New York Times: The Dollar's Long-Term Direction: Down

The Dollar's Long-Term Direction: Down
By EDUARDO PORTER and ELIZABETH BECKER

New York Times

November 4, 2004

The election drove the dollar all over - down when it looked like President Bush would lose, up briefly when Senator Kerry conceded defeat.

But ultimately, the dollar's fate never hinged on the outcome of the presidential election. Now that the dust has settled, the currency is back on its long-term path: downward. According to most economists, it is likely to stay there over the next four years.

"There is a certain inevitability to the decline,'' said Alan Blinder, an economist at Princeton University who served as vice chairman of the Federal Reserve and was an adviser to President Bill Clinton. "I think the Treasury understands this. It would be nice if they would say so."

Managing this potentially painful move will be a pressing challenge for Mr. Bush's economic team. The nation's current account - the broad gap between the nation's exports and imports of goods and services - has reached a deficit of nearly $600 billion, almost 6 percent of the nation's overall economic activity. And it shows no signs of diminishing on its own.

Closing this gaping hole will overshadow the administration's trade policy, coloring its push for better access to foreign markets for American products, and adding urgency to its attempts to make China and other Asian nations revalue their currencies against the dollar so that American industry can be more competitive.

Today, the dollar is at the center of a delicate interlocking web of international financial imbalances. The United States imports much more than it exports. Asian countries - some of the biggest exporters - send the proceeds back into the United States by investing here, mostly in government bonds. That keeps interest rates low, fueling spending and leading Americans to import even more goods and services from the rest of the world.

Both sides benefit from this arrangement. The Asian money allows Americans to spend beyond their means. At the same time, dollar purchases by Asian central banks depress the value of Asian currencies, stimulating their exports to the American market.

An influential group of economists has argued that there is no reason that this imbalance cannot go on relatively undisturbed - if not forever, at least for a very long time. But most mainstream economists argue that, at a minimum, the unraveling of this web would send the dollar lower and squeeze American consumption.

Kenneth Rogoff, a professor of economics at Harvard, said that to smoothly and significantly narrow the current account deficit requires a depreciation of at least 20 percent in the dollar, making it much more costly for Americans to buy imported goods and travel abroad.

The imbalance is fueling a stupendous buildup of foreign debt in the United States. At the end of last year, the nation's net financial deficit - broadly, what Americans owe the rest of the world minus what the rest of the world owes to the United States - amounted to nearly 30 percent of total output. And both sides are digging themselves deeper into holes, with American debts mounting and foreigners acquiring ever greater piles of depreciating paper assets.

Economists who speak of the current account deficit often quote the economist Herb Stein: "If something cannot go on forever, it will stop.''

So what will it take for the brakes to be applied? Barry Eichengreen, a professor of economics at the University of California, Berkeley, argues that Asian policy makers are going to force a change. He contents that as they move away from their present export-led growth strategies, which require cheap currencies, to focus monetary policy on managing internal demand, Asian governments will support the dollar less, buy fewer Treasury bonds and shift some of their foreign reserves to other currencies, like euros.

Indeed, China's decision to raise interest rates last week put upward pressure on the yuan and indicated a willingness to take market-based measures to cool its galloping economy.

"Asian policy is changing," Mr. Eichengreen said. "The end is growing increasingly near."

This suggests that President Bush's efforts to maintain open markets will increasingly be up to others. The United States' leading trade partners - Europeans, Asians and even Canadians - are promising more challenges to Washington on trade issues, bringing disputes to the World Trade Organization and going after new markets as well.

A cheaper dollar would stimulate American exports but would create some conflicts with other countries. And a dollar depreciation, on its own, would do little to curb the nation's dependence on foreign money. For a devaluation to work effectively, economists explain that other measures to reduce the nation's excess spending are needed as well.

The situation, some suggested, is analogous to the problems faced by Ronald Reagan early in his second term, when the United States, despite robust growth, suffered from an expensive dollar, weak exports and big deficits.

In 1986, the administration negotiated the Plaza Agreement with six other major industrial powers, helping pave the way to a manageable, if sometimes rocky, 40 percent decline in the value of the dollar.

"We have to do something similar to get the value of the dollar down and not wait for a market adjustment which could be more damaging to the economy," said Robert E. Scott, of the liberal Economic Policy Institute in Washington.

The strategy worked for Mr. Reagan because he also pushed through a couple of tax increases that helped narrow the budget gap. Economists are not very confident, however, that a second Bush administration would be prepared to do something similar.

That could leave the economy vulnerable to a more painful adjustment, with the dollar falling rapidly and interest rates rising fast. The result would almost certainly lead to a recession and perhaps a collapse in the real estate market.

"There is a real possibility,'' Catherine Mann, an economist at the Institute for International Economics, wrote in a study earlier this year, "that the entanglements created by this co-dependency cannot be undone by anything short of a global economic crisis."

Businessweek: A Windfall from Foreign Bonds

A Windfall from Foreign Bonds

Arthur Steinmetz of Oppenheimer International Bond Fund explains why he likes fixed-income securities from emerging markets

Despite the risks, foreign bonds have paid off in recent years for investors willing to weather volatility in exchange for higher returns. Oppenheimer International Bond/A (OIBAX ), managed by Arthur P. Steinmetz, head of Oppenheimer's international fixed-income team, looks for value and yield in both developed and emerging markets around the globe.

For the 12-month period ended Sept. 30, the $1.6 billion portfolio rose 11.6%, vs. 6% for the average global fixed-income fund. For the three-year period, the fund gained 18.2% annualized, vs. 9.1% for the peer group. For the last five years, it has risen 12.8% annualized, vs. 6.5% for its peers.

Given that Oppenheimer International Bond can invest in emerging markets, the portfolio is more volatile than its peer group, which is illustrated by its higher standard deviation. It also has a substantially higher annual turnover rate. The fund's expense ratio of 1.22%, however, is below the 1.29% peer group average. Based on risk and return characteristics over the last three years, Standard & Poor's gives the fund its highest rank of 5 Stars.

Steinmetz took over as sole manager in April, 2004, following the departure of Ruggiero de Rossi. However, Steinmetz has been on the management team in one capacity or another since the fund's inception in June, 1995. He also manages the Oppenheimer Strategic Income Fund (OPSIX ).

Palash R. Ghosh of Standard & Poor's Fund Advisor recently spoke with Steinmetz about the fund's investing strategy and top holdings. Here are edited excerpts of their conversation:

Q: How does the performance of foreign bonds correlate with the performance of U.S. securities?

A: There's actually a very high correlation between domestic bonds and the fixed-income markets of most of the developed world. For example, in 1994, U.S Treasuries sold off dramatically when the Federal Reserve enacted an aggressive tightening campaign. Interestingly, the German bond market also sold off by about 90% as much as the U.S., even though the German Bundesbank didn't move interest rates at all.

One major exception to this rule is Japan. Japanese bonds do not correlate with our markets, given that their business cycle has been out of whack with global economies for the past 15 years.

Q: What about emerging markets?

A: Emerging-markets bonds also have a low correlation with U.S Treasury bonds because they essentially provide a credit spread. By investing in emerging-markets securities, we add diversification to our portfolio and some protection against changes in U.S. markets.

However, most of the diversification that foreign bonds provide [to] investors comes from taking on currency exposure, and this is central to our investment philosophy.

Q: How do you assemble your portfolio?

A: We seek to create a broadly diversified portfolio by country, region, and currency to minimize volatility. We invest in both developed countries and the emerging markets. Our exposure to emerging markets provides us with a bit more yield than funds that invest exclusively in developed nations.

Essentially, through our investments, we're seeking an income advantage over U.S. markets. Currency is the most important variable in the construction of our portfolio. On a top-down, macroeconomic basis, the three most important global currencies are the U.S. dollar, the euro, and the yen. We evaluate the relationships between these three. The relative strengths and weaknesses of other currencies are of less significance.
Q: How is the fund currently positioned?

A: This fund operates on three different types of risk: interest rate risk, credit risk, and currency risk. At the moment, we're underweight in credit risk, underweight in interest rate risk -- by moving to shorter durations -- and overweight in currency risk.

Q: Do you invest in sovereign bonds or corporate bonds?

A: We're free to invest in both sovereign and corporate bonds. However, in practice, we usually have no exposure to corporates. The primary drivers of return are from currency risk and sovereign credit spreads. Any additional money we might make from buying high-grade corporate bonds would not enhance our overall returns.

We also avoid emerging-markets corporate bonds because they're especially problematic. The credit spread that these issues trade at doesn't compensate for the probability of a sovereign or corporate blow-up in these volatile markets. We find vastly better value and liquidity in sovereign bonds.

Q: What's your currency allocation at present?

A: We have about a 53% exposure to developed-market currencies, emerging markets denominated in U.S. dollars account for 19%, local emerging-markets currencies, 7%, and 10% is in U.S. currency.

We actually have an underweight in dollar-denominated emerging-markets bonds because we thought that rising U.S. interest rates would be a problem for the emerging markets and present a credit risk, but that has turned out not to be the case thus far.

Q: How has the portfolio changed over the last year?

A: We've reduced our interest rate duration as rates declined in the U.S. We've increased our exposure to emerging-markets bonds denominated in local currency, notably in Turkey and Brazil. We like countries with high real returns and declining inflation. Q: What is the fund's average credit rating?

A: It is currently at A+, but typically it's not that high since we're willing to invest in both emerging-markets bonds and below-investment-grade bonds. However, keep in mind that many emerging-markets bonds have witnessed upgrades to their sovereign debt in recent years.

Q: This fund generated big returns in 2002 (20.8%), and 2003 (25.9%). What drove this outperformance?

A: In 2002, we got big performance from emerging-markets bonds. In 2003, it was a combination of the continuing strength of emerging-markets bonds and the sustained weakness of the U.S. dollar.

Q: Why does the fund have such high annual turnover rates, as much as 300%?
A: The high turnover is a result of our investment methodology, and we think it's a spurious number. Currency hedging and active currency overlays are usually done on a 1- to 3-month rolling basis. Therefore, simply maintaining the positions requires several rolls per year, which inflates the turnover figure.

Q: Do you expect foreign bonds to outperform U.S. bonds as we head into next year?

A: Yes, and for two reasons: rising interest rates in the U.S. and the necessary correction in the U.S. dollar, which is ongoing. Interest rates are falling around the world, outside of the U.S. European bonds perform particularly well when the U.S. dollar weakens.

Bloomberg: Dollar Drops to Record Low on Speculation Europe to Tolerate Gain in Euro

Dollar Drops to Record Low on Speculation Europe to Tolerate Gain in Euro

Nov. 5 (Bloomberg) -- The dollar tumbled to a record low against the euro after German Chancellor Gerhard Schroeder suggested he will tolerate a stronger European currency, overshadowing a surge in U.S. job growth in October.

The euro's rise is ``not yet dramatic,'' Schroeder, leader of Europe's largest economy, told a press conference in Brussels. His remark followed European Central Bank President Jean Claude Trichet's failure yesterday to protest a four-week euro advance that helps offset the impact of higher oil prices.

``We were lined up with everyone else to buy euros; we did buy some,'' said David Durrant, chief currency strategist in New York at Bank Julius Baer & Co., which manages $95 billion. European officials may ``allow the euro to appreciate somewhat because of their inflationary concerns,'' he said.

Against the euro, the dollar weakened to $1.2964 at 5 p.m. in New York from $1.2872 late yesterday, according to EBS, an electronic currency-trading system. The dollar fell as low as $1.2972, breaching the Feb. 18 record low of $1.2930. The U.S. currency fell to 105.58 yen, a six-month low, from 106.03 yesterday.

The dollar, down 5 percent in the past month against the euro, initially jumped after the Labor Department said employers added 337,000 workers in October, after a gain of 139,000 a month earlier, fueling bets the Federal Reserve will raise its benchmark interest rate twice more this year.

``If a payrolls like this can't cause the dollar to rally it's the clearest signal that there is something seriously wrong with the dollar,'' said David Bloom, a currency strategist at HSBC Holdings Plc in London.

`Loving This Market'

The dollar has lost 8.3 percent since its high for the year of $1.1761 on April 26, surrendering gains made on expectations the Federal Reserve would raise its benchmark interest rate from a four-decade low. The U.S. currency is also down this year against the yen, British pound, Swiss franc, Brazilian real and the currencies of Australia and New Zealand.

Hedge funds, pension funds and mutual funds are selling dollars, said Michael Klawitter, a currency strategist at WestLB AG in Duesseldorf, Germany.

``A lot of currency hedge funds had a miserable year, and so they're loving this market now,'' he said. ``The euro will be testing $1.30, which the market desperately wants to see.''

The ECB may sell the euro for the first time to stem a rally should it reach $1.35 per dollar, Stephen Jen, head of currency research at Morgan Stanley in London, in a report.

Decline Under Bush

The dollar is weakening as the U.S. current account deficit widens, economists pare forecasts for U.S. economic growth and foreign demand for U.S. assets wanes. The currency has shed 21 percent since President George W. Bush, who won a second term on Nov. 2, took office in 2001.

Slowing purchases by foreigners of U.S. securities fueled speculation the economy won't be able to attract enough capital to compensate for a record current-account deficit and maintain the dollar's value, said Aziz McMahon, a currency strategist at ABN Amro Holding NV in London.

``The dollar's decline is really not a function of relative growth,'' said Michael Rosenberg, senior strategist and managing director in New York at Harbert Management Corp., an investment firm with about $5 billion in assets. ``It's really a function of the current account deficit,'' and strong U.S. growth may actually hurt the dollar by inflating that deficit, he said.

The shortfall in the current account widened to a record $166.2 billion in the second quarter. The gap is equivalent to 5.7 percent of gross domestic product, up from 5.1 percent in the first quarter, meaning the U.S. economy needs to attract about $1.8 billion a day to match it, according to Bloomberg calculations. The current account is a measure of trade, services, tourism and investments.

Schroeder, Trichet

A widening deficit in the current account may cut demand for the dollar, Robert McTeer, president of the Dallas Fed, said in a speech in New York on Oct. 7. San Francisco Fed President Janet Yellen and Kansas City Fed President Thomas Hoenig have also said they're concerned. Currency policy is set by the U.S. Treasury.

The dollar has lost 1.3 percent this week against the euro, and 0.2 percent versus the yen. The U.S. Dollar Index fell below 84 for the first time since December 1995. The index tracks the dollar against a basket of the euro, yen, British pound, Canadian dollar, Swedish krona and Swiss franc.

Schroeder said the rise in the euro isn't yet ``dramatic,'' so ``we don't need to take any political measures.'' He spoke at a press conference after a summit of European Union leaders in Brussels.

Trichet

When asked about the euro's gains at a press conference in Frankfurt yesterday, Trichet referred to a statement by the Group of Seven earlier this year that ``excess volatility and disorderly movements in exchange rates'' are undesirable, stopping short of his January denunciation of ``brutal'' exchange- rate moves.

``In the previous dollar down phase at the start of the year, we swiftly got complaints from European officials,'' said McMahon. ``This time around, there have been no complaints and some arguments that the euro appreciation, in the context of high oil prices, would provide some sort of shield for the economy.''

Speculators including hedge funds boosted futures bets on euro gains to a record, according to data released today from the Washington-based Commodity Futures Trading Commission.

In the week through Nov. 2, speculators boosted so-called euro long positions, which profit from euro gains against the dollar, to 53,465 greater than euro short positions. It was the largest net long stance since the euro's debut in January 1999. Net long yen futures holdings rose to 36,814, the highest since February, according to the CFTC.

To contact the reporter on this story:
Mark Tannenbaum in New York at at mtannen@bloomberg.net.

Morgan Stanley's Andy Xie: Back to Carry Trades

Back to Carry Trades
Andy Xie (Hong Kong)

Carry trades are dominating investment themes among the financial investors I visited in the UK last week. Long commodities and emerging markets and short on the US dollar seem to remain the core investment ideas. The expected revaluation of the renminbi, continued strong demand from China for commodities, and the large US current account deficit are the three building blocks for the carry trades.

The reviving enthusiasm for carry trades after a lull in the spring and summer is due to several factors. 1) China did not raise interest rates in September, 2) the level of liquidity, especially the flow into hedge funds, has remained strong despite three Federal Reserve rate hikes, and 3) there is still nothing else to be really bullish about.

While the recent rate hike by China is denting the enthusiasm for carry trades, its impact is unlikely to last. We believe the carry trades will truly unwind when the Fed funds rate is significantly above inflation and/or there is physical evidence that China’s demand for commodities has declined.

Putting on Carry Trades Again

The hedge fund community in London has grown rapidly. I spent three days in London last week and did not feel unproductive. The city appears to have successfully made the transition from a center for traditional money managers to one for hedge funds in the two years since the former was decimated by the tech burst. I believe this speaks volumes on how flexible and dynamic London’s financial community is in taking advantage of the shift to absolute from relative performance in the money management business.

The mood of investors I met was somber in general. The seesawing market conditions have made it difficult to make money this year. Even hedge funds can only make money when there are trends to catch. The recent weakness in the US dollar, which has made carry trades profitable again, has not been big enough to change the investor mood.

Most investors I met in London have convictions on going long emerging markets (equity, credits or currencies) and commodities (commodity futures, currencies or commodity producers) and are short on the US dollar or long on the yen, euro and emerging market currencies. The US current account deficit, expected renminbi revaluation and continuing strong demand for commodities from China are the fundamental arguments in favor of the carry trades.

Low Fed Funds Rate Still Drives Carry Trades

The low Fed funds rate is the source of enthusiasm for carry trades. Even though the Fed has raised the rate by 75bps, it is still substantially below the inflation rate in the dollar block (East Asia plus US). The US liquidity indicators are all turning down but the level of liquidity is still high. The amount of liquidity with money managers, especially in hedge funds, is still significant. Another 100bps of rate hikes by the Fed could reverse this liquidity tide.

Most money managers I have met are expecting stock markets to rally after the US election. If oil prices come down, which is already taking place after China’s rate hike, this should be the case and would be another example of a self-fulfilling expectation in a world with too much liquidity.

The carry trades will only work for everyone if China revalues its currency, which would cause another round of US dollar weakness and an even bigger commodity bubble. If China raises interest rates but keeps the peg, as I believe, carry trades will be a negative sum game for all participants.

Dollar Devaluation Is the Wrong Solution to Global Imbalance

The case for a weaker US dollar is the large US current account deficit, as it reduces the deficit through more exports and/or more import substitution. However, last year’s dollar devaluation had the opposite result. The main reasons for this were: 1) that consumption in other major economies would not rise much, given their stronger currencies and 2) that global companies have spread their capacity to lower-cost locations and could meet more US demand with foreign production. Therefore, the level of globalization has changed how currencies affect economies.

I believe the right solution to the US current account deficit or the global imbalance is for a US consumption correction. The US consumer has overspent in the past four years. Two to three years of below-trend growth, say 2-3%, could well correct the global imbalance. In my view, this would not be such a high price to pay for the consumption binge that has been going on in the US.

The US dollar is the anchor currency for globalization (i.e., global trade). Devaluing this anchor currency to gain trade advantages just does not work. If policymakers insist on pushing the dollar down, there may be global financial crisis. Two to three years of US consumption weakness would be more preferable for everyone, in my opinion.

China's Outlook Does Not Support Carry Trades

I believe an overwhelming majority of money managers are on the same side of carry trades, pushing up commodity prices and pushing the dollar down. The only way for everyone to make money is for the global equilibrium to change to justify a lower dollar value and higher commodity prices. A revaluation of the renminbi would have done the trick, which is why the expectation of a Chinese currency revaluation was so central to the carry trades around the world.

The rate hike by China shook the confidence in this plan a little, as the market had thought China would deal with inflation by raising the currency’s value rather than increasing interest rates to slow demand. This undermined the fundamental assumption for carry trades. Oil prices appear to have declined in response to China's rate hike as some speculative positions were unwound.

However, most money managers appear to have found a way to interpret the rate hike in favor of carry trades: if China could increase interest rates suddenly, it could also just as suddenly increase the value of the renminbi. In my view, this expectation is what continues to support the carry trades that are prevalent in currency and commodity markets.

I believe that China will continue to raise interest rates along with the Fed but keep the currency stable. With the economy in overshooting territory and surrounded by a lot of speculation, appreciating the currency – even if it is small amount – could cause speculation to mushroom and thus create a bigger bubble, with a big crash bound to follow. In my view, China is unlikely to take such a risk.

I believe the best course of action for China is to gradually raise interest rates to maximize the economy’s chances of landing softly. Only after this has occurred should China contemplate exchange rate reform.

Bloomberg's Chet Currier: Grantham, Gross Gloomy Over Troubles and Bubbles

Grantham, Gross Gloomy Over Troubles and Bubbles:

Bloomberg

by Chet Currier

Nov. 5 (Bloomberg) -- Here's a handy way for optimistic investors to test the strength of their convictions:

Spend an hour or two perusing the latest comments of two widely respected money managers, Jeremy Grantham and Bill Gross.

Gross's views are so glum he himself speaks of them as ``the economics of despair.'' Grantham says the history of investment ``bubbles'' argues for a drop of about 35 percent in the Standard & Poor's 500 Index, on top of the 40 percent slide already endured in 2000-02.

``Asia has hollowed out our manufacturing base and is now making inroads into services,'' says Gross, chief investment officer at Pacific Investment Management Co. in Newport Beach, California, where he oversees $415 billion including the biggest bond mutual fund. ``We can't really educate or innovate our way out of this.''

In the circumstances, Gross says (at http://www.pimco.com/LeftNav/Late +Breaking+Commentary/IO/2004/IO_ N ov_04.htm), the Federal Reserve will have to hold interest rates very low. ``While that keeps the patient/economy breathing, it leads to asset bubbles, potential inflation, and a declining currency over time,'' he says.

Grantham, chairman of Grantham, Mayo, Van Otterloo & Co., a Boston-based manager of $66 billion in mostly institutional money, says ``the current U.S. equity bubble'' is the 28th he found combing through the history of currency, commodity and stock markets ( http://www.gmo.com , registration required).

Painful Pattern

All the other 27 bubbles, he says, ``broke and went back to the pre-existing trend.'' For the S&P 500 to do the same now, he calculates, it would have to hit 720, compared with a recent level above 1100.

``Everything important about markets is mean-reverting or, if you prefer, wanders about a trend,'' he says. ``Prices are pushed away from fair price by a series of `inefficiencies,' and eventually dragged back by the logic of value.''

One of those inefficiencies, says Grantham, is a phenomenon called herding, which occurs among both individual and institutional investors.

In a highly specialized institutional world where managers are measured almost microscopically against benchmarks, Grantham says, ``refusing on value principles to buy in a bubble will look dangerously eccentric. This has guaranteed increasingly larger and longer market distortions.''

Both Sides Now

Gross gives us an external reason -- Fed policy -- to figure on bubbles as a continuing part of the investment scene. Grantham gives us an internal reason, forces in modern financial life that reinforce the human tendency to ``buy because others are buying.''

For myself, I need little convincing that we already live in a bubble-prone age. Stocks, notorious for their attempt to defy gravity in the late 1990s, have since been mimicked by real estate markets in many places, and perhaps some commodity markets too. Look no further than the almost-doubling in the price of crude oil over the last year.

If bubbles are so readily apparent, and so dangerous, why aren't more investors fleeing them? In the week or two since Gross's and Grantham's commentaries came out, stock prices have actually risen.

``The problem with bubbles breaking and going back to trend is that some do it quickly and some slowly,'' Grantham writes. He says the time spans of past bubbles he examined ranged from three minutes to 18 years.

Matter of Time

Thus, a simple strategy of staying away when bubbles threaten poses problems for many people who need to invest within a limited period of years -- before the children are ready for college or it's time to retire.

Suppose you or I detected an incipient bubble in the stock market when price-earnings ratios climbed above 15 to one in the early 1990s, and jumped out of stocks. A dozen years later, we would still be waiting for a proper chance to buy back in, and we would have lost a big chunk of precious time.

So what to do? Investors can heed Grantham's advice to ``lower risk and survive to fight another day.'' Those who don't agree with his assessment of the situation can still take his view into account by submitting their investments to a Grantham- style crash-test.

How would the investment plan look, and how would the investor feel, if the stock holdings were marked down by 35 percent or 40 percent? Given one's age and circumstances, how much time would the plan have to try to recoup the losses?

No bullish investor ought to shy away from such questions. At the very least, they help differentiate between reasoned optimism and reckless see-no-evil, hear-no-evil hope.

Energy Central.com: US economy more vunerable to energy prices than generally reported

US economy more vunerable to energy prices than generally reported
TORONTO, Nov 04, 2004 Canada NewsWire

Despite progress towards improved energy efficiency over the past 30 years the overall net increase in household and transportation demand ensures that the US economy is still vulnerable to energy prices, according to CIBC World Markets' Monthly Indicators Report for November.

"The widely held view that the US economy is half as sensitive to higher oil prices as it was during previous oil shocks simply does not pass muster," says CIBC Chief Economist Jeff Rubin. "The median household spends no less of its income on energy than it did 25 years ago. Energy efficiency is fast improving, but energy usage is rising even faster. And while energy-intensive goods are no longer as likely to be made at home, the energy costs imbedded in their manufacture will still be borne by American consumers."

Citing the impact of high oil prices on the two worst post-war recessions in 1973 and 1979-80/1981, Rubin and fellow CIBC World Markets economists Benjamin Tal and Leslie Preston suggest that the American economy is more sensitive to the current rise in oil prices than many economic commentators are suggesting. By using more realistic and meaningful indicators to measure overall energy use, such as energy consumption per household rather than the energy-to-GDP ratio, the CIBC World Markets economics team suggests that the North American economy is still highly vulnerable to the current high price of oil.

"We may well consume energy more efficiently than in the past, but that doesn't necessarily mean we consume any less of it," the Monthly Indicators report explains. "In fact, on average, North American households consume about 10% more energy than they did twenty-five years ago."

Energy and the Canadian Dollar

The November Monthly Indicators Report also features an article by senior economists Avery Shenfeld and Peter Buchanan on the impact of the increased demand for energy on the Canadian dollar as a result of Canada's role as a net exporter of oil and gas, particularly to the US market.

"The world's newest petro-currency, the Canadian dollar, looks poised to hold onto most of the stunning appreciation seen in the past two years," explain Shenfeld and Buchanan. The recent rally in the Canadian dollar "is supported not by unrealistic interest-rate differentials, but by a massive current account and goods trade surplus. That, in turn, attests to the octane from a hot US economy and surging Chinese growth for resources, which comprise about half of Canada's export sector."

"What's particularly new has been the role played by oil and gas prices. Oil shocks in 1973 and 1979-80 did little for the Canadian dollar. Back then, however, Canada was a net oil importer and its natural gas was trapped by pipeline limitations. It's only in recent years that the oil/gas trade balance has mushroomed into a huge source of net-demand for Canadian dollars in the current account. Moreover, capital investment inflows are being drawn to Alberta's tar sands and other opportunities, a contrast with the outflows seen under the National Energy Program following the second OPEC shock."

Lagging profitability in non-resource manufacturing suggests, however, that the Canadian dollar resource-levered rise is hurting other sectors and suggests Canada may face problems similar to those created in the Netherlands by North Sea oil in the early 1990s.

Tax News.com: Hedge Fund Barometer Sees Shift In Sentiment Towards Commodities

Hedge Fund Barometer Sees Shift In Sentiment Towards Commodities

by Carla Johnson, Investors Offshore.com

02 November 2004

Geneva-based hedge fund advisory firm Tara Capital last week released its quarterly hedge fund strategy barometer, which has shown investors tending to shy away from convertible arbitrage funds in favour of managed futures and commodity trading funds.

According to the barometer, sentiment has consistently shifted against convertible arbitrage strategies in recent times, due largely to a dip in implied volatility on longer term convertibles, which has resulted in “relatively significant losses” for many funds in this sector.

Noting a drop in the CBOE Volatility Index (which measures volatility in the equity markets) to the lowest level since 1997, John Lowry, CEO of Tara Capital, commented: “This reflects a complacency amongst investors, which is somewhat curious given the backdrop of concerns over growth rates and higher energy prices.”

Meanwhile, the barometer has recorded a noted shift in sentiment back towards Managed Futures funds and CTA (Commodity Trading Advisor) funds, with 44% of respondents stating that they plan to increase asset allocations in these sectors, contrasting sharply with the 6% who said the same in the last survey.

The barometer also found that Multi Strategy funds continue to be very popular, with many investors looking to increase exposure in these strategies.

Fixed Income strategies are also gaining strength, partly reflecting an increase in the number of available funds in this sector.

However, Tara Capital anticipates the popularity of Equity Market Neutral Funds will soon wane following three quarters of increased investor interest

Minesite.com: Toledo Mining Steps Up The Pace In Its Philippines Nickel Business

Toledo Mining Steps Up The Pace In Its Philippines Nickel Business

October 26 2004

Minesite.com

By Robert Wallace

We last wrote about Toledo Mining in August. It’s not like us to feature a reported company just two months later as there are so many juniors clamouring for a bit of exposure to investors in Europe. Rapidly evolving events at its nickel projects in the Philippines have, however, demanded an update.

To recap, when it listed in April this year, the company was named Toledo Copper as its sole project was the Carmen copper mine near the town of Toledo on Cebu island. This is a medium-term project where the rehabilitation required to return the project to operational status has now been costed at US$ 178 million. Endeavour Financial has just been appointed to plan capital provision. Toledo acquired a 40 per cent interest in what was effectively a dormant resource from Atlas Consolidated Mining Corporation, a Philippine-registered company owned by the Ramos family, which also own substantial publishing interests in the country.

This summer, the company did a second set of deals primarily with the same family, acquiring stakes in two established but non-producing nickel laterite mines located on Palawan island in the south-west Philippines, acquiring 44 per cent in Berong and 52 per cent in Celestial. These deposits are so important that on 6th October, the company changed its name to emphasise its wider-than-copper activities; its AIM epic also altered from TCU to TMC.

At Berong, mining is expected to be contracted to Australian company Leighton Contractors and the total cash cost of operations will be around US$1.30 per pound of nickel shipped. Profitability is helped by a strong nickel price and a weak Philippine peso. An FOB shipping contract has now been signed with a Japanese customer, Nippon Metals and Alloy, to supply 300,000 tonnes of dried ore pa at a nickel grade of 2.2%. At the current price of US$6 per pound, this should give total annual revenues of US$15.7 million , of which Toledo’s share will be US$6.9 million. A second agreement with Japanese buyers for a further 350,000 tonnes of ore pa is nearing signature. This would bring the total to 650,000 tonnes, generating total income of US$35.5 million and US$15.6 million respectively.

Negotiations are also proceeding with a prospective Australian customer which would take 600,000 tonnes of high grade nickel/cobalt limonite material at a grade greater than1.8% nickel equivalent. At the same nickel price, Toledo’s revenue from this additional contract should be US$5.9 million.

Total annual Toledo cash flow from Berong of US$21.5 million is therefore thought by management to be within reach. All that is needed is a road, a shipping pier and a final government mining permit to add to the regional one already obtained. Permitting and confidence is helped by the existence some 150 kms south of Berong on Palawan island of the Rio Tuba nickel mine which has been direct shipping nickel for over 25 years and has just installed and is commissioning a 10,000tonnes/year HPAL processing plant which has recently received its government environmental permit.

The Berong nickel deposit is said to be the fourth largest in the world with 275 tonnes of reserves at 1.3% nickel, ie 3.6million tonnes of contained nickel. As it has an approximately 50/50 mix of limonite and saprolite orebodies it offers options for either leaching or smelting. The company intends to commission a bankable feasibility study at a cost of some US$20 million which it could fund out of cash flow to asses the economics of developing the mine into a not less than 50,000 tonnes of nickel pa producer. Not surprisingly, there is considerable interest already from majors to farm in to its future large scale operations.

Toledo’s success is largely due to its Australian CEO Chris Kyriakou. Originally a lawyer, he was a mine developer in Australia, Canada and South Africa for 20 years. In the late 90’s he left the industry but returned with a keen interest in the Philippines where he first met Atlas in July last year. Most mining companies have to discover an economic orebody, attract capital and then develop a mine. What Kyriakou especially likes about Berong is that Toledo just has to dig ore, dry it and deliver it to a port.

The Philippines hosts some of the world’s most important mineral resources, especially of copper, nickel, cobalt and gold and silver. Yet currently mining development in the country is minimal; the effects of past typhoons, economic strife and environmental antipathy to mining have conspired to close most previously viable mines. The government is now actively courting mining companies and hopefully the Minister of Mines will be in London for a Special Philippines Mining Forum run by Minesite in February 2005.

At the moment there are less than a dozen operating miners either listed on the Philippines Stock Exchange or foreign explorers active in the country. Most of the prospects being explored or developed are previously-active mines which closed in the 90’s; Toledo’s Carmen copper mine is an instance. No wonder the Philippines Environment Secretary Michael Defensor appealed at a business leaders’ forum in Manila last week for investors to “participate in developing mineral resources”.

Toledo heard the call ahead of the crowd. So have some other shrewd investors in this rapidly-evolving story; with a purchase of 30million shares, 3.4%, AIM listed Cambrian Mining has just joined RAB Capital and Resources Investment Trust as significant holders on Toledo’s share register.

The Economist: "The wolf at the door"

The wolf at the door
Oct 28th 2004 From The Economist print edition
A further steep decline in the dollar seems inevitable

MOST economists, and this newspaper, have been fretting about America's huge current-account deficit and predicting the dollar's sharp decline for years. The trouble with crying wolf too often is that people stop believing you. After slipping 14% in broad trade-weighted terms since 2002, the dollar had stabilised this year, even as the current-account deficit continued to grow. This has encouraged some economists to offer theories explaining why America's current-account deficit does not matter and why the dollar need not fall further. But the dollar has now started to slide again: this week it hit $1.28 against the euro, within a whisker of its all-time low of $1.29. Trust us, the wolf is real.

The dollar's latest slide seems to have been triggered by uncertainty about the presidential election and a flurry of comments from Fed officials. Robert McTeer, the president of the Dallas Federal Reserve, mused (only “theoretically” of course) that when capital inflows into America dry up, “there will be a crisis that will result in rapidly rising interest rates and a rapidly depreciating dollar that will be very disruptive”.

Policymakers' usual reply when asked about exchange rates is to say that they are set by the market. But if the dollar was truly being set by the market it would now be much weaker. The dollar has fallen by over 30% against the euro since 2001, but its trade-weighted index has fallen by much less because of heavy intervention by Asian central banks, aimed at holding down their currencies against the dollar. This policy seems likely to continue, despite China's decision this week to raise interest rates for the first time in nine years. That decision was aimed at curbing its overheating domestic economy, rather than bolstering its currency.

Because Asian currencies have been held down against the dollar, America's current-account deficit has continued to swell, reaching almost 6% of GDP in the second quarter. The dollar is already below most estimates of its fair value against the euro, but it will need to undershoot if the deficit is to be reduced. Economists at UBS estimate that the dollar's trade-weighted value might need to fall by another 20-30% to trim the deficit by enough to stabilise the ratio of America's external liabilities to GDP. Though it might seem unthinkable, that could imply a rate of around $1.70 against the euro.

Other economists, however, argue that America can sustain its large current-account deficit for at least another decade, without a sharp fall in the dollar, because it will be happily financed by China and other Asian countries. In a series of papers Michael Dooley, David Folkerts-Landau and Peter Garber at Deutsche Bank have argued that the present arrangements resemble a revived Bretton Woods, the system of fixed exchange rates after the second world war.

Asian economies, they argue, have chosen to link their currencies to the dollar at undervalued rates, supported by heavy purchases of dollar reserves. Asian countries want to keep their exports cheap to support rapid growth and are in consequence happy to keep acquiring dollars indefinitely. In turn, by buying Treasury bonds, they reduce interest rates, which supports spending and ensures that American consumers keep buying Asian goods.

Since 2001, Asia's official reserves have increased by $1.2 trillion, equivalent to two-thirds of America's cumulative deficit over that period. Currency intervention by Asian central banks helps to explain why America has so far been able to finance its deficit without higher American bond yields or a bigger fall in the dollar. However, the claim that the deficit is sustainable for another decade is highly dubious.

An excellent paper by George Magnus, an economist at UBS, argues that the parallels with Bretton Woods are superficial. One big difference is that in the 1960s the United States ran a current-account surplus and was a net creditor to the rest of the world. Today, America is the world's biggest debtor, which could undermine the dollar's role as an anchor currency.

Second, it is wrong to describe the Asian countries as habitual “peggers”. In the 25 years to 1998, non-Japanese Asian currencies typically fell against the dollar, and over the same period their countries mainly ran current-account deficits, not surpluses. Their more-firmly-tied exchange rates and current-account surpluses generally date only from 1998 when these countries needed to rebuild reserves after the Asian crisis. Their desire to tie their currencies to the dollar may be a temporary response to a cyclical problem.

A third important difference is that, unlike under the Bretton Woods regime, most Asian countries have scrapped capital controls or where they still exist, as in China, they are leaky. This requires much greater “sterilisation” by central banks to prevent an increase in reserves spilling into faster credit growth. As sterilisation has become less effective, excessive credit growth is pushing up inflation and causing overinvestment in property, especially in China. As the inflationary costs of maintaining their link to the dollar grow, Asian countries may shift to more flexible regimes.

Lastly, under Bretton Woods there was no real alternative to the dollar as a reserve currency. Today there is the euro, into which Asians could diversify.


Mr Magnus reckons that the revived Bretton Woods is an illusion which will crack within a year or two. Even if it lasts longer, it is a dangerous way to run the world, for it encourages both China and America to pursue reckless policies. Excessive liquidity is causing the Chinese economy to overheat. Meanwhile, by buying Treasury bonds, Asian central banks are subsidising American borrowing costs, encouraging more consumer profligacy, and so allowing the current-account deficit to get even bigger. The inevitable correction will then be all the more painful.

Until recently, some argued that America's current-account deficit was sustainable because foreign investors were eager to buy American assets to take advantage of the economy's faster productivity growth and hence its higher returns. But private inward investment has slumped, leaving America dependent on foreign central banks. And foreign savings are no longer financing investment and hence future productivity gains as they were in the late 1990s. Foreigners are now financing consumption and government borrowing.

America's current-account deficit largely reflects puny domestic saving, so dollar bulls often argue that a fall in the dollar is neither necessary nor sufficient to trim the deficit. But Stephen Roach, chief economist at Morgan Stanley, reckons that a weaker dollar would spark a rise in real bond yields, as foreign creditors demanded extra compensation for currency risk. That would slow consumer spending, boost saving and reduce the deficit.

In the three years from 1985, the dollar fell by 50% against the other main currencies. Inflation and bond yields rose and, in October 1987, the stockmarket crashed. America's current-account deficit is now almost twice as big as it was then, so the total fall in the dollar—and the fall-out in other financial markets—could well be larger. The wolf is licking his lips.

Daniel Lian of Morgan Stanley: UK-Europe View of Southeast Asia

UK-Europe View of Southeast Asia
Daniel Lian (Singapore)

I spent the past week meeting more than two dozen global emerging market (GEM) and Asia-dedicated money (ADM) investors based in the UK-Europe. Below are several major topics/themes that we discussed:

(1) Overweight Southeast Asia relative to China and Northeast Asia: Most investors believe that, given uncertainty on the rate of Chinese growth and the lack of a proactive domestic demand policy response from Korean policymakers, the preferred emerging markets in Asia are the four Southeast Asian markets – Malaysia, Thailand, Indonesia and the Philippines. They also like Hong Kong and Singapore for their reflating domestic demand and stronger corporate governance and returns story.

(2) Easy money has been made and selection is becoming more stringent: Most investors recognize that the easy money has been made as the expansion of global demand from mid-2003 to mid-2004 made equities in global emerging markets an attractive investment proposition. However, investors are now slowly building varying degrees of weak global demand scenarios into their macro-portfolio decisions. Weak domestic demand almost invariably hurts global emerging market equities, particularly in Asia. This means investors will become increasingly selective, searching for either emerging economies that will provide domestic demand resilience or emerging markets that are experiencing other strong macro-micro restructuring positives.

(3) Southeast Asia has avoided the worst-case scenario: I discussed the subject of “Sino Hollow” – how much has China hollowed out Southeast Asia and how much more will it do so in future – with every fund manager I met (see “Sino Hollow”, October 7, 2004). They were impressed with Southeast Asia. Despite a decade (1994-2003) of Chinese attacks on its manufacturing sector, the region experienced a 49% accumulated increase in manufacturing output growth (vis-à-vis China’s 185%) with manufacturing output rising from 25.2% to 30.2% of its GDP. Concomitantly, Southeast Asia has preserved its 4.4% manufactured export share in the global merchandise market. While China’s manufacturing growth has outpaced that of Southeast Asia, there was a relative, but no absolute, hollowing out of Southeast Asian manufacturing.

While FDI trends suggest China is building up its manufacturing FDI substantially faster than Southeast Asia – China took in US$397 billion during 1994-2003 compared to Southeast Asia’s US$147 billion – there is increased evidence of a probable rise in urban Chinese manufacturing wages. The presence of structural reform in Southeast Asia means that it has avoided a worst-case scenario, i.e., a complete hollowing out of Southeast Asian manufacturing because of the rise of China and a lack of effective economic development strategy and positive political-economic reform.

(4) Structural upswing or mere cyclical spurt: Based on our conversations, investors see the need to distinguish between strong structural momentum and a mere cyclical spurt experienced by emerging economies. Structural momentum is attained through the removal of stubborn structural impediments – erroneous macroeconomic policy, or microeconomic inefficiency centered on the private corporate and state enterprise sectors. While some investors were skeptical, a large number we spoke to believe Thailand, in addition to Russia and Turkey, belongs to a confirmed group of restructuring GEM regimes where strong policymakers aggressively pursue removal of structural impediments to produce tangible and sustainable macro-economic growth and micro-economic efficiency gains.

These are clearly distinguishable from temporary economic gains that are tied to a cyclical spurt. Other than Thailand, they also believe Malaysia and Indonesia possess the potential to be among the “restructuring” group.

(5) Investors we spoke to approve of the new economic strategy and positive political economy changes in Southeast Asia, but would be most cheered if a structural investment boom occurs: Investors observed that Thailand has shifted to a more balanced economic strategy, emphasizing “second track” activities in rural, grassroots, agriculture-resource, SME, tourism and other service sectors. They observe Malaysia is putting in considerable effort to do likewise and are hopeful that Indonesia and the Philippines will also unleash new economic strategies to better balance their growth path.

Political-economic change is another structural shift that has won approval from investors. Singapore has a new head of government, and Malaysia and Indonesia have elected new leaders. The Philippines has renewed Mrs. Arroyo’s mandate, and Thailand will soon hold elections. Investors observed that pro-active economic management and the search for new growth engines feature prominently in these Southeast Asian leaders’ platforms.

One of the key shifts investors desired was a structural lift in investment. Since the 1997-98 Asian Financial Crisis, the investment to GDP ratio has declined substantially in Southeast Asia, but in China it has expanded. Investors believe an investment-poor Southeast Asia can now sustain higher investment rates, whereas China should guide down its excessive investment in poor return domestic ventures. The weaker growth momentum in Southeast Asia in recent years has more to do with domestic investment sluggishness than with manufacturing and export weakness (Exhibit 3). As Southeast Asia has to varying degrees repaired its bruised balance sheet since the Asia Financial Crisis period, the region is ripe for a “managed” structural lift (avoiding unproductive assets) domestic investment boom.

(6) Further discussion of investment rationale for each Southeast Asia economy/market:

Singapore: Investors have enjoyed a strong cyclical upturn, with projected 8-9% growth in 2004 making Singapore the second fastest growing economy in Asia. There has been considerable upside surprise on the corporate front as a result of the government’s restructuring efforts and improved corporate governance, which has resulted in greater corporate transparency and a steady rise in dividend yield and asset turnover.

While some investors believe the recent rise in domestic demand, consumer spending and loan growth could be sustained for longer, most agree that Singapore is a high beta Asian economy that is heavily dependent on global demand. If a dramatic slowdown in global demand were to occur in 2005, Singapore’s cyclical spurt would end. However, investors saw good prospects of micro economic and corporate efficiency gains (resulting from ongoing government-linked enterprise restructuring and its emphasis on economic efficiency), which continue to underpin the Singapore market.

Malaysia: Investors generally approved of the Badawi government and his efforts to dismantle the rent-seeking complex and diversify the Malaysian economy. However, while some expected a continued lift in Malaysia’s domestic demand, most investors believed that Malaysia, like Singapore, is a high beta economy that is highly geared towards global demand. They cited the existence of a sophisticated urban consumer culture (households are already quite geared), the strong dependence of the Malaysian economy on exports, the lack of fiscal latitude, and the uncertainty of a structural private investment upswing as evidence for this. However, because of the government’s considerable ownership of the corporate economy and its declared intention to implement corporate restructuring, we believe that Malaysia, like Singapore, could offer considerable micro efficiency gains.

Thailand: A minority of investors believed Thaksinomics has come to a dead-end, that Thai output potential is limited and that in future the economy would cease to outperform other global emerging economies. They also attribute the damage to the Thai economy from unforeseen circumstances (such as avian flu, Southern unrest and substantial oil price hikes) to Mr. Thaksin. However, the majority believe there is room for the Thai economy to grow and that if Mr. Thaksin were to be re-elected and if he continues with his dual-track policy and the “third chapter” of expanding aggregate supply potential, then the structural upswing will have a strong second leg. They see the present low forward price-earnings ratios as a good opportunity to go long on Thai equities. Investors we spoke to also generally agreed that in times of weakening global demand, Thailand would outperform most of its global and Asian emerging economic peers.

Indonesia: Most investors agreed that, in terms of a shift in economic development strategy and positive political economy change, Indonesia has substantial upside. They believed that, given Indonesia’s underdeveloped rural and grass-roots economies, as well as its significant resources and underdeveloped SME sector, it has strong prospects to strengthen its “second track” economy. They were also hopeful that the incoming President Yudhoyono would cripple the rent-seeking complex and install effective and competitive economic leadership.

The Philippines: Investors were still skeptical about the long-term restructuring prospects of the Philippines economy. President Arroyo has a fresh mandate and is likely to secure a “first round” victory in her efforts to diversify and enlarge the tax base, as well as improving tax collection. However, investors are fundamentally skeptical about her ability to tackle the larger issues facing the country’s politics and economy.

Bottom Line: Southeast Asia Has Avoided the Worst Case Scenario

In the past year, UK/Europe investors have raised their exposure to Southeast Asia’s emerging markets – Malaysia, Thailand, Indonesia and the Philippines – in preference to China and Korea, as they seek shelter from the slowdown in China’s economy and the lack of proactive Korean domestic demand policy. They also like Hong Kong and Singapore for their reflating domestic demand and stronger corporate governance and returns stories. However, investors are building weakening global demand into their portfolio assumptions and are either searching for emerging economies that will provide domestic demand resilience or other strong macro-micro restructuring positives.

We believe Southeast Asia has increased potential to fit into the above bill of domestic demand resilience and strong restructuring positives. Investors are also beginning to believe that Southeast Asia has avoided the worst case scenario (a complete hollowing out of Southeast Asian manufacturing because of the rise of China and a lack of effective economic development strategy and positive political-economic reform) as the region succeeds in preserving its global share of manufactured exports and begins to embrace economic diversification and positive political-economy reform.

Investors are distinguishing between structural upswings and mere cyclical spurts. Most see Thailand, in addition to Russia and Turkey, as belonging to a confirmed group of restructuring GEM regimes where strong policymakers aggressively pursue removal of structural impediments and produce sustainable macro-economic growth and micro-economic efficiency gains. They believe Malaysia and Indonesia could become members of the “restructuring” group.

While the new economic strategy shift and positive political-economy changes in Southeast Asia have won investor approval, investors would be further cheered if Southeast Asia were to embark on a structural lift in domestic investment. In my view, Thailand’s Prime Minister Thaksin’s plan to aggressively expand aggregate supply potential in the next few years means that Thailand, among Southeast Asian economies, has the greatest certainty of delivering a structural domestic investment boom to investors.

Fool.com: "Embrace the Unloved" Tom Garner interviews Michael Lewis

Embrace the Unloved
An exclusive interview with Michael Lewis, author of Moneyball.
By Tom Gardner
October 27, 2004

Some call it the best business book out there. Michael Lewis is the author of the best-selling Moneyball, a look into the roaring recent success of the Oakland A's baseball team gained through its contrary thinking and unconventional means. Tom Gardner found the lessons from Lewis' book quite applicable to general stock investing and very relevant in his search for undiscovered, unloved, and undervalued small-cap Hidden Gems. And since this is World Series week, we think it's a great time to share this with you. This is the third of five parts. Play ball!

Tom Gardner: My third carryover philosophy between value investing and the Moneyball take on baseball is a willingness to Embrace the Unloved. That means intentionally looking for bargains among merchandise with fixable problems or impermanent damage. Here I am thinking of the A's, as you repeatedly outlined, looking for players with something wrong with them, shopping for the secondhand engagement ring in Reno.

The great value managers pursue fallen angels, too. Think of someone looking for sound companies that missed a single quarterly earnings target. Everybody hates them the hour of the announcement and the day later. But all that negative sentiment can create opportunities. Not in every instance, but frequently. So if you methodically try to find unloved, temporarily damaged companies, mastering how to distinguish them from the permanently damaged companies, there are some beautiful investment opportunities there. Does the theory carry for you?

Michael Lewis: Yes, and you have got to accept that sometimes you're going to be wrong and you're going to mistake a permanently damaged company for a temporarily damaged one. The Oakland A's make that mistake sometimes as well. But, yes, if you can find companies or baseball players that are irrationally unloved, you'll get a great price on them. Missing earnings targets is a great example because really, quarterly targets are a very poor measure of a company's long-term viability.

So if the market is indeed punishing some company for simply missing this number, my God, that can be a huge opportunity. I don't know whether it's true that that happens. I hear it is true, but I don't know if the market behaves so stupidly.

Tom Gardner: Well, a classic example of a company that I've followed and recommended in our Stock Advisor newsletter is Trex (NYSE: TWP). They make outdoor decking out of recycled materials. After the hurricane season last year, they had a bad three-month period because, in a few primary markets, nobody was building decks in driving rainstorms. They had terrible earnings. Their stock got killed, down 30%-35% over a one-month period because short-term thinkers didn't want to wait for earnings to snap back. Classic temporary damage. I recommended it right then. It's been a beautiful performer since.

Michael Lewis: You know, that makes complete sense to me. And you know what? The other aspect of this issue is it isn't just finding companies that are temporarily unloved. The Oakland A's have found players and succeeded with players who continue to be unloved even though they've performed spectacularly by any standard. They are unloved just because of the way they look or because of the quixotic way they play the game. The rest of baseball doesn't fully understand and appreciate them, even though their performance is excellent. So, let's say this is the company that, if you can find such things, generated earnings at a remarkably steady and high level and that was forever underpriced because of something unusual in their approach to business.

Tom Gardner: Well, try this one. I really enjoyed Sam Walton's account of Wal-Mart (NYSE: WMT). And what happened there? Early on, the Wall Street analysts and investment banks just ignored them. When Wal-Mart was planning to go public, and even in the years after it went public, it was unloved -- in Walton's opinion -- because Manhattan's moneymakers concluded that these guys were just a bunch of hillbillies from Arkansas.

Michael Lewis: There you go!

Tom Gardner: Hillbillies just flipping inventory out onto the sidewalk trying to sell it. Even though their numbers were good, one of the greatest investments in history went unloved for a long time because Wall Street felt certain that retailers from Arkansas couldn't beat the veterans at Kmart (Nasdaq: KMRT), with tremendous resources back then and an enthusiasm for the superstore game.

Michael Lewis: There you go. That is a perfect example. Especially the bias against the hillbillies. That is a great example of a marketplace ignoring excellent performance because something doesn't look normal.

Tom Gardner: OK, our first three carryover theories are:

Make a Habit of Asking Why
Stop Caring About Your Reputation
Embrace the Unloved

The fourth tenet is to Figure Out What to Count. Figure out what the numbers are telling you. This applies to everything from valuation to looking at slugging percentage or on-base percentage in baseball instead of the flawed traditional measure of a player's batting average. For investors, I'm comparing that to focusing on cash flow rather than earnings. Or following rates of return on equity rather than caring about what the company's stock price is doing this month. So I think a lot of investors don't yet really know what to count, and I'm wondering if you think that carries over.

Michael Lewis: This is the thing. In most spheres of life, most people don't know what to count. In baseball, the problem isn't that people aren't counting things or that they are not quantitatively inclined. They are. It's that they are counting the wrong things. They make a fetish of certain numbers because they get told that this is important or that is important.

In baseball, people were told for generations that batting average was what was really important. Well, it turns out that when you actually ran historical studies to determine what correlated highly with a team's run totals, batting average was very low on the list. Imagine that! And that's because you have these teams that have high batting averages who never get on base with walks and who don't hit for power. Compared to a team that had a lower batting average but walked a whole lot and hit home runs, they weren't on base as much so they weren't scoring as much. A fetish was made of the wrong number. It's been that way for decades in baseball and persists even today. And this created a huge opportunity for the Oakland A's.

Naturally, there must be fetishes in the financial markets, too. Maybe they were made of either hitting earnings targets or of targeting particular price/earnings ratios or whatever it is that is fashionable and unscrutinized. Of course, there are intelligent fetishes, which help accurately measure the health of a company. But if it hasn't been scrutinized, who knows! Investors, just like baseball's general managers, have to start asking and continue asking if there is some better number, some better way to measure how a company is doing.

Tom Gardner: Time for my fifth and final tenet: Study Patterns in History. You have Paul DePodesta, now the general manager of the Los Angeles Dodgers, advising analysts to look at process rather than outcome. Study why teams win throughout history. Find the patterns that matter and emulate them.

In investing, the equivalent would be studying why companies win. Apply regression analysis and probability theory and seek patterns. Michael, I'm thinking specifically here about how difficult it can be to embrace the idea that everything is not new. We want to believe that it is.

You confess at one point in Moneyball that your problem is that you keep seeing every player and every situation as unique whereas Billy Beane and folks like him are seeing patterns that have evolved into trends over very long periods of time that enable the seer to make pretty accurate predictions about the future productivity of baseball players. There are investors using patterns as well, carrying this out methodically in a fairly private way, able to see the market as much more predictable because they have studied process in history rather than thinking that everything is new and being obsessed with immediate outcomes. Do you agree?

Michael Lewis: Yes. Let's take an example in baseball, since I just mentioned on-base percentage (which factors walks alongside hits). Two years ago, when I was hanging out with the A's, they got a guy named David Justice for a final year before he retired. All of baseball thought he was basically washed up, that he'd gotten too old. But the A's looked at him and factored in that he had been hurt the previous year. So they realized that some of the data there was possibly misleading. But then they looked at the kind of hitter he was throughout his career. He was a hitter who drew lots and lots of walks.

One of the things they found by studying process, by analyzing statistical patterns in player behavior over decades, is that that kind of hitter -- a hitter who walks a lot, a power hitter who walks a lot -- as he ages and as his career starts to fall off that cliff, yes, he doesn't hit as many home runs, but he continues to walk usually even more than he has walked before. Maybe because he can't run!

They knew they were going to get a high on-base percentage out of this guy and that that was very valuable. Whereas most baseball people just thought, "Here's an old guy with no value left." No one wanted him. But Oakland could see they could squeeze the last few ounces of on-base percentage out of him, something that would help them score more runs and win more games, which they did quite nicely. How did they find him? They found him because they didn't view him as an individual; they viewed him as a type that they recognized and valued.

So there must be, I agree, people in the stock market who think in terms of companies as a type. Sure, each company is unique in some ways, but each company is also a type. Investors have to look for the patterns. I would say the equivalent in the stock market for David Justice's final year would be companies that are going out of business but where there is still asset value.

Tom Gardner: Right. There is actually a recommendation in Hidden Gems by one of our guest analysts of a company named Arch Wireless (Nasdaq: AWIN). It's a paging business that is just gradually losing its subscribers to cell phones and other means of communication. But doctors still have uses for pagers and so they are actually very, very cash-flow positive. However, the profits are steadily dwindling. To carry the analogy over, they are still very productive relative to the average baseball player, but there aren't many years left. You can see an end point on the horizon and so the market doesn't know what to do with that valuation.

Michael Lewis: That is right. If the market doesn't know and the market misvalues it, it probably doesn't understand it and likely undervalues it. There is an opportunity for someone who understands how to milk the last few years of good earnings out of this company. So, yeah, I think there is a clear analogy there.

Oct 28 Philippine Stock Market Daily Review: Awesome Foreign Support

Oct 28 Philippine Stock Market Daily Review: Awesome Foreign Support

As we enter into the final phase of statistically weak October, we are now witnessing a vigorous rebound spurred by foreign money. The Phisix surged for the second straight session up by a considerable 33.15 points or 1.87% as portfolio investments from overseas money dictated on today’s activities. Foreign money accounted for 59% of today’s output while foreign inflows registered P 176.454 million or about 19% of the day’s aggregate turnover. These positive developments come in the light of the mostly upbeat Asian bourse with the Philippine as the third best gainer in the region following South Korea’s Kospi and Hong Kong’s Hang Seng Index.

In the most recent past while the local bears bashed the Phisix to its one and a half month low we have noted that foreign money continued to buoy the property heavyweights. Today, aside from the recovering market leaders led by key telecom issues, PLDT (+2.54%) and Globe (+1.44%), the property heavyweights represented by its index (+.7%) have provided the flanking support to the foreign bulls. Meanwhile the sanguine sentiment by overseas investors buying has likewise filtered to the Banking Issues, net foreign buying to the banking issues totaled P 26.457 million or about 15% of the day’s foreign buying activities with 5 of the 13 most liquid banking issues accounting for a positive inflow against two that posted outflows.

Looking at the main components of the Phisix, only two of the eight Phisix heavyweights recorded net foreign sales, namely Metrobank (unchanged) and San Miguel B (unchanged) while the rest were receptacles to overseas portfolio investments and closed mostly higher, specifically Ayala Corp (+3.17%), Ayala Land (+2.85%) and Bank of the Philippines Islands (+2.17%). Only SM Prime (-2.59%) seems to be the outlier defying the current bullish sentiment today while being defiantly bullish when the market was sold down.

I would also like to particularly point out that Banco De Oro (+1.13%), which of late had posted large cross trades, has seemingly been the object of foreign accumulations. The Henry Sy owned Banco De Oro whose stock languished since its IPO (still trading below IPO price of P 20.5) could possibly be the next target by foreign investors maybe due to its aggressive corporate maneuvers to expand its market share through mergers and acquisitions. A breakout from its IPO price could possibly indicate for a buy.

Finally, definitely the euphonious blathers by our media grandstanding colleagues would probably say that today’s positive action has been triggered by the massive rally in the US financial markets and the steep correction in oil prices, while they may be partially true I stand to say the current rally is part and parcel to the unfolding cyclical shifts, historical patterns, seasonal strength and a vibrant technical picture which represents the underlying psychological positive shift of mostly foreign investors to the Philippine equity assets, as well as, macro development undergirding such paradigm shift. Local investors, as usual, being outrightly fickle and of the speculative propensities have always been the laggards. A case in point is Philippine Realty up 50% today and 400% over the week. According to the PSE, Phil Realty is "undergoing judicial proceedings for corporate rehabilitation" (read: to sell assets to pay off debts). Nice recovery huh.

Matthew Lynn of Bloomberg: Europe's Non-Fossil Fuels Receive Boost From Oil

Europe's Non-Fossil Fuels Receive Boost From Oil: Matthew Lynn

Oct. 27 (Bloomberg) -- Non-fossil fuels are finally getting the boost they need to become a feasible long-term solution to the world's dependence on oil.

Surging crude prices won't wean Europe or the U.S. off their addiction to imported oil in the near future. Yet they will help redirect capital to other energy sources for the next generation.

Last week, Electricite de France said it would build a new type of nuclear reactor in Flamanville, France. According to Pierre Gadonneix, the chairman of EDF, the plant will ``contribute to ensuring Europe's energy independence in the coming decades.''

In Finland, work has already started on a new nuclear power station, which will be the first completed in Europe since the Chernobyl disaster in 1986. The plant is scheduled to start operating in 2009.

Britain is thinking about whether to build a new generation of nuclear stations to replace three-decade-old plants that are nearing the end of their useful lives.

Nuclear energy accounts for 32 percent of the European Union's electricity production. That figure is bound to rise over the next few years. After a decade during which nuclear energy was considered too expensive or environmentally unsafe, it has now forced its way onto the agenda.

And it's not just nuclear power. Capital is pouring into companies that are developing any kind of alternative to pumping lots of black, sticky stuff out of the ground.

IPO Rush

``High oil prices increase the attraction of non-conventional energy sources,'' said Credit Suisse First Boston in a recent note to investors. ``These include heavy oil, gas to liquids, and liquefied natural gas, as well as alternative energy sources such as fuel cells, solar and wind power.''

In London, there has been a rush of initial public offerings by alternative-energy companies.

ITM Power Plc sold shares in June to develop its fuel-cell technology. Fuel cells generate electricity by combining hydrogen and oxygen, producing only steam or water as byproducts.

Ocean Power Technologies Inc., which makes equipment to generate power from waves, listed its shares in London last year.

And D1 Oils Plc this month announced plans for an IPO. It hopes to raise 13 million pounds ($24 million) to make diesel fuel from vegetable oil -- the money will be used for plantations of Jatropha Curcus, a tree that produces oil-bearing seeds.

Investors have started to take notice. ``A lot of companies had promised a lot and not delivered,'' said Charles Hall, a director of London-based Westhall Capital Ltd. who specializes in alternative-energy companies, in a telephone interview. ``People were starting to lose faith. Not until this summer did they start to get that back again.''

Canadian Flop

Investors have also been burnt. Take Ballard Power Systems Inc., which also makes fuel cells. The Burnaby, British Columbia- based company's shares soared to C$189 in 2000 as investors got excited about the prospect of the big carmakers using Ballard's equipment. The stock now trades for less than C$10.

That's in the nature of the investments. These are all technology companies, which are always risky.

And oil prices prompt serious questions, too. Is almost $55 a barrel a speculative bubble? Or does it represent a permanently high price that consumers will have to adjust to? Many alternatives look appealing with oil at current levels. At $30 a barrel, people would stick to the black stuff.

Nuclear energy has a bad image because it can be expensive and is seen as dangerous. France's Areva SA, the world's biggest maker of nuclear reactors, has to battle constantly with protesters who obstruct its plutonium shipments.

Nuclear Energy

Yet, it is a well-established technology with a stable cost base. And, with the exception of Chernobyl, none of the reactors have caused a disaster, even after 30 years of operation in some cases. That's enough of a track record to suggest they aren't as unsafe as some people imagine.

Wind and solar power are more environmentally friendly, though there is scant evidence that either can be a major alternative. Fuel cells powered by hydrogen are the big hope. Nobody has made them cheaply or efficiently enough yet -- but that doesn't mean they won't soon.

Expensive oil will lead to more exploration and efficient exploitation of resources. Yet it will also encourage investors to hand over money to any bright scientist who can think of another way to make energy. And it is prompting smart young entrepreneurs to move into the area.

Capital is shifting into the alternatives to oil. As long as crude prices remain at current levels, other energy forms will be attractive for investors.

To contact the writer of this column:
Matthew Lynn in London at matthewlynn@bloomberg.net.

Financial Times: Cuba to end circulation of US dollar

Cuba to end circulation of US dollar

By Reuters

October 26 05:36

Cuban President Fidel Castro, seeking to rid his country of the currency of his arch-enemy, said on Monday Cuba was ending circulation of the U.S. dollar as of Nov. 8 in response to tightened American sanctions.

Cubans, foreign residents and tourists will have to use locally printed convertible pesos, equal in value to the dollar, for all cash purchases, a Central Bank decree said.

“As of Nov. 8, the dollar will not be accepted in our shops, which will only take convertible pesos,” it said.

A 10 percent commission will be charged for changing dollars into the local currency, according to the decree read on a special television broadcast attended by Castro.

Appearing on television in a sling only five days after falling and fracturing a knee and an arm, Castro said the issue was so important that he had to be there despite Wednesday’s accident that left his left leg in a plaster cast.

“The empire is determined to create more difficulties for us,” he said, referring to Bush administration steps to restrict travel and cash flows to the island nation.

The dollar was legalized in Cuba in 1993 after the fall of the Soviet Union plunged the island into deep economic crisis and forced it to open up to tourism and foreign investment.

Dollars became the dominant currency and are used to buy most consumer goods in dollar stores that will now only accept the local currency.

The decision will effect cash remittances from the United States, a major support for the cash-strapped Cuban economy that amount to an estimated $1 billion a year, unless they are sent in other currencies.

The government encouraged Cubans living abroad to send remittances to their relatives in Cuba in euros, British pounds, Swiss francs or Canadian dollars, to avoid exchange costs.

NO DOLLAR BAN

Castro, wearing his trademark military uniform, said his communist government was not banning possession of dollars, just their use in the economy.

“We are not restoring the penalization of holding dollars; it will not be a crime,” he said.

The move to eliminate use of the greenback was prompted by U.S. moves to squeeze Cuba financially, the decree said.

A four-decade-old U.S. trade embargo against his communist government prohibits the use of dollars in transactions with Cuba unless they are licensed by the U.S. Treasury.

Foreign banks were put on guard in May when the Federal Reserve fined UBS, Switzerland’s largest bank, $100 million for illegally transferring freshly printed dollar notes to Cuba and three other countries subject to U.S. sanctions, Libya, Iran and Yugoslavia.

Foreign bankers in Havana said this had created serious problems for Cuba to deposit its dollars abroad and renew bills in circulation.

Existing dollar accounts will be “totally guaranteed” and their funds can be withdrawn in the U.S. or local currency at any date with no charge, the decree said. Dollar bank transfers will be also be accepted, but not cash deposits.

Foreign companies operating in Cuba, as well as Cuban state enterprises, will not longer be able to make dollar bank deposits in cash.

Cuba’s tourism is based on the dollar, though euros are accepted as currency in some resorts. Tourists will have to exchange their currency into convertible pesos, though the 10 percent charge will only apply to dollars, the decree said.

The commission will not affect credit cards payments. Cards issued by U.S.-based banks are not valid in Cuba.

Cuba took the first step to curb dollar circulation last year when it banned state corporations from using the U.S. currency in their domestic operations.

U.S. President George W. Bush launched a strategy in May to undermine Castro’s government by tightening restrictions on travel from the United States and the amount of dollars licensed visitors could spend on the island.

Castro, who has outlasted nine U.S. presidents and survived the demise of the Soviet Union, said his socialist system will prevail.

“The destiny of this country was decided long ago and nothing can intimidate us,” he said.

Business Report: World trade to grow 8.5%, says WTO

World trade to grow 8.5%, says WTO
October 26, 2004
By Jonathan Fowler

Geneva - Global commerce was expected to grow 8.5 percent by the end of this year despite record oil prices, the World Trade Organisation (WTO) said yesterday.

Oil prices might dampen growth in trade and overall output in 2005, but at present the effects of the rise were being outweighed by economic revival, the WTO said in its annual International Trade Statistics report.

The WTO stopped short of predicting a dollar figure for the value of world merchandise trade for all of 2004, but said it would be 8.5 percent higher than the $7.3 trillion (R45 trillion) recorded for 2003.

Michael Finger, of the WTO's development and economic research division, said the percentage increase was based on constant dollars.

The rate of increase would be even higher if the depreciated dollar and higher oil price were used, he said.

"Growth in world trade in 2004 will not be adversely affected by higher oil prices to any great extent because we are seeing good growth in trade and output in China, Latin America and Africa," said Supachai Panitchpakdi, the head of the WTO.

"We have also seen stronger-than-expected economic recovery in Japan. Strong demand is behind rising prices for oil and other commodities," he said.

WTO said it would release its full statistical report next month.

Initial figures showed that world merchandise trade grew 4.5 percent last year to $7.3 trillion compared with 3 percent growth in 2002 and a decline in 2001, the WTO said.

The recovery was sustained by stronger economic activity in manufacturing and mining, and strong expansion in agriculture, it said. Merchandise trade expanded faster than output.

Demand for foreign goods in the US helped sustain output in other regions, and the US trade deficit continued to rise despite the weakness of the dollar.

The WTO said that strong US demand had helped the global economy, and that a sudden reduction could have "strong repercussions" on world trade.

Trade in the EU was stimulated by its expansion in May to 25 from 15 members. Asian growth in exports and imports was fuelled by China.

"With its rapidly expanding economy, China has become a major trader," the WTO said. "Its surging demand for oil, copper, soybeans and many other primary commodities contributed significantly to higher prices."

"In 2003, as in the second half of the 1990s, China's merchandise export growth was twice as high as that of world trade."

Latin America, which had recorded 12 years of successive deficits, registered a merchandise trade surplus in 2003, with China a major customer.

Some industries did particularly well. Trade in chemicals has accelerated in tandem with a surge since 2000 in pharmaceutical products, with 2003 world chemical exports rising 19 percent to $794 billion and accounting for nearly 15 percent of global trade in manufactured goods.

Bloomberg: Chinese Tourists `Flood' Abroad, Spending $48 Billion

Chinese Tourists `Flood' Abroad, Spending $48 Billion

Oct. 26 (Bloomberg) -- Like almost all of China's 1.3 billion people, Jiang Liang has never been a tourist in Italy. Next month she'll spend $6,000, almost half her annual wage, to visit Venice during a 10-day honeymoon tour.

``It's our dream to go to Europe,'' says the 26-year-old Shanghai accountant, who married a mobile-phone salesman last month. ``I want to see historic buildings and experience the lifestyle. It'll be very romantic.''

Jiang was able to book her trip because on Sept. 1, China's National Tourism Administration added 26 European countries to the 26 mainly Asian destinations it lets tourists visit. Seven years ago, leisure travel was forbidden. Last year, 20 million travelers from China spent $48 billion on items such as Louis Vuitton bags and Accor SA hotel rooms, according to travel researcher IPK International and the Chinese government.

The Chinese may dominate world tourism in coming years, says Nigel Summers, a director at Horwath Asia Pacific Ltd., one of the region's two largest hotel consulting firms. Tourist departures from China will expand 12.8 percent on average a year -- triple the world rate -- to about 100 million in 2020, according to the World Tourism Organization, a Madrid-based United Nations agency.

The new travelers, sparked by a 40 percent increase in urban incomes since 2000, already account for 9 percent of the world tourism total.

``The numbers have grown substantially, and that's with a lot of travel restrictions in place,'' says Summers, who is based in Hong Kong. ``Wherever they are allowed to go, they'll go, and in big numbers.''

Airlines Add Flights

Intercontinental Hotels Group Plc, Accor and Best Western International Inc., have boosted marketing in China in a bid to increase brand loyalty as more Chinese travel.

Air China, the nation's largest international carrier, is ferrying most tour groups to Europe because European airlines have only limited flights from China.

Beijing-based Air China plans a $500 million initial share sale this year to buy more planes. It placed a $360 million order for seven 737-700 jetliners from Chicago-based Boeing Co. on Sept. 2, according to Boeing.

Cologne, Germany-based Deutsche Lufthansa AG, Paris-based Air France-KLM Group and Stockholm-based SAS AB say they will increase flights to China.

Only Hong Kong-listed China Travel International Investment H.K. Ltd. among non-Chinese-owned travel agencies can arrange outbound tours. The agency is 59 percent owned by China's largest travel operator, state-owned China Travel Service, according to data compiled by Bloomberg.

Las Vegas-Bound

Chinese travelers managed before the restrictions were lifted to find their way to one U.S. tourist destination: Las Vegas. That's where about 90 percent of the 250,000 Chinese who visited the U.S. last year went, according to the Nevada Commission on Tourism. It opened a Beijing office in June.

Those visitors had to have either public or private passports, issued only to businesspeople, students or those with relatives overseas willing to sponsor them.

Now the Public Security Bureau, which controls private passports, can issue travel documents to those joining tour groups. Approved travel agents in turn can organize group visas to so-called Approved Destination Status countries, cutting costs and bureaucratic delays.

Only Croatia, Germany, Hungary, Malta and Turkey among European countries had group visa arrangements with China before Sept. 1. Germany got the go-ahead from the China National Tourism Administration in February 2003. It's since hosted 100,000 Chinese in tour groups, says Xu Shengli, a Beijing-based spokesman for Germany's National Tourism Office.

Fifth-Largest Spenders

Added to the list Sept. 1: Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Greece, Italy, Iceland, Ireland, Latvia, Liechtenstein, Lithuania, Luxembourg, the Netherlands, Norway, Poland, Portugal, Romania, Slovakia, Slovenia, Spain, Sweden and Switzerland.

``With the pent-up demand from the last 50 years, the flood of outbound travelers will be massive,'' says Bernard Bialylew, the Shanghai-based director of Gulliver Travel Associates of London, the world's largest tourism services provider.

Chinese travelers already are the world's fifth-largest spenders, according to Falls Church, Luxembourg-based IPK International. Last year Chinese paid $2,967 on average for a European tour package, sightseeing and shopping, compared with $3,870 for U.S. tourists and $3,616 for Japanese.

The U.S. and Britain so far are missing out. U.S. security concerns mean tour-group visas can't be negotiated by travel agents, according to the U.S. State Department. The U.S. in any case has not applied for Approved Destination Status.

Response `Amazing'

Britain hopes to be an approved destination soon, says Jonathan Simpson, a London-based spokesman for Visit Britain, the marketing arm of the British Tourist Authority and the English Tourism Council. ``The British and Chinese governments are in talks,'' Simpson says.

At China CYTS Tours Holding Co., China's second-largest travel agent, the first 10-day tour from Shanghai to France and Italy was fully booked about a month before the Sept. 1 departure.

``The response has been amazing,'' says Wang Peijun, director of CYTS Tours' Shanghai office. ``We only advertised in the local newspapers for about two weeks.''

Ten-day tours cost about 14,000 yuan, Wang says. France, Switzerland and Italy dominate bookings.

Shanghai China Travel Services Co. expects to send 10,000 travelers to Europe before year-end -- triple the 2003 total, says Yu Weihong, the general manager.

``People are more keen to travel to countries that have just opened up,'' says Yu. The company runs tours for about 200,000 Chinese each year.

Congee for Breakfast

Berkshire, England-based Intercontinental, the world's largest hotel operator by rooms, opened a Chinese-language booking Web site in February.

It also added Chinese-language signs and menus at some European hotels, says Patrick Imbardelli, the company's Asia- Pacific managing director. About 8 percent of the company's guests worldwide, excluding China, are Chinese nationals.

Accor's European hotels with Chinese tour groups now provide Chinese-language satellite TV and newspapers, as well as congee, or rice porridge, for breakfast, says Reggie Shiu, who heads the Paris-based company's Chinese unit.

``At our hotels worldwide, for every 100 room nights occupied, two are Chinese guests,'' Shiu says. ``Our objective is to double that in the next year.''

Best Western, the world's largest hotel group by number of properties, is promoting mid-price rooms that appeal to more than 80 percent of China's tour-group market, says William Dong, the company's spokesman in China. Rooms cost $80 to $150 a night.

Credit Cards

European tourism authorities are gearing up, too. France expects 1 million Chinese tourists by 2009, said Junior Tourism Minister Leon Bertrand, who greeted the first Chinese tourists at Paris's Charles de Gaulle airport Sept. 1. About 400,000 Chinese visited France last year -- 1 percent of the 75 million total, according to the Tourism Ministry.

About 85 percent of China's tourists chose an Asian destination last year, including Australia and New Zealand, according to the London-based World Travel and Tourism Council. Favorite vacation spots were Thailand, Taiwan and Singapore.

San Francisco-based Visa International Inc., the world's largest credit-card company, says Chinese cardholders touring in Asia spend $253 on average for each transaction, compared with $135 for U.S. tourists and $141 for those from the U.K.

Luxury Brands Expand

In Hong Kong, a special administrative region of China, 60 percent of the record 2.1 million tourists in August came from mainland China, the Hong Kong Tourism Board reported -- a 31 percent increase from 2003. Chinese tourists still need visas to visit the former British colony.

The influx has prompted luxury retailers such as Paris-based LVMH Moet Hennessy Louis Vuitton SA and Geneva-based Cie Financiere Richemont AG to expand in duty-free Hong Kong. China levies duties of as much as 35 percent on imported goods and a 17 percent sales tax.

Jiang, the Shanghai honeymooner, visited France for three days in 2001 on a business visa that took her a month to get. Her tour-group visa for next month's trip to Italy and France was approved in two weeks.

Now Jiang is plotting her next jaunt -- to the U.K. ``It has a lot of history and culture,'' she says.

To contact the reporter on this story:Jasmine Yap in Hong Kong at jyap5@bloomberg.net.