Governor Rafael Buenaventura.

Bad loans may fall to 7.5 percent of total credit from 14.2 percent in October last year, Buenaventura said. Banks are expected to sell as much as 54 billion pesos ($971 million) of bad loans this year, compared with 26 billion pesos in 2004.

None of this detracts from formidable problems like corruption, high poverty and population growth. And for all the talk of going after tax cheats, the Philippines is still home to an amusingly high number of ``middle class'' actors and business people. Tax dodgers are a major cause of the Philippines' budget woes.

Calpers may have ample justification to leave the Philippines. Yet if history is any guide, such a pullout may signal a revival there.