BBC: Central banks 'shunning dollar'

BBC: Central banks 'shunning dollar'

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

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

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

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

Losing ground

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

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

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

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

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

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

"The euro seems to have come of age."

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

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

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

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

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

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

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

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

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

Following Calpers

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

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

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

Argentina of Asia

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

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

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

Looking for Positives

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

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

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

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

Bad Loans

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

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

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

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

BBC: US retail sales 'to slow' in 2005

US retail sales 'to slow' in 2005

Retail sales growth in the United States will slow in 2005 as consumers are hit by higher energy costs and slower wage growth, a report has said.

According to the National Retail Federation, sales of general merchandise - including clothing and furniture - will rise 3.5% this year.

This compares to 6.7% growth in 2004, the highest figure for five years.

The NRF said the retail sector would be hit by rising interest rates and persistently-high fuel costs.

Slowdown

"This year, consumers will be under increased financial pressure due to higher energy costs and slow wage growth," said Rosalind Wells, the Federation's chief economist.

"Additionally, past stimuli provided by tax cuts and very low interest rates will no longer be there to boost consumer spending."

Consumer spending is closely watched in the US as it accounts for about two thirds of all economic activity.

According to the NRF's figures, the recent Christmas sales season outperformed 2003, with sales rising 5.7% compared to 5.15% the year before.

However, the organisation said that higher interest rates and slowing wage growth would dampen consumer demand in the second half of 2005.

*****

Prudent Investor says

This certainly bodes ill for the US equity markets.

Reuters: Weak dollar sends capital to emerging markets -IIF

Weak dollar sends capital to emerging markets -IIF
Wed Jan 19, 2005 07:40 PM ET
(Adds comments on bubble, U.S. current account in paragraphs 12, 13)

By Lesley Wroughton

WASHINGTON, Jan 19 (Reuters) - Net private capital flows to emerging markets surged by 32 percent last year to $279 billion, the highest level since 1997, a global association of financial institutions said on Wednesday.

The Institute of International Finance said the higher flows were mainly due to a weaker U.S. dollar.

The Washington-based IIF, whose members include most of the world's largest commercial and investment banks, said the rise in 2004 flows was $53 billion higher than its October forecast of $226 billion.

Nearly 60 percent of that extra $53 billion went to China, while Russia accounted for 25 percent.

"The sharp downward movement of the dollar, particularly in October, may have been (the catalyst) in the pickup in flows," Charles Dallara, IIF managing director told a news conference.

Although global growth was likely to slow in 2005, the IIF said it expected the pace of capital flow to emerging markets to continue in the first months of this year. It revised up its 2005 projections for capital flows to emerging markets to $276 billion from an October projection of $230 billion.

The group said Asia is expected to capture about 46 percent of the total net flows for 2005, down from 52 percent in 2004.

Meanwhile, flows to Latin America could exceed $39 billion in 2005, up from $26 billion last year, the IIF noted.

Capital to "emerging Europe" should increase slightly this year to 37 percent of total flows, the IIF said, amid a pickup in interest in Turkey, where flows are the second highest in the region after Russia.

Private flows to Africa and the Middle East are likely to remain small at about 4 percent of the total.

Dallara cautioned, however, there were downside risks to the projections, including a sharper-than-expected rise in U.S. interest rates that could be triggered by shifts in inflation, disruptive currency movements, concerns over global imbalances, and political uncertainty.

He said the surge in private capital to emerging markets "could well be a dimension of a bubble," but noted that 2005 would likely be more challenging for policymakers in developing countries and for investors, amid a widening U.S. current account deficit.

The current account deficit, which is nearly 6 percent of U.S. GDP, is the broadest measure of trade since its includes investment flows.

IIF chief economist Yusuke Horiguchi, a former International Monetary Fund official, said the U.S. Federal Reserve was expected to keep raising interest rates at a measured pace through 2006 toward a neutral range of 3.5 to 4 percent.

Horiguchi said he was more comfortable with a neutral stance of 4 percent by the middle of 2006.

A neutral federal funds rate is defined as one that neither hinders growth by choking off credit nor spurs inflation by failing to keep prices in check.

Federal Reserve chairman Alan Greenspan has declined to specify a precise level for a neutral rate, saying only that Fed policy-makers will know it when they reach a neutral rate.

The IIF forecast that the U.S. economy would grow 3.4 percent in 2005.

It also forecast gross domestic product growth for emerging markets of 5.4 percent in 2005, one percentage point lower than in 2004.

© Reuters 2005. All Rights Reserved.

Prudent Investor says

This is what I’ve been saying all along. Well anyway a rather oxymoronic comment in this news report is that the surge in private to emerging markets ‘could be well a dimension of a bubble’. If the weak dollar is what 'mainly' prompts private capital to emerging markets could this mean the dollar’s fall is likewise exaggerated or ‘bubbly’ in context? Amazing disconnect, huh?

Bloomberg's William Pesek: The Year to Fight Corruption in Indonesia

The Year to Fight Corruption in Indonesia
by William Pesek Jr.

Jan. 19 (Bloomberg) -- ``Our reputation and credibility as a nation is at stake.''

Rarely have truer words been written about Indonesia than those recently by Jakarta Post editor Endy Bayuni. They have great resonance for foreign investors wondering how one of the world's least trusted economies will handle a sudden rush of billions of dollars of aid following last month's tsunami.

The government is worried, too.

``One of the most persistent challenges Indonesia is facing is widespread corruption,'' Coordinating Minister for Economic Affairs Aburizal Bakrie said in Jakarta on Monday.

Even Bakrie harbors doubts that anti-corruption efforts will be enough to eliminate the siphoning of cash that routinely dogs Southeast Asia's biggest economy. That's a big problem for a nation badly in need of more international investment. Corruption is partly behind the slump in overseas investment to $10.3 billion in 2004, a quarter of the amount in 1995.

What's so breathtaking about Indonesia's dodgy dealings is that they aren't a matter or debate, but fact. U.S. Ambassador Lynn Pascoe seemed to speak for many foreigners last week when he said the ``high level of corruption'' in Indonesia is a ``very significant problem.''

Even President Susilo Bambang Yudhoyono lacks trust in his government. Rather than having Indonesian agencies monitor corruption in the tsunami-ravaged Aceh province, he turned to Berlin-based Transparency International for help. The watchdog group ranks Indonesia as one of the 10 most corrupt economies.

Tsunami Funds

The stakes are high. Indonesia's failure to force companies to pay back billions of dollars in debts from the Asian financial crisis continues to taint its standing among investors. It's home to Asia Pulp & Paper Co., for example, which in 2001 reneged on almost $14 billion of debt to become one of Asia's biggest defaulters. It's still wrangling with creditors.

Now, Indonesia is experiencing a huge windfall of foreign money. Of the billions of dollars of aid pledged for tsunami relief, Indonesia is sure to get a sizeable chunk. It was the worst affected by the Dec. 26 tragedy; so far, more than 110,000 died in Indonesia. How it handles the funds will demonstrate to investors how serious President Yudhoyono is about tackling Indonesia's legacy of graft.

President Suharto is gone, ousted by public uprisings in 1998 at the height of the Asian crisis. Yet the political system, and, by extension, the financial one, Suharto created in his 32 years in power lingers. Its vestiges mean few of this nation's 235 million people benefit directly from its 5 percent growth.

`Kleptocracy'

All this hampers the quality of public investment and, ultimately, economic growth. ``Corruption in Indonesia is widespread and costly,'' economists Vernon Henderson of Brown University and Avi Kuncoro of the University of Indonesia concluded in a paper published in July. ``Bribing is a time- intensive activity.''

The nation's ``kleptocracy,'' as observers used to call it, took corruption to highly refined levels -- so much so that it may even involve the evaporation of corporate debt.

Corruption isn't the only reason more investors aren't flocking to Indonesia. Another one: High poverty rates. More than 40 million Indonesians -- more than the population of Argentina -- are unemployed, while more than half of the world's largest Muslim population live on wages of $2 a day.

Some Optimism

Still, it's corruption that most often scares investors away. For one thing, bribes and other hidden costs employers pay to do business lead to paltry wages, perpetuating poverty. For another, the combination of corruption, a weak legal system and a lack of corporate transparency mean debt investors can have a very hard time getting repaid.

The good news is that some local business people are optimistic. ``The political will is there'' to fight corruption, says James Riady, who heads the Lippo group of companies. ``He (Yudhoyono) set very good values.''

Ditto for some foreign observers. ``Indonesia already is a powerhouse for the region,'' says John Merante, a vice president for Lehman Brothers Holdings Ltd. in New York. ``It's just a question of now taking the next steps to get it back into the level you were seeing before the crisis (of 1997/98).''

A Major Test

Yet the sudden rush of tsunami aid is a major test for Yudhoyono. When he took office in October, the world thought he would have time to prove his anti-corruption mettle. That was not to be. Now, Yudhoyono must see to it that aid is delivered to those who need it with a minimum of corruption. If reports of aid siphoning become widespread -- some have already surfaced -- much of the pledged aid may not come.

That's a problem, considering Indonesia needs as much as $150 billion of projects over the next five years, plus an additional $4 billion to rebuild tsunami-ravaged areas.

Here's the bottom line: If lots of money is lost to dodgy dealings, nations offering moratoriums on Indonesia's debt payments may regret it and reverse course. The same goes for investors wondering whether to trust the nation's new leader. For Indonesians, this isn't just the year of living dangerously, it's also the year of fighting corruption.

*****
Prudent Investor says

Corruption, corruption, aaaah it is in the headlines again. Isn't this the chic word to go on government bashing? Corruption hither and thither. Well quite bizarrely and contrary to the common perception, the financial markets for these two (which means including us!) most corrupt countries have been the best performers in the region for the year 2004. Does this indicate that the more the corrupt the better it is for the markets? Hardly. It just reveals that corruption is not the sole determinant for capital flows. For the jackasses who unwaveringly thinks the country would fester mainly due to perceptions is bound to shoot himself/herself in the foot.

Washington Post: China builds up strategic sea lanes

China builds up strategic sea lanes
By Bill Gertz
THE WASHINGTON TIMES
Published January 18, 2005

China is building up military forces and setting up bases along sea lanes from the Middle East to project its power overseas and protect its oil shipments, according to a previously undisclosed internal report prepared for Defense Secretary Donald H. Rumsfeld.

"China is building strategic relationships along the sea lanes from the Middle East to the South China Sea in ways that suggest defensive and offensive positioning to protect China's energy interests, but also to serve broad security objectives," said the report sponsored by the director, Net Assessment, who heads Mr. Rumsfeld's office on future-oriented strategies.

The Washington Times obtained a copy of the report, titled "Energy Futures in Asia," which was produced by defense contractor Booz Allen Hamilton.

The internal report stated that China is adopting a "string of pearls" strategy of bases and diplomatic ties stretching from the Middle East to southern China that includes a new naval base under construction at the Pakistani port of Gwadar.

Beijing already has set up electronic eavesdropping posts at Gwadar in the country's southwest corner, the part nearest the Persian Gulf. The post is monitoring ship traffic through the Strait of Hormuz and the Arabian Sea, the report said.

Other "pearls" in the sea-lane strategy include:

• Bangladesh: China is strengthening its ties to the government and building a container port facility at Chittagong. The Chinese are "seeking much more extensive naval and commercial access" in Bangladesh.

• Burma: China has developed close ties to the military regime in Rangoon and turned a nation wary of China into a "satellite" of Beijing close to the Strait of Malacca, through which 80 percent of China's imported oil passes.

China is building naval bases in Burma and has electronic intelligence gathering facilities on islands in the Bay of Bengal and near the Strait of Malacca. Beijing also supplied Burma with "billions of dollars in military assistance to support a de facto military alliance," the report said.

•Cambodia: China signed a military agreement in November 2003 to provide training and equipment. Cambodia is helping Beijing build a railway line from southern China to the sea.

•South China Sea: Chinese activities in the region are less about territorial claims than "protecting or denying the transit of tankers through the South China Sea," the report said.

China also is building up its military forces in the region to be able to "project air and sea power" from the mainland and Hainan Island. China recently upgraded a military airstrip on Woody Island and increased its presence through oil drilling platforms and ocean survey ships.

•Thailand: China is considering funding construction of a $20 billion canal across the Kra Isthmus that would allow ships to bypass the Strait of Malacca. The canal project would give China port facilities, warehouses and other infrastructure in Thailand aimed at enhancing Chinese influence in the region, the report said.

The report reflects growing fears in the Pentagon about China's long-term development. Many Pentagon analysts believe China's military buildup is taking place faster than earlier estimates, and that China will use its power to project force and undermine U.S. and regional security.

The U.S. military's Southern Command produced a similar classified report in the late 1990s that warned that China was seeking to use commercial port facilities around the world to control strategic "chokepoints."

A Chinese company with close ties to Beijing's communist rulers holds long-term leases on port facilities at either end of the Panama Canal.

The Pentagon report said China, by militarily controlling oil shipping sea lanes, could threaten ships, "thereby creating a climate of uncertainty about the safety of all ships on the high seas."

The report noted that the vast amount of oil shipments through the sea lanes, along with growing piracy and maritime terrorism, prompted China, as well as India, to build up naval power at "chokepoints" along the sea routes from the Persian Gulf to the South China Sea.

"China ... is looking not only to build a blue-water navy to control the sea lanes, but also to develop undersea mines and missile capabilities to deter the potential disruption of its energy supplies from potential threats, including the U.S. Navy, especially in the case of a conflict with Taiwan," the report said.

Chinese weapons for sea-lane control include new warships equipped with long-range cruise missiles, submarines and undersea mines, the report said. China also is buying aircraft and long-range target acquisition systems, including optical satellites and maritime unmanned aerial vehicles.

The focus on the naval buildup is a departure from China's past focus on ground forces, the report said.

"The Iraq war, in particular, revived concerns over the impact of a disturbance in Middle Eastern supplies or a U.S. naval blockade," the report said, noting that Chinese military leaders want an ocean-going navy and "undersea retaliatory capability to protect the sea lanes."

China believes the U.S. military will disrupt China's energy imports in any conflict over Taiwan, and sees the United States as an unpredictable country that violates others' sovereignty and wants to "encircle" China, the report said.

Beijing's leaders see access to oil and gas resources as vital to economic growth and fear that stalled economic growth could cause instability and ultimately the collapse of their nation of 1.3 billion people.

Energy demand, particularly for oil, will increase sharply in the next 20 years -- from 75 million barrels per day last year to 120 million barrels in 2025 -- with Asia consuming 80 percent of the added 45 million barrels, the report said.

Eighty percent of China's oil currently passes through the Strait of Malacca, and the report states that China believes the sea area is "controlled by the U.S. Navy."

Chinese President Hu Jintao recently stated that China faces a "Malacca Dilemma" -- the vulnerability of its oil supply lines from the Middle East and Africa to disruption.

Oil-tanker traffic through the Strait, which is closest to Indonesia, is projected to grow from 10 million barrels a day in 2002 to 20 million barrels a day in 2020, the report said.

Chinese specialists interviewed for the report said the United States has the military capability to cut off Chinese oil imports and could "severely cripple" China by blocking its energy supplies.

Reuters: Cell Phone Market Seen Soaring in '05

Cell Phone Market Seen Soaring in '05
Tue Jan 18, 2005 11:54 AM ET

LONDON (Reuters) - The global mobile phone market is set to grow to 2 billion subscribers by the end of 2005, fueled by strong demand from developing economies in Asia and Latin America, Deloitte & Touche said on Tuesday.

The consulting firm said it expected voice calls to continue to be the primary driver of profits and revenues for mobile phone companies, with volumes continuing to grow steadily on the back of falling prices and rising ease of use.

Mobile penetration would surpass 100 percent in some markets as users take a second connection for data or for personal use. The mobile industry had 1.5 billion users in June last year.

"The most compelling and lucrative mobile content will continue to revolve around phone personalization, such as ring tones, real tones, wallpapers and basic games," Deloitte said in its 2005 outlook for the telecoms sector.

Traditional fixed-line operators will continue to face margin pressures because of competition from mobile and voice over Internet protocol (VoIP) providers, but the vast majority of voice calls would still originate and end on their networks, the report said.

"They should focus on marketing their superior capabilities and investing in full-featured phones with key convenience features, such as stored number dialing, text messaging and conference calling, to stimulate call volume," Deloitte said.

RADIO TAGGING

Radio tagging could become the sunrise industry this year, Deloitte said, as sectors ranging from retailing to automobiles drive up adoption of the technology to curtail theft, cut waste and improve productivity.

"In 2005, Radio Frequency Identification (RFID) will finally make it out of the lab and into the commercial world ... By the end of the year, more than 10 billion RFID tags will have been sold and used," Deloitte said in its 2005 outlook for the telecoms sector.

Retail giants such as Wal-Mart and Britain's Tesco are in the midst of a drive to replace bar codes with RFID chips embedded in plastic product tags that can track goods and signal the need for restocking, boosting supply efficiency and cutting costs.

Analysts estimate this technology and subsequent cuts in manpower, with inventory control done automatically, could save Wal-Mart, which posts annual sales of about $256 billion, more than $1.3 billion a year.

Deloitte said it expected collecting, collating and presenting RFID data will become a very sizeable industry, with technology companies grabbing the lion's share of revenue.

RFID readers and other hardware could become a healthy market, and RFID applications will find use in sectors ranging from healthcare to construction and transportation, it said.

Timesonline: Fears for global trade as shipping costs sink

Fears for global trade as shipping costs sink
By Gary Duncan, Economics Editor

THE global economy may be hit by a sharp drop in trade following an abrupt decline in the cost of shipping cargoes across the world, analysts say. The Baltic index, a key gauge of shipping costs that is regarded by economists as a reliable indicator of future trading activity, has tumbled since the start of the year.

Research by Morgan Stanley highlights the scale of the fall in the index in recent months, which has taken it down more than 10 per cent compared with a year ago.

The scale of the reversal in both the level and direction of shipping costs — a reflection of the trend in world demand for goods — is emphasised by data showing that early last year these costs had risen more than 250 per cent from a year before.

Daily hire rates for the world’s biggest ships for moving dry cargo have plunged by 45 per cent from a peak in December last year. While these costs can be volatile, Rebecca McCaughrin of Morgan Stanley believes that the trend probably marks a turning point for recent buoyant levels of world trade.

“Leading indicators, such as the Baltic Dry Index, have been signalling a precipitous deceleration in global trade for the last several months,” she said.

Her research also notes that trade activity between key economies has slowed, particularly in Asia.

However, she said that China continued to buck the global trend with its surging export business.

Fears of a steep decline in world trade will fuel anxiety over a broader slowdown in the global economy this year.

****
Prudent Investor says: We hope that this is just a blip and China would continue to offset the slowdown seen in global trade, otherwise, under contracting monetary conditions aggravated by a slowdown in global trade equals declines in equity investments.

Philippine Stock Market Commentary: January 18, 2005: Where's the Rout?

Where’s the Rout?

Yesterday I read news accounts that some analysts predicted substantial declines in today’s domestic equity market activities following S & P’s downgrade. Because the downgrade talks have been floated in the market since the middle of last year, I was skeptical of any major violent reactions in today’s market activities despite yesterday’s downgrade. This is simply because to my understanding financial markets function as discounting mechanisms which factors in future probabilities rather than the present developments. The downgrades were digested as part of the probabilities which obviously did occur, was mainly discounted, hence the soft decline. If it came as a surprise then the market would have reacted violently. But rather, it would seem that based on today’s activities, the local market simply found a fundamental reason to profit take considering that Phisix had a lofty three day 4.9% advance.

Now browsing over at the Bloomberg’s website, it can be noted that Asia’s market has predominantly been in the red today, which was primarily blamed on rising energy or particularly crude oil prices, of course except the Philippines. In addition while the Peso climbed significantly during the past few days, today’s fall will likewise be imputed on the downgrades, from which again I would dissent. The Peso has tracked the movements of the Japanese Yen in line with region for the past few days. Today’s decline is NOT an isolated move but rather a regional one considering that the Japanese yen after reaching a 5 year high are falling alongside all Asian currencies except for the New Zealand Dollar and the Australian dollar, as of this writing, and to pegged currencies as the Malaysia’s ringgit.

The logical repercussions from a downgrade would be that foreign money to refrain or withdraw from investing in the local market, which doesn’t seem to be the case. Today’s market showed that with the substantial share of net foreign participation to cumulative Peso turnover at 48.8%, foreign money STILL registered a net buying of P 58.8 million. Moreover, looking at the market breadth we note that advancing issues trumped declining issues by 61 to 39. These positive data doesn’t speak of a downgrade concern in spite of Phisix’s .2% decline, although it does look more like a profit taking in the guise of a downgrade pretext. As a saying goes, “If it walks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.” So where’s the rout?

Reuters: Trade Gap Swells Unexpectedly to Record

Trade Gap Swells Unexpectedly to Record
Wed Jan 12, 2005 08:30 AM ET

WASHINGTON (Reuters) - The U.S. trade deficit widened unexpectedly in November to a record $60.3 billion, propelled by the highest-ever oil import bill and a drop in exports, a government report showed on Wednesday.

The trade gap topped $60 billion for the first time and defied Wall Street expectations that it would narrow to $54 billion in November. October's deficit was revised up to a $56.0 billion gap from the originally reported $55.5 billion.

The deficit has continued to balloon despite a 50 percent drop in the value of the dollar against the euro over the past three years, which has been expected to gradually narrow the gap.

The trade shortfall for the first 11 months of 2004 was $561.3 billion, well past the record of $496.5 billion set for all of 2003.

Although average oil import prices retreated slightly in November, they remained high enough to push the value of crude oil imports to record $13.4 billion.

Meanwhile, imports from China fell only fractionally to $19.6 billion from the record $19.7 billion set in October. The trade imbalance with China accounts for about 25 percent of the overall U.S. trade deficit.

Rising U.S. consumer demand for household goods and other products helped boost overall imports by 1.3 percent to a record $155.8 billion. Strong demand for advanced technology products widened the deficit in that category to a record $5.8 billion.

U.S. exports slipped 2.3 percent to $95.6 billion, as shipments of U.S. industrial supplies and materials -- including things such as plastic and chemicals -- fell in the face of weaker foreign demand. U.S. auto and auto part exports also edged lower.

Even though the drop in the value of the dollar makes U.S. exports more competitive, demand from major U.S. trading partners remains weak and the Federal Reserve has cautioned against expecting any significant improvement in the near term.

While the U.S. trade deficit with China improved slightly from the record set in October, the bilateral gap with Japan was the highest since October 2000 and deficits with Canada, Russia and South Korea set records in November.

© Reuters 2005. All Rights Reserved.
*****

Prudent Investor says

I have noted in my recent outlook that the US dollar looks poised for a rebound, as seen in the large spike during the first week of 2005, given its largely oversold conditions. However, despite the consensus expectations of a narrower trade deficit for the US (once again on the wrong side) this essential measure for the US economy appears to be deteriorating lending more credence that US dollar is set to fall further. The record trade deficit means that the US would need $2 billion a day of financing from foreign savers given its low savings level which once again furthers the risk of Global central banks veering away from financing the overly debt laden US economy.

For the financial markets it does seem that in the US, its equity markets fumbled when the Dollar rallies and is on a recovery mode as the dollar falls, as evidenced by its movements since the advent of 2005. It does seem to indicate that their market sees a weaker dollar to be more beneficial for its economy and/or corporate health. For the Philippines, the first half of this week saw foreign selling as the US dollar peaked while yesterday's rout in the currency markets of the US dollar appears to have fueled foreign buying in today's domestic market activities. Let us not forget that foreign money entering the Philippines is part of the institutional portfolio diversification in the Asian region away from US dollar denominated assets or bluntly, an anti-dollar play.

Financial Times: Record flows to developing world boost global FDI

Record flows to developing world boost global FDI
By Vanessa Houlder
Published: January 12 2005 02:00 | Last updated: January 12 2005 02:00
Financial Times

Record investment flows to developing countries have sparked a recovery in global foreign direct investment, the United Nations said yesterday.

After three years of decline, world foreign direct investment (FDI) rose 6 per cent to $612bn (€466m, £326m) in 2004 as increased flows to developing countries and central and eastern Europe offset a slump in developed countries.

The UN Conference on Trade and Development (UNCTAD) predicted that a continuing improvement in economic activity, equity market valuations and mergers and acquisitions would fuel expansion of FDI over the medium term.

The positive outlook was underlined yesterday by A.T. Kearney, the consultancy, which declared that "a fundamental shift in investor outlook and risk perception is under way" as corporate investors perceive increased profit opportunities and reduced risk in leading emerging markets.

FDI in developing countries rose 48 per cent to $255bn from 2003. Karl Sauvant, director of UNCTAD's investment division, said the data was "good news" for developing countries, which now accounted for an estimated 42 per cent of global FDI inflows. This compared with 27 per cent in 2001-2003.

The US was the world's largest recipient of FDI with inflows of $121bn, pushing China into second place with half as much. The UK also rose to the top of the European league table with FDI more than doubling to $55bn from $21bn thanks to a revival of corporate profitability and mergers.

But overall, developed countries experienced a 16 per cent fall in FDI to $321bn, largely due to the repayment of intra-company loans in some countries, particularly Belgium, Germany and the Netherlands. These repayments do not appear in the FDI inflow statistics of the country where the parent company is based.

FDI flows to Asia and the Pacific reached $166bn, a 55 per cent increase over 2003. Improved economic performance, a more favourable policy environment, higher corporate profitability and a rise in mergers and acquisitions fuelled the growth.

A strong rebound in commodity prices helped FDI inflows to Africa increase for the second consecutive year to $20bn. UNCTAD predicted a further increase if high commodity prices prompted multinational companies to undertake new exploration projects in Africa, which accounts for just 3 per cent of global FDI flows. FDI flows to Latin America and the Caribbean rose for the first time in five years, up 37 per cent to $69bn. Following a dip, central and eastern Europe attracted a record £36bn worth of FDI inflows.

Resource Investor.com: China Looks to Record Deal to Secure Energy Reserves

China Looks to Record Deal to Secure Energy Reserves
By Xu Zhiqiang
10 Jan 2005 at 03:55 PM EST

SHENZHEN (ResourceInvestor.com) -- China National Offshore Oil Corporation [CNOOC] is said to be considering a $13 billion bid for U.S.-based oil group Unocal. The putative purchase of one of America’s most recognized energy brands underscores China’s growing M&A clout as the country seeks to secure reliable supplies of key resources.

China has displaced Japan as the world’s second largest oil consumer [BRNT] [GSOIL]and has been a net importer for a little over a decade due to strong economic growth. CNOOC is China’s third largest energy parastatal.

According to the Financial Times, CNOOC wants the Asian assets of Unocal and would sell off the US assets. Industry analysts have warned that it is not going to be a simple transaction, not least because of potential liabilities arising from environmental claims.

Unocal has an $11 billion market value and $2.68 billion net debt at 2004 year-end. CNOOC’s market value is about $21.5 billion and had $1.6 billion cash at the end of 2003. Through the $1 billion convertible bond issue last month, CNOOC has $3 billion at hand. As Goldman Sachs points out, that leaves it dependent on an equity issue to pay for the rump of the supposed purchase.

Were the deal concluded, it would be China’s most significant foreign deal to date, easily eclipsing last month’s $1.75 billion purchase of IBM’s computer business.

Unocal has a significant presence in Asia. Of its year-end 2003 total oil and gas reserves of 1.76 billion barrels (38% in oil and 62% in gas), about 50% is in Asia, mainly in Thailand and Indonesia.

Little wonder then that CNOOC is interested since Unocal’s would potentially boost the Chinese company’s reserves by 83% (oil up 47%, gas up 157%) and production volume by 126% (oil up 53% and gas up 591%). Unocal boasts the ninth-largest reserve base among American producers.

Goldman Sachs says it would make more sense for CNOOC to acquire the Asian assets specifically rather than making a potentially hostile bid to acquire the whole company.

Cao Yunshi, vice-president of CNOOC, said in Hong Kong that negotiations with Unocal have not begun yet, and that it would be risky to do a deal in haste since oil and gas prices remain historically high.

Meanwhile, CNOOC has been quite active abroad with a $348 million natural gas deal in Australia and ongoing negotiations for Canadian oil-sands assets.
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Prudent Investor says: If the deal to buy UNOCAL pushes through this in effect will represent China’s backdoor entry to acquire energy assets in Asia and in the Philippines.

In the Philippines, the local flagship of Unocal, Unocal Philippines formerly Philippine Geothermal Inc. (PGI) has geothermal projects in Tiwi, Albay and Makiling Banahaw (Mak-Ban) covering the areas of Laguna and Batangas.

Aside, in 2004, the American company under the Unocal Sulu Limited invested $41 million (Manila Bulletin, June 14, 2004) in oil exploration at the Sandakan Sulu Sea under Service Contract 41 covering the Zebra 1 and Rhino 1 wells with a consortium of several other foreign and local groups. As I said previously, “Watch it, here they come!!!”

New York Times' Matt Richtel: Momentum Is Gaining for Cellphones as Credit Cards

Prudent Investor says: One promising technology application which may favor the wireless industry....

Momentum Is Gaining for Cellphones as Credit Cards
By MATT RICHTEL
New York Times

People already use their cellphones to read e-mail messages, take pictures and play video games. Before long, they may use them in place of their wallets.

By embedding in the cellphone a computer chip or other type of memory device, a phone can double as a credit card. The chip performs the same function as the magnetic strip on the back of a credit card, storing account information and other data necessary to make a purchase.

In Asia, phone makers are already selling phones that users can swipe against credit or debit card readers, in much the same way they would swipe plastic MasterCard or Visa cards. Trials are now under way to bring the technology to America, industry executives said.

Ron Brown, executive director of the Infrared Data Association, a trade group representing companies pushing the technology for cellphone credit cards, said that the new handsets could become "a major form of payment, because cellphones are the most ubiquitous device in the world." He added, though, that "cash will never go away."

Advocates say that consumers will readily embrace the technology as a way to pay for even small purchases, because it is less bother than taking a credit card out of a purse or parting with cash.

The impending changes to the cellphone happen to coincide with major shifts taking place in the banking industry. Since credit cards are still considered somewhat inconvenient, particularly for quick, small purchases, major credit card companies have developed "contactless payment" technologies for checkout counters that allow customers to wave their cards near an electronic reader without having to swipe the card or sign their name.

MasterCard, for example, has introduced a system called PayPass that lets cardholders wave a card in front of a reader to initiate a payment, much as motorists use E-ZPass and similar systems to pay tolls and ExxonMobil customers use SpeedPass to buy gas. Several major credit card companies issue PayPass cards; McDonald's has agreed to accept them at some restaurants.

And American Express announced late last year that it would have its system, ExpressPay, in more than 5,000 CVS drugstores by the middle of this year. Judy Tenzer, a spokeswoman for American Express, said the technology made it more likely that customers would use credit cards to pay for small items.

Cellphone makers are hoping these new payment systems will also make it easier to market handsets with credit card functions, although they could just as easily represent competition for the practice of paying by cellphone.

The marriage of cellphone and charge card poses some significant challenges, including security problems. To reduce fraud from stolen phones, consumers may be required to punch an authorization code into their phone each time a charge is made.

For more than a year, phone makers, software companies and computer chip manufacturers have been working to develop secure and reliable payment technology for cellphones. After the phone's chip is recognized by the electronic reader, the credit card account number will be verified, as it is now, and the price of the purchase will be added to the consumer's credit card bill.

The new phones may also be capable of being programmed for a prepaid sum from which payments could be deducted.

But there have been some glitches in the product trials, according to Jorge Fernandes, chief executive of Vivotech, a cellphone software company based in Santa Clara, Calif.

In two trials, one at a corporation in the Midwest and the other at Santa Clara University, Vivotech used infrared technology for communications between the phone and the card reader. Participants had to aim the cellphone at the reader in a certain way for the infrared beam to be picked up.

"People got very upset," Mr. Fernandes said. "Pointing your cellphone at a target is very difficult."

Mr. Fernandes said the company believed it might have solved that problem by switching to a technology that uses low-level radio signals. Last month, Vivotech began testing the technology, which allows users to wave the phone within a couple of inches of a reader, at a sports arena in the Atlanta area.

Cellphones are becoming mainstream payment devices in Korea and Japan. In Japan, NTT DoCoMo, the mobile phone operator, said that it had already sold more than a million phones equipped with chips that include the payment function.

More than 13,000 Japanese shops have electronic readers capable of communicating with the phones. For now, the phones are used mostly to debit a prepaid amount, which is deposited by plugging the phone into a machine similar to an A.T.M. that takes cash and credits the handset.

In South Korea, people are already using cellphones as credit cards, said Sue Gordon-Lathrop, vice president for the consumer products platform for Visa International. She said American consumers would eventually embrace these new functions, but acceptance could be slower than in Japan and Korea, where people are more comfortable with using phones for many purposes.

Also, she said, there are more cellphone operators in America, making it harder to set standard technology and business practices. "The phones are exciting, but it's going to be a long time" before a widespread base of merchants and consumers in America are equipped to use them, she said.

For now, some of the major American cellphone companies are monitoring the technology without committing to it. Jim Ryan, senior vice president of product development for Cingular Wireless, the country's largest cellphone provider, said the company was "closely watching" the progress in this field.