Arts as Investments "Where the Blue Chips Fall" by jori finkel

Where the Blue Chips Fall
economist michael moses tracks the high-end art market
by jori finkel

By now everybody knows the story of Picasso ’s Garçon à la pipe, from 1905.Bought by John Hay Whitney in 1950 for a reported $30,000,the Rose Period masterpiece sold for $104 million at Sotheby ’s in May, becoming the world ’s most expensive painting. Sotheby ’s described it as a “haunting and poetic ” portrait of adolescent beauty..Reporters called it “the best investment ” ever made in art..

Think again. Despite its staggering price, the Whitney picture did not generate an earth-shattering financial return, says Michael Moses, an economist at New York University ’s Stern School of Business. He calculates that the painting had a compound annual return of 16.3 percent. Yes, that ’s impressive, surpassing the S&P 500 ’s average return for the same period of 12.1 percent. But it ’s hardly the best investment ever made in art, and not even the best return for your money on a Picasso. According to Moses ’s research on auction results, that honor goes to a small drawing the artist made in 1903,Le vieillard. Purchased at Christie ’s in 1991 for $9,350, it sold two years later at Sotheby ’s for $25,300,making its annual return 64 percent.

Since this line of thought might surprise members of the art world, who are so often dazzled by high price tags, Art & Auction asked Moses to share his data. We asked him to rank the three heavyweights from the May sales —Picasso, Monet and Renoir —in terms of auction performance. Which of these artists has historically posted the best, and worst, returns? Do their works, which so often get labeled “blue-chip,” really resemble the tried-and-true stocks of ge,ibm or Microsoft?

Yes and no, says Moses, who used as his sample 372 works by the three artists that have sold more than once at auction. “Monet, Renoir and Picasso are very much the large-cap stocks of the art world, in that they are the most frequently traded of the truly expensive artists. We couldn ’t have done this study,for example, with Degas or van Gogh,” he says..“But when it comes to financial returns, our three great artists fall somewhat flat. We found that they underperform the art market as a whole.”

While Picasso leads the pack with an annual return of 8.9 percent (see bar graphs on page 51 ),the others lag behind the Mei Moses Art Index, which Moses and his nyu colleague Jian ping Mei developed using repeat auction sales for thousands of different artists. And all three trailed the S&P 500. This reflects a trend that Mei and Moses described in “Art as an Investment and the Underperformance of Masterpieces,” published in the American Economic Review. “The art market, like the stock market,is very democratic,” says Moses.“ If you slice the art market into thirds by purchase price, the works in the top third do not appreciate as much as those from the middle third, and works from the middle third do not appreciate as much as those from the bottom third.” Apparently the most expensive works have already made their way into the canon of art history and have that recognition written into their price tag. Pricey works have less room to grow.

Still, blue-chip art has one wonderfully redeeming feature, which may be best described as staying power. As shown in the bar graph on holding periods, all three artists promise strong returns, as long as you keep the works for several years. Just look at Monet, who posts the lowest average return (2.3 percent) for works sold within 5 years of purchase, but the highest (12 percent)for works sold after 15 years —a dramatic illustration of how art can appreciate over a long holding period. And that speaks to another finding Moses has made: While fine art sold at auction exhibits greater day-to-day volatility than stocks, it roughly matches the performance of the S&P 500 over the long haul.

Some data is ambiguous. Some numbers equivocate. But this much is clear: If you plan to park your money in art, you should make sure time is on your side. Take your cue from John Hay Whitney and hang on to that Picasso as long as you can.

JORI FINKEL IS THE SENIOR EDITOR OF ART +AUCTION

Ishida of Japan Times: Asian currency zone beckons

Asian currency zone beckons
By MAMORU ISHIDA
Special to The Japan Times

There is no doubt that the stable renminbi (RMB) exchange rate, pegged at about 8.25 yuan to the U.S. dollar, has helped China's economic development. It has brought about enormous production capacity in the export industries. Meanwhile, the sharp increase in exports to the United States has prompted America to pressure China to revalue the RMB. Earlier this year, Zhou Xiaochuan, governor of the People's Bank of China, said China planned to improve the mechanism for determining the RMB exchange rate.

Revaluing the RMB vis-a-vis the dollar could be like opening a Pandora's box. As the U.S. trade deficit is unlikely to decline significantly, the U.S. could claim that any revaluation was inadequate and demand further revaluations, as it did with Japan. The market would respond, driving the RMB to fluctuate wildly at the sacrifice of China's economic stability.

Alternatively, China could peg the RMB to a basket comprising the dollar, yen and euro. John Williamson of the Institute for International Economics proposes a respective dollar-yen-euro ratio of 35 to 40 percent, 30 to 35 percent and about 30 percent.

To the extent that fluctuations between the three currencies are offset, fluctuations of the effective exchange rate of the RMB would be reduced.

Some members of the Association of Southeast Asian Nations have already pegged their currencies to their own baskets including the yen and euro. China is reported to be studying a currency basket. If China and ASEAN countries move to a common basket regime, it could lead to a major change in the U.S. economy.

When the twin U.S. deficits kept increasing in the 1980s, Stephen Marris of the Institute for International Economics predicted that investors would one day refuse to lend to the U.S., causing a hard landing for the U.S. economy. That did not happen because the global capital market kept lending to the U.S.

Now, though, Japanese and Chinese monetary authorities have been financing a significant amount of the U.S. current-account deficits by buying dollars in the markets to prevent the yen and RMB from appreciating.

Two events could make further financing of the U.S. current-account deficits difficult: (1) It has already become possible for investors to shift their assets from the U.S. to the euro capital market; and (2) if China and ASEAN countries move to a basket currency regime, a certain portion of their foreign exchange reserves now invested mostly in dollar assets would shift to yen and euro assets.

Depending on the magnitude of such a shift, the supply of capital to finance U.S. current-account deficits would be reduced. That could signal the beginning of the U.S. becoming an ordinary country that cannot enjoy both economic prosperity and military power by piling up foreign liabilities.

Stephen Roach, chief economist at Morgan Stanley, has warned of vulnerability to the world economy, which depends on the U.S. economy, which in turn depends on ever-increasing foreign liabilities. The U.S. current-account deficits must be addressed. A sharp fall in the dollar is inevitable.

Growing Asia would be the only realistic candidate to take over the role of the world's growth engine. Asia would have to depend less on exports to the U.S. and more on regional economic activities. A currency system to reduce exchange risks in trade and investment within Asia would be indispensable. China and ASEAN countries could mark the first step in forming such a system by adopting a joint currency basket.

China could explain to the U.S. that the basket regime would possess flexibility to reflect changing economic fundamentals as well as stability, and that a stable currency zone in Asia would be in the interests of the world economy. The higher the weight of the dollar in the basket, the easier it would be for the U.S. to accept it.

A good time to implement the reform would be when U.S. pressure and the market's speculative waves had subsided as a result of China's economic boom and worsened trade balance. One idea for an interim measure is to allow a wider trading band.

Asia is practically a dollar zone now, as most Asian countries peg their currencies mainly to the dollar. Japanese companies take yen-to-dollar exchange risks even in trade with Asian countries. They would welcome an Asian currency zone that would result in a more mild fluctuation vis-a-vis the yen. In 1998, then-Finance Minister Kiichi Miyazawa recommended a basket currency regime to Asian countries. It is natural for Japan to participate. If an unprepared Japan faces the sharp fall of the dollar predicted by Stephen Roach, it will risk experiencing another lost decade.

Asian political leaders and monetary authorities are speaking frequently of an Asian common currency. Malaysian Prime Minister Ahmad Badawi said in Tokyo that East Asian integration was not a wish but a reality, and that it was not premature to start studying regional currency integration.

Yu Yongding, director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, told a finance ministry's meeting in Tokyo that the three major international currencies in the future would be the dollar, euro and an Asian common currency, and urged China and its neighbors to cooperate to realize it. Officials of The People's Bank of China surprised visiting Japanese politicians by proposing a joint study of an Asian common currency. Obviously, Japan is not prepared.

Japan has a serious disadvantage. In Europe, the trust between German and French political leaders was crucially important in realizing the euro. Such trust does not exist between Chinese and Japanese leaders, as Japan has yet to come to terms with parts of its history.

Suppose an Asian currency zone with China but without Japan was formed. Its economic size would overwhelm Japan in time. According to the CIA's Global Trend, Japan's gross domestic product in 2015, measured by purchasing power parity, will be $4.5 trillion against China's $12 trillion.

It is time for Japan to decide how to live in the community of Asian nations and how to participate in forming an Asian currency zone.

Mamoru Ishida is a guest fellow at the Institute of Asia-Pacific Studies, Zhengzhou University, China, and an adviser to Itochu Corp.
The Japan Times: Aug. 10, 2004

August 10 Stock Market Review

August 10 Stock Market Review

We’re seeing some sideways movement again, but this time in contrast to yesterday, domestic investors were on a profit-taking mood while snowballing foreign accumulation on primarily the telecom sector led the major composite to close little changed. The Phisix inched higher by 1.05 points or .07% on a rather moderate to heavy volume of P 994.864 or $17.765 million on voluminous cross trades of Globe, SM Prime and PLDT which accounted for 51.04% of the total output.

The heavy caps were mixed with more decliners, SMPH (-1.69%), Ayala Land (-1.78%), Bank of the Philippine Islands (-1.21%) and San Miguel A (-.9%) against only two advancers, Globe Telecoms (+2.25%) and PLDT (+.39%) while San Miguel B and Metrobank were unchanged.

Foreign money once again took the significant majority of trades and accounted for 62.2% of total turnover while they remained selectively bullish with inflows amounting to P 107.148 million or US $1.913 million on mostly telecom issues, Jollibee (+1.96%) and DM Consunji (+10%). However, they liquidated positions on SM Prime, Ayala Land, Bank of the Philippine Islands, First Philippine Holdings (unchanged), Meralco (+1.14%) and Petron (-1.85%).

So based on the data above issues, the companies that accounted for substantial foreign money inflows registered mostly gains while those that posted outflows or liquidations registered losses. In other words, foreign money dictated the tempo of today’s trade.

Sentiment was largely mixed with bearish bias as declining issues edged advancing issues 38 to 35 while industry sub-indices were mostly lower except for the Phi-All and the Commercial Industrial index. Apparently after last week’s frenzied speculations on the mining heavyweights, the local investors took the market’s lull as an opportunity to pocket gains from recent trades.

The Asian region reflects the mood of the domestic market with 8 advancers against 7 decliners as of this writing with no significant gains or losses noted except for Singapore’s Strait Times which is down by about one percent. The ambivalence seen in the regional markets highlight on the concerns of today’s US FED meeting which is anticipated to announce a quarter point hike despite the stream of softening US economic data.

Fox News: Saudi Royal Family Faces Troubles

Saudi Royal Family Faces Troubles
Monday, August 09, 2004
By Kelley Beaucar Vlahos

WASHINGTON — Behind a façade of control, the ruling family of Saudi Arabia (search) is in tough shape and teetering on the brink of collapse, a victim of its own corruption and a violent Islamic insurgency at its door, some U.S. experts warn.

"It is a pretty fragile royal family, it's pretty corrupt and it's sitting on some pretty weak legs," S. Enders Winbush, director of the Center for Future Security Strategies (search) with the Hudson Institute, told FOXNews.com.

"The question is, can it do enough soon enough to put off what I suspect will be the inevitable — that at some point it will come apart," he said.

"Anyone who knows anything about the area knows it's not a question of ‘if,' but of ‘when,'" said Bill Lind, a military analyst with the Free Congress Foundation (search). "We need to delay it as much as possible … and think of what to do when it does happen."

Saudi Arabia's record has left open room for concern. Since a series of car bombs in May 2003, militant violence has escalated in the kingdom. This past May, a weekend rampage at two compounds housing offices and homes of expatriates in the city of Khobar left 22 people dead.

In June, American contractor Paul Johnson (search) was very publicly executed by militants in the country. Al Qaeda operatives claimed that Saudi security forces sympathetic to their cause aided in Johnson's abduction, which the government denied. Law enforcement authorities later discovered Johnson's head in a Riyadh home belonging to a suspected high-level terrorist.

Just days ago, armed men shot and killed an Irishman after storming his office in Riyadh.

Nonetheless, last month's release of the Sept. 11 commission report vindicated the Saudi government of any role in the Sept. 11, 2001, terrorist attacks upon the United States. A day before, in a statement distributed by the White House, President Bush used Saudi Arabia as an example of positive progress in the War on Terror.

"[The Saudi government] is working hard to shut down the facilitators and financial supporters of terrorism," read a White House statement from July 21.

"Today, because Saudi Arabia has seen the danger and joined the war on terror, the American people are safer," the release added.

Aware of the pressures on it, the Saudi government has tried to take proactive measures. On Thursday, Saudi security forces arrested Faris al-Zahrani, who is on a list of 26 top wanted militants with suspected links to Usama bin Laden's Al Qaeda group.

In an overnight raid in June, Saudi forces killed the kingdom's top Al Qaeda (search) leader Abid al-Aziz al-Muqran (search) and three other terrorists.

In July, the Saudi government announced it will be holding its first nationwide municipal elections this September. Earlier, it also declared a month-long amnesty to suspected terrorists who turn themselves in.

That did not result in much progress. Near the end of July, the Saudi government announced that upon the expiration of its amnesty, only six would-be terrorists had turned themselves in.

Despite Washington's historically close ties with the ruling royal House of Saud as well as the official White House line, the country, which holds the world's largest oil reserves, is a mess and desperately needs change that will benefit the Saudi people, say the experts who spoke with FOXNews.com.

"We can wish this away all we want. But the reality is getting harder and harder to ignore," wrote former CIA Agent Robert Baer in 2003's "Sleeping with the Devil," which explores the U.S. relationship with the House of Saud and the destructive trajectory the ruling family is on today.

Baer said the billions of dollars spent each year by some 30,000 members of the family, combined with the corruption, debauchery and sporadic funding of Islamic extremist terror groups and mosques in and outside the country, have created a volatile beast that is racing back at them with a vengeance.

"The terrorists who were created by the royal family as a political weapon to control the population and the Islamic world are trying to pull the kingdom backward," said Stephen Schwartz, author of "The Two Faces of Islam: Saudi Fundamentalism and Its Role In Terrorism (2003)."

"Saudi Arabia is at a fork in the road of its history," Schwartz said.

Schwartz said he does not buy into the theory that the government's fall is imminent, but he does call the situation there "a crisis." He said a large middle class is repressed by the strictest of religious law, which bars women from an education and gives them no rights; men are whipped publicly if they don't get to daily prayers on time and people accused of crimes are beheaded in the public square.

The middle class is becoming increasingly restless with the environment in the country, said Schwartz.

"It has happened again and again (in history) — the business class and the elements of the ruling elite get together and merge a transition to normalcy and stability on the road to democratic reform."

But others have said Schwartz's view is too rosy. A large percentage of the ulama — or religious leadership — espouses incendiary anti-Western, anti-royal family rhetoric in schools and mosques across the oppressed country.

That leadership has been bolstered by the war and subsequent instability in Iraq, said Lind. The rhetoric continues to be a tool of Saudi-born Usama bin Laden (search), who remains at large after his orchestration of the Sept. 11 attacks.

"This is all one war," to purify the royal family and the Middle East of the "evil" Western influence, said Lind, who sees the violence in Saudi Arabia as part of a global Islamic insurgency. "When we do a thing like invade Iraq, we are going to have problems on the other parts of the single battlefield our opponents see."

Saudi Arabia's state religious doctrine follows Wahhabite (search) Islamic law, which is the ideology driving the fundamentalist militancy of the Al Qaeda network, according to experts.

Baer and others say Saudi princes have often thrown money at religious leaders — extremists and otherwise — as a way to control them.

"They retain remarkable tools of persuasion," said Jon Alterman, Middle East Program director for the Center for Strategic and International Studies (search). "It's a government walking around with a whole lot of money and they can co-opt a whole lot of people."

Jim Phillips, Middle East expert at the Heritage Foundation (search), said the enormous amount of wealth owned by the royal family could help the government fend off an attempted overthrow.
"They are in a position to forcefully block a coup or a revolt," he said. "There is a rising disenchantment with the royal family, but the Saudis have shown themselves to be more stable than it appears."

Some experts suggest that if the government did implode, the extremists would rush in to fill the vacuum and the United States might have to move in to protect the oil supply in order to keep the world market in balance.

Almost all agree, however, that Iraq, which sits on the kingdom's border, could shift behavior and attitudes in Saudi Arabia. Last month, the two nations re-established diplomatic relations after a 14-year hiatus.

"If Iraq stabilizes, I see some hopeful signs," said Winbush, as the change would provide an attractive democratic model — and economic opportunities — for the Saudi people living in poverty and fear across the border.

"The other wild card of course, is if Iraq goes the other way and it descends into chaos," he said.

"Then I think then you could see the Saudi regime being replaced by what I call 'The Nasties.'"

****

Prudent Investor:

Two significant ramifications: Oil and Filipino Workers.

For chaos to erupt in Saudi Arabia would ripple to the neighboring middle east countries and thus severely affecting global oil supplies and send oil prices spiraling to the high heavens. Consequently, an oil shock would mean a compression of aggregate demand on a global scale, dampen global growth, or possibly induce recessions or even depression or serve as a cassus belli for possible military confrontations.

Filipino overseas contract worker’s exposure to the mid-east is quite significant considering the density of Filipino overseas in the Mid-East is second to that of the US hence, a cataclysmic event such as a civil war in Saudi could send Filipino overseas workers packing homewards, which means lesser dollar remittances, swelling unemployment and larger debts to cover on the deficits.

The insurance to your portfolio: Gold.

August 9 Philippine Stock Market Commentary

August 9 Philippine Stock Market Commentary

The depressed sentiment arising from the steep weekend drop of Wall Street was initially carried over to the Philippine market at the start of the opening bell. However, underlying bullish sentiment by local investors took this as an opportunity to accumulate on the broader market and caused the market to close marginally higher by .09% or 1.36 points.

Among the key heavyweights, PLDT (-.39%) and Property heavyweights Ayala Land (-1.75%) and SM Prime (-1.66%) weighed on the Phisix while Ayala Corp (+1.88%), San Miguel A (+.9%) and San Miguel B (+.73%) lifted the index to its slightly positive showing today. Globe Telecoms, and Banking heavyweights BPI and Metrobank were neutral.

Incidentally, the market cap weightings of the eight blue chips relative to the composite index have substantially been reduced, where once they constituted more than 75% of the composite, today these 8 issues have seen the broader sector of the Phisix gaining momentum hence the decline of their share to only 70%. Put differently, local investors have bought up the other components of the Phisix, whose growth has steadily outpaced that of the heavyweights, resulting to the recent dilution of the share of the heavyweights vis-à-vis the Phisix.

Mr. Market’s mood today was mixed with bullish inclination. While foreign money’s share to output was once again a significant majority (61.41% to accrued output), net foreign capital flow recorded a meager outflow of P 5.885 million on considerable liquidations in BPI, SM Prime and Meralco. However, advancing issues outnumbered declining issues 43 to 27 for a difference of 16, the most in 6 sessions, an obvious mending of Mr. Market’s underlying psychology in the wake of the other week's foreign instigated panic-selloff in the Lopez owned energy companies which almost brought down the house. Moreover, industry sub-indices were mostly up with only the Property and All index down.

Like our market, the Asian region is, as of this writing, trading mixed and looks least affected by Friday’s carnage in New York.

With the continuing bullish underpinnings manifested by the market internals, any positive news or even a no news at all could spark an opportunity for aggressive buying on the broader market by the locals. Hence, barring a market crash in Wall Street or an explosion from a Nuclear suitcase bomb in any part of the world, it looks as if the momentum for the domestic market is tilted in favor of the bulls.

Business Times Asia: Global grey money buoys greenback

Global grey money buoys greenback
Dollar pessimists fail to take this into account, says study
NEIL BEHRMANN
IN LONDON

MONEY laundering, tax and exchange control evasion, and other irregular capital flows are buoying the US dollar and financing a substantial portion of the US current account deficit.

A study by Brendan Brown, London-based head of research at Mitsubishi Securities International, estimates that these 'grey capital inflows' could be accounting for 30-40 per cent of the capital flows that offset the US trade and services deficit.

'Dollar pessimists sounding a state of alarm about the US current account deficit fail to acknowledge the huge flows of funds into the US dollar from grey areas of the world financial system,' he says.

'A proportion of these funds are placed in euro, yen, sterling and Swiss francs, but the bulk remain in dollars and each year steadily finance the American current account deficit.

'In 2003, there was a net flow of funds from the rest of the world to the US of US$550 billion and an estimated US$580 billion this year.'

Around 30-40 per cent or up to US$240 billion of these flows are classified as 'errors and omissions' since they cannot be traced from official sources.

'These huge amounts are 'grey money' from continents such as South and Central America, Africa, parts of Asia and offshore tax havens,' says Mr Brown, who regularly estimates global capital flows.

'The problem in measuring such capital flight is that the errors and omissions item is typically large and volatile for most countries. Thus, any investigation into the hypothesis that hidden global capital sources play a big role in the financing of the mega US current account and savings deficits is unlikely to come up with precise answers.

'Nevertheless, they should be considered by economists and market strategists because the amounts are so large.'

The main identifiable legal sources of net capital outflows in the world that are invested in US dollar securities and also currencies such as the euro, include Japan, US$170 billion; other advanced Asian economies, US$80 billion; China and other Asian developing countries, US$40 billion; Switzerland and Norway, US$70 billion; Middle East oil exporters, US$85 billion; and Russia, US$60 billion.

The unidentified flows include corrupt African and other Third World governments that siphon off tax, international aid and bribes and invest the money with unscrupulous banks.

Then, there are the flows that emanate from drugs, other money laundered funds and false invoicing to mask tax evasion and capital movements from nations with exchange controls.

There are also substantial cash payments for black market trade. Bank notes are generally dollars deposited in secret bank accounts in Switzerland and offshore banking sectors.

Unrecorded flows also include investments by Russians and Middle Eastern investors that wish to hide the identity of their companies in the US, Europe or Asia by registering the names of the businesses in the names of local residents.

These inward investments can be placed in the errors and omissions item of balance of payments, contends Mr Brown. Unrecorded shipping transactions also end up in the errors and omissions item.

The Economist Magazine on OPEC: Pumping All They Can?

Pumping all they can?
Aug 6th 2004

From The Economist Global Agenda

As the oil price rose to a new high of more than $44 a barrel this week, amid concerns about supply, OPEC’s president said the cartel was unable to pump more oil and thus bring down the price. He later contradicted these comments, but observers remain sceptical about OPEC's ability to turn on more taps

ANYONE who expected that the invasion and occupation of Iraq would lead to a sharp decline in the price of oil has been sorely disappointed. Instead of falling, the price has risen sharply, and this week West Texas crude rose above $44 a barrel for the first time since New York’s Nymex exchange started trading oil 21 years ago.

Not only has Iraq’s oil industry, hampered by creaking infrastructure and sabotage, been unable to pump anything like its potential capacity, but supply elsewhere is under pressure too. Last week, it appeared that Yukos, Russia’s biggest oil producer, might be forced to stop production, as part of its ongoing battle with the country’s tax authorities. That fear proved unfounded, but it still appears that some in the Kremlin are bent on destroying Yukos, and oil traders remain nervous.

They are also worried by the apparent impotence of the Organisation of the Petroleum Exporting Countries (OPEC). On Tuesday August 3rd, Purnomo Yusgiantoro, president of OPEC and Indonesia’s oil minister, stunned observers by saying that the cartel would be unable to pump any more oil to alleviate the pressure on prices. “The oil price is very high, it’s crazy,” he said, adding that “there is no additional supply.”

However, he contradicted that statement the next day (most likely after coming under pressure from Saudi Arabia, the leading member of OPEC), claiming that the cartel has around 1m to 1.5m barrels per day (bpd) of spare capacity that it could tap immediately. This, combined with a surprise increase in American gasoline stocks and news that Russian bailiffs would allow Yukos access to its bank accounts to pay workers, helped bring the oil price down by around a dollar. But the price bounced back to a new high on Friday after hardliners in the Russian administration overruled the bailiffs. General scepticism about OPEC's ability to pump any more oil has also put upward pressure on the price.

Like the oil market, the money markets are fretting that the high price could hurt the world economy. Mr Yusgiantoro’s comments sparked a sell-off on America’s stockmarkets, which were already worrying about America’s flagging economic performance—GDP growth slowed to a lower-than-expected 3% in the second quarter, on an annual basis. Alan Greenspan, chairman of the Federal Reserve, has said the high oil price is partly to blame for weakening consumer spending, which fell by 0.7% in June. Dresdner Kleinwort Wasserstein, an investment bank, reckons that half a percentage point could be knocked off American growth in 2006, and 0.7 added to the inflation rate, if oil remains above $40 a barrel.

OPEC’s power has been on the wane since the oil crises of the 1970s, when the cartel was able to triple prices almost overnight by restricting supply to western consumers. Since then, industrialised economies have reduced their dependence on oil, but it is still a crucial commodity, and OPEC still accounts for around 40% of world oil production. Moreover, Saudi Arabia alone accounts for a quarter of the world’s proven oil reserves. It has been able to influence prices simply by turning its taps on and off.

Until recently it was OPEC’s ability to turn the taps off that was in doubt. Members tended to exceed the production quotas set at the cartel’s regular meetings, in the hope that other members, especially Saudi Arabia, would keep to their limits, and thus support the price. The incentive to cheat grew even stronger as non-OPEC suppliers, especially Russia, grew in importance. (Russia’s output has increased by 2m bpd every year for the past three years.) OPEC’s current production of around 30m bpd (including Iraq) is well above its official quota of 26m bpd.

But now it is OPEC’s ability to open the taps further that is in doubt—and at a time when the antics of Russian prosecutors are also raising questions about supply from that country. OPEC’s spare capacity is now thought to be 1-2% of global demand, well under the 4% that is thought necessary in order to influence prices. That gap cannot be closed quickly, since the oil-production business has long lead times and any new oil will take a couple of years at least to come on stream. In his comments on Tuesday, Mr Yusgiantoro hinted that that went for Saudi Arabia as well as the rest of OPEC.

Saudi production in July was 9.25m bpd, well above its 8.45m quota, but below its 10.5m official capacity. Following Mr Yusgiantoro’s comments, Saudi officials insisted they could indeed raise output quickly. Saudi Arabia claims that it has opened two new production plants, at Abu Safah and Qatif, three months ahead of schedule. While these are meant to replace production from older facilities, not to add new output, it is understood that the Saudis are now planning to delay the retirement of older fields in order to help ease the oil price.

In addition to OPEC’s attempts to increase supply, the International Energy Agency also expects non-members to boost output by a combined 1.2m bpd over the coming year, of which around half will be from the former Soviet Union. But that figure is hostage to events in Russia. At 1.7m bpd (more than is pumped from all of Libya’s wells), Yukos’s output makes up 2% of global oil production and thus has a noticeable effect on the price. With Russian officials now attempting to sell the company’s prize subsidiary, Yukanskneftegaz, oil traders are likely to remain jittery.

Another factor adding to nerves in the market is the alert about more attacks from al-Qaeda, issued by America’s homeland-security chief last week. This came as a stark reminder of the dangers facing America (the world’s largest oil consumer) and the instability in the Middle East (home of much of the world’s oil reserves). With this uncertainty likely to continue, OPEC likely to keep brushing up against its capacity limits, and Yukos certain to remain under fire, the world may just have to get used to oil of $40 or more a barrel.

When the lights went out in Xinjiang by ROSEMARY RIGHTER Timesonline

August 03, 2004

When the lights went out in Xinjiang
BY ROSEMARY RIGHTER

Timesonline

IT WAS 39C outside, distinctly cosy inside and would be a lot hotter as the day went on. The lift was not working. The hotel’s emergency generator could, sort of, cool the bedrooms, but not run the lift and cool the public areas as well. Kizil, a dusty town just north of the Taklamakan Desert, has ways of making you understand why Marco Polo took the sea route back rather than retrace this punishing segment of the old Silk Road.

China’s “Develop the West” campaign has barely impinged on this western corner of the country’s northwest, in the great sweeping wildness of Xinjiang. But that made the power cut unexpected. Rich in oil and coal and under-industrialised, Xinjiang is supposed to be one of the few areas of China not affected by the country’s crippling energy crisis, its worst in history.

China is 30-35 gigawatts short of the energy it needs this year, a gap equivalent to four fifths of the energy Britain generates in a year. Chinese towns and cities endured 757,000 brownouts between January and June — even before summer temperatures drove urban demand up by 40 per cent, as offices, factories and millions of increasingly affluent consumers switched on the air-conditioning. Now, in torrid heat, the lights are going out all over China.

Literally, in some apartment blocks, where parents complain children cannot see to do their homework; metaphorically, in the booming heart of Shanghai. The municipality has dimmed lights on the Bund, installed low-energy bulbs in Pudong’s landmark Oriental Pearl TV tower and introduced minimum temperatures for shops, restaurants and government offices. It has sent out inspectors to shut off supply to “low-efficiency, energy-consuming enterprises”, a ban now to be enforced nationwide.

In Beijing, 6,000 factories were recently closed for a week. Some government employees have been sent on holiday. Sales of fuel-guzzling private generators have soared, pushing up demand for fuel oil by 100,000 barrels a day.

Government statements that supplies are adequate, or would be if demand were not out of control, are not going down well. Manufacturers complain that brownouts have depressed production by 20 per cent, just when they need to fill Christmas export orders. They also complain that power still reaches “well-connected” enterprises.

Yet the Chinese authorities have a point: energy demand, like much else in this strange hybrid economy, is out of control, galloping way ahead of domestic capacity, far faster than international markets anticipated and, at 15 per cent a year, three times as fast as government planners anticipated. You can take that as a healthy sign, proof that no power on earth can now suppress Chinese commercialism, or as the grim harbinger of a landing so hard that it could throw global growth off course.

“Oil for the lamps of China” is moving world markets in unexpected ways. Sabotage in Iraq, Yukos-related uncertainty about Russian supplies and awareness that Opec is already pumping close to peak capacity have helped to drive crude prices up 30 per cent to $43.20 a barrel last Friday; but it will be China’s needs that determine long-term trends.

This has happened fast. It is only 11 years since China became a net oil importer, yet last year it overtook Japan to become the world’s second-largest consumer of petroleum products. China accounts for at least 40 per cent of the growth in global oil demand. That may be 50 per cent by the end of this year.

A report issued last week by the US Energy Information Administration shows how the gap between China’s production and consumption has widened since 1980 (see chart). EIA analysts suggest that we ain’t seen nothing yet. Twenty years from now, they predict, China’s consumption will more than double, to 12.8 million barrels per day, and it will be hunting for 9.4 million of these on world markets, nearly three times today’s imports.

This forecast assumes little increase in domestic production — recent finds in Xinjiang and elsewhere are unlikely to do more than compensate for declining output at Daqing and Liaohe, China’s two big established fields. Yet on consumption, EIA projections may even be too modest. So says the Chinese Academy of Engineering itself.

In the next 20 years, China will need as much extra power from all sources as the United States developed in the past half century, it says. One reason for that is obvious. Although China absorbs 10.5 per cent of the world’s energy output, consumption by individual Chinese is little more than a tenth of American levels.
This will change. Go shopping and observe consumers beginning to live the American dream.

They are buying not watches, transistor radios and footpowered sewing machines, but televisions, washing machines, air-conditioners — and cars. Gulp. But there are other reasons for China’s power-guzzling. The first is that China is a horribly inefficient consumer, using 50 per cent more energy per unit of output than even India; its best factories are three times as wasteful as American counterparts.

The second is a massive concentration on four energy-intensive sectors (steel, aluminium, cement and chemicals) which together absorb a third of China’s electricity. In the first half of this year economic growth of 9.7 per cent was accompanied by a 15 per cent surge in demand for power.

A pell-mell construction boom is partly responsible.

Whatever may be done to cool the economy elsewhere, steel and cement factories, as well as building gangs, will be kept busy by Beijing’s preparations for the 2008 Olympics and for Shanghai’s Expo 2010. But the other factor, which I wrote about in this column after visiting China last September, is the phenomenon of “empty growth” — copycat investment in manufacturing and construction, regardless of market demand and quality. Local authorities compete for their “share” of growth by pouring investment into identical industrial parks, “silicon valleys” and “special” development zones.

At the personal level, the cadres are being quite rational, since it is still largely true that promotion depends on glowing production statistics. Besides, it is impossible to be an administrator in China without becoming deeply sceptical about central planning. The country’s energy crisis is very much a case in point. China's five-year plan for 2001-2005 botched almost every aspect of energy planning.

Take fuel oil. The plan called for demand to decline by 2005, as domestic coal replaced oil. So Sinopec and PetroChina, two of China’s three oil giants, duly cut fuel oil production. Coal — the unwashed, sulphur-belching kind — is still king in China, providing three-quarters of its electricity, and it was in oversupply. But coal has to be delivered, and China’s railways can handle only 100,000 freight cars, a third of demand. Power stations ended up so short that last month the Government requisitioned 5,000 extra freight cars and announced emergency plans to shift coal by coastal ships. As for fuel oil imports, they have doubled since 2002.

Similar misjudgments were made over refining capacity and over electricity, where the plan halted construction of fuel-burning power plants. Official forecasts of consumption in 2005 were realised last year, two years ahead of schedule. And, because too low a priority was given to completing a national grid, as well as the West-to-East hydropower network and gas pipelines, power cuts will plague China for at least two more years.

The danger now is overreaction the other way. China is bingeing on power plant construction, building 130 gigawatts of new capacity. It is scouring the world for guaranteed oil supplies (the reason, in case you wondered, why President Hu Jintao paid a call on Gabon last February); it is seeking deals in the Caspian, Kazakhstan, Indonesia and Latin America. It is pressing Russia hard to route a proposed new Siberian pipeline from Angarsk via Daqing in Gansu Province, rather than to Nakhodka, as the Japanese would prefer.

The one thing China will not do, it appears, is open up its energy markets to foreign multinationals. It will take their money, through limited IPOs, but give them no voice as partners. So official plans will continue to call the tune, not profitability. In energy, there will be no “new economic model”. And China, not America, will be the energy glutton of tomorrow.

Indiana Jones and the China crusade-The Guardian interviews Market maven Jim Rogers

Indiana Jones and the China crusade

Jim Rogers, investment guru; co-founder of Quantum Fund with George Soros

Nils Pratley
Saturday July 3, 2004
The Guardian

The American dollar is a flawed currency and will collapse in value before the end of the decade, taking with it the prosperity of the American nation. Investors should be buying commodities - platinum, lead, wheat, sugar, oil, the sort of assets that haven't been fashionable for a quarter of a century or more. While you're at it, teach your children to speak Mandarin, the coming language of the 21st century. And don't encourage them to do an MBA: "Tell them to be a farmer and do a real job."

Such advice, if given by your regular financial adviser, would probably provoke a complaint to the ombudsman. The speaker, though, is Jim Rogers, a legendary Wall Street name. The Indiana Jones of finance - a nickname earned by virtue of two round the world trips in the name of grass-roots investment research - has become a multimillionaire by backing such views with hard cash.

In 1973, Rogers and George Soros founded Quantum, one of the first and most successful hedge funds. In Britain, the Quantum Fund is best known for making £1bn by selling sterling ahead of Britain's exit from the exchange rate mechanism on Black Wednesday in 1992, but Rogers' contribution came before then. He helped Quantum to return a 4,000% gain in its first 10 years and departed in 1980, staying a year longer than he had intended only because 1979 had been so profitable - he predicted the stock market crash of that year.

The "poor boy from Alabama" whose first job was picking up bottles at baseball games at the age of five, retired at the age of 37 a very wealthy man. He set about managing his own fortune and travelling the world, projects that have become virtually indistinguishable over the years. In the early 90s, Rogers travelled 65,000 miles roving the world by motorbike and related the tale in his first book, Investment Biker. Last year, he completed a second, Adventure Capitalist, which was the result of an even more ambitious journey: a three-year, 150,000 mile journey by custom- built Mercedes across 116 countries with his girlfriend, who became his wife along the way - in Henley-on-Thames, of all places.

Snake burger

Like the earlier book, it is part anecdote - what it's like to eat snake; what happened when he forgot about the bottle of vodka in the boot when trying to enter Saudi Arabia - but the heart is commonsense investment analysis built on firsthand observations. His philosophy is that you learn about a country from talking to brothel owners and black marketeers rather than government ministers.

In conversation, Rogers rattles along in similar style. He punctuates everything with American-style full disclosure of his personal holdings - "I'm short Citibank, incidentally," he will interject into a dissection of the rotten heart of the American stock market - and delights in challenging received wisdom. His central argument is that a new bull market has started that will match the fireworks seen in the dotcom-fuelled stock markets of the late 90s. This time, though, the bull market will be in commodities not shares. Rogers' reasoning is straightforward: raw materials are running out.

"There has been no great oil discovery in the past 35 years," he argues. "The North Sea has peaked. Alaska is in decline. Mexico is in decline. All these great oilfields are in decline. To anybody who thinks I am lying about this, I would ask: where is the oil going to come from?

China bull

"Mines deplete. Wells deplete. It's supply. In the 1970s, we had horrible economies around the world, but commodities skyrocketed despite those horrible economies because there was no supply. That is happening again."

How high is high? The nature of all bull markets, he argues, is that prices go higher than anybody would have imagined possible. "Nobody could ever have thought that Cisco could go to $75 [it had been $5 a few years earlier]. Who would have thought in the 1970s that oil could go to $40 a barrel - it was $2 a barrel in the 1960s," he says.

"Sugar in 1966 was 1.4 cents per pound. In 1972 - six years later - sugar was 66 cents. Who could have conceived that? For decades, it had done between one and five cents. If you had said in 1966 that it would go up 47 times they would have made you certifiably insane. But it happened."

Hand in hand with this faith in the value of commodities is a long-term confidence in China, whose appetite for raw materials has already fuelled a strong rise in commodity prices in the past 18 months. All the best capitalists live in communist China, he argues, and overseas Chinese are returning with their capital and expertise. He has employed a Chinese nanny for his one-year-old daughter. Mandarin will be the most important language in his child's lifetime, he thinks.

But even this China bull predicts a major economic slowdown there, with accompanying political unrest, very soon. In this, he is not wholly out of the line with the consensus thinking - City economists are currently debating whether China's landing, after a decade of extraordinary growth, will be hard or soft. Rogers' view is that it will be very hard, but will also represent a golden investment opportunity.

"I remind you of the last two times that China had to cut back an overheated economy," he says. "In the late 80s, it led to Tiananmen Square when things got out of control and the second time was in the mid-90s, when they had to devalue their currency. Sometime this year or next you will see headlines in the Guardian, 'Turmoil in China'. At that point, you buy all the China you can and all the commodities you can because that will be bottom of the consolidation in commodities and consolidation in China."

Buying in the face of prevailing hysteria is a principle that has served Rogers well over the years. Crisis in China - however serious it looks at the time - will merely mark the end of the first leg of this new bull market, he thinks.

"Remember," he enthuses, "that the second leg is wonderful, and the third leg is spectacular. In the fourth leg, there is dancing in the streets and in the fifth leg people are hysterical and everything is skyrocketing every day. We are nowhere near the second leg, much less the third, fourth and fifth legs."

His bearishness on the US dollar is predicated on economic fundamentals, notably the balance of payments. Alan Greenspan, the chairman of the Federal Reserve and Rogers' bogeyman-in-chief, has been printing money on an unprecedented scale and President George Bush has been spending it just as rapidly.

"The US owes the world $8 trillion," he argues. "We are the world's largest debtor nation by a factor of many times and our foreign debts are increasing by $1 trillion every 21 months. That's terrifying.

Dollar demise

"People need to understand about this major change in the world and about the demise of the US dollar. The US dollar is going the way that sterling went as it lost its place as the world's reserve currency. I suspect there will be exchange controls in the US in the foreseeable future. It will be a complicated and difficult currency."

Not that Rogers is a fan of many currencies. He says he has stakes in a dozen but has "no confidence in any of them". He expects the euro to fail eventually but holds some anyway because he judges it to be less flawed than the dollar. For the record, his daughter's assets are held in Swiss francs and gold, silver and platinum coins.

Unlike his old partner, Soros, who has devoted part of his vast fortune to opposing Bush's election campaign, Rogers stands wholly outside the political fray. He calls the US-led invasion of Iraq a "horrible, horrendous, unbelievable mistake", but thinks the Democratic candidate, John Kerry, would make his own mistakes. "They wouldn't be politicians if they knew what they were doing," he says, far from flippantly.

The balance of payments, and the looming dollar crisis, make the election result irrelevant, he argues: "Whoever is elected president is going to have serious problems in 2005-06. We Americans are going to suffer."

The CV
Born 1942, Alabama
Education Yale; Balliol College, Oxford
Career US army; co-founder, Quantum Fund; professor of finance, Columbia University Graduate School of Business
Family Married to Parker Paige with a daughter
Interests Henley royal regatta

August 4 Philippine Stock Market Review TELECOMs Boosts Market

August 4 Philippine Stock Market Review TELECOMs Boosts Market

Threats of record high levels of crude oil prices apparently rattled and unnerved the US Markets and the skittishness have now permeated into the Global bourses including those of Asia, where only FOUR among the 15 indices in the region are contradictorily manifesting gains. These outliers include the emerging markets of China, Pakistan, South Korea and the Philippines whose composite index or the Phisix climbed 10.88 points or .7% on foreign accumulations into the top telecom issues, PLDT and Globe.

While foreign capital remained a minority in today’s moderate-to-heavy Peso volume turnover valued at P 869.617 million (US$ 15.531 million), its share to total output constituted only 47.21%. Net foreign accumulation accounted for P 116.305 million (US$ 2.077 million) or 13.37% of today’s cumulative turnover even as foreign investors sold more issues than it bought by almost 2 to 1 in the broader market. Furthermore, the mixed market sentiments seen in the foreign money activities was likewise shared by the general market as advancers edged out decliners by a tightrope thin 30 to 29, which we had accurately forecasted yesterday, and industry subindices were largely on the black with only the Banking and Finance index lower for the day.

Although the distribution of capital flows from overseas investors was even at four apiece, among index heavyweight issues, the load of these money inflows were soaked by Globe Telecoms (+2.87%) and PLDT (+2.8%) whose combined output represents 53.91% of today’s turnover, while Property heavyweights Ayala Land (+1.82%) and SM Primeholdings (+3.51%) recorded minor inflows. The rest of the heavyweights, Bank of the Philippine Islands (-1.21%), Metrobank (-1.92%), San Miguel B (-1.43%) and Ayala Corp (-1.85%), reported net outflows.

Meralco B (+3.48%) recorded its second straight day of recovery after last Friday and Monday’s excruciating fall, while affiliate First Philippine Holdings (+3.26%) posted its first day of technical rebound following the mass exodus of foreign investors in the past three successive days. Both issues still reported hefty foreign outflows despite today’s rally meaning that foreign investors have placidly liquidated their positions in a much-tempered manner.

The pressure from the recent sell-offs has gradually abated though its shadows lurk in the market’s backdrop. Foreign selling in the broader market, aside from the Lopez group, was noticeably heavy in the banking and finance sector, of which 6 of the actively traded issues reported outflows and 5 of these posted declines leading its index lower by 1.4%.

Again telecom issues remain as the pillar of the local market, as foreign money, the acknowledged drivers of our index have focused squarely on the sector, almost single-handedly. While we note of ancillary buying in the property sector, the volume for its upkeep is still significantly wanting.

One area of concern is today’s broad sector selloff in the banking and finance industry wherein 6 of the most actively traded issues were all unloaded by foreign investors. Of the 6, 5 posted declines which eventually encumbered on its sector’s index to close lower by 1.4%. It is quite evident that any slowdown in the telecom sector could accelerate equity dispatch by foreign money on the other key blue chips if these momentum are to be sustained, or simply, we could see further downward pressures in the other blue chip companies if the foreign driven-rally in telecom sector tapers off.

The greatly reduced sales pressures in the Lopez owned energy stocks could mean that the foreigners have opted to gradually unload or have nearly exhausted their inventories for liquidation, this can only be established in the coming days if the current levels hold or serves as a floor to the recent panic.

As for the moment, the selloffs in the Lopez-owned energy group have basically been offset by the massive accumulations in the telecom sector, which has rendered the market practically neutral in terms of the market breadth, except that relative to the market cap, the weightings of the telecom issues has lent a bullish tone to the index.

Again on the bright side, the animated trading activities by the local investors has provided a pivotal framework for the market in its entirety to move higher barring another major shock. Today’s massive accumulation by foreign capital is expected to persist in the near term, given the recent breakout in Globe Telecoms, and the accelerating momentum by PLDT to test its recently established highs. A largely improved market breadth should also indicate a bottom for the recently battered Lopez group of energy companies and its recovery should provide the necessary impetus for the Phisix to breach the 1,600-psyclogical resistance level.









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August 3 Philippine Stock Market Review: The Selling Abates

August 3 Philippine Stock Market Review: The Selling Abates

Selling persisted in today’s activities though on a much-mitigated basis. The object of the last two trading day’s panic, Meralco B finally rebounded by 6.17%, after losing almost as much as 29% in the previous TWO sessions. While Meralco stakeholder, First Philippine Holdings, fumbled anew for the third straight session albeit on a moderated basis by 1.07% on renewed heavy foreign outflow, the Lopez owned natural gas processing energy company contracted by as much as 22% during the past three sessions as the issue touched today’s low of P 22.25 per share, a 5-month level.

The marginal gains of the top telecom issues, PLDT and Globe helped cushion today’s composite index decline of 2.44 points or .16% but was unable to lift the index to positive territory due to the losses of four heavyweights namely San Miguel B (-2.11%), Ayala Corp (-1.81%), Bank of the Philippine Islands (-1.2%) and SM Primeholdings (-1.07%) while San Miguel local shares, Ayala Land and Metrobank were unchanged.

Domestic investors supported today’s market, as overseas capital remained dumbfounded by the latest ruling by the Court of Appeals against Meralco that sent foreign money scouring to the exit doors. Foreign trades constituted about 46% of today’s output while overseas capital recorded a net outflow of P 82.769 million (US $1.478 million) on moderate volume of P 567.414 million (US$ 10.132 million) the outflows were mostly directed at Meralco, First Philippine Holdings and SM Prime even as foreign investors sold more than they bought in the broader market.

Sentiment was mixed with bearish undertones as declining issues edged out advancing issues by 39 to 33, while major sub-indices were majority on the red against only two gainers, the Commercial Industrial Index and the Mining Index which has showed extraordinary resilience and has been approaching its January heights, largely on Manila Mining speculations.

Thus far the Phisix belongs to the minority decliners in the Asian region alongside China, Malaysia, Japan and Thailand while the ten other indices are in surprising green following the rebound in Wall Street, apparently unmoved by yesterday’s threats of the RECORD OIL prices and TERROR scare. Well, CRUDE OIL as of this writing is now at over $44 per barrel!

After three sessions of disgorging Philippine equity assets, the market breadth or market sentiment seems to be on the mend. The difference from the number of advancing issues to declining issues has narrowed meaningfully and could presage for a better advance-decline breadth tomorrow (a probable rally) depending on the persistence of the foreign outflow on the Lopez owned issues. The outflow from Meralco seems to be easing while the intensity of the outflow in First Philippine Holdings is almost at Friday’s level. If local investors could cover the remaining inventories to be liquidated by foreign institutions, who should by now have regained sanity, then we could probably see a sideways movement with bullish bias for the index. As for Meralco and FPH, expect a bearish near term trend as these issues attempt to find a base after the most recent carnage.

Finally, the actions of WALL STREET could provide us some directions despite the low correlation between our markets. So far, US equities have largely ignored the headline news, which are predominantly glum and has moved positively, although one major concern is that rising OIL Prices is on a roll and will continue to haunt investors like scarecrow on the field. Does the recent movements reflects a “Wall of worry” for the US markets to climb or a technical rally due for a selloff?

August 2 Philippine Stock Market Review: And THE CARNAGE Continues

August 2 Philippine Stock Market Review: And THE CARNAGE Continues.

During the early trading session, PLDT opened higher in an obvious attempt to buoy the market and the composite index higher but was evidently thwarted by the intense flurry of wave after wave of foreign led selling on Meralco (-13.82%) that practically resulted to a broad market bloodletting. During the mid-session PLDT (-1.2%) succumbed to the tenacity of the bears and found itself mired in losses until the trading close.

I might have spoken so soon in my latest newsletter that based on the recent internal market developments, the market WOULD probably ASSUAGE OR EVEN REVERSE the hemorrhaging sentiment seen in the Lopez-owned energy companies Meralco and First Philippine Holdings (-6.06%) which resulted from Friday’s shocking adverse reports. Although I did mention that in the interim the probability of selling pressures would continue, the intensity of today’s butchery was unexpected and even more distressing than on Friday to require a revaluation of the market’s internals.

Yes, misery loves company and upon looking at the region’s bourses, ONLY THREE, India, SRI Lanka and Australia, of the Asia’s 15 indices are trading slightly higher with Thailand’s SET closed probably on holiday. The probable culprit of the dreary outlook~ crude oil prices hitting a high of $43.92 per barrel!

In the domestic front, ONLY GLOBE Telecoms (+.58%) managed to defy the overwhelming bearish outlook among the blue chips with seven of the 9 issues posting losses that dragged the Phisix lower by 1.28% or 20.23 points, the third biggest loser in the region after Korea and Taiwan. Aside from PLDT, SM Prime (-3.3%), Metrobank (-1.88%), Ayala Land (-1.78%), Ayala Corp down (-1.78%), Bank of the Philippine Islands (-1.19%), and San Miguel A (-.86%) were all in the red while San Miguel B was unchanged.

NET Foreign selling was a massive P 142.846 million or US$ 2.551 million on moderate to heavy peso volume turnover of P 712.037 million or US $12.715 million. Foreign share to trade outstanding was at 58.01%. The fiery liquidations were practically concentrated on MERALCO, PLDT and First Philippine Holdings, which represented substantial percentages to their output, 73.01%, 36.39%, 56.16%, respectively. Among the blue chips, aside from PLDT, SM Prime and Metrobank recorded modest to minor outflows while BPI, AC and Ayala Land reported minor inflows, this of course is aside from Globe Telecoms which posted heavy inflows.

Market sentiment was generally bearish with decliners upstaging advancers by 46 to 19 or a ratio of over 2 to 1 while in terms of industry sub-indices, except for the mining index all other indices were lower for the day. Number of traded issues was at the threshold 100 level.

Today’s activities were a COMPLETE turnaround from Friday’s foreign bullishness that capped on the declines. Although the selloffs were limited to THE MARKET LEADERS, particularly Meralco and PLDT, the broad market felt the heat of the ferocious liquidations and caved in to the intense bearish pressure resulting to the hefty declines of the composite index. While technically speaking the chart of the Phisix seems to be out of danger, the failed breakout and the considerable damage in the market internals are things to keep a close eye on. One day does not make a trend.

Oil and Politics

Oil and Politics
Steve H. Hanke,
08.16.04, 12:00 AM ET

Reserves are not fixed. Proven reserves in 1971: 612 billion barrels. Since then the world has produced 767 billion--and still has 1,028 billion left.

Every president since Richard Nixon has asserted that we are running out of oil. Meaning: We are sitting ducks for those who brandish the oil weapon. To keep the evildoers at bay, the government must adopt policies that ensure our energy independence. Both George W. Bush and his challenger John Kerry worship at this altar. And why not? How many elections have been lost by blaming foreigners for an impending crisis and promising a quick fix?

Despite their cynicism about politicians, most people actually believe that mineral resources, including oil, are doomed to disappear. It's obvious: Start with a given stock of provisions in the cupboard, subtract consumption and eventually the cupboard will be bare.

But what is obvious is often wrong. We never run out of minerals. At some point it just costs too much to produce them profitably. In the 19th century the big energy scare was in Europe. Most thought Europe was running out of coal. That doomsday scenario never materialized. Thanks to a plethora of substitutes, the prices that European coal could fetch today are far below its development and extraction costs. Consequently, Europe sits on top of billions of tons of worthless coal.

Once economics enters the picture, the notion of fixed reserves becomes meaningless. Reserves are not fixed. Proven oil reserves, for example, represent a warehouse inventory of the expected cumulative profitable output, not a fixed stock of oil thought to be in the ground.

When thinking about oil reserves, we must also acknowledge another economic reality: Oil is sold in a world market in which every barrel, regardless of its source, competes with every other barrel. Think globally, not locally. When we do, the dwindling reserves dogma becomes nonsense. In 1971 the world's proven oil reserves were 612 billion barrels. Since then the world has produced 767 billion barrels. We should have run out of reserves five years ago, but we didn't. In fact, today's proven reserves are 1,028 billion barrels, or 416 billion barrels more than in 1971.

How could this be? Thanks to improved exploration and development techniques, costs have declined, investments have been made and reserves have been created. The sky is not falling.

If oil reserves aren't the problem, what is? The real problem is our oil policies. We inadvertently give aid and succor to OPEC, the world's clumsy oil cartel. That has been especially true since Nov. 13, 2001, when President George W. Bush announced that the U.S. would fill the Strategic Petroleum Reserve to capacity. Mightn't this plan have a little something to do with the rise in the price of oil, from $22 then to $40 now?

The economics of crude oil inventories provides the key to unlocking this mystery. The net cost of carrying inventories is equal to the interest rate, plus the cost of physical storage, minus the "convenience yield." The convenience yield is driven by the precautionary demand for the storage.

When the convenience yield is zero, a market is in "full carry," future prices exceed spot prices and inventories are abundant. Alternatively, when the precautionary demand for oil is high, spot prices are strong and exceed future prices, and inventories are unusually low. When the President ordered the reserve to be filled, the spot and future oil prices were in rough balance. Since then the spot prices shot up and have exceeded future prices (until recently) by a wide margin, indicating scarce private inventories. Indeed, private oil inventories fell to a 29-year low on Jan. 23, 2004.

The oil price run-up and scarcity of private inventories can be laid squarely at the White House's door. Since Nov. 13, 2001 private companies have been forced to compete for inventories with the government. Fortunately, it appears that, barring "events," the oil price surge has run its course. Spot and future prices are once again in rough balance, and private inventories are up by 14.9% over their January lows.

The pain of higher oil prices could have easily been avoided if George W. Bush had followed his father's lead. On Jan. 16, 1991, the day the first Gulf war began, George H.W. Bush ordered a drawdown of the government's reserve. The results were dramatic: The spot price of oil fell from $32.25 per barrel to $21.48 in one day. More important, the positive spread between spot and four-month future prices also fell, from $5.90 per barrel to $1.65, indicating a higher comfort level with the adequacy of private inventories.

The lesson is clear: We have an oil weapon, too. The strategic reserve should be used to bloody OPEC's nose, not to prop up a cartel.

The Economist on Oil Prices: Russian roulette

Russian roulette
Jul 30th 2004 From

The Economist Global Agenda

The oil price has hit a 21-year high thanks to a bout of nerves about supply from Yukos, Russia’s biggest oil producer. While much of the recent price rise has been due to strong demand, supply is so stretched that it would take little disruption to send the price higher still

THE curious, high-stakes poker game that is the investigation of Yukos, Russia’s biggest oil producer, appeared to have reached a climax this week. On Wednesday July 28th, Steven Theede, the company’s chief executive, said that a freezing of its assets by bailiffs seeking to enforce a 99 billion rouble ($3.4 billion) tax demand could be interpreted as meaning it must stop selling oil. Alarmed at the prospect that Yukos’s output of 1.7m barrels per day (bpd) could be taken off the market, traders pushed the price of West Texas crude up to more than $43 a barrel that day. The price fell back the next day, after a court official denied this interpretation of the asset freeze. However, the fight is still on: the court is still trying to sell Yukos’s most valuable business, Yukanskneftegaz, which is by any estimate worth several times the value of the disputed tax bill. The continued concern about Yukos, set against the backdrop of an oil industry working close to full capacity, sent prices to $43.15 on Friday, the highest level since the Nymex exchange in New York started trading crude 21 years ago.

The erratic behaviour of the Russian prosecutors, and the amazing, though plausible, idea that they might close down Yukos’s production, served to illustrate just how important Russian oil has become. Yukos alone produces 2% of the world’s output, and more than all the wells in Libya. A couple of years ago OPEC, the cartel of oil-exporting countries, was annoyed with Russia, which is not a member, for increasing production while the cartel tried to support the price through production quotas. But with demand booming and supply constrained, the world, and even OPEC, is now grateful for Russian production—it has become the second-biggest exporting nation, after Saudi Arabia. As output from oilfields in places like North America and the North Sea has declined, production from Russia and other former Soviet countries has shot up, by 2.5 billion bpd since 2001. This has helped to meet new demand from oil-thirsty China and other countries.

But suppliers are still struggling to meet worldwide demand. OPEC, which is largely made up of Middle Eastern countries, is under intense pressure to increase production, in order to bring the oil price closer to its official price band of $22-28 for a basket of crudes (which typically trade a few dollars below the West Texas benchmark). In particular, Saudi Arabia (OPEC’s swing producer) has seen its relationship with America (the world’s biggest oil consumer) come under strain, especially since the latest price spike has come in the pre-election driving season. But there is little OPEC can do to relieve the pressure: it is already operating within 5% of capacity. There are even rumours that Saudi Arabia’s state oil company is experiencing production difficulties, suggestions the kingdom strenuously denies.

At these production levels, then, there is little room for any supply disruption. But the unhappy truth about oil is that it is produced in some of the nastiest, least stable places in the world. Iraq is a case in point. Production at its oilfields has apparently risen to 2.4m bpd, much of which is being exported. However, there is a lot of scepticism about just how reliable Iraqi production and exports will be, given the state of unrest in the country. (Currently, exports are coming only from its southern fields because of sabotage in the north.) Production in Venezuela and Nigeria is running close to normal, but both countries have seen disruption over the past couple of years thanks to strikes (over Hugo Chávez’s rule in Venezuela, and work conditions in Nigeria). And a terrorist attack in the port of Khobar in May, which killed 22 workers, showed that even Saudi Arabia is vulnerable.

If the oil price remains above $40, what would it mean for the world economy? Despite the fact that the price is at a two-decade high, the real price (adjusted for inflation) is around half of the level in the early 1980s. Moreover, since the two oil-price shocks of the 1970s, western countries have reduced their dependence on the black stuff.

Still, if oil remained above $40, there would be an impact. Dresdner Kleinwort Wasserstein (DKW), an investment bank, reckons that 0.5 percentage points could be knocked off American growth and 0.7 points added to American inflation in 2006. The effect on Japan, which relies almost entirely on imported oil, would be even greater: it could see its GDP growth reduced by a full percentage point, according to DKW.

But the biggest impact of a high oil price could be on the American voter. Petrol is lightly taxed in America, and so its drivers feel the force of any price rise more than those in other rich countries. If the price climbs much further, they may even be angered enough to vote in a new president.

July 30 Philippine Stock Market Daily Review

July 30 Philippine Stock Market Daily Review

A reported adverse ruling by the Court of Appeals against the Energy Regulatory Board’s decree that allowed Meralco to raise its electricity rates by 17 cents per kilowatt-hour in June of last year sent the chain of LOPEZ owned companies collapsing at the start of the trading session.  Foreign investors fled in a panic-stricken hysteria that saw Meralco B shares dive by 16.07% while major Meralco stockholder First Philippine Holdings crashed by 13.15%.  Today’s net foreign selling of P 33.602 million in the market was largely due to overseas money stampeding out of the LOPEZ owned energy companies; Meralco B posted P 111.650 million worth or 56.61% of its trades while First Philippine Holdings recorded P 34.227 million or 68.94% of its turnover from foreign money exodus.  In sharp contrast, Meralco local or ‘A’ shares lost only 9.85%, as domestic investors seemed to have contained their consternation arising from the politically sensitive ruling while parent Benpres Corp felt the shockwaves similarly down by a lesser degree at 8.62%.

Ironically, FOUR of the nine heavyweight issues, Globe Telecoms (+.58%), Ayala Corp (+1.81%), San Miguel A (+1.75%) and its foreign or ‘B’ shares (+1.75), were up against only TWO decliners, PLDT (-2.34%) and Bank of the Philippine Islands (-1.17%) while the rest were unchanged. Aside, only Metrobank among the heavyweights accounted for modest foreign money outflows, while the rest of the heavy cap issues recorded moderate inflows. 

Sentiment turned bearish as declining issues walloped advancing issues by 57 to 28 or a ratio of 2 to 1, while industry indices were ALL in the red EXCEPT for the ALL index which was buoyed by the advances in Sunlife (+1.65%) and Manulife (+3.75%).  The OIL index topped the loser’s list down 3.66%, followed by the Banking and Finance lower 1.03%, the Commercial and Industrial index fell .94%, the Mining index skidded .57% and the Property index was least affected down .38%.

The bearish mood sparked by the unsettling news on Meralco encumbered the market from the very start that filtered to most issues in the broader market.  While foreign buying supported most of the heavyweights that resulted to a much-mitigated decline in the Phisix at the end of the session, the corrections in PLDT and Bank of the Philippines Islands apparently had larger effects to the major composite index and had been aggravated by the generally bearish market breadth.  The Phisix at the end of the bell fell by 14.36 points or .9%, one of the minority decliners in the Asian bourse today.

To be continued in our weekly newsletter… 

July 29 Philippine Stock Market Review

July 29 Philippine Stock Market Review

It’s kindda funny on how things are turning out, obviously events based on market internals and macro economic fundamentals has conflated to pave way for what we have detailed in numerous occasions here and in my newsletters with bizarre precision. 

The softer dollar, though on a lagged effect, has engendered for renewed interest in emerging market assets by foreign capital coupled with the anticipated orderly pace of monetary policy adjustments by the US FOMC plus the sturdy psychological optimism manifestly ingrained with local investors has jumpstarted the market to test its psychological resistance at the 1,600-level. 

Yesterday, we noted that the bellwether index is faced with three resistance levels and evidently, today, the Phisix has hurdled its first barrier and stopped right at the portals of the second frontier.

With foreign money goosing the index and taking the centerfield of the action while the locals bulls flanking the bears on the broader market, these circumstances are exactly the prescription we envisaged as a requirement for a successful campaign for the market to scale new heights, and heretofore are materializing right before our very eyes!

SEVEN of the EIGHT major index heavyweights accounted for Foreign Buying except for Metrobank (+1.92%) that resulted to a cumulative net acquisition of P 136.602 million the second consecutive session of more than P 100 million worth of foreign buying.  Foreign money has upped its share of participation to 63.7% of the total trades as today’s volume registered a hefty improvement on the surface with P 955.013 million or US$17.06 million, although cross trades and special block sales took up 39.4% of the trades. 

Again of the 9 issues that make up more than 75% of the market capitalization of the Phisix only TWO were unchanged, SM Primeholdings and San Miguel A shares, while the rest, PLDT (+.39), GLOBE (+.59%), Ayala Corp (+1.85%), Bank of the Philippine Islands (+2.4%), Ayala Land (+1.81%) and San Miguel B (+2.17%), posted gains for the day that buoyed the index.

SENTIMENT was OVERWHELMING bullish; Advancers drubbed Decliners 58 to 20 or almost 3 to 1 ratio, ALL major subindices were in the Green, and the infusion of foreign capital was broad based, this aside from cumulative net inflows for the day.  Moreover, total issues traded jumped to 122 even as average Peso volume per trade surged by about 63%, meaning that locals continue to expand trading, particularly buying activities on the broader market, while the increased volume per trade connotes participation of more institutional trades compared to retail based activities.

The PHISIX, so far, as of this writing, outperforms the region’s bourses whom are mostly, 10 out of the 15, in the red. Aside from the Philippines, India, China, Australia and New Zealand are slightly on the upside and could swing either way at the end of the trading session.

Since domestic investors are wont to the speculative side of the trade, the best performers today are the third tier issues, namely Lucio Tan’s Baguio Gold (+49.25%), Jardine Davies (+48.83%), A. Brown Company (+25%), ex-BW Fairmont Holdings (+19.35%), Balabac Resources, (+19.04%), Manila Mining A (+15.38%) and B (+14.28%), iVantage Corp (+13.63%), another Lucio Tan company, Tanduay Holdings (+11.53%) and Gotesco Land B (+10%).  Again the fantastic moves of these companies are based on stories fact or fiction depends on how you want to view it.  These times are the best for the 'children' and NOT for the professional investors.

The floundering Asian bourses today despite Wall Street’s upbeat performance could reflect on the coming infirmities with the US market tonight.  With CRUDE OIL on a record-breaking run, the recent rally in the US equity markets seems vulnerable to further slips sans a major shock that could embroil ALL global bourses.  So far the Philippine market has shown limited correlation or has moved divergently from that of the US markets, as an example the Philippine market is approaching its major resistance a 3 year high while the US benchmarks are treading on either new lows (NASDAQ) or testing its major support levels (S&P 500, Dow Jones). Although the recent animated moves by the Philippine market could induce some profit taking in the interim.

As the Prudent Investor has mentioned before, barring any seismic temblors that would likely affect world bourses, the underlying confidence in the local market as seen with the improving market internals are indications that the markets are headed higher over the short to medium term consideration.   

 

July 28 Philippine Stock Market Review

July 28 Philippine Stock Market Review

Voila! As precisely diagnosed, Wall Street’s vigorous bounce provided the springboard for the domestic market’s sizzling jump of 22.51 points or 1.44%.  Ingredients were as accurately prescribed, foreign buying to bolster the index and sanguine local investors to provide the icing on the cake. 

The rebound in New York certainly did shore up the Asian bourses with Japan’s Nikkei 225 leading the region with advances of about 1.74% as of this writing.  11 out of 15 or more than 70% of the region’s index are currently manifesting gains with the Philippine benchmark index being the second to Japan. Only China has sustained moderate losses while the declines in India, Indonesia and Taiwan are marginal and could swing to the upside at the end of the trading day.

Pent up foreign infusion of capital to select index heavyweights indeed propelled today’s major index to an astonishing climb on moderate volume of P 505.650 million or US $ 9.03 million.  Even as domestic investors dominated the market with 60% share of the total turnover, foreign investors injected P 158.005 million or an equivalent equity accumulation of 31.25% to the traded volume, which simply means that locals sold out heavyweight issues to perky foreign investors to speculate on third tier issues.

Of course sentiment was primordially bullish; advancing issues bludgeoned declining issues 49 to 25 or almost 2 to 1, industry sub-indices were all green except for the ALL index on lower Manulife and Sunlife prices and foreigners bought twice more issues than it sold, aside from the recorded NET INFLOWs from overseas money.

PLDT (+3.65%), SM Primeholdings (+1.69%), First Philippine Holdings (+1.81%) and Jollibee Food Corporation (unchanged) were the major beneficiaries of foreign capital.  Among the index heavyweights 5 of the 8 scored major to moderate inflows while two, Ayala Corp (unchanged) and San Miguel B (unchanged) had negligible capital flows and only Metrobank (unchanged) figured a modest outflow. 

Among the industry sub-indices the OIL index spearheaded the domestic investors appetite for speculative activities and surged 9.6% while the other extractive industry, the MINING index reached its highest level since February or during the past five months on a noteworthy 3.46%, even as global prices of metals were flailing during the recent sessions on a ‘Greenspan engineered’ resurgent US Dollar.

Local investors whose underlying outlook remains optimistic prefers to treat the stockmarket as an alternative to PAGCOR or the government mandated gambling outfit or Casino.  And the flavor of the week remains to be that of the LUCIO TAN owned companies on, once again stories dramatizing revival and recoveries.  Tanduay Holdings closely hit the PSE-imposed ceiling up a startling 49.42% followed by Baguio Holdings with another fabulous 48.88% gain for the second straight day, Macroasia Corporation was seventh among the top winners of the Tan Group of companies higher by 13.51% for the EIGHT session for an accrued 171.43% gain, WOW! 

The other NON-Tan Group but on the top ten list of winners are Centro Azucar de Tarlac (+44%) on third spot, Boulevard Holdings (+26.66%) fourth, BALABAC Resource Holdings (+20%), Oriental Petroleum (+18.75%) sixth, Swift Foods Inc (+12.9%) eighth, Kuok Philippine Properties (+12.12%) ninth and Oriental Petroleum B or foreign shares ‘B’ (+11.76%) tenth.

Yesterday’s outside day reversal DID validate its usual immediate term move and is likely to LEAD the index higher to test the resistance levels at 1,594 (triangular), 1,600 (psychological) and 1,620 (major-three year).  Given that the outlook by the locals are manifestly bullish but hampered by the lack of volume, the market’s tendency is to either move higher or move sideways largely dependent on the scale and intensity of foreign instituted buying. 

On the risk side, the major drawback IS the ‘stalling’ or the loss of momentum seen with the US equity markets, which has thus far served as the PARADIGM for most of the Global bourses.  Any major ‘shocks’ on the downside COULD be expected to SPILLOVER to Global bourses including ours.  The Philippines’ major risk would come from torrential selloffs by foreign investors, who had, in 2003, goosed the domestic market to its current levels, but so far US FED Chair Greenspan’s telegraphed or ‘measured’ pace of rate increases reveals renewed appetite for emerging market assets.

July 27 Philippine Stock Market Commentary

July 27 Philippine Stock Market Commentary

The contained damage in the US markets gave an opening for the Bulls to seize the initiative and boost the main Philippine composite index by 17.64 points or 1.14%.  Today’s move practically recouped or zeroed out the losses incurred from yesterday with a small change left for gains.  In chart lingo, today’s candlestick shows a semblance of an ‘outside day’ reversal formation which suggests of a potential reversal from the current weaknesses or denotes of a bullish undertone for the coming sessions, although the rather lean volume indicates that the chirpy outlook would probably be less pronounced.

Despite the vibrant gains of the benchmark index, volume turnover in local currency was relatively benign at P 362.599 million.  Sentiment indicators were mostly positive, namely, advancers outpaced decliners 39 to 28, foreign capital recorded a net inflow of P 41.388 million mostly directed at PLDT, foreign investors bought one company more than it sold, while industry indices were mixed with the ALL index down, due to the Sunlife’s decline, and the extractives sectors were sold out by the local investors.

SIX of the 9 heavy cap issues posted gains against 3 unchanged.  Bank of the Philippine Islands reversed yesterday’s anomalous steep decline with a considerable 2.5% gain, meanwhile, PROPERTY heavyweights Ayala LAND and SM Primeholdings were today’s top-heavy cap advancers which added 3.77% and 3.5% respectively.  Major Telcos equally buoyed the index PLDT up by 1.65% and Globe higher by .6%.  Lastly Ayala Corp nudged higher by 1.89% on a MEASLY P 80,700 worth of trades.

Well, the PHISIX surfed the wave of optimism among Asian bourses with about 10 of the 15 bourses trading on the upside, as of this writing.  It seems that the Philippines will be today’s second top gainer following the Taiwan’s Taiwan Weighted which is up 1.25%.  The rest of the region are trading on thin margins and could be swayed to either side except for Japan whose Nikkei 225 is likely to close lower as it is down by 1.05%.

DOMESTIC investors have again ramped up their speculative activities with Taipan Lucio Tan’s companies being the top winners for the day; Baguio Gold hit the PSE-imposed price ceiling after surging by 50% followed by Macroasia Corporation which jumped 37.03% on a follow through from last week’s remarkable 64.5% advance most PROBABLY due to its recent disclosure that the company intends to revive its nickel mines in Palawan.  Other the other winners for today were Centro Escolar University (+27.27%), Fairmont holdings formerly the controversial BW (+12.9%), Araneta Properties (+12.5%), Vantage Holdings (+12.5%), Yuchengco construction Engineering Equipment Inc. (+10%), Uniwide Holdings (+9.37%), Prime Orion (+6.45%) and Philodrill B (+5.0%).

The number of traded issues equaled the highest level touched last July 21st at 124, demonstrative of the continuing optimistic outlook by the local investors. As we have noted previously, only FOREIGN INITIATED accumulations could conspicuously ratchet up the major benchmark index considering the volume slack by the local investors, who prefer to fiddle with third tier or issues. As in today’s case, foreign take up to total volume was at 44.53%, hence the slim volume despite the sizable uptick.  In spite of these, the MASSIVE INFLOWS to the PRIVILEGED FEW like PLDT, Globe Telecoms and Ayala Land sparked a wave of bargain hunting that spilled over to the rest of the blue chips and to the broader market.

Lastly as noted in the past,  it pays to keep a close watch on the US markets for any major tremors that could unsettle the global bourses, including ours.

 

Bloomberg's William Pesek: Should Jay Leno Laugh at Philippines

Should Jay Leno Laugh at Philippines?
By William Pesek Jr.

July 26 (Bloomberg) -- Gloria Arroyo is taking considerable flack for withdrawing Philippine troops from Iraq. Even Jay Leno is taking shots at the leader of Asia's No. 12 economy.

``A new world record has been set for the 100-meter dash -- it was set by the Philippines fleeing Iraq,'' the Tonight Show host joked recently.

It's hard to decide whether to applaud Arroyo's move or loathe the Philippine president for it. Either way, she may have shot her fragile economy in the foot.

The common complaint about Arroyo recalling troops to save a Filipino hostage is that she encouraged more terrorism in Iraq. U.S. Secretary of State Colin Powell said Arroyo ensured that ``the kidnappers were rewarded for kidnapping.'' Clearly, Arroyo's pullout was a huge blow to the White House.

Yet the real fallout may be felt not in Iraq but Arroyo's shaky, debt-laden economy.

A key pillar of the economy is the 8 million Filipinos working overseas. Filipinos are expected to send $8.2 billion home this year -- that's 10 percent of gross domestic product. The 46-year-old truck driver Arroyo saved from being beheaded was one such worker. He was in Iraq to support his wife, eight children and extended family back in the Philippines.

It's hard to exaggerate the extent to which the economy relies on this source of hard currency. It's needed to pay off $61 billion of debt, half of which is owed overseas. At the moment, a third of the national budget goes to servicing debt.

Sending Money Home

Annual remittances are three times larger than all the foreign direct investment the nation receives, estimates Alex Pomento, head of research at CLSA Philippines Inc. And when you meet with officials in Manila they invariably mention remittances as a key strength of their economy.

It's really the opposite. The Philippines isn't creating enough jobs for its swelling population, driving one in 10 people to seek employment in Frankfurt, Hong Kong, Kuwait, Riyadh, Singapore, Tokyo or elsewhere. Some surveys show that one in five Filipinos still at home would work overseas if immigration laws allowed.

For better or worse, that's the situation in which the Philippines finds itself. Trouble is, by giving in to kidnappers in Iraq, Arroyo may have declared open season on snatching Filipino workers around the world.

What's to keep an individual or organized crime unit with no terrorist ties in any city around the world from snatching a Filipino and demanding cash from Manila? What's to keep Islamic separatists in the Southern Philippines from kidnapping Filipinos and demanding their comrades be released from prison or policy concessions from the government?

Arroyo's Risk

It really is true that the Philippines' most lucrative export is its people. The risk is that the precedent Arroyo set in Iraq will imperil the millions of Philippines working overseas and, by extension, an economy that relies on their income.

Even before the Iraq hostage ordeal, the work Filipinos did overseas was often risky, the compensation poor and treatment by employers shabby. Fewer Filipinos heading abroad and sending money home could have severe fiscal implications, increasing bond yields. The nation already carries a junk debt rating.

It's not hard to understand why Arroyo withdrew the Philippines' 51 soldiers and police officers from the U.S.-led force in Iraq. For one thing, overwhelming public support informed her decision. She knew that if hostage Angelo de la Cruz lost his head, her presidency would lose its head, too.

Maintaining Support

For another, Arroyo just survived a messy presidential election in a nation often beset with rumors of military coups. To shore up the economy she'll need to take unpopular steps like hiking taxes and raising power prices. She'll need the support of the nation's poor to do it. Besides, it's not as if the justifications for the Iraq invasion served up by the U.S. have proven true.

It was a courageous thing to risk the ire of the U.S. and invite international criticism for bowing to terrorists. Just as Spain took flack for pulling its troops out of Iraq, the Philippines can expect some barbs -- even from comedians like Leno.

Arroyo's move also was a sign of insecurity. A third of the country's 85 million people live on less than 60 U.S. cents a day. Unemployment, the highest of 14 Asia Pacific countries tracked by Bloomberg, rose to 13.7 percent in April. She also faces Islamic extremists, domestic terrorism and kidnap-for- ransom groups that sometimes operate in downtown Manila.

If there's a silver lining in all this, it may be Arroyo's improved standing with voters. De la Cruz returned to Manila to a hero's welcome last week. The public euphoria cloaked Arroyo in a softer light than voters were used to; many there see her as an aristocrat with little feel for the average Filipino.

Improved support ratings could make it easier for her to attack the corruption gnawing away at the economy and boosting bond yields. It means that little of the nation's 5 percent trickles down to those to most need it. Filipinos and investors alike would be well served if Arroyo felt empowered to address impediments to higher living standards.

For the sake of one of Asia's most vulnerable and geo- Politically important economies and investors in it, let's hope Arroyo's call in Iraq was the right one.

July 26 Philippine Stock Market Commentary

July 26 Philippine Stock Market Commentary

As admonished in our commentary last Friday, any earthshaking move in the US markets could fray sentiments of global bourses including ours.  As of this writing, only THREE bourses are in the green and stands defiant to the bloodstained region and these are the indices of Singapore, Malaysia and India, whom are all incrementally higher.

In the domestic front, the foreign induced selling particularly on the Bank of the Philippine Islands (-3.61%) weighed on the benchmark index to close 15.96 points or 1.02% lower for the day, almost expunging the gains attained during the last two trading days of the previous week.  Except for the lonesome winner among index heavyweights San Miguel ‘B’ (+.72%), 6 others including BPI posted declines while PLDT and San Miguel ‘A’ closed neutral.  Metrobank suffered a similar outcome to that of BPI and was off a considerable 3.7%, followed by Ayala Corp and subsidiary Ayala Land down 1.85% respectively, SM Primeholdings lower by 1.72%, and Globe Telecoms lost .6%.

Local investors governed today’s activities as the share of its foreign counterparts to total turnover was only 45.67%.  Telco issues as PLDT, Globe and PILTEL (-3.5%) were supported by foreign capital, as well as Ayala Corp, ABS-CBN Preferred (unchanged) and First Philippine Holdings (unchanged). Foreign money outflow from BPI accounted for 94.38% of its volume, and was evidently dragged down by the accelerated exodus by offshore portfolios.  Moderate liquidations were seen in Meralco B (-1.75%), Philippine Stock Exchange (-15.12%), Petron (-5.08%), Metrobank, Filinvest land (unchanged) and SM Primeholdings.

Sentiment weighted towards the bears, as declining issues led advancing issues 39 to 22 and industry sub-indices save for the extractives were all in the red while foreign money acquired one company more than it sold.  Issues traded remained above the 100 level at 101 but significantly lower than the past 7 sessions which traded above the 110 level.  As the Prudent Investor pointed out earlier, investors are likely to hold on to declining issues than to sell them hence, in a declining market, the issues traded tends to ebb.  Today’s action points towards these biases, although the prevailing optimistic outlook by local investors, based on the previous movements or ‘established trend’, still underpins the market sentiment.  One day does not make a trend, but a collective series of daily moves.

Again all eyes should now center on the pivotal US markets as its recent downward moves have been conveying mixed messages about the sustainability of the US economy’s resilience, the market’s ambiguous reaction to the forthcoming monetary policy adjustments, the impacts of continuing higher oil prices on inflation, the unwinding of carry trades in anticipation of the ‘measured rate’ increases, the high volatility of the US dollar and the deceleration of China’s breakneck pace of growth.  Stay tuned...