Will
Gold and Precious Metals Sustain Their Momentum into 2004?
By
Keith W. Rabin
 NEW
YORK (KWR) If you invested in gold during the 1990s, it
was clearly an exercise in frustration. However, the tide
turned in the early 2000’s as long depressed metals
prices came roaring back. Gold is becoming one of the new “hot” ideas
for the general investing public, though dedicated gold
investors have long been positioned to take advantage of
the improved pricing environment. Where is gold going?
While there is likely to be some continuing consolidation
occurring over the near term, we see gold continuing to
rise over coming years as a number of key factors favor
an upward sloping price projection .
Although we are not so bold to predict that gold will go
over $500 an ounce
over the coming year and would not be surprised
to see a continuing consolidation over the short term,
it still has room to go and constitutes a sound investment
opportunity.
Depending upon ones investment orientation, the performance
of precious metals over the past few years has either been
surprising or the natural byproduct of the excessive worldwide
fiscal and monetary stimulation caused by U.S. Federal
Reserve Board policy. Furthermore, a higher degree of political
risk, directly linked to the new cold war of the 21st century – terrorism,
societal upheaval related to the globalization of markets
-- and resistance to that process – as well as a
falling out of the former major Cold War allies over the
Iraq war have contributed to the greater degree of market
uncertainty that favors precious metals. To this we add
the decline of the dollar and extremely low interest rates,
all of which enhance the value of gold as a storehouse
of value. As a result, both the unhedged Gold Bugs (^HUI)
and hedged Gold/Silver Index (^XAU) have substantially
outperformed the Dow Jones, Nasdaq and S&P Index over
the past two years.
As readers of numerous analytical reports we are actively
aware of the current debate as to whether gold remains
in a “multi-year secular bullish trend” or
whether the current consolidation seen since gold hit multi-year
highs late last year will now enter into a full-blown correction.
The answer is over the short term no one really knows for
sure, but we think the question itself misses the point.
In addition to all the fundamental reasons often used
to create a bullish case for gold, we believe one of
the key
reasons that gold-related shares will continue their
upward projection is that overall equity supply trends
will lead
to a further appreciation over time. Yes, recent reports
indicate that the Toronto Stock Exchange and Venture Exchange
was home to nearly 1,600 mining equity financings worth $4.18
billion in 2003, with a worldwide deal flow of almost $10 billion.
However, with all the talk seen in recent months from investors
and the financial
media, the entire capitalization of the entire gold and
silver market as of late November, according to Mineweb,
totaled only $120 billion.
To provide a simple comparison, General Electric and
Microsoft have market capitalizations exceeding $300
billion, and
Walmart and Intel both exceed $200 billion. Coca Cola
registers about $120 billion, roughly the same size
as the entire
market for all gold and silver companies.
Coca Cola is admittedly a large company with over 56,000
employees. However, as present trends continue and
investors around the world increasingly turn to hard
assets as
a safe haven and store of value, it is hard to see
how demand
for precious metals and related equities will not continue.
It may be true that gold and precious metal shares
are overbought at the present time, (a situation not
helped
by the central bank of Germany’s recent decision
to sell their gold reserves) and that the sector is gaining
a lot more attention within the financial media. In addition
a lot of the present volatility might be attributed to
aggressive hedge funds seeking to gain quick profits by
bidding up or down prices. Despite all of this, however,
most retail investors have minimal gold exposure and have
not yet begun to focus on metals at the present time. Even
if one looks at the major copper and nickel companies,
such as Phelps Dodge and Inco, which have also appreciated
strongly over the past year, the actual investment is relatively
small. While both of these firms have developed loyal followings,
together they are not as large as Newmont Mining, the largest
gold mining company. Newmont has a market cap slightly
over $17 billion as opposed to Phelps Dodge ($6.8 billion)
and Inco ($7.1). To provide a point of comparison, Eastman
Kodak has a market cap of $8.6 billion.
Most metals-oriented conferences and events – while
attracting more attention in years past – still do
not attract anywhere near the interest of more mainstream
investments. At one presentation held last week highlighting
a Canadian gold exploration company here in New York for
retail and small institutional investors, there were little
more than a dozen people in attendance. From the questions
it was clear most could not even distinguish between exploration
and mining companies. That seems hardly the sign of a market
top, when all people with a possible interest are invested.
Even precious metals-oriented mutual funds are relatively
small. Cursory research reveals none of these funds have
net assets exceeding $1 billion. The bottom line is that
the small investor – who helps create a bubble of
rising prices and expectations – has yet to be fully
engaged.
Many analysts reject the supply argument noted above
on the grounds that ultimately equities are valued
based on
earnings and gold and precious metals companies have
not delivered in that regard. There is certainly some
truth
to this line of thinking, however, we would argue given
the nature of the mining process, all increases in
the price of the underlying metal above extraction
and administrative
costs will fall to the bottom line. As a result, a
sustained increase in metals prices will likely lead
to dramatic
upside surprises in the profitability of mining companies.
It is also important to note that many mining companies – in
gold and otherwise – have considerably reduced their
inventories. There is a less supply than in the past, while
demand is on the rise for gold as well as copper, nickel,
zinc and many other commodities.
Furthermore, given the sparse investment into new mining
properties that has taken place over the past two decades,
we could begin to see an upturn in the M&A environment
within the sector as major producers seek to acquire properties
that can help to boost their reserves.
On the other hand, higher prices for gold has also
led to an increasing number of secondary financings.
After
a $1 billion financing last November, Newmont Mining,
the world's largest gold producer, filed with regulators
last
week to raise up to $200 million for a possible acquisition
and to sell up to another $1 billion in debt and stock.
While we still believe the aggregate amount is still
small compared to the demand that will arise over the
next few
years, many analysts point to the dilutions
and added supply that will result as evidence that
the move
in precious metals has past.
This may indeed be true over the short term, and there
may indeed be better entry opportunities in the near
future – however,
the basic fundamentals, which include, but are not
limited to, a declining dollar, highly simulative central
banking
policy in the U.S. and many other economies, stronger
long-term growth in China, India and other developing
countries, as well as the relatively low level of investment
and equity supply
following an almost two decade bear market in the commodity
sector -- all point to continuing appreciation over
time. While we do not necessarily see gold going over
$500 in
the near term, and would not be surprised to see a
continuation of the current consolidation, it
has room to run and the potential
to surprise on the upside, especially if – and
ultimately when -- greater uncertainty begins to creeps
back again
into equity markets.
The
New Banking Order in the United States
By
Scott B. MacDonald
NEW
YORK (KWR) -- Although there appeared to be little momentum
on the U.S. banking consolidation side following Bank
of America's purchase of Fleet Boston, this changed
with J.P. Morgan Chase/Bank One announcement of an
agreement to merge on January 14, 2004. The two banks
agreed to form a bank holding company with $1.1 trillion
in assets. Following this news, Sovereign Bancorp announced
it was acquiring Massachusetts-based Seacoast Financial
Services for $11 billion. These acquisitions have brought
the issue of bank consolidation back to the front burner.
They have also made bank stocks much more interesting.
Just when it looked like a boring year for the banking
sector, the consolidation game picked up. It is about
to accelerate.
What is evident is that there is a large gap in terms
of the size of the nation's three major banks and the
next tier of institutions. The actions of Bank of America
and JPM are likely to force many bank management teams
to reassess the banking environment and determine whether
to expand business through organic growth or look for
possible merger partners and acquisition targets. This
is particularly true for Wells Fargo, Wachovia, US Bancorp,
Fifth Third, Sun Trust, KeyCorp. and Bank of New York.
In a sense, a failure to move is likely to invite a suitor
- welcome or not.
Taking heed of the changing banking environment, two
large southern regional banks, Union Planters and Regions,
announced on January 24, that they were merging. Combined,
the two companies would rank as one of the largest banks
based in the Southeast, boasting just under $81 billion
in assets and nearly $56 billion in deposits. This has
left many investors and analysts looking at other southern
banks, such as Sun Trust, BB&T, First Tennessee,
and Colonial – among others.
| Banks
by |
Market
Cap.* |
Assets** |
| 1.
Citigroup |
$258
billion |
$523
billion (Estimated total assets $1.2 trillion) |
| 2.
Bank of America & FBF |
$163
billion |
847
billion (Estimated total assets $940 billion) |
| 3.
JPM and Bank One |
$131
billion |
893
billion (Estimated total assets around $1.1 trn) |
| 4.
Wells Fargo |
$95
billion |
370
billion |
| 5.
Wachovia Bank |
$63
billion |
332
billion |
| 6.
US Bancorp |
$53
billion |
192
billion |
| 7.
Fifth Third Bank |
$33
billion |
55
billion |
| 8.
Bank of New York |
$26
billion |
97
billion |
| 9.
Sun Trust |
$20
billion |
119
billion |
| 9.
BB&T |
$20
billion |
68
billion |
| 9.
National City |
$20
billion |
100
billion |
| 10.
PNC |
$17
billion |
61
billion |
| 11.
KeyCorp. |
$12
billion |
75
billion |
*
Source: MSN. Ranking based on market
capital, not total capital.
** Federal Reserve, June 2003.
The most likely banks in play as possible acquisitions
include: PNC, KeyCorp, which must expand or be bought)
BB&T and National City. Beyond this group, Sovereign
Bancorp, which has been in and out of talks with Royal
Bank of Scotland and Comerica are also frequently mentioned.
Another combination is Wells and Wachovia, which would
create a coast-to-coast bank and propel the new institution
into the same range of assets and market value as JPM-One.
We also think that HSBC, Royal Bank of Scotland and ABN
Amro all could become more active in 2004 and 2005 about
expanding their U.S. operations. All three have U.S.
holdings and would find any new acquisition an opportunity
to broaden their retail, commercial and consumer footprints
in the U.S. market.
As for the proposed merger of JPM and Bank One we
think it makes considerable sense, especially since
Bank
One's more plain vanilla business is likely to reduce
some
of the volatility inherent in JPM's investment banking
business. There is a strong possibility the combined
bank will be rated Aa3/A+/AA- - if the combined management
team is able to demonstrate a well-constructed integration
plan. Both rating agencies have ratings for each
bank, which are one notch apart. Fitch rates both
banks at
A+. S&P already put Bank One’s A rating on
Credit Watch positive and affirmed JPM's A+ rating due
to the "excellent fit" of the merger. The rating
agency observes the merger addressing certain weaknesses
in the franchises of the two banks - JPM achieves significant
scale in branch banking, while Bank One gains a stronger
corporate banking business. S&P sees the merger as
upgrading the combined institution's national businesses.
Fitch has put both banks on rating watch positive as
it expects both banks will benefit from the greater balance
in the businesses of the combined bank and its stronger
branch network.
Moody’s has indicated it expects the merger to
be net positive for JPM and has placed it on review for
a possible upgrade. This positive view is based on Bank
One’s substantial and more geographically diversified
consumer and business banking base helping JPM’s
more limited role as a New York metro area regional bank.
Furthermore, the national lending businesses (credit
cards, autos, mortgages, and student loans) are complementary.
This bolsters JPM’s position as a universal bank
that competes in the investment banking arena. Moody's
noted this is a very large merger that entails considerable
execution risk. Nonetheless, both predecessor firms have
management teams that are experienced at acquisitions.
Management is forecasting cost savings of $2.2 billion
over three years and Moody's indicated it is reasonably
confident that cost synergies can be achieved.
While we see 2004 as a year of consolidation for
the U.S. banking sector, we would be cautious over
whether
the process is likely to continue into 2005. Not
every bank is ready to be bought or acquired or wants
to
become a Citigroup or a JPM Morgan Chase. And considerations
must be given to maintaining profitability and prudent
banking practices. But there are enough banks that
do
want to grow and maintain their independence, which
keeps the banking sector a place to watch in the
U.S. stock
market.
A
Delicate Balance: Thailand’s increased prosperity
brings new risks
By
Jonathan Hopfner
BANGKOK
(KWR) Few would contest the Thai economy is undergoing a spectacular
resurgence. Gross domestic product (GDP) growth surged to over
6 percent last year and is projected by analysts such as Lehman
Brothers to reach 7 percent in 2004. The stock market, racking
up gains of over 100 percent in 2003, is scaling dizzying heights,
and consumer confidence, as measured in a recent MasterCard
poll, is the highest in the Asia-Pacific region. Thanks to
more efficient tax collection, government revenues are exceeding
targets. International reserves are holding steady and inflation
remains low. And all this at a time when many of the world’s
economic players, continue to underwhelm or even disappoint
in comparison.
Arguments remain, however, as to who or what is responsible
for this stellar performance. The government, and an ever-growing
circle of admirers in Asia and beyond, credit it to the forward-thinking
policies of Prime Minister Thaksin Shinawatra, who through
a series of carefully orchestrated spending initiatives fostered
economic growth based on domestic demand. Others see it as
the fortunate convergence of a series of external factors that
have little to do with “Thaksinomics” and warn
that the administration’s appetite for spending on debt-relief
and universal health care programs will eventually put the
country in a precarious fiscal position.
While Shinawatra no doubt deserves much of the credit for convincing
Thais it is once again safe to go out and spend their money,
it also seems true that the Thai economy is being at least
partially supported by a set of happy coincidences. The first
is the relative weakness of the baht, which, though scraping
back some territory recently, has shed nearly half its value
since hitting its peak against the US dollar before the 1997
economic crisis. This has provided a much-needed boost to exports,
which have found a willing and relatively new market in China.
Since 1999, when they totaled $1.85 billion, exports to China
have surged to $4.5 billion in the first ten months of last
year. High prices for commodities such as rice, rubber, and
tapioca have contributed further to Thailand’s favorable
trade balance. The administration has spoken much of the need
to “balance” the economy by reducing its dependence
on exports, but has taken few steps towards this goal. A recent
decision to spend $97 million this year on heightening safety
and standards among local food producers demonstrates the importance
the government continues to attach to the sale of Thai agricultural
products on the international market.
Domestically, rock-bottom interest rates have helped companies
restructure their debts – many left over from the excesses
of the period prior to the 1997 crash – and encouraged
households to borrow money for purchases, boosting domestic
consumption in the process.
The question now is how long these circumstances will last.
Despite government efforts to slow the baht’s rise, it
gained steadily against the dollar last year. With the US reluctant
to shore up the dollar against Asian currencies due to its
ballooning trade deficit, it is likely to rise further. According
to the independent Thailand Development Research Institute
(TDRI), household debt is increasing at a dangerous speed;
from three times monthly income in 1994 to 5.5 times in 2002.
While this rate remains relatively low compared to other countries
in the region, much of it is accounted for by households under
the 900 baht ($23) per month poverty line. They have seen their
debts soar to 19.8 times monthly income in 2002. With mortgage
loans up 14 percent in the last year and land sales up 39 percent,
the Bank of Thailand (BOT) has warned that the country is fast
moving towards a property bubble, a situation eerily like that
which preceded the 1997 crisis.
Banks, too, especially the state-owned institutions that have
bankrolled much of the government’s development efforts,
continue to be saddled with uncomfortable bad debt burdens.
Non-performing loans as a percentage of total lending reached
23.72 percent at the Small and Medium Enterprise Development
Bank, 17.02 percent at the Government Housing Bank, and 11.51
percent at the Industrial Finance Corporation of Thailand in
the first nine months of 2003.
None of this is to say that the economy will once again suffer
the kind of devastating bust it did in 1997 – the government’s
abundant foreign exchange reserves and steady revenue stream
should preclude that – but unbridled optimism may be
equally unwarranted. A stronger baht, higher interest rates,
and the inevitable downturn in spending when households struggle
to service the debt they have amassed could all conspire to
quickly unravel the gains Thailand has made over the past few
years.
Crucially, some forces within the government seem well aware
of these possibilities, and are already taking steps to prevent
them. BOT Governor Pridiyathorn Devakula, while far more publicity-shy
than the Prime Minister, may prove an equally important actor
in the economy’s success or failure; he warned on Jan.
15 that import growth, household debt, and property prices
were all reaching unsustainable levels, and that the central
bank was concerned Thailand was on the verge of “walking
too fast and then stumbling.”
The central bank already appears to be taking action to correct
any possible imbalances. The government approved a plan put
forward by the BOT and the Ministry of Finance (MOF) for the
streamlining of the financial sector. Under the framework institutions
failing to meet stricter minimum capital requirements will
be forced to merge with their larger counterparts or bring
their operations to an end.
While the MOF said the goal of the plan was to strengthen local
institutions to allow them to better compete in the international
market, analysts believe it is also intended to reduce the
number of burgeoning consumer credit firms that have sprung
up in the midst of Thailand’s recent prosperity. The
weeding out of the sector’s smaller players will make
it easier for the BOT to supervise their lending practices.
With forces like the MOF and BOT conscious of the risks Thailand
faces and prepared to take steps to reduce them, the country’s
strength will likely stand on firmer foundations. And if its
growth continues apace, it will become increasingly apparent
that Shinawatra has contributed to, rather than single-handedly
created, Thailand’s success.
Bonds
may be Thailand’s story this year
By
Michael Preiss
HONG KONG (KWR) There are some recent developments
in Thailand, which could make the country
even more interesting
to investors in 2004. Last year Thailand was the market
for equities. The SET being the best performing Asian
equity market (+135%) and the Thai baht has risen (+8.7%)
against the US dollar in 2003.
In 2004, however the investment story in Thailand might
be corporate bonds.
More than 30 blue chip Thai companies are expected
to have their corporate bonds listed and traded on
the domestic
market in the 1st quarter of 2004.
The deepening of the domestic corporate bond market
helps the government’s objective of not only having quantity
of growth but also “quality” of growth.
This is because of the following reasons: Corporate
bonds provide added fuel for the already fast-growing
economy,
while at the same time, reducing the risks of overheating.
The reason being that it offers companies and investors
a less risky alternative to the stock market, better
asset allocation, capital structures and as an end
result, better risk and capital raising diversification.
The Thai economy is expected to grow by over 6% in
2004, which would make it Asia’s third-fastest growing
economy after China and Vietnam. Private sector economists
are even more bullish, forecasting growth this year to
be at around 6.4% and 8% for 2004.
Prime Minister Thaksin is even more ambitious and wants
economic growth to reach 10% in 2005. However, without
a liquid and well functioning bond market this most
probably would lead to an overheating of the economy
and misallocation
of capital.
Non-performing loans are still putting a drag on quality
growth but the increased issuance of liquid debt securities
will help in assisting the workout and restructuring
of bad debts.
In addition, more corporate bonds issues will result
in better capital structures for companies, a lower
weighted average cost of capital as well as providing
an alternative
to bank financing.
Another added advantage of the bond market is that
of channeling funds to the right sectors of the economy.
Bank lending sometimes tends to be politically motivated,
but the scrutiny and more democratic nature of the
bond
market helps an economy to best allocate capital for
productive rather than speculative use.
For this very same reason, Chinese authorities at present
are carefully studying and implementing the enhancement
of their local currency denominated bond markets.
Thailand has shown leadership by setting up the Bond
Market Exchange (BMX), a new trading platform for corporate
bonds. Trading liquidity of listed companies has been
improved, an efficient clearing and settlement system
has been introduced and as a result a wider array of
alternatives has been provided.
Before the launch of the BMX, bond trading was the
domain of the Thai Bond Dealing Centre (TBDC) whose
purpose
was to provide infrastructure for the secondary bond
market and to facilitate discussion of issues related
to bond market development.
Pricing transparency however was low and there was
no scope for retail investors to get involved. Even
among
institutional investors most of the activity was concentrated
on government rather than corporate bonds.
This in turn lead to little interest by companies to
issue corporate bonds due to a lack of investor interest
and subsequent low liquidity and transparency.
But now this is all changing. Last month the BMX started
trading with Bt141 billion of bonds (US$3.5 billion)
from some of Thailand’s leading companies: Siam
Cement, Thai Airways, National Finance (the country’s
biggest finance company) Advanced Info Services (the
nation’s largest mobile phone company by subscribers,
and its parent Shin Corp, (Prime Minister Thaksin’s
main company).
Buyers and sellers can get their bonds or money two
days after executing a transaction, one day faster
than the
settlement for stocks.
Before the launch of the BMX, only 53 of Thailand’s
415 listed companies had raised funds through the bond
market. Total outstanding issuance amounts to approximately
Bt 542 billion or less than 10 per cent of the market
value of all the stocks that trade on the Stock Exchange
of Thailand.
The BMX’s electronic trading and efficient settlement
system will open the bond market to retail investors.
Hong Kong as well is slowly warming up to the idea of
a retail bond market.
However, breaking the dominance of the stock market
might be difficult at first. This applies to both Hong
Kong
and China as well as Thailand -- but it is equally
important.
The bond market in Thailand and Asia is still in its
early stages. A strong educational push is needed,
but there is a lot of room to grow and the outlook
is very
promising.
The Writer is the Chief Investment Strategist for CFC
Securities.
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Costa
Rica: Stable Democracy Despite Economic Deterioration
By
Jonathan Lemco
 Costa
Rica is something of an enigma. Long before it became
fashionable for the large majority of poor emerging
market countries to adopt democratic practices, Costa
Rica was the exception. Despite a substantial degree
of economic inequality, it has long been in the forefront
of political democracies. It has also been able to
avoid all of the turmoil that engulfed many of its
Central American neighbors in the 1980s. Indeed, it
has had only two brief periods of violence since the
late nineteenth century. Of course, Costa Rica has
long benefited from support from the United States.
Also, it has not had a standing army within memory.
But its ability to retain its largely democratic character
over a long period of time is admirable and unusual
by any measure.
Like its neighboring countries, Costa Rica remains dependent
on agricultural exports as its primary industry. This is
problematic, as low coffee prices and an overabundance of
bananas have hurt. But unlike its neighbors, it has cultivated
a vibrant tourist industry and a fairly strong technology
sector as well. Land ownership is now reasonably widespread,
and there is a small but growing middle class. Poverty is
still readily apparent, but it has declined over the past
fifteen years and a strong safety net has been put into place.
According to World Bank figures, headcount poverty declined
from 27% in 1990 to 21% in 2000. Access to healthcare and
primary education is nearly universal.
From an investment perspective, Costa Rica’s democratic
character, its attractive industries, and its reasonably
well-educated population are obvious attractions. The government
is, however, faced with the twin challenges of reducing a
large deficit and a growing internal debt. Costa Rica’s
domestic fiscal problems are cited by the credit ratings
agencies (Moody’s and Standard & Poor’s)
as particularly troublesome for fixed income investors. They
both rate the sovereign in the “BB” range with
negative outlooks. The government continues to have trouble
curbing expenditures and investors should expect a budget
deficit of about 3.0% in 2004. Fortunately, Costa Rica’s
external debt burden is not particularly odious. The external
Debt/Exports ratio is forecast at 58.1% for 2004. In addition,
the government has had difficulty passing legislation that
would modernize the state-owned electricity and telecommunications
sectors. This stalled reform effort has hampered economic
growth.
Investors should also pay particular attention to inflationary
pressures. Over the past twelve years inflation has averaged
12%, which is second only to Honduras in the Central American
region. As of January 2004, it is in the 10.5% range. Also,
the monetary and exchange rate regimes promote dollarization,
which in turn, limit the scope for relative price adjustments.
But the economy is now improving. Boosted by the manufacturing,
construction and financial services industries, Costa Rica’s
monthly index of economic activity expanded by 5.4% in the
twelve months through June 2003 at 5.3%. This is the highest
level since July 2000. The latest government forecast, which
we regard with skepticism, puts real GDP growth for 2003
at 5.3%. (We expect it to be more in the 4.0% range for 2004).
Meanwhile, export earnings increased by 22.4% in the first
seven months of the year compared with the same period in
2002. A pending free trade deal with the United States may
also help the trade balance. Costa Rica is also a prime beneficiary
of the positive disposition that investors have towards all
sovereign credits offering decent yields. Its recent issue
of US dollar denominated bonds in January was substantially
oversubscribed.
Costa Rica is not without its problems. But relative to many
other emerging market sovereigns, its economy is open and
diversified. More striking is the fact that amidst economic
reversals, it has remained a democratic stalwart.
Geo-political
Issues – Some Bumps Ahead?
By
Scott B. MacDonald
 While
U.S. economic and corporate news are moving in a
generally supportive direction for the U.S. stock
market, geo-political factors are aligning on an
even more positive trend – at least over the
short term. This by no means reflects the view that
the threat of a major terrorist attack is not a possibility.
Rather, the Bush administration's objective of reducing
the scope for radical Islamic attacks and restoring
some degree of stability to the Middle East is looking
better than it has for some time. Bush now has four
things going for his foreign policy:
1) The capture of Saddam Hussein as well as the
capture of a number of other high-ranking
Baathist former officials
in recent weeks is hurting the ability of the
opposition to mount large-scale and widespread
attacks on U.S. and
Allied occupation troops. Rebel operations
to the north of Baghdad have almost stopped
since Saddam's capture;
2) A new constitution in Afghanistan and upcoming elections
indicates that there is an ongoing shift in control to
the local Afghan authorities. Along this track, if elections
are held, Afghanistan will have its first open elections
and the anti-U.S. forces will have to contend with a
government elected by the Afghan people rather than imposed
from the
outside. While this is not likely to stop the fighting,
it could help the central government establish greater
legitimacy with the population and take away some of
the propaganda points for the opposition, including the
Taliban;
3) Libya's admitting that it had a weapons of mass destruction
program and that it is now working with the United States
and the United Kingdom to dismantle such a program. For
anyone arguing that the use of force (or the threat of
using force) does not have results, certainly Libya's
move to be open about its WMD program and desire for
foreign
assistance in dismantling it, indicates that in some
cases this policy has value. Certainly the significance
of Saddam’s
capture was not missed on long-time Libyan strongman Col.
Ghadaffi; and
4) A quietly negotiated, yet effective working agreement
with Iran over Iraq. The Iran-U.S. rapprochement is probably
the most important as Washington is willing to take some
of the pressure off of Iran in terms of trade and allowing
Teheran some influence among the Shiites in Iraq (the
majority group). In return, Iran is allowing UN inspections
of its
nuclear facilities, is backing away from the pursuit
of nuclear weapons, and is less supportive of anti-U.S.
terrorist
groups (including whatever al-Qaeda agents are in Iran).
The improving relationship is marked by a sharp fall-off
in U.S. comments about the Axis of Evil and Iran's calling
the United States the "Great Satan". The U.S.
humanitarian aid to the victims of the Bam earthquake was
also important: that assistance was welcomed and was delivered
by U.S. military personnel - previously a big no-no for
Teheran.
The outcome of all of this is that the Bush administration
ended 2003 in a much stronger position than it was in
following the early occupation of Iraq.
Yet, problems still remain
- there is still no major momentum on a peace agreement
between Israel and the PLO, North Korea continues to
simmer, and calls for a shift in status
from being a province of
China to an "independent" Taiwan through a popular
referendum all have the makings of being flashpoints during
2004. There are likely to be growing concerns that Asia
could see another outbreak of SARS, as there are reports
of new cases in Guangdong, China and the Philippines. Avian
flue is now rising on the points of concern list.
In addition, the stakes in launching a major terrorist
attack on the part of al-Qaeda have risen. Despite the
ongoing tapes allegedly by Osama bin-Ladin, al-Qaeda
has not launched a major attack on the United States
or major
allies (UK, Australia and Spain) since 9/11. The heightened
airline security for flights from London and Paris during
the winter holidays reflected that al-Qaeda is not a
spend force. It is thought that al-Qaeda has managed
to recruit
new agents, who are referred to "White Moors",
i.e. Europeans or North Americans, who have converted to
Islam and do not fit any easy profiling. This also means
that a White Moor would carry a legitimate passport, hence
the tightened security in the UK and France, two countries
with large Muslim populations.
The international war on terrorism is not over. The risks
remain high. However, 2003 ended up in a more positive
direction than many had projected. The trick for 2004
is likely to center on how the U.S. handles the delicate
issue
of political development in Iraq. In particular, Washington
will have to strike a balance between maintaining control
of Iraq and allowing the Shiites to appear to wrest some
sovereignty from the United States. For this to happen
the Bush administration will have to be flexible and
somewhat thick-skinned. For the Shiites, they will have
to carefully
measure their rhetoric while not allowing actions to
get out of control. The end game for Washington is to
have
a relatively representative government in place (that
means Shiite-dominated) by year-end 2004 so that the
Bush administration
can demonstrate that Iraq was not a policy disaster -
at least until after the November elections. For the
Shiites,
the end game is the creation of an Islamic republic,
which they dominate. Failure for both sides to reach
an accommodation
could reverse some of the gains made in the international
war on terrorism in 2004.
The other major battle zone is going to be Saudi Arabia.
Since 2001 there has been an ongoing and marked political
polarization between the regime and its supporters and
those opposed, in particular, al-Qaeda and liked-minded
radical Islamists. The problem is that a majority of
the Saudi royal family is corrupt, largely opposed to
any changes
(including reforms), and has been slow to deal with the
radical Islamic threat. In 2003 and early 2004 the regime
has made a greater effort to deal with the problem, but
those willing to challenge the government also appear
to be stepping up their activities. While it would be
rash
to argue that any change is imminent, the political stability
of Saudi Arabia is a major point of concern. There is
no mistake that many countries, including China, are
actively
seeking energy sources outside of the Middle East. Too
much dependence on Middle Eastern oil leaves the door
open to the political upheavals top come.
Japan
Briefs
by
Scott B. MacDonald
Japan- Foreign Exchange Reserves Up: Japan’s
foreign exchange reserves increased by 43% to $673.52
billion at year-end 2003, posting a record high
for the fifth consecutive year, according to the
Ministry of Finance. The sharp rise is because
of repeated and massive interventions in the foreign
exchange market by the Bank of Japan in 2003 to
stem a rise in the yen's exchange value. The year-on-year
increase of about $200 billion roughly matched
the Y20 trillion the government spent on intervention.
The 43% growth in reserves is the highest since
1995.
In 2003, the Ministry of Finance stepped into the
foreign exchange market almost every month through
the Bank of Japan, spending more than 1 trillion
yen to buy dollars in hopes of offsetting strong
selling pressure on the greenback due to the Iraq
war. In September alone, the MOF spent over 5 trillion
yen, and continued to intervene in the market to
the tune of 1.5 trillion yen to 2.0 trillion yen
per month from October through December. Consequently,
Japan’s foreign currency reserves topped
$600 billion for the first time at the end of September
and continued to hit all-time highs in each of
the following three months. The government has
continued to purchase the dollar since the beginning
of 2004 as the yen continued to appreciate. This
is likely to result in even further increases in
Japan’s foreign exchange reserves.
Bank Turnaround – Looking for a Success Story?: Everyone
likes a Phoenix-like story of businesses rising
from the dead. In Japan, many companies
have sadly risen, although they amble along
as walking dead zombies. However, this could
be
changing – albeit
slowly. Shinsei Bank, formerly the Long Term Credit
Bank that was nationalized by the government and
sold to Ripplewood Holdings, a U.S. investment
company, will re-list on the Tokyo Stock Exchange
by February 19, 2004 though Ripplewood will maintain
management rights. Significantly, Shinsei Bank's
move will mark the first time a financial institution
returns to the stock exchange after being temporarily
nationalized. The bank collapsed in October 1998
and was reborn as a private sector-owned bank in
March 2000. The new management took advantage of
a loan buyback provision that gave the bank the
rights to sell loans whose values dropped significantly.
The fact that Shinei’s management used this
option and played hardball with deadbeat borrowers
was not always appreciated by the authorities or
the business community, especially during the first
couple of years. However, Shinsei’s performance
gradually improved. Although the process of rebirth
as a public company has been long and painful,
Shinsei’s story provides a model for
a business turnaround led by a foreign investor.
There are roughly 1.35 billion common shares outstanding,
almost all of which are owned by an investment
partnership created by nine foreign financial institutions,
including Ripplewood. About one-third of the outstanding
shares, or roughly 450 million, are expected to
be offered in February, with the initial offering
price likely to be set at around 1,000 yen per
share. The IPO is expected to generate a total
of 400 billion yen to 500 billion yen.
Banks – Lending Less: Japanese banks continued
to lend less in December while the money supply
grew modestly, according the Bank of Japan. Bank
lending declined 5.1% year-on-year, deteriorating
slightly from a fall of 5.0% in November.
Foreigners in Big to Japanese Markets in 2003:
Foreign investors were net buyers of Japanese stocks
for the third consecutive year last year, purchasing
a net Y8.213 trillion on the Tokyo, Osaka and Nagoya
bourses. It was the second-biggest annual net buying
of Japanese stocks by foreign investors since the
TSE started disclosing trading data in 1981. In
1999, foreign net buying totaled Y9.128 trillion.
Foreigners bought a gross Y72.380 trillion of Japanese
shares in the year against Y64.167 trillion of
sales.
In contrast, local investors were net sellers last
year. Among them, the TSE said individuals sold
a net Y1.652 trillion last year and investment
trusts sold a net Y141.61 billion. Corporations
sold a net Y224.51 billion, while financial institutions
sold a net Y6.992 trillion, the TSE said. In December,
foreign investors were net buyers of Japanese stocks,
buying net Y571.96 billion in the month. It was
the ninth month of foreign net buying in a row.
In November, foreign investors bought a net Y609.51
billion of Japanese shares.
By
Scott B. MacDonald
 Afghanistan – Elections
Scheduled: Afghanistan has long been held up as a model of
a failed state. Invaded and occupied by the Russians, torn
apart by civil war, conquered by the zealots of the Taliban
and their al-Qaeda allies, the central Asian country has
a new constitution and scheduled elections for June 2004.
President Hamid Karzai fought and won a presidential system,
which hopefully the majority of Afghans will have the right
to vote for in June. The new constitution establishes an
Islamic Republic in which the president will rule with the
national assembly. Women are recognized as equal citizens
and will have close to one fifth of the lower-house seats
reserved for them. Two official languages are recognized – Pashtu
and Dari. The president’s powers are extensive, but
are checked by the national assembly, which is given the
right of say in fundamental policies, some monetary matters
and the right to censure ministers.
Argentina - Argentina’s
official unemployment rate has dropped from 21.5 percent
in May 2002 to 14.3 percent in third-quarter
2003. However, the data is not reliable because it includes government
subsidies to hundreds of thousands of people who, though they
are not working, are listed as employed simply because they
are receiving
government money, Buenos Aires daily Clarin reports.
eMergingPortfolio.com Fund
Research tracks country/regional weightings and fund flow data on the widest
universe of funds available to emerging market participants, including
more than 1,500 emerging market and international equity and bond funds
with $600 billion in capital and registered in all the world's major domiciles. http://www.emergingportfolio.com/fundproducts.cfm.
eMergingPortfolio.com also offers customized financial analysis, data and
content management services on emerging and international markets for corporate
and financial Internet sites. For more information, contact: Dwight Ingalsbe,
Tel: 617-864-4999, x. 26,
Email: ingalsbe@gipinc.com.
Bhutan - At least 50 people -- including 32
soldiers -- have been killed in southern Bhutan in battles between
government troops
and Indian separatist rebels, according to reports on Dec. 17.
More than 80 soldiers have been wounded and rebels from India's
eastern state of Assam say 16 of their fighters have been killed
and 50 wounded since fighting started on Dec. 15. The operation
is the first Bhutan’s 10,000-member army has mounted against
the United Liberation Front of Assam (Ulfa) and the National
Democratic Front of Bodoland (NDFB), which have been hiding from
Indian troops
inside Bhutan.
India - Russian Defense Minister Sergei Ivanov and Indian Defense
Minister George Fernandes signed a $1.5 billion deal on Jan. 20
to sell the Russian aircraft carrier Admiral Gorshkov to the Indian
navy. Russia will refurbish the carrier before delivery in 2008.
India is acquiring 28 MIG-29MK jets for the carrier in the deal
as well as unspecified parts and components for the carrier, likely
to include new missile and radar systems and helicopters.
Book
Reviews:
Alexander Hamilton: A Life
 William
Sterne Randall, Alexander Hamilton: A Life (New York:
Harper Collins, 2003). 476 pages. $15.95 paperback.
Reviewed
by Scott B. MacDonald
 Click
here to
purchase William Sterne Randall's
book, "Alexander Hamilton: A Life", directly from Amazon.com
At
a time when tales of U.S. Treasury Department secretaries
appear to be all the rage, it is insightful to have at
hand an excellent biography of the first man to fill
that position, Alexander Hamilton. Although his life
has been treated before, William Sterne Randall’s
account, Alexander Hamilton: A Life is well worth the
money.
Randall, an accomplished historian with biographies
on Washington, Jefferson and Franklin, presents a well-written
and vivid re-telling of Hamilton, the bastard son of
an English women in the Caribbean, who climbed his way
from being a clerk in a West Indian clearing house to
become the first Secretary of the Treasury Department
and an active participant in the shaping of America’s
political, economic and financial systems.
The strength of Randall’s book is that he makes Hamilton’s
life, from his birth to his death in 1804, following a duel
with Aaron Burr, accessible for the general reader. The story
is indeed compelling. Yet, the bulk of the book is on youth
and the war years. Less attention is given to his post-Revolutionary
career, which for those in finance, is the most interesting.
Even so, what Randall does give us has application to the
post-stock market bubble of the 1990s. Hamilton was an early
believer that the maturing private interest was the glue
that would hold American society together and make it succeed.
As Randall noted of Hamilton’s views: “Just as
long as Americans learned to reign in their impulse toward
unbridled greed and could control, channel, and regulate
their prosperity for the public good, they would be invincible
even against English military might.” To his credit,
Hamilton had an active hand in founding the first bank in
the United States, creating the Treasury Department during
the first term of President Washington, and bringing the
national debt under control.
Hamilton was also the first treasury secretary to effectively
deal with a financial panic in 1792, by intervening in the
market. As Randall noted: “By acting so fast, Hamilton
actually helped the federal budget and cushioned the crash,
keeping it from spreading and ruining major taxpayers.”
While Randall portrays Hamilton as a grand architect for
the U.S. financial system, he also brings him across as a
very human figure, with human weaknesses. Randall conveys
some sense of Hamilton’s disdain for the mob, his two
affairs outside of his marriage, and an inability to judge
some people (such as first deputy at the Treasury William
Duer, the man who sparked the financial panic of 1792). At
the same time, Hamilton helped pay off the debts of his old
comrade at arms, Baron Steuben, an act which kept the older
man out of debtors prison.
For anyone looking for a good historical read with relevance
to today’s world, Randall’s Alexander Hamilton
has much to offer.
Recent
Media Highlights
For
pictures and updates of our recent Japan Small Company
Investment Conference, click above
Past
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