Market Activity & Views

What is a Bond?

2007-03-01T14:08:00.000-05:00

In finance, a bond is a debt security, in which the issuer owes the holders a debt and is obliged to repay the principal and interest (the coupon) at a later date, termed maturity.
Other stipulations may also be attached to the bond issue, such as the obligation for the issuer to provide certain information to the bond holder, or limitations on the behavior of the issuer. Bonds are generally issued for a fixed term (the maturity) longer than ten years. U.S Treasury securities issued debt with life of ten years or more is a bond. New debt between one year and ten years is a note, and new debt less than a year is a bill.

A bond is simply a loan, but in the form of a security, although terminology used is rather different. The issuer is equivalent to the borrower, the bond holder to the lender, and the coupon to the interest. Bonds enable the issuer to finance long-term investments with external funds. Certificates of deposit (CDs) or commercial paper are considered money market instruments.

Traditionally, the U.S. Treasury uses the word bond only for their issues with a maturity longer than ten years, and calls issues between one and ten year notes. Elsewhere in the market this distinction has disappeared, and both bonds and notes are used irrespective of the maturity.
Market participants normally use bonds for large issues offered to a wide public, and notes for smaller issues originally sold to a limited number of investors. There are no clear demarcations. There are also "bills" which usually denote fixed income securities with three years or less, from the issue date, to maturity. Bonds have the highest risk, notes are the second highest risk, and bills have the least risk. This is due to a statistical measure called duration, where lower durations have less risk, and are associated with shorter term obligations.

Bonds and stocks are both securities, but the difference is that stock holders own a part of the issuing company (have an equity stake), whereas bond holders are in essence lenders to the issuer. Also bonds usually have a defined term, or maturity, after which the bond is redeemed whereas stocks may be outstanding indefinitely. An exception is a consol bond, which is a perpetuity (i.e. bond with no maturity).

Issuers

The range of issuers of bonds is very large. Almost any organization could issue bonds, but the underwriting and legal costs can be prohibitive. Regulations to issue bonds are very strict. Issuers are often classified as follows:

Supranational agencies, such as the European Investment Bank or the Asian Development Bank issue supranational bonds.
National Governments issue government bonds in their own currency. They also issue sovereign bonds in foreign currencies.
Sub-sovereign, provincial, state or local authorities (municipalities). In the U.S. state and local government bonds are known as municipal bonds.
Government sponsored entities. In the U.S., examples include the Federal Home Loan Mortgage Corporation (Freddie Mac), the Federal National Mortgage Association (Fannie Mae), and the Federal Home Loan Banks. The bonds of these entities are known as agency bonds, or agencies.
Companies (corporates) issue corporate bonds.
Special purpose vehicles are companies set up for the sole purpose of containing assets against which bonds are issued, often called asset-backed securities.

Trading and valuing bonds

The interest rate that the issuer of a bond must pay is influenced by a variety of factors, such as current market interest rates, the length of the term and the credit worthiness of the issuer.

These factors are likely to change over time, so the market value of a bond can vary after it is issued. Because of these differences in market value, bonds are priced in terms of percentage of par value.
Bonds are not necessarily issued at par (100% of face value, corresponding to a price of 100), but all bond prices converge to par when they reach maturity. At other times, prices can either rise (bond is priced at greater than 100), which is called trading at a premium, or fall (bond is priced at less than 100), which is called trading at a discount.
Most government bonds are denominated in units of $1000, if in the United States, or in units of £100, if in the United Kingdom. Hence, a deep discount US bond, selling at a price of 75.26, indicates a selling price of $752.60 per bond sold. (Often, bond prices are quoted in points and thirty-seconds of a point, rather than in decimal form.)
Some short-term bonds, such as the U.S. T-Bill, are always issued at a discount, and pay par amount at maturity rather than paying coupons. This is called a discount bond.

The market price of a bond is the present value of all future interest and principal payments of the bond discounted at the bond's yield, or rate of return. The yield represents the current market interest rate for bonds with similar characteristics. The yield and price of a bond are inversely related so that when market interest rates rise, bond prices generally fall and vice versa.

The market price of a bond may include the accrued interest since the last coupon date. (Some bond markets include accrued interest in the trading price and others add it on explicitly after trading.) The price including accrued interest is known as the "flat" or "dirty price". (See also Accrual bond.) The price excluding accrued interest is sometimes known as the Clean price.

The interest rate adjusted for the current price of the bond is called the "current yield" or "earnings yield" (this is the nominal yield multiplied by the par value and divided by the price).

Taking into account the expected capital gain or loss (the difference between the current price and the redemption value) gives the "redemption yield": roughly the current yield plus the capital gain (negative for loss) per year until redemption.

The relationship between yield and maturity for otherwise identical bonds is called a yield curve.

Bonds markets, unlike stock or share markets, often do not have a centralized exchange or trading system. Rather, in most developed bond markets such as the U.S., Japan and western Europe, bonds trade in decentralized, dealer-based over-the-counter markets. In such a market, market liquidity is provided by dealers and other market participants committing risk capital to trading activity. In the bond market, when an investor buys or sells a bond, the counterparty to the trade is almost always a bank or securities firm acting as a dealer.
In some cases, when a dealer buys a bond from an investor, the dealer carries the bond "in inventory." The dealer's position is then subject to risks of price fluctuation. In other cases, the dealer immediately resells the bond to another investor.

Bond markets also differ from stock markets in that investors generally do not pay brokerage commissions to dealers with whom they buy or sell bonds. Rather, dealers earn revenue for trading with their investor customers by means of the spread, or difference, between the price at which the dealer buys a bond from one investor--the "bid" price--and the price at which he or she sells the same bond to another investor--the "ask" or "offer" price.
The bid/offer spread represents the total transaction cost associated with transferring a bond from one investor to another.

What is the S&P 500?

2007-03-01T10:39:00.000-05:00

S&P 500 is an index containing the stocks of 500 Large-Cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill. S&P 500 is used in reference not only to the index but also to the 500 actual companies whose stocks are included in the index.

The S&P 500 index forms part of the broader S&P 1500 and S&P Global 1200 stock market indices.

All of the stocks in the index are those of large publicly held companies and trade on major US stock exchanges such as the New York Stock Exchange and Nasdaq. After the Dow Jones Industrial Average, the S&P 500 is the most widely watched index of large-cap US stocks. It is considered to be a bellwether for the US economy and is a component of the Index of Leading Indicators.

Many index funds and exchange-traded funds track the performance of the S&P 500 by holding the same stocks as the index, in the same proportions, and thus attempting to match its performance (before fees and expenses). Partly because of this, a company which has its stock added to the list may see a boost in its stock price as the managers of the mutual funds must purchase that company's stock in order to match the funds' composition to that of the S&P 500 index.

In stock and mutual fund performance charts, the S&P 500 index is often used as a baseline for comparison. The chart will show the S&P 500 index, with the performance of the target stock or fund overlaid.

History

Prior to 1957, the primary S&P stock market index consisted of 90 companies, known as the S&P 90, and was published on a daily basis. A broader index of 423 companies was also published weekly. On March 4, 1957, a broad, real-time stock market index, the S&P 500 was introduced. This introduction was made possible by advancements in the computer industry which allowed the index to be calculated and disseminated in real time.

The S&P 500 is used widely as an indicator of the broader market, as it includes both "growth" stocks (which inflated and then deflated in the dot-com bubble and bust) and generally less volatile "value" stocks; it also includes stocks from both the NASDAQ stock market and the NYSE.
The index, near the height of the bubble, reached an all-time closing high of 1,527.46, and intra-day high of 1,553.11, on March 24, 2000. After that, the index eventually lost approximately 50% of its value, spiking below 800 in July 2002 and reaching a bear market low of 768.63 intra-day on October 10, 2002.
Since then, the US stock markets have gradually recovered. However, during the week of October 2, 2006, when the DJIA set new record highs for the first time in nearly seven years, the S&P 500 remained below its all-time closing high. As of late 2006, the S&P 500 remains below its all-time high, although it established a monthly close above 1400 points for the first time in over six years on November 30, 2006.

Selection

The components of the S&P 500 are selected by committee. This is similar to the Dow 30, but different from others such as the Russell 1000, which are strictly rules-based.

Although the index includes many large companies in the US, it is not simply a list of the 500 biggest companies, and includes a handful (11 as of September 19, 2006) that are incorporated outside of the US and are therefore technically not US companies.
The companies are carefully selected to ensure that they are representative of various industries in the US economy. In addition, companies that do not trade publicly (such as those that are privately or mutually held) and stocks that do not have sufficient liquidity are not in the index.
By contrast, the Fortune 500 attempts to list the 500 largest companies in the United States by gross revenue, regardless of whether their stocks trade or their liquidity, without adjustment for industry representation, and excluding companies incorporated outside the US.

See a list o S&P 500 companies

What is the Dow Jones?

2007-03-01T10:00:00.000-05:00

Dow Jones Industrial Average (NYSE: DJI, also called DJIA, Dow 30, or informally the Dow Jones index or the Dow) is one of several stock market indices created by Wall Street Journal editor and Dow Jones & Company founder Charles Dow.

Dow compiled the index as a way to gauge the performance of the industrial component of America's stock markets. It is the oldest continuing U.S. market index. Today, the average consists of 30 of the largest and most widely held public companies in the United States.
The "industrial" portion of the name is largely historical - many of the 30 modern components have little to do with heavy industry. To compensate for the effects of stock splits and other adjustments, it is currently a scaled average, not the actual average of the prices of its component stocks - the actual average of prices is multiplied by a scale factor, which changes over time, to generate the value of the index.

History

First published on May 26, 1896, the DJIA represented the average of twelve stocks from various important American industries. Of those original twelve, only General Electric remains part of the average. The other eleven were:

American Cotton Oil Company, a predecessor of Bestfoods, now part of Unilever
American Sugar Company, now Amstar Holdings
American Tobacco Company, broken up in 1911
Chicago Gas Company, bought by Peoples Gas Light & Coke Co. in 1897 (now Peoples Energy Corporation)
Distilling & Cattle Feeding Company, now Millennium Chemicals, a division of Lyondell Chemical Company
Laclede Gas Light Company, still in operation as The Laclede Group
National Lead Company, now NL Industries
North American Company, (Edison) electric company broken up in the 1950s
Tennessee Coal, Iron and Railroad Company, bought by U.S. Steel in 1907
U.S. Leather Company, dissolved 1952
United States Rubber Company, changed its name to Uniroyal in 1967, bought by Michelin in 1990

When it was first published, the index stood at 40.94. It was computed as a direct average, by first adding up stock prices of its components and dividing by the number of stocks. Many of the biggest percentage price moves in the Dow occurred early in its history, as the nascent industrial economy matured.

The index hit its all-time low of 28.48 during the summer of 1896.
The largest one-day percentage drop in the history of the Dow occurred on December 12, 1914, 24.39%, after a multi-month NYSE hiatus brought on by World War I.

In 1916, the number of stocks in the DJIA was increased to twenty, and finally to thirty in 1928, near the height of the "roaring 1920s" bull market. The crash of 1929 and the ensuing Great Depression returned the average to its starting point, almost 90% below its peak, by July 8, 1932. The highs of September 3, 1929 would not be surpassed until 1954.

The largest one-day percentage gain in the index, 14.87%, happened on October 6, 1931, in the depths of the 1930s bear market.
The post-World War II bull market, which brought the market well above its 1920s highs, lasted until 1966.
On November 14, 1972 the average closed above 1,000 (1,003.16) for the first time, in the midst of a lengthy bear market.

The 1980s and especially the 1990s saw a very rapid increase in the average, though severe corrections did occur along the way.

The largest one-day percentage drop since 1914 occurred on "Black Monday", October 19, 1987, when the average fell 22.6%.
The largest one-day percentage gain since 1932, 10.15%, occurred two days later on Wednesday, October 21, bringing the Dow back above 2,000 and in line for a yearly gain.
On November 21, 1995 the DJIA closed above 5,000 (5,023.55) for the first time.
On March 29, 1999, the average closed at 10,006.78, its first close above the 10,000 mark.
On May 3, 1999, the Dow closed at 11,014.70, its first close above 11,000.

The uncertainty of the early 2000s brought a significant bear market, and whether it has ended or simply gone into hibernation has been an ongoing subject of debate.

On January 14, 2000, the DJIA reached a record high of 11,750.28 in trading before settling at a record closing price of 11,722.98; these two records would not be broken until October 3, 2006.
The largest one-day point gain in the Dow, an advance of 499.19, or 4.93%, occurred on March
16, 2000, as the broader market approached its top.
The largest one-day point drop in DJIA history occurred on September 17, 2001, the first day of trading after the September 11, 2001 attacks, when the Dow fell 684.81 points, or 7.1%. By the end of that week, the Dow had fallen 1,369.70 points, or 14.3%. A recovery attempt allowed the average to close the year above 10,000.
By mid-2002, the average had returned to its 1998 level of 8,000.
On October 9, 2002, the DJIA bottomed out at 7,286.27 (intra-day low 7,197.49), its lowest close since October 1997.
By the end of 2003, the Dow returned to the 10,000 level.
On January 9, 2006 the average broke the 11,000 barrier for the first time since June 2001, closing at 11,011.90.
In October 2006, four years after its bear market low, the DJIA set fresh record theoretical, intra-day, daily close, weekly, and monthly highs for the first time in almost seven years, closing above 12,000 for the first time on the 19th anniversary of Black Monday.
On February 27, 2007, the Dow Jones Industrial Average fell 415.30 points, closing at 12,216.96, the biggest point drop since September 17, 2001, the first day of trading after the September 11, 2001 attacks.

The individual components of the DJIA are occasionally changed as market conditions warrant. They are selected by the editors of The Wall Street Journal.
When companies are replaced, the scale factor used to calculate the index is also adjusted so that the value of the average is not directly affected by the change.
On November 1, 1999, Chevron, Goodyear Tire and Rubber Company, Sears Roebuck, and Union Carbide were removed from the DJIA and replaced by Intel, Microsoft, Home Depot, and SBC Communications. Intel and Microsoft became the first two companies traded on the NASDAQ exchange to be listed in the DJIA.
On April 8, 2004, another change occurred as International Paper, AT&T, and Eastman Kodak were replaced with Pfizer, Verizon, and AIG. On December 1, 2005 AT&T's original T symbol returned to the DJIA as a result of the SBC Communications and AT&T merger.

See how the Dow Jones is calculated
See a list of DOW companies

What is the NASDAQ?

2007-03-01T09:42:00.000-05:00

NASDAQ (originally an acronym for National Association of Securities Dealers Automated Quotations system) is an American electronic stock exchange, founded in 1971 by the National Association of Securities Dealers (NASD), who divested it in a series of sales in 2000 and 2001.

It is owned and operated by The Nasdaq Stock Market , Inc., the stock of which was listed on its own stock exchange in 2002.
NASDAQ is the largest electronic screen-based equity securities market in the United States. With approximately 3,200 companies, it lists more companies and, on average, trades more shares per day than any other U.S. market.

Its current chief executive officer is Robert Greifeld.

History

When it began trading on February 8, 1971, it was the world's first electronic stock market. At first, it was merely a computer bulletin board system and did not actually connect buyers and sellers. The NASDAQ helped lower the spread (the difference between the bid price and the ask price of the stock) but somewhat paradoxically was unpopular among brokerages because they made much of their money on the spread. Over the years, NASDAQ became more of a stock market by adding trade and volume reporting and automated trading systems. NASDAQ was also the first stock market to advertise to the general public, highlighting NASDAQ-traded companies (usually in technology) and closing with the declaration that NASDAQ is "the stock market for the next hundred years."

By 1975, the NASDAQ displayed only NASDAQ-listed stocks, separating itself from other OTC stocks. Five years later the NASDAQ began displaying inside quotations, which showed the market’s best bid and best sell prices on screen. This basically kept the market makers honest, and published spreads (margin between the best bid and best sell) declined on more than 85% of NASDAQ stocks.

From 1982 - 1986, the NASDAQ’s top companies broke away from the smaller ones, forming the NASDAQ National Market. This new market offered traders real-time quotes on stocks, and also offered margin to traders, meaning they could now purchase these stocks on credit with their brokers.

Until 1987, most trading occurred via the telephone, but during the October 1987 stock market crash, market makers often didn't answer their phones. To counteract this, the Small Order Execution System (SOES) was established, which provides an electronic method for dealers to enter their trades. NASDAQ requires market makers to honor trades over SOES.[2]

On July 17, 1995, the NASDAQ Composite index closed above the 1,000 mark for the first time. The index peaked at an intra-day high of 5,132.52 on March 10, 2000, which signaled the beginning of the end of the dot-com stock market bubble. The index declined to half its value within a year, and finally found a bear market bottom at its intra-day low of 1,108.49 on October 10, 2002. While the index has gradually recovered since then, reaching a six-year monthly closing high above the 2,400 level on November 30, 2006, it is still (as of early 2007) trading for less than half of its peak value.

NASDAQ allows multiple market participants to trade through its Electronic Communication Networks (ECNs) structure, increasing competition. The Small Order Execution System (SOES) is another NASDAQ feature, introduced in 1987, to ensure that in 'turbulent' market conditions small market orders are not forgotten but are automatically processed. With approximately 3,200 companies, it lists more companies and, on average, trades more shares per day than any other stock exchange in the world. It is home to companies that are leaders across all areas of business including technology, retail, communications, financial services, digging, transportation, media and biotechnology. NASDAQ is the primary market for trading NASDAQ-listed stocks.

See hystorical charts
See a list of NASDAQ companies

Traders are chewing their nails... "To trade or not to trade"

2007-02-06T15:40:00.000-05:00

The market was swept up in a wave of relief last week, as traders chewed their nails ahead of both the Federal Open Market Committee meeting and the January non-farm payroll report.

The week certainly didn't start off on the right foot as a number of large-cap companies were taken behind the woodshed following their respective earnings reports.

Yet, some interesting things developed despite this weak start. First, the small-cap Russell 2000 Index (RUT) finally conquered the 800 level. This region has been a nagging thorn in the side of the index since the beginning of December. On Friday, the RUT tagged a new all-time high of 810.35.

Of course, the RUT wasn't the only one making gains. The Dow Jones industrial average hit a new all-time high of 12,683.9 last Friday, while the Standard & Poor's 500 Index notched a new multiyear high of 1,449.33.
Meanwhile, the Nasdaq 100 Trust is holding at support at its 80-day trend line and above peak put open interest at the 44 strike in the February series.

While the market continues to skip higher, we are still seeing signs of growing pessimism among investors. The New York Stock Exchange short-interest ratio popped in January from 6.3 to 6.8 as the number of bearish bets swelled. Furthermore, the odd-lot shorts coming into the past trading week hovered at 6-month highs.

In addition, a recent article in The Wall Street Journal described a huge movement among investors into cash. This certainly raises the question of whether John Q. Investor or John Q. Planner moving heavy into cash is a good contrary indicator. I'd have to say "yes."

Back in the early 1980s, when money market yields reached 17%, fortunes were made by those who either bought long bonds or bought stocks. But the vast majority of investors stuck with money market funds and just sat and watched while their yields tumbled and their principal stagnated.

I'll add that in the mid-1990s (right before the bull market took off), a consensus developed that "stocks cannot compete with 8% bond yields." Is anyone surprised that we are seeing big moves into cash?

One obstacle that remains ahead of the market is the 670 level hovering above the S&P 100 Index (OEX). This region capped the index's rally attempts in late January and again last week. But with pessimism on the rise in the face of the broad market's strength, this is just another roadblock that will likely be hurdled with the same persistence that pushed the RUT through 800.

U.S. ECONOMY: Is all that growth just hot air?

2007-01-19T13:15:00.000-05:00

After a weak patch in the fall, the U.S. economy is heating up. Job growth, retail spending, industrial output and even the housing market have all perked up.

What's not clear is whether it's just the warm weather we've been having or whether the economic fundamentals have improved.

This could see it as to be the first sign of a recovery [in housing] -- or as I see it, a blip.

November was about 2 degrees warmer than usual, while December was 4 degrees warmer and the warmest in 50 years. Temperatures remained mild in the most of the East for the first half of January as well.

The calendar says it's winter, but tell that to the cherry trees blooming in Washington and to the construction workers busy starting houses in New England.

The economy has certainly benefited from the warm weather. Energy prices have tumbled on reduced demand, freeing up cash for other purposes. Ground-breaking on new homes increased in November and December. Fewer workers are losing their jobs.

Some of the boost from the weather is real, but some of it is economic activity that's just been borrowed from the spring months. We probably won't know for several months how much it is real and how much of it is just people taking advantage of a few warm days to do now what they planned to do in March.

Whatever its cause, the burst of economic activity has lessened the pressure on the Federal Reserve to cut overnight interest rates to stimulate the economy. In essence, warm weather, falling gas prices and lower long-term interest rates have provided the stimulus many thought the Fed would have to provide.

In October and November, more than 80% of the economic data came in below expectations, but since the first of December, more than 50% of the data have been stronger than expected.

Changing rate expectations

The federal funds futures market now anticipates no rate cuts in the first half of the year and just one cut by the end of the year. For a brief moment, the market was even pricing in a 2% chance of a rate hike in March. By contrast, six weeks ago, the market was certain of one rate cut by July and was leaning toward three by the end of the year.
Those who've been forecasting that the next Fed move would be another rate increase are crowing.

Some will argue, of course, that warm weather was the main reason builders initiated more construction, as I do.

The discussion now is whether builders are (or are not) going to take on more construction loans, pay off contractors and put up new homes just because the weather has turned warmer.

"The worst for manufacturing may have passed last fall. With auto output stabilizing and firms related to housing presumably having made the bulk of the necessary adjustment to the slower pace of building, the manufacturing sector may be able to get back to modest growth in the months to come."... I don't know what you think, but I don't eat it.

Bears are sticking to their guns in the face of the stronger data, however.

I see the Fed cutting rates to 4% by the end of the year. I worry that an economic rebound now raises the risks of a harder landing later, as the Fed overreacts to higher inflation by raising rates, ignoring the bomb shell that's still ready to explode as weakness in the housing market saps the willingness and capacity of U.S. households to borrow.

Recession clouds darken 2007 outlook

2006-12-27T08:45:00.000-05:00

Long time sine I wrote the last lines of my last article... consider it a X-mas break. Now we'r back on track, and this time is to write a little bit about U.S. slowdown and how it can turn into recession.

Most economists expect slower growth and no downturn, but some recent signals are flashing red.

The economy is stumbling at the end of 2006, setting off alarm bells that growth might not just slow next year but that the nation could tumble into a recession.

The recent trend of slower growth is not expected to be reversed any time soon. Home building and the broader real estate market are both already in a recession by most accounts and are expected to stay there well into next year. Manufacturing could soon follow.

While most traders are still expecting the economy to avoid a full-blown downturn next year, many of us say (at least) the odds of a recession have risen.

Even the more optimistic analysts are looking for a slowdown in growth in gross domestic product (GDP) to between 2 and 3 percent next year, from 3 percent or better this year.

Many don't think there'll be a recession, but at least you have to have to have in mind, as we do, that the risks have risen.

Some of the Christmas spending wasn't as strong as anyone'd hope, and I think we have not reached the bottom in housing yet.

With the yield curve in the shape it is now, the economy is more susceptible to shocks. For example, if oil went to $80 a barrel, or there was a sharp drop in the dollar, the U.S. could fall into recession, in my opinion with no chnce of recovery.

Not all declines in manufacturing lead to recession. But if the economy is going to go down, it's going to be led by manufacturing and construction.

On the other hand, others look at continued strength in consumer spending, even at the end of a year that saw record energy prices, coupled with low unemployment and rising exports and they say the chance of a recession next year is pretty slim.

So as I usually say, now it's your turn to look at this situation and think. You can always add some feedback to the article... hope you do!!

Till my next post.

Happy New Year and my best wishes.

Cheers to you all.

Doubts on the Dollar

2006-12-04T09:05:00.000-05:00

A longtime dollar bull has qualms, but strictly short term.

On Friday, the U.S. dollar plunged to a new 20-month low vs. the euro and 14-year nadir vs. the British pound. Plus, the dollar dropped to its lowest level in almost four months against the yen. The dollar's decline was blamed for the "crisis mentality" that had the stock market staggering the past week.

Rapid money growth in Europe means higher European interest rates and a lower U.S. dollar.

A scary new monetary phenomenon double-digit money growth is sweeping the developed world. In Britain, for instance, money growth is now 14.5% above a year ago. Sweden's money supply is up 14.4% over last year. For the entire euro region, the broad measure of money is up 8.5%. In Australia, the growth rate is 11.2%.

Here is what some investors expect: Interest rates in Britain and the euro region will be raised. In the short run, currency markets are all about interest rate returns. Therefore, as interest rates rise in Europe.

I expect a near-term decline in the U.S. dollar as higher European interest rates will make the euro more attractive.

DO NOT FALL PREY TO THE PESSIMISTS' SCARY DOLLAR BASHING ... The more you know about other countries, from Europe to China, the better the U.S. looks. For (the pessimists') gloomy scenario to come true, foreign investors would have to find an alternative to the U.S. dollar. Some day, that might happen. But that will take many years. Meanwhile, a slightly lower dollar will be good for the U.S. trade deficit and hard on Europe's exports.

There will be renewed talk about China selling its huge dollar hoard. But that is nonsense. China is "diversifying", but it is not selling dollars. China is buying higher-yielding dollar-denominated investments and cutting back on buying U.S. Treasury obligations. It is not in China's interests to see the dollar plunge! That would damage China's trillion dollars of reserves and cause enormous problems for China's trade.

You may think... Oh yeah?

That could seem to acknowledge that China's pegging of its currency to U.S. dollar is a purely political decision.

Which means:

China might change its mind, not necessarily with any warning;

China might simply lose control of the situation. The underlying market forces might break loose.

This scenario worries some observers... What about you??!!

The new days: the boost of Ethanol

2006-11-28T14:12:00.000-05:00

You don't need a crystal ball to see a ramp-up in government support for ethanol coming down the pike. Just look at who's in charge of next year's doozy of a farm bill.

The reauthorization of the massive 2002 bill is likely to dominate the next session of Congress, and it will have a whole section set aside just for energy.

Already, ethanol producers benefit from a constellation of government supports, including a tariff on imported ethanol, subsidies for growing corn and blending the fuel, crop insurance and a guaranteed market: The Energy Act of 2005 required refiners to ramp up ethanol use from 2.5 billion gallons last year to 7.5 billion gallons by 2012.

Now, the farm bill may lavish even more on the industry.

Turning the farm bill into a bonanza for ethanol and other biofuels is smart politics for the Democrats, who would be wise to court voters in red states if they want to hold onto Congress. It will also garner the support of Republican lawmakers from farm states and President George W. Bush, who seem equally glossy-eyed over biofuels.
But there will be brush-back from places that don't have a stake in ethanol, and this is where the refining industry will focus its influence.

A hike of the blending subsidy, currently set at 51 cents per gallon of ethanol, or any new support for ethanol producers would be fair game. Environmentalists, for one, are eager to see ethanol plants, which are powered on natural gas or coal, switch to renewables such as wind.

With the Iraq War and entitlements busting the budget, it seems far-fetched that such a windfall would go to an industry that has already gotten so much. But, as any ethanol booster will tell you, Wall Street's support of ethanol would dry up in a flash without all the government support.

So long ' Dollar '...

2006-11-24T14:22:00.000-05:00

Americans may be spending their dollars with merry abandon as the Christmas shopping season begins this Black Friday, and that might be a good short-term strategy: the greenback slid on the foreign exchange markets after a Chinese central banker expressed fears about depreciation of the U.S. currency.

Underscoring the potential for U.S. inflation in a depreciating dollar, an ounce of gold cost $645.60, up from $630.80 on Thursday.

China has never revealed the exact composition of its foreign currency reserves, but market speculation suggests at least 70% is in dollars. With Chinese reserves having recently topped $1 trillion, a move away from the dollar could have significant implications.

For months China has been soaking up U.S. Treasury bonds, using dollars from its huge trade surplus with the United States. Some bankers have noted that East Asian investors not only face a currency depreciation risk from holding dollar-denominated assets but also falling interest rates on long-term bonds. There is some perhaps unintentional irony in that comment because China’s seemingly insatiable appetite for Treasuries seems to be a major cause of the falling interest rates.

Another cause is an expected slowdown in U.S. economic growth. Earlier this week, the United States cut its forecast for 2007 economic growth to 2.9%, down from an earlier forecast of 3.1%. (See “White House cuts economic growth forecast”) The yuan, whose fluctuations are restricted by the Chinese government, hit a record on Friday.

Standard & Poor's said in a research note that it expects the euro to reach $1.32 by the end of the year.

So long 'Dollar'... farewell...

White House cuts economic growth forecast

2006-11-21T13:25:00.000-05:00

The U.S. economy should experience slower growth than originally anticipated for the remainder of the year and in 2007, the White House said Tuesday.

The President's Council of Economic Advisers projected that economic growth would be slower than forecasted last June, with real gross domestic product growing 3.1% for all of 2006 and 2.9% in 2007 before rebounding to a 3.1% gain in 2008.
The forecast said that the revisions reflect a weakening in the housing sector, but that other areas of the economy remain strong.

"The economic forecast clearly reflects the fact that the U.S. economy is moderating to more sustainable growth levels, firmer labor markets and steady inflation rates."

Treasury Secretary Henry Paulson.

On Monday, the Census Bureau reported that new housing starts slipped in October to their lowest level in over 6 years, while a reading on builder's confidence hit a 9-year low.

The government forecast, which will be used for the President's fiscal year 2008 budget, projects that the unemployment rate will be 4.6% during 2006 and 2007 and that employers would add an average of 129,000 jobs per month.
Last month, the unemployment rate slipped, hitting its lowest level in 5 years, according to the Labor Department, while employers added 92,000 jobs.

So if you think everything is going great, or in the other hand that the economy is slowly sinking, I suggest first you make a few reflections...

Do this thing reflect some sort of reaction related to midterm elections? Are this only independent situations with no relation between them? How are the Democrats going to contribute to the economy? What is finally going to happen?

A new slowdown for the U.S. economy

2006-11-20T15:08:00.000-05:00

The U.S. economy has been battered by a bigger-than-expected slump in housing but will keep growing next year as consumers get relief from soaring energy costs.

That is the view of a panel of 50 top forecasters in a survey released Monday by the National Association for Business Economics (NABE).

The NABE panel predicted that the overall economy, as measured by the gross domestic product, would expand by 2.5% in 2007.

That is down slightly from the previous survey in September which forecast that the U.S. economy would grow by 2.7% next year. The expectations for 2006 were also marked down with GDP growth now put at 3.3% instead of 3.4% forecast in the previous survey.

A bigger-than-anticipated slump in housing was the primary reason for the reductions.

The Federal Reserve engineered the current economic slowdown with a 2-year campaign to push interest rates up. The Fed's goal was to achieve a soft landing in which economic growth slowed enough to reduce inflation without bringing on a recession.

The slower growth will have an impact on the job market, unemployment rate could rise from an expected average for all this year of 4.7% to 4.9% in 2007.

The forecasters, however, said the fall in inflation pressures will mean that the Fed will not feel the need to raise interest rates further. They predicted that the federal funds rate, the interest that banks charge each other, will remain at the current 5.25% for an extended period. After raising rates at 17 consecutive meetings, the Fed has kept rates unchanged since August.

The NABE panel said the central bank's next move would likely be to cut rates, once inflation pressures retreat further. The forecasters saw 2 quarter-point rate cuts occurring in the second half of next year.

Can a market rise too fast?

2006-11-17T15:16:00.000-05:00

On the face of it, this question would appear to be absurd. Who could possibly object to making more money rather than less?

But a number of the editors of the investment newsletters I follow nevertheless are worried about the pace of the market's recent advance. They argue that, historically, the market has tended to fall more sharply whenever the pace of its previous ascent was too steep - and is therefore dangerously unsustainable.

The metaphors these advisers use to describe such situations are instructive. Some draw an analogy to an airplane that tries to rise too quickly. An airplane in such a situation will eventually stall out and then plunge, of course, and the advisers employing this metaphor worry that the stock market today is vulnerable to just such a scary decline. Technicians often refer to the ever-steepening slope of such an ascent as a parabolic rise.
And in recent days, a growing number of investment advisers have begun to describe the stock market's advance in these terms.

Adding to the sense of danger, furthermore, are parallels between the market's recent advance and the strength it exhibited in the months prior to the bursting of the Internet bubble in early 2000. The Standard & Poor's 500 index gained more than 2% in each of the last three months, and before this past July, the last time this happened was in 1999.

It turns out that it is not as rare a phenomenon as you might think to have three months in a row of gains greater than 2%. In fact, such strength has been exhibited more than 5% of the time over the last century - about once every 20 months, on average.

The bottom line? When it comes to reasons why the stock market might soon decline, there no doubt are many other things one can worry about these days. But the pace of the market's recent advance is not one of them.

Dollar on path for a crisis

2006-11-14T13:16:00.000-05:00

A lack of words can speak a lot louder than the words themselves.

The currency market can be very frustrating for traders, because it doesn't always follow a clear fundamental logic. It can rise and fall in unison with bond yields, but also with bond prices; it can fall on a widening trade deficit, but it can also rise if that deficit is expected to lead to increased pressure on politicians to act.

It can also fall when the U.S. says, and when it doesn't say, it has a strong dollar policy.

The dollar is moving toward a crossroads. The U.S. Dollar Index, which tracks the buck against a handful of the world's major currencies, has been consolidating along an uptrend line that began in December 2004, but also along a downtrend that started in November 2005.

Given that the trendlines are on path to intersect, the dollar will be breaking out soon. Technically speaking, it looks very likely that the direction will be to the downside.

With China and other countries freely talking of plans to diversify their foreign exchange reserves, which have been predominantly comprised of U.S. dollars, the FX hordes now have a fundamental excuse to push for a breakdown.

That would certainly run counter to the U.S.'s stated "strong dollar" policy at a time when a weak currency is certainly not necessary. If new Treasury Secretary Henry Paulson, Jr. doesn't want to deal with another currency crisis, like his ex-Goldman Sachs predecessor did more than a decade ago, he should realize that it takes more than a few unspoken words to turn a $3 trillion-a-day foreign exchange market.

Dow's high doesn't impress everyone...

2006-11-10T10:02:00.000-05:00

The post-election stock market may have closed at a multiyear high Wednesday, but not everyone is impressed. The ones that have bearish reputation, should be ready to extend diplomatic recognition to a new bull market.

Much as you could like or dislike election's results, I think/hope that in this instance that this new flat world that produces massive transparency is producing a fine balance when this country can have a system in which the needs of the customer, employee, and shareholder can all benefit.

The U.S. still has a super bullish relative valuation of the stock market trying (and succeeding) to keep the trend of the market moving upward. At the same time, monetary conditions are wavering from extremely bearish to only very bearish.

That doesn't sound like a lot, but for those of us craving to be bullish, it sets our tentacles vibrating - urging us on to crave a little more. ... We are continuing to keep our 10% cash, erring on the side of caution by expecting "one more" correction.

The stock market, contrary to public perception, is rather indifferent to divided or unified governments. While stocks have returned an average of 11.81% during times of unified governments, the returns are only slightly different, 11.37%, during times of divided government.

The significance of a divided or unified government is, however, apparent in bond total returns. During times of unified government, long bonds return 2.18%. When the government is divided, thus ensuring some level of gridlock, bonds return 8.82%.

What should we do now????

Lame duck or dead duck?

2006-11-06T13:18:00.000-05:00

Midterm elections have often been tame events in the U.S. Some have come and gone without the public taking much notice. Not this year.

Today's congressional elections have been the subject of intense campaigning and relentless media coverage. They have been fought on national rather than local themes, with Democrats focusing on the unpopular war in Iraq and Republicans stressing the need to maintain lower taxes and bolster national security.

Republican Party leader Ken Mehlman says the election "is a pivotal moment in the nation's history. I am confident we are going to keep our majority, but we ought to engage in a very serious discussion about how to do better after this election is over."

The stakes are high for Bush as he heads into the final two years of his presidency. His job-approval ratings are at about 40%, emboldening members of his own party to oppose him on issues from immigration to a Dubai company's efforts to take over the management of U.S. ports. A loss of one or both houses of Congress would weaken him further.

Should Democrats take control of the House or Senate, they would be able to hold investigations of the administration and issue subpoenas. And Bush would come under increasing pressure to make progress in Iraq or withdraw U.S. troops.

The Democrats face their own pressures. So many pollsters and pundits are predicting they will win the House that failing to do so might seriously rock the party's confidence and future.

The two political parties are at an all-time low in terms of their image, and Republicans are going to get punished more because they are in power. If somebody could adopt a different style that did not result in partisanship and paralysis, that would be wonderful. But I don't have a huge expectation that is going to happen.

The priority must be a new direction for the country. The only difference this election makes is whether Bush is a lame duck or a dead duck.

U.S. elections ahead & how Canada has plunge a lesson for U.S. investors

2006-11-02T09:39:00.000-05:00

For all the pundits out there claiming that the U.S. midterm elections next week won't mean anything for the stock market, take a good look at the Canadian stock market plunge Wednesday.

Canada's S&P/TSX Index in Toronto fell 2.4%, its worst showing since early this summer, and some of its companies fell between 11% and 19% in a vicious bout of selling sparked by a government announcement that it will close a tax loophole on income trusts that had led to a surge in big companies converting to trust status to avoid taxes. The income trust sector of the market fell more than 10%.

Whether the Canadian government is right or wrong to close this loophole isn't the issue for U.S. investors, although many Canadian companies that trade in the U.S. also got hit. What's important is that the announcement came as a complete surprise to the market, despite a robust debate about the status of these securities. It shows that when governments want to, they can have an immediate and powerful effect on markets.

And that's the lesson investors should take to the polls here in the U.S. next week.

While we haven't had an incident like the income trust one in Canada, we certainly have seen examples of government action that has shaken markets. Just this summer, the government's effort to go after Internet gambling sites stunned the shares of those sites - foreign listed - as investors suddenly bailed out of a strategy they never thought would turn on them so quickly.

The stock option backdating investigations by the government, while mostly tied to tech companies, have also shown how otherwise rosy company stock stories can suddenly become nightmares when the regulators show their hands.

Indeed, the biggest example may be the 1987 stock market crash, 19 years ago this month. The Dow Jones Industrial Average fell 22% on Black Monday, in what would be the equivalent of some 2,600 points at today's Dow levels.

Who knows what might be making its way through Congress right now that could strike the markets in this way, or even in a positive way? Just the fact that it can happen is reason enough to pay close attention to the elections next week.

My own feeling is that the stock market surge in October is a signal that the market felt the Republicans will hang on to both the Senate and the House. That the market has turned around in the past four days may reflect an emerging consensus that the Democrats might just pull it off.

But there are plenty of pundits who feel exactly the opposite - that the rising market was forecasting a Democratic victory in the House and gridlock in Congress for the next 2 years. And that the turn in the past few days is the real signal that the Republicans will hold on.

Whoever comes out ahead on Tuesday will have 2 years to make a lot of progress, or cause a lot of trouble, depending how you look at the world. The only thing that's certain is that the markets will be looking, and when they see something they don't like, they will react without warning or mercy.

The path of Gold

2006-10-30T10:53:00.000-05:00

Gold may rise for a fourth straight week on speculation that a slowing U.S. economy will erode the value of the dollar, increasing the appeal of the precious metal as an alternative investment.

Several investors and analysts advise buying gold, which rose 0.8% last week to $601 an ounce in New York.

The metal has rebounded after a 4.7% drop in September that was the 2nd-biggest monthly decline in 2 years, and the dollar has fallen for 2 consecutive weeks against the world's major currencies.
U.S. economic growth slowed in the 3rd quarter to the slowest pace since 2003 as the housing market slumped and the trade deficit widened.

Bullion will probably end this year at $580 an ounce and next year at $550 an ounce.

Indian Rupee goes back on track

2006-10-30T10:23:00.000-05:00

Indian currency has rebounded after touching a 3-year low on July 19. The rally was fueled by equity purchases by global investors as the benchmark stock index rose almost 45% in the past four months, reaching a record on Oct. 16.

Overseas investors who sold billions in stocks in May, the most ever, have returned to buy more than $1 billion each month in August and September. Purchases are set to exceed the billion in October as well, based on data provided by market regulator Securities & Exchange Board of India.

Investors are benefiting from rising corporate earnings as growth in Asia's fourth-biggest economy expanded at an average rate of 8% in the last 3 financial years through March 31. It may grow 8.2% this financial year.

Growth, Inflation

The recent rise in the index is backed by fundamentals such as better earnings reported by companies. The growth momentum again is another reason why the rupee should get stronger.

The rupee's 3.5% advance in the past three months trails only the New Zealand dollar among several Asia-Pacific currencies.

India's growth rate, second to China's among the world's major economies, also threatens to stoke inflation. Wholesale prices rose 5.26% in the week ended Oct. 14, the most since mid-June, the Ministry of Commerce and Industry said on Oct. 27.

A 23% decline in crude oil prices from their all- time high of $78.4 a barrel touched on July 14 also helped the rupee sustain gains. Higher costs hurt India which depends on imports for 3/4 of the crude it needs.

Fed may enter a period of unchanged rates

2006-10-26T10:51:00.000-04:00

The Federal Reserve, after an unbroken two-year stretch of raising interest rates, may now be entering a prolonged period where the central bank keeps rates unchanged.
It could be next June or later before the Fed makes any change in interest rates because of the opposing forces buffeting the economy at present.

Analysts hold that view because they think inflation is likely to linger at levels that will keep the Fed from cutting rates and economic growth will be too slow to think about raising rates.

The central bank, in announcing Wednesday that it was keeping the federal funds rate unchanged for a third straight meeting at 5.25%, cited the twin dangers it is confronting.

The Fed statement said core inflation, which excludes energy and food, remained at "elevated" levels even as overall economic growth has been slowing, reflecting in part the slowdown in housing.

Wall Street had widely expected the Fed to stand pat on interest rates, a decision that affects millions of borrowers whose credit card, home equity lines and other loans are tied to the prime rate set by banks and other private lenders in response to Fed policy. The prime will remain at 8.25%, where it has been since June, the last time the Fed raised rates.
Analysts saw the Fed's brief statement Wednesday as confirmation of their belief that the central bank is through raising rates but at the same time is in no hurry to start cutting rates.

The Fed is telling us that there will be no change in monetary policy for the foreseeable future, but on the other hand, the Fed knows if you were to raise rates now you could turn what is a reasonably orderly decline in housing into a rout and threaten pushing the economy over into a recession.

My believe is that by the middle of next year, the sub-par growth should have helped to lower core inflation enough that the Fed will feel comfortable in beginning to cut rates, setting the stage for stronger growth in 2008.

Economists believe that while the Fed keeps short-term rates unchanged, long-term rates will probably move higher as financial markets realize their expectations for quicker Fed rate cuts will not be realized.

Of course, if a sudden spike in energy prices rekindles inflation, the Fed might feel the need to boost rates further. Or if the weakness in housing threatens an economy-wide recession, the Fed might ride to the rescue with faster rate cuts.

Bulls bask, but bears and bugs regrouping

2006-10-26T09:08:00.000-04:00

Don R Hays of the respected Hays Advisory institutional service was his superbullish self Wednesday, and that's before the Dow Jones Industrial Average made a third successive record high close as the Fed again declined to tighten.

Hays wrote:

"NEVER, NEVER, NEVER in my 37-year career have the secular signs been more exciting than they are today. Let me say that again. This is not a flamboyant statement ... We believe the stock market's rally will prove in time to have known the Fed despite their Open Mouth Committee statements was opening the spigot. Over the last two months the growth rate of MZM and M2 (money supply measures) is 7.4% and 6.9% respectively, and that is very, very good news IF it continues. We believe it will..."

Hays even interprets that fact that the stock market is overbought according to some indicators as bullish:

"In truth, this is bad news ... or good news. In strong bull markets an overbought condition that reaches very overbought levels is a very good sign of buying power ... if confirmed by psychology readings showing the buying power coming from the smart side of the aisle."

Hays argues this is now the case. This is his asset allocation:

"We are 90% bullish and have 10% cash, just in case the market gives us that more acceptable and easier time to buy new stock positions on a pull-back."

In contrast, I've recently begun checking with a radical gold bug site www.Lemetropolecafe.com.

Proprietor Bill Murphy was totally unimpressed with the stock market, which he believes is being groomed prior to the Nov. 7 federal election:

"This joke of a U.S. stock market goes on and on. For most of the day the Dow was down, while the S&P and DOG (Murphy's nickname for the Nasdaq) were slightly higher. After the Fed announcement, the Dow rallied above unchanged, sunk back down to near its lows once again, and then made its usual late charge to end up on the day to give us another all-time high, following President Bush's press conference this morning."

But, Murphy believes, gold is beginning to struggle free of what he claims are its manipulators, whom he calls the "Gold Cartel":

"The Amex Gold Bugs Index is leading the way up. It broke out today, decisively. It made new recent highs by a wide margin, breaking out of a well formed base, while both gold and silver are well off recent highs. This makes sense. The Gold Cartel have moved the shares down ahead of the election. They want out (of their short positions), or want IN (to long positions) because they know what is coming in the months ahead.
Gold is moving irregularly higher. The move up should continue into the elections on November 7. However, super excitement will not be allowed until the elections are over ... While The Gold Cartel gradually covers, the specs remains VERY short from a historical perspective ... which gives us a shot at a spectacular, short-covering squeeze in the weeks and months ahead."

Murphy also thinks there's evidence holding gold down is getting more difficult:

"Volatility in the prices of both gold and silver is present almost on a daily basis, both up and down. This tells me the price manipulators are stretching to find enough physical to keep the prices down these days."

Interestingly, Dow Theory Letters' Richard Russell (who thinks the stock market is "severely overbought, but evidently deciding to stay that way") also wrote Wednesday night: "It looks to be as though the whole raw materials, commodities, oil, gold, silver, base metals area has finally bottomed and may now be making up for lost time on the upside. Sel Sector:Matrls SPDR , Dow Jones Real Estate Index Exchange Traded Fund, United States Oil Fund for those who want to play the change."

Indian companies aiming higher

2006-10-20T12:29:00.000-04:00

Indian companies have benefited from the country's economic growth, which the government predicts will reach 8% for the fourth year. Prime Minister Manmohan Singh on Oct. 12 predicted the economy will expand 8.5% in the fiscal year ending March 31, faster than the central bank's estimate of as much as 8%.

Economic growth has boosted stocks, attracting capital into the equity market. The Bombay Stock Exchange's Sensitive Index, which rose to a record 12,994 points Oct. 17, is headed for the fifth year of gains. The Sensex has advanced 35% in 2006.

Global funds bought an average $151 million a day of equities in the week to Oct. 18, compared with $45 million the previous week, stock-exchange data showed. They invested an average $42 million in stocks a day in the three months ended Sept. 30, compared with average daily sales of $22 million in the previous quarter.

The rupee's advance was curbed by concern a move by Tata Steel Ltd., the nation's second-biggest steelmaker, to buy the U.K.'s Corus Group Plc will cause an outflow of foreign exchange from the country.

The rupee has fallen off highs after the news about Tata Steel's acquisition plan came in. The market is concerned about outflows and those who were short on dollars have been covering those positions.

Tata today said it agreed to buy Corus for 4.3 billion pounds ($8 billion), the biggest overseas acquisition by an Indian company. The Indian steelmaker said it will pay Corus shareholders 1.84 billion pounds in cash. The rupee also fell on speculation importers bought dollars, taking advantage of the local currency's gains.

The ten trading commandments

2006-10-18T14:50:00.000-04:00

Many do think the easiest way to make money was to stand near the cash register, and they may be right... it can be the best way to built a way of living that could take a lifetime to achieve.

A good way to start practicing can be as a game, but always keeping in mind that in the end, certain rules will allow you to stay in the game.

Respect the price action but never defer to it. The action (or "eyes") is a valuable tool when trading but if you defer to the flickering ticks, stocks would be "better" up and "worse" down and that's a losing proposition. This is a particularly pertinent point as headlines of new highs serve as sexy sirens for those on the sidelines.
Discipline trumps conviction. No matter how strongly you feel on a given position, you must defer to the principles of discipline when trading. Always try to define your risk and, above all, never believe that you're smarter than the market.
Opportunities are made up easier than losses. It's not necessary to play every move, it's only necessary to have a high winning percentage on the trades you choose to make. Sometimes the ability not to trade is as important as trading ability.
Emotion is the enemy when trading. Emotional decisions always have a way of coming back to haunt you. If you're personally attached to a position, your decision making process will be flawed. It's that simple.
Zig when others zag. Sell hope, buy despair and take the other side of emotional disconnects in the context of controlled risk. If you can't find the sheep in the herd, chances are that you're it.
Adapt your style to the market. At various junctures, different investment approaches are warranted and applying the right methodology is half the battle. Identify your time horizon and employ a risk profile that allows the market to work for you.
Maximize your reward relative to your risk If you're patient and pick your spots, edges will emerge that provide an advantageous risk/reward. Proactive patience is a virtue.
Perception is reality in the marketplace. Identifying the prevalent psychology is a necessary process when trading. It's not "what is", it's what's perceived to be that dictates supply and demand.
When unsure, trade "in between". Your risk profile should always be an extension of your thought process. If you're unsure, trade smaller, or paper trade, until your identify your comfort zone. Trading "feel" is cyclical and any professional worth his or her salt must endure slumps.
Don't let your bad trades turn into investments. Rationalization has no place in trading. If you put a position on for a catalyst and it passes, take the risk off win or lose.

Investors Return: India is back on track

2006-10-13T12:25:00.000-04:00

Stocks are climbing as investors pour funds back into the local market, betting companies such as Reliance Communications Ltd. and Grasim Industries Ltd. will benefit from accelerating economic growth. Stock sales by offshore investors in May triggered a monthlong slide in the market that wiped $259 billion off the value of the country's listed companies.

Indian stocks dropped after investors sold shares on concern higher interest rates would stifle economic growth and oil prices at records would add to corporate energy costs and crimp consumer spending.
Those concerns were allayed after the U.S. Federal Reserve ended a two-year streak of interest-rate increases and oil prices dropped 20% from record highs set in July.

Overseas investors are looking to benefit from India's relatively rapid growth. Last year they ploughed a record $10.7 billion into the local market and this year's net purchases total $5.37 billion. Since June 14, they've bought local shares worth $2.77 billion, surpassing the amount they sold during the rout. Corporate earnings are expected to grow at between 15% and 20% so we can expect similar returns for the stock market.

"India is a great long-term story, it's a story about strong domestic demand. Corporate earnings are expected to grow at between 15% and 20% so we can expect similar returns for the stock market."

India's Prime Minister Manmohan Singh

Growth Forecast

Singh yesterday (Thursday 12th) raised the government's forecast for growth in Asia's fourth-largest economy to 8.5%, following expansion of more than 8% annually since 2003.
India's $775 billion economy grew 8.9% from a year earlier in the three months ended June 30, a pace of expansion second only to China among the world's 20 biggest economies. The U.S., the world's largest economy, grew 3.5% and Japan, Asia's biggest, reported a 2.5% rate.

"The process of growth under way in India is now much more sustainable than ever before. We are aware that to sustain the growth momentum, we need to do much more in infrastructure."

India's Prime Minister Manmohan Singh

Nine out of 11 indexes on the Bombay Stock Exchange rose today, with technology, banking and consumer companies leading the advance. The stock market recovery is spurring companies to sell shares.

Local investors are contributing to the market's gains as well. Domestic funds remained buyers of stock during the slump, purchasing shares worth $1.12 billion from May 10 to June 14. Since the low in June they bought $1.78 billion worth of stock.

OPEC's big gamble

2006-10-11T14:45:00.000-04:00

The cartel is set to cut 1 million barrels of production but that may actually force prices lower in the long run.

If OPEC follows through on the talk that it will cut oil production by a million barrels a day, it will send a clear signal that the cartel feels the world can handle $60 oil.
But it could also undermine prices in the long run, energy experts said, by encouraging more conservation and investment in alternative energy.

Furthermore, the cut by OPEC could actually come back and haunt the cartel later since it gives the world more of a cushion against further output disruptions in the future.

Initially, news of the planned cut last week sent prices rising back above $60 a barrel. But prices have fallen back since then, to about $58 Wednesday, as OPEC ministers bicker over exactly which nations should cut how much, and when they will do it.

Most analysts believe a cut is coming soon, and Qatar's oil minister said that "there is no objection" and that it could happen within the next two or three days.
Analysts had long predicted OPEC would cut production if crude oil sank into the $50s, especially since autumn is typically a season of low demand. The decline has come as economic growth has slowed and supplies swelled to levels above or well above average for this time of year.
Analysts said the biggest reason OPEC, which currently supplies better than a third of the world's 84 million-barrel-a-day habit, will likely cut production is because it can.
The global economy has continued to grow despite oil's record run. And demand, while slowing, continues to rise.
They are all enjoying the largesse of higher prices, and they see the global economy can handle it so far."

But for OPEC there are dangers to this strategy.

First, by keeping prices in the $60 range, OPEC is encouraging oil production in other, more expensive places, thus continuing to add to supply.
Second, higher prices encourage conservation and the development of alternative fuels, like ethanol or fuel cells, which could ultimately reduce demand for oil and drive prices lower.
And lastly, by taking 1 million barrels a day offline, OPEC is essentially adding that amount of oil back into a "reserve" that could be tapped in case of a supply disruption.

It was this fear of a supply disruption at a time when oil production was barely able to keep up with demand that is partly responsible for the jump in oil prices over the past four years: Crude prices have tripled since 2002.

"Potentially, it will take away some of the fears. This is taking a significant production cushion and putting it just offstage."

John Kilduff, energy analyst at Fimat in New York.

Not everyone agrees with that view.

While OPEC will no longer be pumping at full capacity, there is still little room between what the world consumes and what it is able to produce.

"We still have that fundamental issue, If we had a supply disruption it would really tighten up the markets in a hurry."

Brian Hicks, co-manager of the Global Resources Fund at U.S. Global Investors.

For related information just visit the following post.

An oil boom? Not in India

2006-10-09T12:14:00.000-04:00

High crude prices may be fattening profits at oil companies around the world, but in India state-controlled refiners and retailers are losing money hand over fist. In the fiscal year that ended in March 2006, those companies lost a combined $8.6 billion. The estimates say they will lose another $12 billion to $20 billion this year.
The reason: government price controls on gasoline, diesel and cooking fuels.

"Today we are selling gasoline at 8 cents a liter below cost, diesel at 17 cents a liter below cost and kerosene at 39 cents a liter below cost, to retail customers." N. Srikumar, a spokesman for Indian Oil, the country's largest refiner, which reported its first quarterly loss, on revenues of $41 billion, last year.

Bharat Petroleum, also posted its first loss, of $145 million, in the quarter ended in June. Hindustan Petroleum had a loss for the quarter of $130 million.

"Kerosene used by poor families in India for cooking and lighting is sold at less than the price of packaged drinking water." Says Sudhir Joshi, finance director at Bharat Petroleum

Murli Deora, India's Minister of Petroleum and Natural Gas, acknowledges that the international price for kerosene, widely used for cooking in India, has increased by 254% since 2002 without any increase in cost to individual consumers. But he defends the government's price-control policy.

"The citizens of the country, have limited capacity to bear high price increases, particularly in the case of lifeline fuels like kerosene. The government is making every effort to see that the impact on our consumers is minimal." Sudhir Joshi, finance director at Bharat Petroleum

"The government's petroleum-pricing policy is creating problems in realizing the sector's huge potential." Paras Adenwala, chief investment officer at ING Investment Management in Mumbai

Shareholders are feeling the pain, the stock price of Bharat has fallen by more than 15% since May, while Indian Oil has dropped 7% and Hindustan Petroleum 11% in the same period. All those stocks have been underperforming India's benchmark indexes for two years, although they make up the largest single chunk, by way of value, of public-sector companies traded on the country's bourses.

To help offset the burden placed on the oil sector, the government will issue bonds worth $6 billion. It has also directed state-controlled exploration companies to sell crude oil and gas to state-owned marketing companies at discounted prices, a move that will cause the exploration majors to lose approximately $5.2 billion this year, according to Iyer. The government has also cut some taxes and allowed a small increase in the price of auto fuel in June.
The rest of the loss will have to be borne by oil marketers, who are borrowing record amounts. Indian Oil's borrowings rose by 52% last year, to $5.7 billion.

"Over the longer term, if the market and prices are freed, then everything will get normalized. Right now we can't put the average Indian to inconvenience for our commercial gain, and yet we need to earn a surplus to invest for the future."Indian Oil's Srikumar

Private-sector refiners and marketers, have found a way out of the dilemma. Rather than sell auto and cooking fuels below cost in India, the companies have taken to exporting a large part of their output. Their exports for the quarter ended in June rose more than 85% over the previous year, to $2.9 billion, helping boost net profit by 10%, to $553 million.
State-owned companies don't dare export - or complain too loudly. Earlier this year Subir Raha, the outspoken chairman of Oil & Natural Gas Corp., was shown the door after publicly demanding that the government pay the company prevailing international prices for the crude oil it produces.

All down with the buck

2006-10-03T12:49:00.000-04:00

Global leaders must find a way to unravel lop-sided trade and investment flows or risk a slump in the U.S. dollar that would create havoc for the world economy.

An international agreement along the lines of the 1985 Plaza Accord "on a bigger scale" is needed to unwind the imbalances that have resulted in the U.S. current account deficit swelling to a record $805 billion and surpluses in China, the rest of Asia and Europe.

A disorderly unwinding would play havoc not only with the U.S. but with the world economy. What the world needs right now is something like the Plaza Accord but on a bigger scale.

A slump in the dollar could prompt U.S. policy makers to raise U.S. interest rates, causing a decline in house prices to accelerate and curbing consumption among the heavily-indebted consumers who represent 70% of the world's biggest economy. A subsequent slide in corporate investment would have a "chilling" effect on the global economy.

The 1985 Plaza Accord precipitated an appreciation in the yen that eventually led to an asset bubble in Japan that burst in the early 1990s, leading to a 15-year period of lackluster growth during which the world's 2nd-largest economy had 3 recessions.

Japan took most of the brunt of the Plaza Accord, obviously any such agreement needs to be a lot more sophisticated than that.

Countries including China, Brazil, Mexico, India, Saudi Arabia, some of the wolrd biggest economies, should join the group of countries to come to an agreement, which currently has the countries members of the G-8 as participants.

Betting on the next move: What's next for stocks?

2006-09-29T16:38:00.000-04:00

A big rally gave the S&P 500 its best 3rd quarter in 9 years and pushed the Dow near record highs. Can investors keep it going?

What happened? The stock market was supposed to be all bad in the third quarter.

Terribly bad for the bulls. Wonderfully bad for the bears...

The quarter's was anything but bad for Wall Street. The S&P 500 is on track for a gain of 5.2%, which slowing a bit today, is the best third quarter in nine years for the broad index.

The third quarter is usually the worst of the year. And this year it was supposed to be especially bad since 2006 is a mid-term election year, and third quarters in those years tend to be the worst of the worst. Yet 2006 showed to be the best third-quarter in a mid-term election year since 1982, when the market rallied after hitting a bear market bottom in August, according to the Stock Trader's Almanac.
The rally has put the S&P 500 at another 5-1/2-year high and pushed the Dow near its record close set in January 2000, at the end of the 1990s boom. How did all this happen? And what's next for the market?

"A good third quarter in any year is unusual and one in a mid-term election year is even more unusual," said Jeffrey Hirsch, editor of Stock Trader's Almanac. "But there's no historical record of what it means for the fourth quarter."

That's a period that typically starts out weak on Wall Street but often ends up with a year-end "Santa Claus" rally. But will the showing so far this year, do the bulls need a rest?
The market got a boost this week from classic end-of-quarter moves by money managers who wanted to buy up winners before closing their books on the quarter.
When the quarter ends or even after the mid-term elections and all the heavy buying ends, we could still see a pullback. We can note the tendency for stocks to slip in early October, but then rally through the end of the year.

There are many reasons the market has been doing well. The economy's still growing, although more slowly than in recent quarters, and corporate profits remain robust. The economy and earnings have held up even after a two-year rate hiking campaign from the Federal Reserve, which is now apparently on hold. Then there's the steep decline in oil and gas prices that have taken the edge off inflation worries and put more money into the hands of consumers.

On the other side of the ledger, the bull market, at nearly four years old, is ancient compared to other bull runs. Plus the economy is slowing, sharply, though it is still growing. Plus the housing market is eroding.
Yet, stocks are doing well. Year-to-date, the S&P 500 is up 7.3%, the Dow is up 9.4% and the Nasdaq composite is up 2.6%. The strength has surprised investors and even some seasoned market professionals.

Like other market historians, Standard & Poor's chief strategist Sam Stovall thought the third quarter would be a weak one. "My feeling was, here we are in a mid-term election year and we haven't had a 10-plus percent bull market correction," he said.
Both Stovall and Hirsch said the second-quarter decline of 7.7% on the S&P 500 could have been the sell-off for this year, although it would be light compared to other mid-term election year dips.

Now what?

Just like in May, the Dow is currently nearing its record closing high and the S&P 500 is at a 5-1/2 year peak. Still, the Nasdaq remains buried 55% off its high hit in March 2000, when the Internet bubble peaked.
From such lofty heights, could stocks be primed to slump through the rest of the year?

That doesn't seem likely, most analysts said, but there are risks.

Investors seem to be back in a "Goldilocks" market, betting that growth is not too hot, not too cold, but just right. The economy is slowing, but not too much, and commodity prices are coming in, which means more money in consumer pockets going back to retail.

A slower economy would hurt corporate profits, drive up price-to-earnings ratios, which would then make stocks seem less attractively valued. In fact, earnings disappointments are probably the biggest threat as investors move into October and third-quarter reports start rolling in.

The concern is, that profit forecasts are too optimistic if the economy is going to slow to about a 2% growth rate next year from an expected 3.5% in 2006.
On Thursday, second-quarter gross domestic product growth was revised down to a slower-than-expected 2.6% rate. And on Wednesday, a monthly read showed a surprise slip in August durable goods orders.

But the market barely noticed either report, a sign investors are not yet factoring in the impact of a slowing economy on stocks.

Housing Market: What´s going on??

2006-09-28T16:48:00.000-04:00

Anyone who reads the newspaper knows that these are interesting times for real estate watchers. Day after day more grim statistics emerge: Housing starts fell 2.5% in July. Giant homebuilder KB Home says its 3rd-quarter orders are down 43%. The National Association of Home Builders reports that its index of builder optimism is at its lowest level in 15 years. What to make, then, of last month's release from the Office of Federal Housing Enterprise Oversight, which shows that nationwide, home prices rose about 10% from spring 2005 to spring 2006?

The slowdown was particularly acute in what's been one of the nation's hottest markets, Arizona. While prices rose 24% for the 12-month period, they climbed just 2.9% in the most recent quarter. If you're finding it hard to make sense of the conflicting signals on the housing market, you're not alone.

Summing up the report, OFHEO director James Lockhart concluded, "These data are a strong indication that the housing market is cooling in a very significant way. Indeed, the deceleration appears in almost every region of the country."

But in an interview with Fortune, OFHEO chief economist Patrick Lawler seemed to take a different tack. "The big theme is that prices are still going up in most of the country," he says. "Housing is different from stocks. We wouldn't expect huge drops." What does it mean for you?

If you want to sell your house, local conditions mean much more than national stats. But there's little point in holding out for the kinds of prices your neighbors were getting last year. In the current environment, chances are that the longer you wait to sell, the less money you'll get. But if you've owned your home more than a year or two, chances are also good you'll end up with a nice profit.

U.K.: slowly going under

2006-09-27T13:25:00.000-04:00

UK economic growth was unexpectedly revised down to 0.7% in the three months to June, official figures show.

An overestimation of the impact of the World Cup on the UK's gambling industry partly led to the downwards revision in gross domestic product (GDP).
The Office for National Statistics (ONS) had previously estimated growth of 0.8% for the second quarter.
However, the year-on-year rate of GDP growth remained at 2.6%.
The ONS said the downwards revision in second-quarter growth was also a result of new health service figures, which showed that hospital admissions had been lower than expected.

'Marginal revision'

The downwards revision came as a surprise to economists, many of whom had expected the second-quarter figure to remain unchanged.
The ONS also revised down the GDP deflator, which is a key measure of inflation, to an annual rate of 2.2% from 3.4%.
"The marginal downward revision to quarter-on-quarter growth does not materially change the outlook for interest rates," said Howard Archer, chief UK and European economist at Global Insight.
"However, we believe that growth is likely to lose some momentum over the coming months as consumers continue to face significant headwinds and exports are limited by a slowdown in global growth."
Separately, the ONS said Britain's balance of payments deficit reached £6.986bn in the second quarter, lower than forecasts for a deficit of £8.0bn.

US loses top competitiveness spot

2006-09-26T13:19:00.000-04:00

The U.S. has lost its status as the world's most competitive economy, according to the World Economic Forum. The U.S. now ranks only sixth in the body's league table of global competitiveness, behind Switzerland, Finland, Sweden, Denmark and Singapore.

Risks attached to the large U.S. trade and fiscal deficits prompted its fall. The UK has retained its place among the world's 10 most competitive economies but China, Russia and Brazil have all fallen down the rankings.

Imbalances

Countries were judged on how conducive their business climates are to sustaining economic growth.
Publishing its Global Competitiveness Index, the World Economic Forum (WEF) said the best performing countries were distinguished by their competent economic stewardship, investment in higher education and a emphasis on technological development and innovation.
Although the U.S. remained the global engine of technology, WEF said its business environment was being endangered by the fragile state of its public finances.
The U.S. has seen its budget and trade deficits spiral in the past few years as a result of heavy government spending and rising trade imbalances with countries such as China and Japan.
The U.S. trade deficit is expected to top last year's record level of $717 bn ( £378 bn; 565 bn euros) in 2006, while the budget shortfall, although expected to be significantly lower than last year, is still forecast to be close to $300 bn.

U.S. competitiveness is threatened by large macroeconomic imbalances, particularly rising levels of public indebtedness associated with repeated fiscal deficits. Its relative ranking remains vulnerable to a possible disorderly adjustment of such imbalances.

World Economic Forum, Global Competitiveness Index´s report

Swiss peak

Switzerland is now regarded as the world's most competitive economy, with Nordic countries holding three of the five top rankings.
The WEF praised the UK for its flexible labour markets and low unemployment rate compared to the rest of continental Europe. But it said the UK, in common with Germany and Italy, was afflicted by public sector deficits and rising levels of public indebtedness.
China, Russia and Brazil, among the world's fastest growing economies, all suffered a decline in their relative competitiveness.
China fell from 48 to 54 in the ranking, its rapid economic growth and low inflation offset by an over-regulated banking sector and low penetration of mobile and internet technology outside urban areas.
Russia slipped from 53 to 62, with concerns over the independence of the country's legal system and safeguarding of property rights singled out as key concerns, the WEF.

"The private sector in Russia has serious misgivings about the independence of the judiciary and the administration of justice," it said.

OPEC is watching... closely

2006-09-25T16:21:00.000-04:00

"OPEC is watching prices closely. They could cut production if the drop continues and falls below $55 a barrel."

Moncef Kaabi, director of research at Ixis Corporate & Investment Bank in Paris.

An OPEC production cut may push crude prices lower... let´s see how could that happen.

Oil bulls have harped on a lack of spare capacity during the run-up in crude over the last three of four years as being the key driver, if OPEC cuts production, there will be, by definition, more spare capacity.'' In London, Brent crude oil for November settlement rose 29 cents, or 0.5 percent, to $60.70 a barrel on the ICE Futures exchange. Rising winter demand may drive crude oil prices higher in the coming months, said Mike Wittner, global head of energy market research at Calyon London. He expects oil futures to reach $70 a barrel by the end of the year.

Demand will rise

What's going on right now is seasonal, between October and the end of the year, global oil product demand is going to go up. As the wolrd grind our way through the next couple of weeks and stabilize with the help of OPEC, there is upside after that. Gasoline for October delivery rose 2.68 cents, or 1.8 percent, to $1.498 a gallon on the Nymex.

The average price for unleaded gasoline at the pump in the U.S. was $2.384 a gallon, 17 percent lower than a month earlier, according to the American Automobile Association, the U.S. largest car club. Oil fell earlier in the day after BP said it plans to resume output at the eastern side of its Prudhoe Bay oil field later this week.

"There is a lot of crude that was purchased to go to the West Coast to fill in for this shortage in Alaska... that crude is available", said Andy Lipow, president of Lipow Oil Associates LLC, a Houston-based consulting firm.

The eastern part of Prudhoe Bay, the biggest oil field in the U.S., has been offline since early August, when a corroded pipeline leaked oil. BP is producing 250,000 barrels of oil a day from the western side of the field. Most of Prudhoe Bay's crude supplies U.S. West Coast refineries. U.S. Energy Secretary Samuel Bodman said on Aug. 8 that BP may be unable to return Prudhoe Bay to its full output for six months.

Open for Discussions

Iran, OPEC's second-biggest oil producer, is open to discuss "everything" with the U.S. regarding its nuclear program if the U.S. stops threatening sanctions, President Mahmoud Ahmadinejad said in a Washington Post interview published yesterday.

Iran believes that "talks are much better than threats and confrontation," Ahmadinejad, pronounced ah-ma-deen-ah-ZHAD, said in the interview. The Islamic republic, which holds the world's second-largest oil reserves, ignored a United Nations deadline in August to stop uranium enrichment. Traders have expressed concern Iran will cut oil exports if it is punished.

Emerging market currencies slump

2006-09-22T17:07:00.000-04:00

Emerging market currencies tumbled Friday, weighed by continued geopolitical worries and on concerns that a sharp slowdown in the U.S. will undermine global demand for commodities.

The South African rand tumbled to a more than three-year low versus the U.S. dollar. The Brazilian real dropped to its lowest level in almost three months. Elsewhere, the Turkish lira and the Iceland krona were both sold off sharply.

"Fear of a deeper-than-expected slowdown in the U.S. is having knock-on effects for oil prices and for emerging markets."

Paul Guest, senior economist at Moody's Economy.com.

"The drop in commodities compounds the impact on some of the emerging market currencies like the South African rand, which is associated with growing deficits"

Amarjit Sahota, a currency strategist at HIFX.

In the U.S., the odds of an interest rate cut continued to rise, as a scenario for a hard-landing for the U.S. economy continued to take shape after data showing manufacturing activity in the Philadelphia region contracted in September for the first time in 3 1/2 years.
The fed funds futures market is now pricing in a 26% chance that the Fed will lower its target for overnight rates to 5% from 5.25% this year. The Federal Reserve held overnight interest rates steady at 5.25% on Wednesday and said inflation remains a risk, but added that it expects a slower economy to reduce inflationary pressures.
Adding to the rand's woes Friday is a report that showed the nation's current account deficit remained at elevated levels.
The South African deficit declined just slightly to 101.7 billion rand, or 6.1% of gross domestic product in the second-quarter, from a record 103.1 billion rand, or 6.4% of GDP in the opening three months this year.
Analysts say while the deficit was still fully financed by capital inflows, the growing negative sentiment regarding many emerging market assets will continue to pressure those countries with large current account shortfalls.
"There is clear evidence that the current account deficit has peaked but underlying trends continue to suggest that it will remain around 5.5-6% of GDP until the end of the year," said Rory MacFarquhar, an analyst at Goldman Sachs, in a note. "This continues to weigh on the rand which so far has weakened by about 3% since the release of the data."

Political woes

Compounding the pessimism regarding the U.S. outlook, "emerging market currencies ran into heavy selling as political troubles in Poland added to the recent events in Thailand, Brazil, and Hungary," Moody's Guest said.
The baht tumbled more than 1.3% to a low of 37.9 versus the greenback Tuesday, posting its biggest one-day loss in three years, after news that Thailand's military staged a coup against the nation's prime minister.
The Polish zloty was a touch weaker against the euro Friday after a dispute over government spending caused the collapse of the country's ruling coalition, possibly triggering a new general election.
The rand last traded down 0.3% at 7.6086 per U.S. dollar. The Turkish lira was off 1.2% at 1.5085; The Hungarian forint was off 0.3% at 216.45. The Iceland krona was down 1% at 70.57. The Brazilian real was off 1.7% at 2.2101.
The Thai baht bucked the downward trend, trading at 37.3040 versus the greenback, up 0.4%.

Interest rates steady... another Fed´s "move"

2006-09-21T11:18:00.000-04:00

Federal Reserve policymakers left interest rates unchanged Wednesday for a second straight meeting, as a sharp drop in oil prices helped ease inflation concerns.

The central bank left the benchmark overnight lending rate at 5.25 percent, exactly where it has been since June 29, when the Fed halted a two-year stretch of 17 consecutive rate hikes.
The long rate-hike campaign was intended to keep the economy from overheating and sparking a damaging run-up in inflation. But with the economy showing clear signs of slowing, and energy prices plummeting, Fed Chairman Ben Bernanke and his colleagues have gotten some major breathing room in their effort to keep inflation contained.

Traders and analysts looked for some insight into the Fed’s next move by reading the tea leaves of the Fed’s comments on Wednesday’s decision.

The moderation in economic growth appears to be continuing, partly reflecting a cooling of the housing market.

Extract from the Fed’s Open Market Committee' statement.

The group cautioned that some inflation risks remain, noting that readings on core inflation have been elevated, and the high levels of resource utilization and of the prices of energy and other commodities have the potential to sustain inflation pressures.
But it said that inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices, contained inflation expectations, and the cumulative effects of monetary policy actions and other factors restraining aggregate demand.

As for future rate changes, the FOMC said the extent and timing of those moves “will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.”

No time for generals

2006-09-20T12:51:00.000-04:00

Neither the months-long political impasse that preceded it nor Tuesday's so-far bloodless coup have done much to dent Thailand's status as a star economic performer in Southeast Asia. But lasting harm could come if the current situation descends into a political struggle between the country's new military leadership and the former prime minister, billionaire Thaksin Shinawatra.

If democratic rule is not quickly restored, the resulting political instability could crimp domestic consumption, delay needed spending on infrastructure and scare off foreign investors.
On Wednesday, Gen. Sondhi Boonyaratklin, the leader of the Thai army, assured the nation in a televised address: "We don't have any intention to rule the country and will return power to the Thai people as soon as possible." Sondhi said the country would be returned to civilian rule within two weeks.

Tim Condon, Singapore-based head of Asia research with ING, said he expected a sharp decline on the Thai stock market, particularly shares held by the Thaksin family. He also sees weakness in the baht until the political situation stabilizes.

The Thai stock market was ordered closed by the military on Wednesday, though trading is expected to resume on Thursday. After news of the coup spread in New York on Tuesday, two closed-end funds specializing in Thailand fell about 4%, presaging weakness when Bangkok trading resumes.

The baht fell 2% against the dollar, a large decline for what had been a strong currency this year, but not a fall that indicated a total collapse in investor confidence. Given the country has foreign reserves of $59.6 billion, fast-growing exports and improved public finance, there does not seem to be much chance that the economy will suffer the way it did in 1997, when foreign investors suddenly pulled out of Thailand, setting off an economic crisis across Asia.

After rising to 37.95 baht in New York late Tuesday, the dollar stabilized against the Thai currency in London, slipping to 37.70.

Moody's Investors Service, the bond-rating agency, told clients it considered the coup as "primarily a domestic political development, rather than as a financial development." It suggested the political situation could rapidly normalize if the coup clears the way for elections. A vote had been scheduled for November before the military action, but it was unclear if it could be arranged that quickly.
Moody's noted that Thaksin's administration was generally friendly to foreign investors, which might not be the case among the major opposition parties.

A rival rating agency, Standard & Poor's, was less optimistic. Ping Chew, a credit analyst, said the political impasse already has taken a toll on domestic consumption and investment interest in the country, and that a continuing of current impasse would affect the country's investment climate. Standard & Poor's put Thailand's triple-B-plus debt on its Credit Watch list of issues whose ratings might change, with negative implications.

The political paralysis in the past few months has claimed casualties in a projected $7 billion spending on public infrastructure projects, which is critical to Thailand's economic growth in the next few years. Already, the political uncertainty has halted the extension of Bangkok metro line and new highway plans.

More immediately, the automobile industry, which has drawn significant foreign investment, is suffering from plant closures on Wednesday at Nissan Motor and Mazda Motor in what has been declared as a day of "public holiday."

Another casualty will likely be Thailand's plans to become a regional transportation hub. The government had planned to use the Sept. 28 opening of Suvarnabhumi, or Golden Land, airport in Bangkok as a showcase. The airport has been touted as the most modern in Asia, but the plans to draw international traffic will probably have to wait for a while.

India attacks 'flawed' IMF reform

2006-09-19T09:29:00.000-04:00

India has attacked changes to the voting structure of the International Monetary Fund (IMF) after it saw its share of the vote decrease.

Its comments came after the 184 IMF nations agreed a deal on Monday to give some emerging economies a bigger vote.
While China, South Korea, Turkey and Mexico all saw their voting quotas rise, India's declined.
India said the reforms were "hopelessly flawed". The IMF has now pledged to overhaul its voting system by 2008.

New formula

Indian Finance Minister Palaniappan Chidambaram said it would "hold the IMF to its promise" of a complete reform of the voting system within two years.

"We may have lost the vote but we have not lost the argument," ,he said.

Under the temporary reforms agreed at the IMF's annual meetings in Singapore on Monday, India saw its voting quota drop slightly to 1.91% from 1.95%.
Mr Chidambaram said the reform formula used to determine Monday's changes - including a country's GDP and market openness - did not accurately reflect the economic might of emerging economies such as India.
India wants the next formula to take into account the need of large developing economies to protect their farmers and young industries from foreign competition

Economic growth: What the game's about

2006-09-18T11:40:00.000-04:00

OPEC has steadfastly refused to set a formal price target, but is on alert for any signals that oil's slide could be prolonged by fundamental market imbalances or by an economic slowdown.

U.S. industrial output fell last month for the first time since January, providing fresh evidence of a cooling economy.

"We are following (U.S. economic growth) with a lot of attention, because this element is critical for petroleum demand in the next few years,"
Algerian Oil Minister Chakib Khelil

But there is a chance for the prices to stay above $50 in the coming years. No new risks to supply emerged over the weekend.

China urged Iran to be more flexible about its atomic work after a week of European Union talks left officials upbeat that a row between Tehran and the West could be resolved.

Weather concerns were also on the backburner, with the fourth storm of the Atlantic hurricane season - Helene - churning over the open seas but posing no immediate threat to land, U.S. forecasters said.

U.S. recession on the horizon

2006-09-15T11:50:00.000-04:00

The U.S. economy may fall into recession in 2008 as "inflation pressure'' drives up borrowing costs next year.

U.S. Federal Reserve policy makers have so far persuaded investors that they will contain inflation, helping keep yields on 10-year notes below 5 percent. U.S. consumer prices will increase more than expected, prompting a bond market selloff.

The view is darker than the predictions published yesterday by the IMF, which also expects a slowdown in the U.S. Inflation will persist because of rising prices in Asia, whose growth will fuel the global expansion next year.

Inflation is not going away at all, it's coming from land
prices in Asia, and hat's feeding into production costs."

The IMF yesterday said that inflation, oil prices and the risk of an abrupt drop in U.S. housing prices the strongest global expansion in three decades. The fund cut its prediction for U.S. growth next year to 2.9 percent from the 3.3 percent it forecast in April. That would be the weakest since 2003.
Morgan Stanley's New York-based chief economist, Stephen Roach, said that while he didn't share such type of view, the "odds of a U.S.-led global recession are rising in the 2007-08 period and cannot be taken lightly.'' David Rosenberg, chief North America economist at Merrill Lynch & Co., forecasts a 45 percent risk of a U.S. recession next year.
U.S. government 10-year bonds are yielding 4.77 percent and consumer prices rose 4.1 percent in July from a year earlier. The average rate on a 30-year fixed mortgage was 6.32 percent last week, close to the lowest since March.

Chinese Growth

Asia may be insulated from a U.S. recession at first, as China's high savings rate could fund continued investment in the world's fourth-largest economy.

If the U.S. stays down for several years then China will also slow down,
because in the end Chinese liquidity is based on exports."

The IMF forecasts the global economy will expand 5.1 percent this year, slowing to 4.9 percent in 2007. Both forecasts are 0.2 percentage points higher than its April estimates. Growth was 4.9 percent last year.
U.S. economic growth slowed to an annualized rate of 2.9 percent in the second quarter, after expanding 5.6 percent in the first quarter. China's economy advanced 11.3 percent in the quarter from a year earlier.

Record clip of metals mergers: chasing fool's gold?

2006-09-14T12:22:00.000-04:00

Forget prospecting. By the time the next rich vein of gold is found, the blistering rally in prices might be over. The much quicker road to today's Klondike is to leverage assets and jump someone else's claim.

Evidence of this fast-forward approach to mining is piling up in the number of mergers seen so far this year. Mining companies worldwide have announced 737 deals so far this year, closing in on the record high of 763 unveiled in 2005, according to Dealogic, a merger-tracking research firm. Already, their combined price tags have surpassed last year's by $34 billion.

"The pace is continuing to be quite robust, and there are a number of active deals in the pipeline," said Gordon Bell, managing director and head of the global mining and metals group at RBC Capital Markets. Joining oil and natural gas, metals is the latest commodity sector to undergo a massive consolidation in the wake of steep price increases.

The incentive is simple. Mining companies need reserves, and it's faster to buy them than do the prospecting. And with stock prices for many buyers at all-time highs, they can offer hefty premiums to their targets' share prices. In the last few months, major gold companies including Goldcorp Inc. Barrick Gold Corp. and NovaGold Resources Inc. have all launched deals to buy other gold miners.

Not even a recent sell-off in gold and other metals prices, which has hurt shares in mining companies, has dulled executives' appetite for the next takeover target. Gold futures have dropped by about $120 an ounce since hitting a mid-May high of $717, with over $40 of that lost in the last week. Silver has fallen $3.70 an ounce, or 25%, to $11.20. And copper futures have dropped about 13%. Those declines have dragged down publicly traded mining companies.

The Amex Gold Miners Index has dropped 13% in the last week and over 4% in the past month. Still, the broader Dow Jones U.S. General Mining Index boasts a 17% advance in just the past three months.The recent sell-off underscores how volatile the fortunes of any company involved in the commodity sector can be. Indeed, not all deals get the gold seal from investors.

M&A gold rush

Consider Goldcorp's Aug. 31 offer for Glamis Gold Ltd. of Reno, Nev. Goldcorp offered a 33% premium for Glamis' stock, motivated in large part by a mine that isn't even producing gold yet. Vancouver-based Goldcorp has set its sights on Glamis' developing Penasquito mine in Zacatecas, Mexico. The site should produce 400,000 ounces of gold a year once it starts up in 2009, which would raise the company's annual production to about 3.5 million ounces from about 1.8 million ounces today. "That's the main asset that Glamis has and the reason we're so excited," said Goldcorp Chief Executive Ian Telfer of Penasquito.

With Telfer expecting already lofty gold prices to rise another $200 an ounce in the next two years, those additional gold deposits will come in handy.

Oil bulls are defiant

2006-09-13T10:45:00.000-04:00

Oil is under pressure, but both bulls and bears seem skeptical.

First, an oil bear and stock bull.

Don Hays of the respected institutional service Hays Advisory put out this powerfully incisive comment :

"It is very hard for any of us in the Strategy Business to say the word recession, but the yield curve has now been saying that was in the cards for the last few weeks. The Dow Transportation Index is certainly confirming economic weakness."

Side note: Hays is being commendably frank here. Wall Street-oriented services know their clients want to be bullish. Independent investment letters, in contrast, aren't afraid of bad news.

Hayes continued:

"So far, the industrial commodity prices have not confirmed it, but we are seeing [Friday] morning ... the price of oil is just barely penetrating its 55-week moving average at $66.90. Some very talented technicians believe a significant penetration of this moving average price would be the 'breaking point' for the price of oil and would put the downside target at the 200-week moving average which is at $47.35 today. An examination of the massive inventory glut gives similar potential."

However, Hays went on, again with welcome candor:

"The slight break is not yet sufficient to turn the full red light on. It is important to note that energy bulls would consider the pull-back to this important support area as a screaming buy. Each time it has pulled back here for the last three years it has bounced and returned to a very bullish trend of higher highs. With my bearish bias, of course you know how my odds are placed, but my bearish bias hasn't done a lot for me in the last 18 months, so please be forewarned."

Economists have been following two very articulate oil bulls, both of which have been beating the stock market recently according to the Hulbert Financial Digest: Sound Advice and Outstanding Investments.
Sound Advice usually comes across as more moderate. But its editor, Steve Horwitz, has been sounding positively vengeful:

"Talk about not being able to chew gum and walk down the street at the same time. The financial media seem incapable of keeping more than one story alive at any one time, and invariably, wherever that story line might be, the tone verges on lunatic panic. ... The excitement surrounding the drop of oil prices below $70 a barrel had the hosts on CNBC almost too giddy to bloviate. But they fail to ask whether there is any substantial reason for the drop other than the diminishing threat to the Gulf Coast from the season's first noticeable hurricane. We can't wait for them to fall into deep depression when the energy prices again rise above $70."

Horwitz concluded: "We are still betting that inflation is building, that natural resource stocks remain a good hedge against inflation, while defensive sectors such as food and [health care] as well as exposure for foreign equities are also timely, and that the slowdown in the U.S. economy does not preclude further inflation (a.k.a., as Sound Advice notes, 1970s-style "stagflation.")

Outstanding Investment's Justin Litle remains equally convinced of the "secular bull market commodities thesis" with a peak "some 5-10 years from now."

But he is advocating "getting tactical" in the face of "the likelihood, and maybe the inevitability of a drawn-out correction." That means looking at "temporary discounts", such as he currently sees in natural gas and coal, and also at SEC 13-F filings (which show the holdings of maybe money managers).

Watch out for the oil trap

2006-09-12T09:14:00.000-04:00

Energy stocks are great long-term investments, but you should buy them very carefully.

Seems like only a couple of weeks ago, everyone was worried that oil was on its way to $100 a barrel. Since then, the oil price has fallen 15 percent to below $66.
It's fairly clear that the cost of energy will rise over the next couple of decades. And top-quality oil & gas stocks figure to be excellent long-term investments. But you have to be careful about when you buy them. Even if the value of oil reserves rises considerably in the years to come, oil prices - and energy stocks - could still go a lot lower in the short run. The greatest success will go to investors who buy slowly and shrewdly.

There are a variety of forces driving oil prices.

The oil market has been tight over the past year or so. Demand has been strong. And there hasn't been a lot of unused capacity that could be tapped. And the problem hasn't been only at the level of crude production. The U.S. doesn't have spare refining capacity. So shortages can occur in refined products even when there's crude oil available. This climate has led to buying by traders and speculators that has bid up the price higher than pure economics would require.
In addition, fears of escalating conflict in the Middle East has added a risk premium - more than $10 a barrel by some counts - to the price of oil. Estimates of the fair price of oil in the absence of all speculative and risk premiums range anywhere from $45 to $65 a barrel.
An outbreak of war or terrorism in the Middle East could send the price right back toward $100 a barrel. On the other hand, a period of stability could allow oil to drift down further from today's level.

Watch the overshoot

It may seem like a no-brainer that if the oil price drops to $55 a barrel, say, you should move all you spare cash into energy stocks. Either those shares will soar during the next crisis or you'll have a great buy price for long-term investment. There's a catch, however. Historically, once a price spike has ended, oil has overshot on the downside.
It's very instructive to look back at the 1970s and 1980s using inflation-adjusted prices.
In 1970, oil was trading at less than $18 a barrel (in today's dollars). In 1980, the price peaked above $89. By 1985, the price had fallen to around $50 a barrel. But that wasn't the end of the decline. Between 1986 and 1999, oil traded for less than $30 a barrel in 12 of those 14 years. And as recently as 1998 and 1999, the price of oil was below $20 a barrel.
I'm not saying that the Middle East will stabilize and the price of oil will plummet to $20. But the range of possible prices is far greater than one might expect. And while the long-term prospects for reserve-rich oil producers is very positive, you could load up on those stocks and watch them lag the market for a year or longer. So accumulate your holdings slowly. As the 1980s show, it can take five to 10 years for a price trend to run its course.
Recent expensive oil has called forth a lot of exploration and we could see a mini-glut of oil production at some point in the next few years. That excess will be absorbed by an oil-thirsty world, but it may take a couple of years beyond that. I'm in favor of having a sizable chunk of money - possibly more than 25 percent - in inflation-hedge investments.

Above all, be prepared to be surprised if the oil price goes down much further than seems possible. If there's a global recession that chokes off energy demand and the oil price drops well below $50 a barrel, you could become a more aggressive buyer.

But until such a recession hits, the slower you buy, the better.

U.S. Growth: inflation should ease

2006-09-11T09:54:00.000-04:00

The U.S. economy will likely slow, helping to bring down core inflation, Boston Federal Reserve Bank President Cathy Minehan said Monday.Speaking to the National Association for Business Economics, Minehan said the risks to her forecast have grown on both sides in recent months. "I see growth for the next year or so in the high 2s, approximately full employment, and core inflation subsiding," she said. "Not a bad picture."

Housing is an obvious concern for growth. While she expects the slowdown to be moderate, "recent data on declines in starts and permits, gloomy assessments by builders, the potential for higher mortgage rates, and increased inventories of unsold homes, remind me that this assessment could well be optimistic," she said.

The new types of mortgages could contain "some nasty surprises" for some borrowers and lenders. The economy could slow too much if housing prices actually decline, Minehan said. However, a decline in prices "would be quite an unusual event." And she said moderately rising income and financial wealth will "buoy household spending."

Business investment in structures and equipment should offset some of the headwinds from housing. And global trade is now "marginally supportive of growth," Minehan said.

Another risk is that "inflation will continue to rise or persist at high levels and embed itself in consumer and business plans," she said. She said she's reassured that inflation expectations remain restrained. Much of her speech revolved around the need to raise U.S. savings rates, including reducing the federal deficit and boosting private savings for retirement.

Unit labor costs up at a 16-year high

2006-09-06T16:52:00.000-04:00

U.S. workers have been more productive, but have also been paid more than previously believed, figures on Wednesday showed.
Revisions to quarterly nonfarm business productivity data show unit labor costs rose 5% in the past year, matching the fastest pace since 1990, the Labor Department reported.

Higher unit labor costs could fuel inflationary pressures as firms struggle to recover their labor costs, and that could push the Federal Reserve to resume raising interest rates.
Unit labor costs -- the cost of the labor needed to produce one unit of output -- had been subdued in the past few years, but now workers are capturing more of their share of the productivity bonanza.
"We now unquestionably have an issue with wage growth," said Stephen Stanley, chief economist for RBS Greenwich. Higher wages mean consumer spending should hold up, but it raises troubling issues about whether a new inflationary spiral is beginning.
The figures "will keep the Fed in an uncomfortable position regarding the inflation outlook," said Michael Englund, chief economist for Action Economics.
Productivity increased 1.6% annualized in the second quarter, up from 1.1% reported a month ago, the Labor Department said. Unit labor costs increased 4.9% annualized, revised from 4.2% earlier. Real hourly compensation increased 1.6% annualized.
But the big revisions came in the first quarter with the introduction of updated data on compensation. Unit labor costs rose a staggering 9.0% annualized in the first quarter, the most since the third quarter of 2001.
In the past year, productivity of the nonfarm business sector increased 2.5%, compared with an average of 3.2% since the recession ended. Meanwhile, real hourly compensation increased 3.6% in the past year, nearly double the 1.9% average gain since the recession ended in 2001.
Unit labor costs rose 5% in the past year, the most since 1990. A month ago, the government was reporting that unit labor costs had risen 3.2% in the past year.
Economists were expecting productivity to be revised up to 1.5% and unit labor costs to be unrevised at 4.2%, according to a survey conducted by MarketWatch.
Markets took the news hard. The yield on the 10-year note rose to 4.83% from 4.78%. Stocks opened lower.

In a separate report, the Institute for Supply Management said its nonmanufacturing sentiment index rose to 57% from 54.8%, indicating healthy growth in the economy.
The federal funds futures markets showed investors were not persuaded the figures would force the Fed to resume hiking interest rates. The odds of a rate hike by the end of the year rose to 20% from 13% earlier.
One economist said the numbers made no sense.
"The problem we have with all these data is that there is no way that corporate profitability could be as strong as it is if unit labor costs were really growing at a 7% annualized rate in the first half of the year," said Joshua Shapiro, chief economist for MFR. "Profit margins continue to expand and profits as a share of national income are in the stratosphere."
It's better to watch the nonfinancial corporate sector, as the Fed does, Shapiro said.
Unit labor costs in the nonfinancial sector are up just 2.6% in the past year, compared with 5% for the nonfarm sector.
The revisions to the second-quarter data reflect new estimates of output, hours worked and compensation. The revisions to the first quarter mainly reflect better estimates of compensation, which was higher than initially reported.
Productivity, defined as output per hour worked, is perhaps the most important long-term variable in economics. But it also the most difficult to define and to measure.
Higher productivity can mean higher profits, wages and living standards. Productivity gains reduce inflationary pressures. But the concept is difficult to measure, especially in financial services where the concept of a "unit" of output is murky.
Therefore, Fed officials watch nonfinancial productivity most carefully.
Productivity in the nonfinancial corporate sector increased at a 2.2% annual pace in the second quarter, while unit labor costs increased 4.2% annualized. Real hourly compensation in the nonfinancial corporate sector rose 1.4%. Unit profits fell 1.2% in the second quarter.
In the first quarter, revisions show nonfinancial productivity increased a stunning 11.1%, the most since 1971. Unit labor costs increased 1.2% in the nonfinancial sector in the first quarter, compared with 9% in the nonfarm business sector as a whole.
In the past year, productivity in the nonfinancial corporate sector rose 4.8%, unit labor costs rose 2.6% and real hourly compensation increased 3.4%. Unit profits are up 8.4% in the past year, a reflection of the favorable environment for profits.

The U.K. growth story: an unhappy ending?

2006-09-04T11:43:00.000-04:00

With sterling trading near levels not seen in 16 months against the dollar, investors are beginning to fret about a foreign-exchange trend they fear may spell an unhappy end to the growth story for U.K. shares.
The U.K. currency briefly touched $1.90 in May and had held around that level for around the last month. Compare that with five years back: sterling hit a low of around $1.3678 against the dollar in June 2001, and has staged a steady recovery since.
If this strengthening trend continues, it could significantly impact revenues at some of Britain's biggest and best-known companies. And it would threaten to undermine the M&A story that's been helping to drive U.K. equities since 2003.
"In the case of the U.K., there is a significantly large proportion of companies in the benchmark FTSE 100 index whose receipts are denominated in dollars -- when (those dollars are) converted back into sterling (for instance to pay costs or dividends), they'll have less sterling receipts to show for it," said Mike Lenhoff, chief equity strategist at London-based stockbrokers Brewin Dolphin Securities.

Robert Parkes, a U.K. equity strategist at HSBC Bank, said that around 25% of sales from U.K. companies are into the U.S, which, when coupled with the high dollar exposure of the commodity sector, brings the total dollar exposure of the FTSE to between 35% and 40%..

Feeling the pinch

Central banks and interest rates have largely been behind the currency moves.
"Interest rates are the dominant driver in the (currency) markets at the moment," said Geoff Kendrick, a senior currency strategist at Australia's Westpac Bank.

"The key in the short term is whether or not the Federal Reserve is really finished (tightening rates) now, or whether they'll need to tighten again," Kendrick says.

The U.S. rate now stands at 5.25%, while in the U.K. it's 4.75%.

The Bank of England surprised investors with a rate hike in early August of a quarter percentage point, which sent sterling spiking upward. The central bank said the pace of economic activity had quickened, with higher energy prices sparking greater inflationary pressures.
If the Bank of England tightens rates again, it raises the possibility sterling could strengthen towards the magic $2 mark. That's when the impact would really kick in, experts say.
"If you're aiming for a target like $2 in cable (as the cross rate is known), you'll probably need the Federal Reserve to stop (raising rates), the market to think about current account balances and the Bank of England to hike again. Then you may start getting close," said Kendrick.
The pound at $2 could undermine the export position of many U.K. companies, which earn revenues in dollars that would be subject to a negative translation effect. And it could knock about 1% off earnings for U.K. companies, said Richard Batty, investment director at Standard Life Investments.
HSBC's Parkes said of all the companies in the U.K. stock market, pharmaceuticals record the most sales in the U.S market at about 44%. Following close behind are aerospace, with 41% sales exposure, and general industrials, with 37% of sales in the U.S.

How much movement's ahead?

However, a move to $2 probably isn't coming anytime soon: the consensus twelve-month view on dollar/sterling is for a level of $1.8734, according to FX Week.
Dresdner Kleinwort heads up that list, forecasting $2 in twelve months, while Westpac expects the dollar to hit $1.97 and HSBC sees it at $1.86. HBOS Treasury Services has the lowest forecast, with a twelve-month view of $1.68.
And even if the cross rate reached $2, the move would have to be sudden and sharp to have a significant detrimental effect, Lenhoff said.
"The trigger would be if the market is convinced that the Fed has stopped tightening, and not only stopped tightening, but that the next move in interest rates would be downward," he said.
If earnings started to fall off, it could be critical for merger and acquisition activity in London. Many companies traded on the London Stock Exchange, and on European exchanges too, have been the subject of intense M&A speculation and deals.

Since May 2005, the FTSE 100 index has increased in value by around 20%, rising from 4,986 points at the close of trade on May 27 last year to 5,959 points on Monday. It's a gain to which "M&A has definitely contributed," said Parkes.
Year-to-date in 2006, a total of 8,231 deals worth $987 million have involved European companies, according to data supplied by Thomson Financial. Separate figures were not supplied for the U.K.
Many of these deals have involved company buyouts by private-equity consortiums, which rely on using high earnings yields to repay debt used to fund acquisitions.
"If the equity market were to weaken because earnings are no longer reckoned to be as forthcoming now that the dollar has weakened... the idea of borrowing in sterling to finance acquisitions and to use earnings to pay off loans and service debt is no longer quite as attractive a proposition as it once was," said Lenhoff.

Might India overtake China?

2006-08-31T16:27:00.000-04:00

Despite recent growth, political oppression will keep the Asian tiger on a tight leash... might India, with its radically different traditions of democracy and freedom, eventually surpass China as an economic force?

China and India had roughly the same income per head; now China's is about double, fueled by a growth rate (9 percent) half again as brisk as India's. China gets more than 10 times as much foreign direct investment, and has five times India's share of world trade. China has higher literacy and better infrastructure. It takes a month to start a business in China, and three in India. China has more savings, less debt and less poverty. And yet, beneath the surface there are trends that suggest that India can close the gap, and over time, even move ahead. Why? Because its democratic political system is more stable and better at accommodating change than China's autocracy.

India is nearing a tipping point of economic transformation. The pace of change is not steady, but its direction is inexorable. Consider the current government, a coalition in which the Communist parties are crucial partners (and India's communists are considerably more economically orthodox than the Chinese variety). Even so, the recent budget managed to continue privatization, open pensions and mining to foreign investment, and cut corporate taxes and tariffs. It is hard to argue that investment, competition and deregulation are bad, or anti-poor, or somehow un-Indian when the deregulation of the telecom industry helped to create the brilliant Indian IT industry.

These early successes have created momentum for more change, and a virtuous circle is beginning to close. Now it is obvious, even to the communists, that the parts of the Indian economy that are humming, such as drugs, auto parts and IT, are the ones that are most open and that this is no coincidence. Outsiders are beginning to notice. In 2003, a survey by the Federation of Indian Chambers of Commerce and Industry found that 40 percent of companies were "positive" on India as an investment destination; last year, that figure rose to 73 percent.

China's hardware - in the form of bridges, roads, ports and the like - is incomparably better than India's. Anyone who has ever been to both Shanghai and Bombay, the countries' respective commercial capitals, does not need any convincing that Shanghai is the more modern and efficient city. But in important ways, India's economic software is superior. India's banks report about 10 percent non-performing loans; China admits to 20 percent and the true figure could be double that.

India's capital markets work the way they should; China's are a rigged casino. India has more engineers and scientists; its domestic entrepreneurs have made a bigger mark. And while no one in his right mind wants to go near the creaky, backlogged Indian civil courts, India is a country that does try to govern by the rule of law. China, ultimately, is a country that will break the rule of law whenever the party feels like it or deems its power to be threatened even if that "threat" is a few thousand poor peasants and their lawyer. It is also worth noting that China's one-child policy means that it will face the costs of a rapidly aging population much sooner than India.
Since 1992, when Deng Xiaoping decided to gun for growth, China's economy has been running flat out. Over the same period, India's has accelerated from a crawl to a brisk jog; in a good year, it can deliver 8 percent growth. But with the example of positive change behind it, plus a reasonable monsoon and the willingness to learn from China's successes, it is not hard to imagine India growing at China-like speed. It is at that point that its institutional strengths (a much richer civil society and a government that can be held accountable) give it a decided advantage.

At some point, a market economy requires a reasonably open and flexible political order. In China, that implies the end of the Communist Party's monopoly of power, or at least the chance to challenge it without being imprisoned. China's rulers are nowhere near countenancing that.

For all the advances in personal freedom in China over the past 15 years - and these have been enormous - the Communist Party's clenched grip on power has not relaxed. It's a whole lot less traumatic for a democratic country to open its economy, as India is doing, than for a dictatorship to open its politics, as China is not doing.

And that's why, a generation or so down the line, it is India that is going to be the Asian tiger that everyone watches.

Balancing on the Wire

2006-08-30T13:08:00.000-04:00

Stocks were little changed early Wednesday as a report showing the U.S. economy's growth essentially as expected in the second quarter left investors treading water.
The Dow Jones Industrial Average was up 4 points at 11,374, and the S&P 500 was fractionally higher at 1305 . The Nasdaq Composite was down 1 point to 2171.
A busy week for data continued with the Commerce Department saying the economy grew at a 2.9% annual pace last quarter. The report was the second of three that will be issued on the second quarter, and it exceeded the advance reading of 2.5%. Economists had expected an upward revision to 3%.
Later, traders will have to pay attention to a speech from the president of the Dallas Federal Reserve, Richard Fisher. Fisher, who has developed a reputation for roiling markets with his blunt assessments of the economy, has already indicated that he will "talk at length about inflation" during his presentation in Dallas.

Reports will be out Thursday on chain-store sales, personal income and spending, factory orders and initial jobless claims, as well as the Chicago Purchasing Manager's Index. August nonfarm payrolls data, the Institute for Supply Management's manufacturing index and auto sales are on tap Friday.

Everything seems to be changing, the markets instability is a great oportunity for traders as big gains can be around the corner. Don´t rush, Middle East is a ticking bomb, Hurricane Season is on the way and economic guidelines in the U.S. are currently no more than a Pandora´s Box. Only the best players will sense the next move on a blurry chessboard as he moves throught uncertain times.

Other Markets

Treasuries were unchanged across the board, with the benchmark 10-year note yielding 4.78%.

The euro was flat against the dollar, and the greenback crept higher on the Japanese yen.

Crude oil futures Wednesday were rising 52 cents to $70.23 a barrel in electronic trading a day ahead of the deadline for Iran to respond to a United Nations attempt to get the nation to suspend its nuclear program. Tehran's leaders have repeatedly said they have no plans to end uranium enrichment.

Tropical Storm Ernesto, which a few days ago was seen as a threat to the petroleum operations in the Gulf of Mexico, made landfall in Florida overnight. The storm, which is about 75 miles southwest of West Palm Beach, continues on a northern track toward South Carolina.

Later, the Energy Department will release the weekly oil statistics that are expected to show declining crude and gasoline inventories.

Extracts from Article

by Robert Holmes

TheStreet.com Staff Reporter