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State fund becomes market player

Tuesday, March 21, 2006

ENOCH YIU and BEI HU

The National Council for Social Security Fund (NSSF) has opened an account in the local stock market's clearing house, indicating that it has successfully lobbied mainland authorities to allow it to receive shares, rather than cash, from the initial public offerings of state-owned enterprises.

Market sources say that such a major policy shift will mean the giant pension fund is in a position to boost its funding through H-share initial offerings.

Under rules introduced in 2001, all state shareholders selling stakes were required to give 10 per cent of the proceeds of new listings to the NSSF, the fund of last resort designed to plug holes in provincial social security systems.

Sources say Bank of China, due to list in Hong Kong in May, could be among the first big initial offerings to pay the NSSF in shares.

The plan still faces objections from China SAFE Investments, the bank's dominant state shareholder, which argues the NSSF had already agreed to a pre-offering investment of 10 billion yuan.

The first company to be affected by the rule will be Hunan Nonferrous Metals Corp, which launches its initial offering today and give a 3.3 per cent stake to NSSF.

Tony Espina, chairman of the Hong Kong Stockbrokers Association, said the new policy would silence mainland critics who had long complained that the listing of state-owned enterprises in Hong Kong would permit them to fall into the hands of overseas investors.

"The NSSF will be able to hold on to these stocks in the long term, receiving dividend income and the capital gains from these IPOs," Mr Espina said. "It means that H-share listings will benefit the national pension funds and the future pensioners of China."

Previously, the NSSF was paid in cash from Hong Kong offerings, allowing it to invest the proceeds only in bank deposits or bonds with low returns of just 3 per cent a year.

posted by Henry @ 6:32 PM 0 comments

Big Name Bets on Small Deals

Goldman FindsGrowth on the Cheap In Hong Kong-Listed Firms

By KATE LINEBAUGHMarch 21, 2006; Page C14

HONG KONG -- Investors hunting for small China or Hong Kong plays might consider following the money. Goldman Sachs' money.

In recent months, Goldman Sachs Group Inc. has invested US$140 million in three small Hong Kong-listed companies in businesses ranging from construction to gas exploration. Buying either equity or equity-linked securities, the New York investment bank has helped fund these thinly traded and capitalized companies, which aren't in a category generally associated with one of Wall Street's premier names.

Should investors follow Goldman's lead? In Asia, the combination of low valuations and solid growth prospects can make less-recognized names a lucrative opportunity, some investors say. But many of those stocks have already performed strongly this year, thanks in part to an influx of foreign money -- such as Goldman's -- into one of the world's fastest-growing regions.

Goldman, which last week reported a 64% increase in fiscal first-quarter net income to a record $2.48 billion, is hoping that taking on more risk both for clients and on its own books will yield better returns.

"They are the first of the big names to invest in the small entrepreneurship area," says Yang Liu, a portfolio manager in Hong Kong for Atlantis Investment Management. "I think that this game has just started."

In November, Goldman bought a 17% stake in Baoye Group, a private-sector Chinese construction company based in Zhejiang province with more than 40,000 employees. With the HK$209.3 million (US$27 million) of proceeds from the sale of new shares, Baoye has begun expanding into other provinces. Last week, it announced a HK$127.7 million purchase of Hubei Construction Group.

Goldman's investment came after the stock already had roughly tripled from a public offering price of HK$1.43 a share in 2003. Still, the shares have more than doubled since Goldman's entry, closing at HK$12.75 a share yesterday. (Goldman paid HK$4.85 a share, a 7.6% discount to Baoye's market price of HK$5.25 on Nov. 3.) Since the beginning of the year, Baoye's shares have risen 59%, in line with a rally of China stocks.

In January, Goldman invested HK$312 million in China Green, a private-sector agricultural company in Fujian province, to help it finance a food-processing center in Shanghai. Goldman bought a five-year convertible bond and was paid HK$12.2 million for managing the deal.

When China Green went public in January 2004, it set a Hong Kong record, as retail investors ordered 1,600 times as many shares in the initial offering as were available. That demand spawned a 58% price jump on the first day of trading to HK$2.025, though the shares then languished and took nearly two years to reach that level again.

On Jan. 25, the day Goldman struck its deal, China Green's shares closed at HK$2.50. Since then, they have risen 45% to HK$3.625 -- well above the HK$2.655 price at which Goldman can convert the debt into equity. China Green's shares are up 69% this year.

Whether Goldman just knew a good time to get into these small China plays or whether its capital fired them up -- or both -- the investment bank's strategy is worth watching.

To be sure, Goldman has put money down in large China investments, too. Alongside its private-equity arm, Goldman invested $2.58 billion in China's biggest bank, Industrial & Commercial Bank of China.

But the two small investments, about which Goldman declined to comment, have drawn attention.

"It's just a trend for investment banks to spot out viable small- and mid-cap stocks and take a significant stake by way of equity or convertible bond," says Andy Mantel, managing director at Pacific Sun Management in Hong Kong. Mr. Mantel, who owns China Green shares, says the company trades at about seven times his forecast of 2007 earnings. He estimates sales will hit US$100 million that year. In the six months ended Oct. 31, company revenue was US$32 million.

Most investment banks have proprietary trading operations, for their own accounts, and make investments that generally aren't publicized. Because Goldman's two Hong Kong investments crossed certain thresholds, they were publicly disclosed to the city's stock exchange by the companies themselves.

For Goldman's private-equity arm, buying into obscure companies, with limited opportunities for advisory fees, isn't typical. It usually looks to leverage investments in companies into such fees when they do a deal or go public.

Many investors are looking at China in search of higher returns. And huge funds are available. Globally, private-equity funds raised US$246 billion last year, compared with US$97 billion in 2003, according to Thomson Venture Economics. Goldman is part of the trend, making investments -- and, like specialized Asian investors -- using its regional experience to find capital-hungry Hong Kong companies that have low valuations but good growth prospects.

"Most of your returns should be coming from this area," says Ms. Liu of Atlantis, "but they require tremendous expertise."

Goldman's latest deal, with Techpacific Capital this month, veered into different territory, with no China angle.

With interests from London to Japan to Louisiana, Techpacific changed into a merchant bank-cum-gas exploration company after the collapse of the technology market made its original mandate, as an incubator for technology companies, untenable. Techpacific is a holding company with an 81% stake in London-listed merchant bank, Crosby Capital Partners, which in turn owns 28% of a Japan-listed company, IB Daiwa.

To raise capital for IB Daiwa's gas-exploration projects at three Louisiana sites, Techpacific began talking to bankers to sell a bond convertible into Techpacific's shares and exchangeable into those of Crosby. That is when Goldman swooped in, offering to take the deal on its own books without a road show.

On March 6, the two parties the completed the US$75 million deal. The five-year bond is convertible into Techpacific's shares at HK$0.7665 or exchangeable into Crosby shares at 99.75 pence (US$1.75). At the time, Techpacific shares were trading at HK$0.75. Subsequently they rose to HK$0.81, but yesterday were back to HK$0.75. Goldman may have sold some of its exposure to DKR Capital Partners, a Stamford, Connecticut, hedge fund that disclosed an interest in Techpacific to Hong Kong's stock exchange. Goldman declined to comment.

Write to Kate Linebaugh at kate.linebaugh@wsj.com

posted by Henry @ 6:26 PM 0 comments

China: What Next?

Andy Xie (Hong Kong)

*****Overcapacity is causing investment slowdown: I estimate that fixed investment in industries that are experiencing overcapacity contributed 40-50% of GDP growth in 2005. Without other components of the GDP accelerating, China’s economy should slow in 2006.

*****Spending more on infrastructure won’t reverse the trend: The infrastructure areas that can justify more investment account for 4% of total investment, I believe. Spending more there won’t reverse the trend.

*****Stimulating property again could lead to another wave of bad debts: Giving property a second wind is a popular proposal for stimulating the economy. Cutting mortgage rates could boost sentiment. However, it would mostly encourage more speculation. The industry is already swollen and highly speculative.

*****Lifting consumption is hard to do: The main problem for consumption is the low income and wealth of the household sector. To solve the problem, the government could securitize its assets for distribution to the population, which could create a consumption boom for several years. However, vested interests may prevent such a policy change.

Summary & Conclusions

China is running into serious overcapacity. On the demand side, I estimate fixed investment accounted for 58% of China’s GDP growth over 2000-05 and the current account 9%, using revised-up GDP as a benchmark. Of course, on the income side, export growth has accounted for most of the increase that has funded the fixed investment expansion.

Overcapacity is likely to force China to slow down fixed investment. In addition, I expect export growth to slow down to 15% in 2006 from 28% last year due to deceleration in factory relocation. What could sustain China’s high growth rate in 2006?

Property is widely discussed as the best option. China has vast overcapacity in steel and cement. Property is the primary user of both. This is why pushing property has become an attractive option. This sort of planning mentality could create another wave of bad debts, I believe, and cripple China’s economy for years to come.

The signal for a property push would be a cut in mortgage rates. If this were to occur, the market could become euphoric again. I doubt that it would push up physical demand significantly. The disconnect between price and supply is too big to overcome simply via a reduction in mortgage rates. Prices need to come down substantially to clear current supply and support more supply to boost GDP. I think another wave of bad debts would be inevitable from such a bubble push for GDP growth.

Infrastructure is considered an alternative. In terms of its fiscal situation, the government has ample room to stimulate. Infrastructure is overbuilt in most areas already, though. I believe a big push in selected areas (e.g. water and environment) would be worthwhile, but the potential boost from such areas would be insufficient to offset the overcapacity-induced investment slowdown or export deceleration.

Consumption is the alternative that receives the most coverage, but rarely receives serious attention when it comes to policy changes. China’s relatively weak consumption is due to demographics, skewed income and wealth distribution, arbitrary healthcare costs, and high property prices. The government could securitize and distribute government-owned assets to boost consumption quickly. Fixing the healthcare system and maintaining affordable property prices would boost consumption over the long term.

Accounting for GDP Growth

China’s national accounting data are very confusing. The latest revisions make it even more complicated. My suspicion is that the revised total value of GDP is closer to reality than the old value, but is on the high side of the potential range. Rmb18.2 trillion of 2005 GDP no longer underestimates China’s GDP, in my view.

China compiles production data most diligently – a legacy of the planning economy. Demand side data are woefully inadequate. The income side data are missing. I have roughly estimated the various components of China’s national accounts on the demand and income side. In the text below, I provide a breakdown of my methodology in deriving these ‘guesstimates’.

China keeps the most detailed information on production side data. Such data are the most difficult to verify. There are millions of business units in China. The market can check only the accuracy of trends by following selective corporate production data. For example, the decoupling of electricity and industrial production in 1998 was cited as the main evidence of overstatement of GDP growth at that time. On aggregate production data, we have to use whatever is available from the National Statistics Bureau.

On the demand side, China keeps detailed data on fixed investment. Since central or local government has to approve virtually all significant investments, I assume that the data largely reflect reality. I suspect the main inaccuracies relate to the extent to which funds for investment are diverted for consumption. I would not be surprised if this sort of double counting represented as much as 10% of the investment amount. To allow for this, I assume Rmb8.1 trillion for fixed investment in 2005, compared with Rmb8.9 trillion in the monthly fixed investment data series.

I derive a net export figure from my current account (CA) balance estimate. The differences between net exports and the CA balance have been erratic in recent years. The CA surplus was 40% higher than net exports in 2004. This is attributable to hot money inflows disguised as CA items. I estimate the CA surplus reached around Rmb 1.3 trillion in 2005. Considering that hot money inflow slowed substantially in 2005 compared with the year before, I consider a figure of Rmb1 trillion reasonable for net exports in 2005.

The difference between GDP and fixed investment plus net exports is consumption. This number is also relatively simple for most people to estimate – we all have a reasonable feel for our own consumption, and how this compares with the average. Multiplying that by the population is consumption. Rmb9.1 trillion for China’s national consumption feels about right to me. I use the 2004 distribution shares of consumption among urban, rural, and government to divide Rmb9.1 trillion among the three sectors.

The revised production data show that nominal GDP rose from Rmb9.9 trillion to 18.2 trillion between 2000 and 2005. I estimate that fixed investment rose from Rmb3.3 trillion in 2000 to 8.1 trillion in 2005 (accounting for 58% of the GDP growth), while net exports rose from Rmb 224 billion in 2000 to Rmb1 trillion (accounting for 9% of the GDP growth).

On the income side, I identify Rmb3.1 trillion of household savings in household savings deposits, a rise in mortgage downpayments and principal paydown, life insurance and pension assets. Added to household consumption, this implies total household income of Rmb10.2 trillion in 2005. It suggests 30% of household savings deposits, which seems not unreasonable.

Government income is the proceeds that the government uses to consume and invest, of which consumption is Rmb2 trillion and investment about Rmb0.5 trillion. This item is not big in other economies, but is very large in China due to the dominant role of the government in the economy.

Monetization of natural resources is a big part of China’s GDP. Oil, coal, and land are the three big ticket items. The income from these sources usually goes into investment through local government or SoE accounts. I estimate that the profit component through the production chain in monetizing such resources was about Rmb1 trillion in 2005.

Other sources of profits are primarily from state-owned monopolies (e.g., banks, telecom companies, utilities, etc.), export companies, property companies, and foreign owned businesses in the consumer sector. Based on profitability trends in companies’ reported data, I derive very rough profit estimates for these segments in 2005, as follows: the state-owned companies ex-the resource sector probably earned Rmb500 billion last year; exporters saw a net profit margin of about 3% on US$762 bn of exports (i.e. Rmb 185 bn in net profits); property developers probably earned Rmb200 bn, foreign companies in China’s domestic market probably earned Rmb 200 bn, and all other companies probably earned another Rmb200 bn. This produces a total of Rmb1.3 trillion.

The residual of Rmb 3.2 trillion is assigned to depreciation. China invested Rmb27 trillion between 2001 and 2005. The total capital stock for productive purposes is probably over Rmb50 trillion now. On this basis, Rmb3.2 trillion of depreciation would represent about 6% of the productive capital stock. Considering how low the returns on capital are on most investments, 6% seems a reasonable level.

The above estimates are really one man’s efforts. The true data could be off by 5% or even more. However, considering the opaque state of affairs, I think it is better than nothing.

The Growth Gap from Overcapacity

China may have over-invested in manufacturing, electricity generation, highways, ports, and property. These sectors accounted for about three-quarters of growth and 60% of total fixed investment in 2005. Under normal circumstances, overcapacity would lead to price and profit decline, which triggers investment decline. However, as local governments have strong influence over investment funding and are motivated by growing GDP at any cost, overcapacity may cause fixed investment stagnation but not decline.

Stagnation of investment in sectors with overcapacity could still have a serious effect on GDP growth. I estimate that growth of investment in such industries accounted for 40-50% of demand growth in 2005. Without acceleration in other GDP components, China’s economy could experience a significant slowdown, deflationary pressure, and a surging trade surplus.

Various ideas are being mooted as to how to sustain high GDP growth. I discuss three popular ideas below.

Pump-Priming Again

The government’s finances have improved tremendously; the fiscal balance bottomed at 2.6% of GDP in deficit in 2002 and was probably balanced in 2005. The actual improvement is much bigger. Many previously outstanding arrears, such as VAT rebates for imported components and equipment for export production, have been paid off. Fiscal incentives for purchase of domestic equipment have been increased. In short, China is in a good position to engage in fiscal stimulus.

Because personal income tax is quite small in China’s tax revenue (direct taxes such as VAT, business tax, and tariffs account for 63% of tax revenue), cutting tax does not stimulate the economy effectively. ‘Borrow and spend’ could be effective, however.

Increasing infrastructure spending is the policy suggestion that I have heard most. However, it won’t be easy technically. The transportation sector accounts for 40% of infrastructure investment and is already experiencing overcapacity. The container ports, for example, are headed for overcapacity on existing projects, despite rapid trade growth. China already adds more highways every two years than Japan has in total. The utilization rate of highways is low in most provinces. Even the railroads are not as underinvested as many believe. The coal-shipping bottleneck has eased and is likely to be solved for good once the three dedicated rail lines under construction are completed.

The electricity sector has accounted for 90% of investment growth in the utilities sector. According to the National Statistics Bureau, installed capacity reached 500 GW by end 2005, with 300 GW under construction. The amount of capacity under construction is similar to the total capacity in the UK, France, and Germany combined. This sector is headed for a prolonged period of overcapacity, in my view.

Gas and water distribution seem to deserve more investment. These sectors accounted for 1% of total fixed investment in 2005. 3G could increase telecom investment. This sector is less than 2% of total fixed investment. Similarly, rail, at about 1% of total fixed investment, may deserve more investment. These three sectors totalled 4% of total fixed investment. A push there could ease the decelerating trend, but would hardly reverse it.

Second Wind for Property?

Stimulating property is the hottest macro idea in the market at present. The cement and steel industries have massive overcapacity. Property construction needs both. Wouldn’t it be smart to stimulate property again?

Property has become a vast industry that involves all local governments, tens of thousands of property developers, thousands of construction companies, banks, and tens of thousands of materials suppliers. The government reported 18.6% growth in property under construction in November 2005. If that growth rate continued into December, total property under construction would be 1,666 million sq m.

At Rmb 2,759/sq m (the official average selling price in November 2005), the total market value of property under construction would thus be Rmb 4.6 trillion – or 25% of revised-up 2005 GDP.

The property data are not reliable. Local governments have incentives to skew the data in their favor in relation to the central government and potential buyers. The overwhelming incentive is to underreport volume under construction to boost price expectations. It is obvious that property is not selling well in some key cities. But, local officials still report brisk sales. Hence, volume under construction is probably considerably understated.

Understating average selling prices has also become widespread, as the central government has shown displeasure at skyrocketing prices that upset people. However, to entice potential buyers, local governments and property developers must project a picture of skyrocketing prices. This is why the media under the control of local governments or property developers report sensational stories about price rises while the government statistics show low and stable average selling prices.

I would not be surprised if the properties under construction were worth 35% of GDP if all the data were properly adjusted. Even levels of around 25% are associated with economies that subsequently experienced big problems (e.g. Thailand in 1997).

The average selling price of an 80 sq m flat is 8 times average urban household income, on my estimates. In some hot cities, the ratio is as high as 12 times. While such high prices are not unheard of (about 8 times in Hong Kong), the combination of such high prices and high volumes has never happened before. If we take the official data, China was building 1,290 mn sq m of residential properties or about 16 million flats at the end of 2005. That is about 10% of urban households.

The government data still show strong sales of properties. Because this is such a fragmented industry, it is impossible to verify the data. However, it is easy to see the empty buildings in so many cities. In the western cities, the situation is even worse than in the coastal region, I believe.

If China wants to give property a second wind, it could cut mortgage interest rates. China’s mortgages are all floating rate. The interest rate of 5.5% is 3.25% higher than the one-year deposit rate. This sort of spread for mortgage products is unheard of elsewhere. It would seem reasonable to cut mortgage interest rates by one percentage point.

Such a policy decision would certainly lift the property industry, mainly through reviving speculation rather than genuine final demand, I believe. For final demand, the disconnect between price levels and income is the main issue.

Further, it would lead to another wave of borrowing for land speculation. Land purchases have exceeded land under development massively in the last few years. I estimate that purchased land not developed could total 725 mn sq m, 3.6 times the land that went into development in 2005. Anecdotal evidence suggests that land flipping is widespread. Cutting mortgage rates could lead to another wave of bad debts, in my view.

If 725 mn sq m land does go into development, and 80% of it is for residential property, this could result in 25 million more flats. Together with the 16 million already under construction, 41 million flats would be equal to 25% of urban households. We do not know how many sold flats are empty, but a figure of 5 million wouldn’t surprise me.

In my view, giving property a second wind is just an excuse to turn bank loans into revenues for local governments and profits for speculators and leave a wave of bad debts behind for the Chinese population. I am not ruling it out, though. Vested interests may be powerful enough to bring about such a policy shift.

Lifting Consumption

Shifting to a consumption-led growth model has been China’s dream for ten years. The reality, I believe, is that consumption declined to around 50% of GDP in 2005 from 65% in 1995, after taking into account the GDP revisions. There are many technical reasons why China’s consumption is relatively weak. The main political factor is that the Chinese government is too powerful in the economy and too interested in mobilizing resources to invest to show progress.

The household savings rate is about 30%, on my estimates. This is high by international standards, but cannot explain China’s low consumption level. The low share of household income in GDP (56%) could be a more important factor. To boost consumption, then, the government needs to increase household income.

I think the most effective way is to securitize government-owned assets and distribute them among the population. Currently, monetizing natural resources such as coal, oil and land creates income that goes immediately into investment through government-controlled channels. Were these assets owned by the broader population, they could decide how much to consume and how much to save. Such a policy could lead to multi-year consumption boom, in my view.

However, in the past few years, powerful vested interests have emerged to take advantage of government-controlled assets, making pro-consumption reforms difficult. This is why I am not optimistic that China can shift to consumption-led growth.

Declining cyclical savings could naturally lead to a higher share of consumption in GDP. During an economic boom, the prices of natural resources (e.g., coal, oil, and land) surge, which is a tax on household income and shifts money to businesses and government, which are more interested in investment. When the cycle cools and the prices of natural resources decline, the process reverses and household income’s share in GDP rises. Consumption’s share in GDP also rises naturally. However, this sort of cyclical fluctuation does not signal any change in China’s development model.

posted by Henry @ 12:50 AM 0 comments

China Steelmaking Capacity Balloons

SEOUL -- World steel industry leaders are worried that mounting overcapacity in China could push down steel prices at some point, despite continued steady demand growth for their products world-wide.

"In coming years, there will be massive, massive excess capacity" in China, said Nicholas Lardy, an expert on China and a senior fellow at the Institute for International Economics in Washington, in a speech to a group of steel industry executives at the International Iron and Steel Institute annual meeting, which is being held in South Korea this week.

China added about 50 million metric tons of steelmaking capacity in 2004 and will add more than that in 2005, taking that country's annual steelmaking capacity to roughly 400 million tons, according to Mr. Lardy. That is enough to meet the country's annual demand until 2015, he said. Mr. Lardy said government efforts in China to consolidate steel capacity and limit expansion could take longer than expected, largely because of resistance from Chinese provincial governments that seek to foster local steelmakers.

The Chinese buildup comes at a time when producers have stumbled in efforts to curb capacity growth elsewhere in the world by cutting back on subsidies paid by governments. Talks at the Organization for Economic Cooperation and Development in Paris aimed at ending state subsidies have fallen apart as trade representatives couldn't agree upon how to implement changes. "These [talks] are not likely to restart in the near future," said Ian Christmas, secretary general of the IISI. "We believe it is still a real issue that, at some stage, if we want a competitive dynamic and open business, we have to address."

In addition to China, steel companies also are grappling with lofty prices for raw materials and energy and face growing competition from rival materials such as plastics, aluminum and cement in key markets such as automotive and containers. And yet, the industry is also enjoying one of its strongest periods of prices and profits as the result of a global commodity boom.

"We are in a very prosperous industry and we believe the outlook for next year is very positive," said Mr. Christmas. "We are not saying it is all gloom and doom. We are saying there are risks and dangers going forward."

Mr. Christmas criticized the world's three largest iron ore companies -- Brazilian mining giant Companhia Vale do Rio Doce, or CVRD, Rio Tinto and BHP Billiton -- for having a natural monopoly with 70% market share for iron ore shipped across the oceans. Steelmakers use iron ore as an ingredient to melt in their furnaces, mixing it with other materials, to create steel.

"Their current market behavior could be a threat to the long-term competitive position of steel," said Mr. Christmas. He and other executives said the organization doesn't plan to raise anticompetitive issues against the iron ore industry at international trade bodies. Instead, he said, steel companies and others are seeking to buy up iron ore mines and bring more iron ore into supply. Mittal Steel Co. of the Netherlands, for example, is pursuing iron ore mines in Liberia.

The IISI estimates steel demand in 2005 stands at 998 million metric tons, up 3% globally from 2004. It expects demand to grow even more in 2006 with an estimated 1.04 billion tons consumed, up 4% or 5% from 2005.

posted by Henry @ 1:26 AM 0 comments

Prices Fall in Manhattan As Housing Market Cools

NEW YORK -- Housing market watchers can exhale. Prices in some of the nation's hottest markets are at least leveling off, and in some cases even coming down.

In New York, a report prepared by appraisal company Miller Samuel Inc. on behalf of real estate firm Prudential Douglas Elliman released Tuesday showed that average Manhattan apartment prices fell nearly 13% in the third quarter 2005 to $1.15 million from $1.32 million in the second quarter.

Housing stock is also staying on the market longer, the report showed, with the number of days it takes to sell an apartment increasing a month to 133 days from 102 days.

The report was confirmed by other research, including reports from two other real estate firms, Brown Harris Stevens and Halstead Property. These showed that average apartment prices in Manhattan were down 11% in the third quarter for co-ops to $1.04 million from $1.17 million in the second quarter, and down 10% for condominiums to $1.28 million from $1.42 million in the previous quarter.

Data released earlier in the week by real estate appraisal firm Mitchell, Maxwell & Jackson Inc. showed that average Manhattan apartment prices for co-ops and condos south of 96th Street fell 3.9% to $1.09 million, the first time in two years the firm had seen a drop in prices. The decline followed a drop in overall demand, according to Mitchell, Maxwell & Jackson managing director Michael Martin, as the number of sales dropped 33% to 1,031 from 1,528.

The Prudential Douglas Elliman report also showed a decline in sales, albeit more modest. In the third quarter, the number of sales dropped 8.4% to 1,997 from the prior quarter's total of 2,181, "as mixed economic news weakened demand," the firm said in a press release.

Not Just New York

The apparent slowing in the New York housing market followed signs of cooling off in markets across the country. The most recent national data have been mixed, while reports from specific West Coast markets have been pointing to a possible slowing of demand.

New home sales reported last week fell 9.9% to a seasonally adjusted rate of 1.24 million units in August, according to the Commerce Department. But the pace of existing home sales rose 2% in August to 7.29 million units, a near-record pace, according to the National Association of Realtors.

In San Francisco, the number of homes sold in August dropped 9.9% to 662 from 735 sold in the same month a year ago, though median prices still climbed a healthy 11.5% to $745,000, according to DataQuick Information Systems. In San Diego, the number of homes sold dropped 3.6% to 5,379 from 5,580 a year earlier, and the median price rose just 2.1% to $493,000.

With home prices appreciating routinely at a double digit pace for a couple of years in certain metropolitan markets, analysts have long predicted a slowdown would eventually take hold. In New York, prices "are going to reach a level that just can't be sustained," said Mr. Martin, the managing director at Mitchell, Maxwell & Jackson.

Particularly with short and long-term interest rates heading higher, affordability may start to make buyers more resistant to high prices in the coming months, he said, at least in the under-$2 million market where buyers are more sensitive to changes in interest rates.

But so far, Mr. Martin said he doesn't see signs of a bubble bursting. More likely, he said, there will be "a soft landing," in which prices ease up a bit and then level off for a time.

posted by Henry @ 1:24 AM 0 comments

日民間企業平均薪資連續7年減少

日本的國稅廳根據去年所得稅繳納情形調查了在民間企業工作的人的平均薪資，結果發現民間企業平均年所得為438萬8000日圓(約台幣131萬6400元)，較前一年下滑了5萬5000日圓(約台幣1萬6500元)，已是連續7年的減少。

　　而去年一年在日本民間企業工作賺取所得的工作者數，也較前一年少了13萬人(0.3%)來到4453萬人，整體薪資總額也較前一年減少了2兆8529 億日圓(1.4%)，來到195兆4110億日圓，這個數字也是連續7年減少。

　　之所以會減少，依國稅廳的評估，主要是因為換工作的人增加，且改變企業雇用型態從正職改為兼職或是打工的企業增加，是構成平均薪資減少的主要原因。

　　而平均薪資再細分的話，可分為薪資、津貼和獎金兩個部分，薪資、津貼的部分也是下滑了1.0%，來到370萬1000日圓(約台幣111萬300 元)，而獎金的部分則是下滑2.0%，來到68萬7000日圓(約台幣20萬6100元)。

　　再依男女別來看的話，男性的平均薪資是540萬9000日圓(約台幣162萬2700元)，較前一年下滑了3萬3000日圓(約台幣9900元)；而 女性的平均薪資則是273萬6000日圓(約台幣82萬800元)，較前一年減少了1萬2000元(約台幣3600元)。

　　在民間企業的薪資持續下降的情況下，政府財政泉源的所得稅額是8兆7988億日圓，比前一年還增加了3339億日圓(3.9%)，是4年來首度反轉上 升，主要原因是從去年開始，所得稅的配偶特別扣除額部分廢止了的影響。所以整體看來，雖然大家都口口聲聲地說日本景氣在復甦，但是事實上還沒有反應到上班 族的薪水及荷包，而且還因政府的稅制改變，繳了更多的稅。
（2005/9/29）

posted by Henry @ 1:29 AM 0 comments

美國市場掀起液晶電視「超低價」行銷戰　　　　

台灣日本綜合研究所副所長
林武雄

從今 年開始，美國的液晶電視市場販賣台數是明顯地增加，其中成長最快的當推「Western House」、「Magnavox」、「Polaroid」等三個品牌。這三個品牌的市佔率在年初就達到10%，同時每月都呈現快速的成長、可謂來勢洶 洶。至今年6月底，全美地區已突破30%的市佔率。

　 　根據調查指出，這三家品牌「人氣」走紅的理由在於「低價位」。就以26吋液晶電視而言，Sharp、三星等名牌的商品店頭售價是1500美元左右，但前 面所言三種品牌相同尺寸的商品卻便宜四成。在量販店Circuit City較年長店員推薦的理由是：「Polaroid的液晶電視畫質不輸Sharp和SONY，但價格便宜、品質又好。」年輕的店員則是推薦 Magnavox液晶電視。據量販店Best Buy店員的分析指出：「買Sharp、SONY、Sansung都是高所得的中高年消費者，而買Western House等品牌則是傾向年輕顧客居多。」據調查公司Displaysearch 在9月1日（2005年）發表，大型液晶電視（10吋以上）價格下滑現象，已出現止跌回升。液晶電視價格下滑，對家電廠商的業績無疑是沈重壓力。

　 　在美國，這三個品牌在家電和照相機領域過去都極富盛名，曾幾何時出現經營困難，先後走上被併購的命運。其中，Magnavox是賣給荷蘭的家電大廠 Phlips、Western House是被台灣奇美併購、2001年Polaroid倒閉後併入美國投資公司的集團內。併購的理由是：「這些品牌在美國有相當的知名度，有利於對美國 市場的行銷。」Phlips在美國擁有高知名度，但Magnavox在美國市場卻是以低價位行銷聞名；Western House的液晶電視是由台灣奇美集團所生產；Polaroid的產品是由中國大陸家電廠商生產；它們的行銷策略就是販賣低價位商品來奪取市場，過去的成 功經驗又再度運用到液晶電視的市場行銷上。

　 　「低價位」取向品牌的興起在美國是見怪不怪。美國的消費者非常重視價格取向的行銷模式。過去，映像管電視、DVD和電腦都受到低價位品牌席捲市場。據高 盛證券家電部門專家的分析指出：「液晶電視和其他家電製品同樣都是低價位品牌抬頭，但來勢洶洶卻在預料之外。」「低價位」品牌急速崛起是數位家電的特性， 也是宿命。液晶電視的構造和電腦液晶螢幕極相近，它是經由面板和影像處理晶片的零件組裝就能成為產品，再加上亞洲國家也擁有這項技術。因此，盡管是美國的 品牌，沒有品質光是低價位要行銷也難。例如Western House等品牌的液晶電視在美國販賣，但實際製品的製造技術是由中國和台灣廠商所提供。

　 　在美國市場一枝獨秀的Sharp，去年擁有30%的市佔率，但今年春天卻降到20%，市佔率和Magnavox已不分軒輊。Sharp濱野稔重專務說： 「跟低價位品牌進行對抗，無異於陷入價格戰的泥沼，我們將另起爐灶。」於是，Sharp重新擬定戰略，不再搶攻20~30吋中型市場，而以30~40吋大 型液晶電視為市場的普及目標。其他日系廠商也東施效顰，採取同樣策略。理由是畫面愈大愈能表現出畫質的差距，而畫質的處理技術又是日系廠商的不傳手藝。

　 　目前美國超薄電視市場還有一個令人矚目的地方，那就是起居室、客廳的電視機市場王座爭霸戰。美國是以大畫面為主流，既使是超薄家用電視的主戰場還是在 40吋以上大型畫面。市場的主角是以超大型內投式電視機（Rear Projector TV）見長的SONY和松下的電漿電視。如今，兩雄對決、烽火四起；40吋大型內投式電視一直是雄霸美國電視機市場。過去，映像管技術是主流。自2000 年以來，採用最尖端零組件的MD（Micro Display)方式新型超大內投式電視機推出市場；主要是40吋以上大型畫面電視在畫質和節省空間上，獲得了突破性的改良，價格上也為消費者接受，因此 市場呈現爆發性的成長。

　 　無疑地，電漿電視已威脅到內投式電視機的市場，銷售業績來勢洶洶、成長亮麗。電漿電視推出之初價格偏高，但松下大幅的降價後和MD內投電視機的價格差距 縮小。現在SD型（標準畫質）電漿電視42吋價格是低於2000美元，因此急速地侵蝕到MD的市場；2005年9月3日，Sharp町田社長說：「要檢討 內投式電視機從市場撤退」。Sharp是世界上最大的液晶電視機製造廠商，但Sharp在美國販賣內投式電視機（Rear Projector）的市場佔有率還不到5%。

　 　在美國市場內投式電視機擁有40%的SONY，已面臨到一股危機感。SONY電視機市場頻頻失守，美國MD內投式電視機市場可算是最後的一座堡壘。據說 今年夏天，SONY預定推出低於2000美元的新產品投入市場，以背水一戰的決心來跟松下一決勝負；最近松下也發表，預定在11月推出65吋新型電漿電 視，年產12000台，店頭價格設定在99萬日幣。首次採用世界最先進的Hi-Vision播放系統，畫面影像細緻、畫質清晰逼真，同時畫質也大幅提升。 松下以一貫生產做武器、徹底削減商品原價、設定讓市場震撼的價格，來對抗低價位液晶電視的威脅。

　 　據美國Displaysearch在8月18日（2005年）的發表：「05年第二季世界電視機佔有率調查結果」。映像管、超薄電視合計總額，SONY 市佔率8.8%，名次從第一位退居為第三，三星躍居第一、市佔率9.9%。SONY超薄型電視因市場對應失策，痛失王座、地位動搖。松下位居第三，但電漿 電視在市場還是穩居龍頭地位。

參考資料：
(1) 渡邊清治、高木あやか「猛威振るう激安〝ブランド〞」，2005.9.3週刊東洋經濟，頁20~21。
(2) 「リアプロ、プラズマの霸權爭い過熱」，2005.9.3週刊東洋經濟，頁21。
(3) 「シャープ、リアプロジェクションＴＶから撤退の可能性」http: //news.goo.ne.jp/news/reuters/keizai/20050905/JAPAN-186699.html
(4) 「液晶：大型価格、1年ぶりに下げ止まる」http: //news.goo.ne.jp/news/infostand/it/20050905/1401242.html
(5) 「テレビ世界シェア：サムスンが初の首位、ソニーは3位転落」http: //news.goo.ne.jp/news/infostand/it/20050822/1399515.html
(6) 「松下、キヤノン　薄型ＴＶ価格競争激化」 http://news.goo.ne.jp/news/sankei/keizai/20050826/m20050826015.html
(7) 「松下、65型の高品位対応プラズマテレビを11月発売」 http://news.goo.ne.jp/news/reuters/keizai/20050825/JAPAN-185696.html

posted by Henry @ 1:25 AM 0 comments

A Place in the Sun

By ERIC J. SAVITZ

SUNSHINE IS FREE. That simple fact is what gives the solar-power business so much allure. You don't have to extract it from the ground, it's not subject to embargos, it's nonpolluting and if the supply ever ran out, we'd have a bigger problem than high gasoline prices. On the surface, at least, it certainly seems like an obvious way to address some of the economy's ongoing energy problems.

It's also well understood: America has been tinkering with solar power for decades. In a symbolic act during the 1979 energy crisis, Jimmy Carter installed solar panels on the roof of the White House. (He also urged us to wear more sweaters.) But as the crisis faded, so did interest in solar. After Ronald Reagan and his brown suits moved into 1600 Pennsylvania Ave., the White House solar panels were removed -- and solar power resumed its previous position as a technology considered more suitable for calculators and pool heaters than powering the grid.

But with talk growing of a new energy crisis, thanks to record prices for crude oil and gasoline, solar companies have been attracting renewed attention. Michael Rogol, an analyst with CLSA Asia-Pacific Markets who tracks the global solar market, says the stocks in the sector are up about 150% over the past 12 months. Wall Street is ramping up to slake the thirst for solar stocks with more supply: SunPower, a subsidiary of chip-maker Cypress Semiconductor, has filed to come public, as has Q-Cells, a large, fast-growing German solar-cell company that Rogol calls "the Netscape of the solar sector." Another large player, Norway's Renewable Energy Corp., or REC, has also said it plans an IPO.

Encouraged by this new enthusiasm for the sector in the public markets, venture capitalists have been funding a steadily increasing number of solar-related start- ups, sinking more than $100 million into new solar companies in the first half of 2005. (See table: The Next Generation.) The recently passed energy bill provides some modest incentives for solar power, and many states have installed solar-friendly tax incentives of their own.

While solar represents a tiny percentage of global power generation, it is growing rapidly. Worldwide, solar power production this year should reach 1.5 gigawatts, double the 2003 level. By 2010, according to CLSA, the total should quadruple to six gigawatts. Industrywide revenue, the firm predicts, will grow from $11 billion this year to $36 billion in 2010.

Now that's some nice, Google-style growth. But investing in the sector isn't easy. Many of the biggest producers of solar cells are actually divisions of much larger companies -- BP, Sharp, Shell, General Electric -- that you'd hardly consider pure plays. And most of the more focused solar companies, with a few exceptions, are still private or trade outside the U.S.

Meanwhile, just as demand seems poised to take off, the solar industry finds itself grappling with a shortage of polysilicon, the raw material used to create both silicon cells and semiconductors. At least for the next few years, the industry's growth rate will be muffled not by any shortage of demand, but rather by insufficient supply. In all, finding good investments will require ingenuity.

The basic idea of solar power is simple. Energy from the sun strikes a silicon panel, releasing electrons and creating electricity. Those panels are connected together in modules, which can provide power standing alone or hooked into the electrical grid. One of the standard, but magical, pitches made by solar equipment providers is the image of your electricity meter running backwards: When the sun is shining and demand for power is high, you can be selling power back to the grid, while others buy it.

The Bottom Line: Though solar stocks have surged over the past year or so, some could rise further. Some analysts think MEMC, the largest-capitalization play on solar, could jump another 50%.

What's not so simple is the economics of solar power. For starters, while the sun's energy is abundant, it isn't available 24/7. (You may be familiar with a fascinating natural phenomenon known as "night," and another frequent but less predictable factor called "clouds.") Ergo, solar power is more practical in some places than others. Also, silicon panels are rather inefficient: Most of the potential energy in sunshine is lost. So to create meaningful amounts of electricity from solar panels, you need lots of them.

The good news is that as the industry has grown, the retail cost of solar energy has dropped an average of 6%-7% a year for the past 15 years, says Rhone Resch, director of the Solar Energy Industries Association, a trade group. Within 10 years, Resch says, solar should reach parity with the average retail electricity price.

"This is not your grandpa's solar," says Ron Pernick, the principal of Clean Edge, a Portland, Ore.-based research firm. He figures the costs of production have been dropping about 18% for every doubling of output -- and output is doubling every two or three years. Still, the industry isn't at parity yet. Resch says solar power, at 22-23 cents per kilowatt, costs about twice as much as the average retail price of electricity in the U.S.

Keep in mind, too, that installing a solar system requires a large upfront capital investment that may require some creative financing. Putting a solar system on your roof with enough cells to run your house could set you back $25,000-$30,000. You do get to lock in costs, though: Resch likens it to buying a car and paying for 25 or 30 years of gasoline upfront.

One small company, Sun Edison, has set up an intriguing scheme where it places solar systems on the flat roof of a supermarket or big-box retailer, then sells the power back to them. The equipment itself is owned by an investor -- in each of the four installations they've completed, it's Goldman Sachs -- which benefits from tax incentive programs. Sun Edison's payoff comes years from now as it gradually buys back the equity and associated income in the equipment.

Fortunately for the solar-power industry, a number of state and national governments have decided that there is a public good in developing alternatives to fossil-fuel based energy production, and have installed lucrative subsidy programs designed to overcome the cost differential.

The most substantial incentives have been offered by Japan and Germany. While neither country is among the world's sunnier climes, both have become the global leaders in solar power. So it should be no surprise that many of the more successful publicly held solar companies are traded in Frankfurt or Tokyo, not New York. (See table: Sunny Prospects)

For domestic solar advocates, that situation is a source of no little frustration. "Our resources are orders of magnitude better," sighs the trade group's Resch. "But Germany has created the best incentives in the world." Germany's policy, designed to reduce the country's reliance on fossil fuels, provides a fixed payout of about 54 cents per kilowatt hour for as much power as you can produce.

Rick Feldt, CEO of Evergreen Solar, a Marlboro, Mass., solar-cell company, complains that the incentives in the recently passed federal energy bill provides little help. He notes that the bill offers only two years of tax credits, with no assurances after that -- not enough to get manufacturers to commit investment capital in the business.

In the U.S., the industry suffered a blow recently from the demise of California Gov. Arnold Schwarzenegger's so-called Million Solar Roofs initiative, which would have provided substantial incentives in the nation's largest state for both residential and commercial buildings. Though the measure passed easily in the state Senate, it fizzled after the governor threatened a veto over amendments to the bill in the state Assembly that would have required solar-installation work to be handled by licensed electricians at the prevailing union wage rate. The governor lately has talked about stepping around the legislature via the adoption of similar incentives through the state's Public Utility Commission.

WHILE THE STATUS OF THE CALIFORNIA MEASURE is important, the talk of the solar industry is the ongoing shortage of polysilicon, the raw stuff used to manufacture photovoltaic cells. For many years, the only real use for that particular material was to make silicon wafers for the semiconductor industry; the solar industry's needs were minimal. But not anymore.

Thanks in no small measure to the incentive programs in Germany and Japan, solar-cell demand has expanded 40% or more for several years running, versus 20%-25% in the past. The result is that by 2006 almost half of the world's polysilicon supply will be soaked up by the solar-cell makers. Richard Winegarner, proprietor of consulting firm Sage Concepts, says the market is about 10% short this year, with the solar-cell industry, and not chip makers, absorbing most of the resultant pain.

"I can't find a data point anywhere that shows anything other than a very real shortage of polysilicon that is going to get worse over the next two or three years," says Paul Leming, an analyst with Princeton Tech Research. "It would take a solar-panel market collapse to bring any slack capacity to the polysilicon business any- time soon."

Not surprisingly, polysilicon prices have soared: Winegarner says contract pricing has moved from about $32 a kilogram to $45 since 2003. Spot pricing, depending on whom you ask, is running $60-$80 a kilogram, though Winegarner notes that there is "essentially no volume" in the spot market. "The industry has already wrung out every nook and cranny of inventory and scrap," he says.

Tables: Sunny Prospects and The Next Generation

The world's polysilicon makers are working frantically to add capacity, but supply is unlikely to catch up for a while. Optimists think the shortage could be cured by 2007. Neil Gayle, coordinator of the Critical Materials Council of Sematech, a chip-industry consortium, thinks there could be shortages though 2009.

The bottom line is that there won't be enough solar cells to meet demand for at least the next several years, potentially triggering a supply crisis for some smaller players that lack contractual supply arrangements with polysilicon producers.

The chip industry has expressed its own concerns about the potential for the shortage to slow the electronics business. But this is a lot bigger problem for solar-cell companies than for the chip industry: While silicon represents less than 1% of the cost of semiconductor products, they account for more than 30% of the raw-material costs for solar cells. A doubling of silicon pricing wouldn't mean much for chip makers, but it would be a big problem for the solar business, which must hold down costs to compete with conventional power.

The obvious play on the polysilicon shortage is MEMC Electronic Materials (ticker: WFR), a St. Peters, Mo., company that is one of the world's largest producers of silicon wafers. Unlike some of its rivals, MEMC produces most of its own silicon feedstock, and in fact sells some excess supply back into the market. The result is that MEMC benefits from soaring wafer pricing without suffering the associated increase in raw-material pricing. MEMC shares have doubled over the past year, to a recent $19.79, boosting the company's market capitalization to about $4 billion. That makes MEMC the largest-cap play on solar growth.

And there may still be some juice left in MEMC shares. Leming of Princeton Tech Research thinks the stock could move up another 50%, and says he can "sketch a scenario where it can double or triple from here," noting that the company trades for only about 12 times expected 2006 earnings of $1.56 a share. Profits at that level would be up 39% from an expected $1.12 a share this year. And this, by the way, is for a company that does not yet do much direct business with the solar industry. Leming thinks MEMC could eventually cut a deal with solar-panel makers to provide dedicated wafer supplies. If so, Lemming says, the growth could lift the stock to $50.

MEMC ranks fourth in the world in polysilicon capacity, behind Hemlock Semiconductor, which is partially owned by Dow Corning. Third on the list is the other potential wafer investment, Japan-based Tokuyama. Also in the top five are Wacker Chemie, a privately held German chemical conglomerate, and Advanced Silicon Materials, which was recently sold by Japan's Komatsu Electronic Metals to Renewable Energy Corp., the Norwegian solar-panel maker. The purchase of Advanced Silicon by REC, which as noted is planning an IPO, assures the company of sufficient silicon supplies.

Then there's SunPower, the Cypress subsidiary now in registration to come public. It is losing gobs of money -- for the first half of this year, it lost $13.6 million on revenues of $27.3 million. But the company is attracting considerable interest for its highly efficient solar cells: The company claims in its SEC filings that it generates up to 50% more power per unit of area than conventional cells. In an industry where driving costs lower is a key to long-term success, SunPower should attract eager buyers.

The only current domestic pure-play solar option is Evergreen Solar (ESLR) of Marlboro, Mass. -- and it has some similar attractions. Evergreen shares have increased sixfold over the past 18 months. The company uses a novel process for generating solar cells that it claims uses 35% less silicon than conventional manufacturing processes. That should give Evergreen an edge in the race to reduce costs. And CEO Rick Feldt says the company has a pilot project that would cut the silicon used per wafer by another 50%.

WHILE CERTAINLY THE STREET IS ENAMORED of Evergreen's technology, analysts are equally enthused about its joint venture with Germany's Q-Cells. The two companies are building a new solar-cell manufacturing plant near Q-Cells' headquarters in Thalheim, in eastern Germany. The plant will dramatically increase Evergreen's capacity, adding 30 megawatts of cell production to the 15 megawatts it can produce at its own factory in Massachusetts. Feldt thinks the German plant will be far more efficient than the company's domestic plant, perhaps generating $100 million a year in revenue with gross margins of 30%-35%. Assuming the plant comes on stream as expected, Feldt says, the company should turn profitable on a run-rate basis sometime in 2006.

Moreover, Feldt says that if the German venture is successful, the partners would increase their production to as much as 120 megawatts. And if that happens, he says, the joint venture could add additional capacity in other locations. If that all plays out, says J. Michael Horwitz, an analyst at Pacific Growth Equities, "it could be one of the better stocks in 2006." And if the German project has problems? Then so will the stock.

CLSA's Michael Rogol, a big Evergreen fan, in a report earlier this year, listed a total of 15 solar stocks to buy. Many are outside the U.S.: Kyocera, Sharp and Sekisui Chemical of Japan; Thailand-based Solartron; Motech of Taiwan; Carmanah and ATS in Canada; and Germany's Conergy and SolarWorld.

The global range is a reflection of the fact that, unlike oil or gas or coal, producing energy from the sun is about creative engineering and -- at least for the moment -- bold government policy, not geographic advantage. No one is going to discover a new source of sunlight, but it's possible to figure out better ways to use it. Anyone can get in the game. Even America.

posted by Henry @ 5:41 PM 0 comments

Tasty Outlook

Barron, By ANDREW BARY

ASSET-RICH NESTLÉ IS STARTING TO ATTRACT greater U.S. investor interest, due to the strength of its global food business, an increasingly shareholder-oriented management and the huge combined value of its stakes in Alcon, the world's top eye-care company, and international cosmetics colossus L'Oréal. Nestlé's U.S.-listed shares (ticker: NSRGY) have risen 9%, to 72, this year, but they still could have significant upside because the Swiss giant is a bargain relative to other major food companies when its Alcon (ACL) and L'Oréal (12032.FR) stakes are stripped out. This makes Nestlé an attractive sum-of-the-parts story. - The shares trade for a moderate 17 times projected 2005 profits of $4.15, but Nestlé's 2005 price-earnings ratio is just 12.7, excluding the market value and earnings contribution of its Alcon and L'Oréal holdings. That's a cheap price for the world's largest and, arguably, best-positioned food company. Nestlé has exposure to fast-growing products like bottled water, pet food and ice cream, as well as the industry's most extensive presence in the developing world, where the growth outlook is better than in the mature Western Europe or U.S. markets. Nestlé gets almost 30% of its sales in Latin America, Asia and Africa. Nestlé's 2005 P/E, adjusted for Alcon and L'Oréal, is much lower than the average multiple of 16 for major U.S. food stocks like Kraft (KFT), General Mills (GIS) and Kellogg (K). The American depositary shares of France's Groupe Danone (DA), meanwhile, at their recent price around 22, have risen 21% this year and fetch a rich 22 times estimated 2005 net income amid continued speculation that PepsiCo is interested in buying the company.

The global food industry clearly faces challenges, including the growth of discount retailers in the U.S. and Europe, the rising popularity of private-label brands, limited pricing power, the trend toward eating away from home, as well as rising commodity and packaging costs. Food tastes differ widely around the world, making it difficult for companies to develop truly global brands. Among the limited number of goods with worldwide appeal are coffee, chocolate, soda, scotch and cigarettes. Food remains one of the most fragmented businesses in the world. Nestlé's No. 1 position and $74 billion in annual sales translates into just a 2% share.

Highlighting the troubles in the food business are the struggles of Kraft, General Mills and Campbell Soup (CPB) to generate growth in both sales volume and profits. Kraft stock, at 31, is back where it stood at its initial public offering in 2001.

Nestlé has performed well since chief executive Peter Brabeck, 61, took over in 1997: The Vevey, Switzerland-based company has delivered 5.7% organic revenue growth -- 7%-plus, if acquisitions are included. That's impressive by the food industry's slow-growth standards. Nestlé shares have doubled since 1997, but haven't risen much in recent years.

Bulls are betting that Nestlé will hit its goal of 5% to 6% annual organic revenue growth, which could translate into yearly profit gains around 10%, based on a widening in Nestlé's profit margin, now at 12%, and share buybacks. During the first half of 2005, organic revenue growth was 5.2% and earnings were $2 a share, up 11% from the level in the same period a year ago. The company also pays out about 40% of profits in dividends, and typically lifts payouts annually. The current yield is 2.2%.

Several analysts covering the 139-year-old Nestlé see modest upside potential of 10% to 15% in the next 12 months. The appreciation could be much greater over the next few years if Nestlé's financial performance stays strong and its story becomes more widely known.

Andrew Wood, a Sanford Bernstein analyst, has come up with a sum-of-the-parts value on Nestlé of around 480 Swiss francs per share, or $95 for the U.S.-listed shares. The Swiss shares traded Friday at 367 Swiss francs. Each U.S. share equals a quarter of a Swiss share.

Nestlé's fans like what they see in its food business and its not-so-hidden other assets. "We used to see Nestlé as a slow-moving animal that was less concerned with driving profitability than in getting bigger," says David Herro, manager of the Oakmark International Fund, a Nestlé holder. "Quietly, and somewhat masked by currency swings, there has been a change in emphasis to running top-notch businesses focused on returns, not on size," says Herro. He maintains that the shares could rise at least 50% over the next few years.

Nestlé offers a hedge against a weakening dollar, because its underlying shares are denominated in Swiss francs, historically one of the world's strongest currencies. The downside: A stronger franc crimps reported revenue and profit growth. This happened last year when the dollar weakened.

MEANWHILE, "NESTLÉ'S MANAGEMENT ACTS as if it were a family company. They look out generationally," says Thomas Russo, a partner at Gardner, Russo and Gardner, a Lancaster, Pa., investment firm that has a position in Nestlé. Russo happily notes that Brabeck talks about an investment time horizon of 35 years.

Russo also points to Nestlé's success in China, where it has $1 billion in annual sales and is the largest foreign food company. Overall, Nestlé's sales dwarf those of its rivals. Kraft, the No. 1 U.S. food maker, probably will have 2005 sales of $33 billion, less than half Nestlé's.

The Swiss company's scale is enormous. It operates in more than 100 countries, runs 500 factories and employs 247,000 people. Its products include Stouffer's frozen foods, Nescafé coffee, Dreyer's and Häagen Dazs ice cream, plus Poland Spring, Perrier and San Pellegrino water. Nestlé is the leading global maker of infant formula, the No. 1 pet-food maker, and a major chocolate producer. Nestlé generates about 60% of its sales from six key brands: Nestlé, Nestea, Nescafé, Purina, Maggi and Buitoni.

Table: Hidden Value

The Nestlé story still isn't well-known in the U.S. investment community. One of the major reasons: The shares are traded on the Pink Sheets, limiting institutional ownership and research coverage. As an over-the-counter stock, Nestlé is less liquid and carries a lower profile than the shares of such other major European companies as BP, Royal Dutch Shell, Vodafone and Unilever, which are New York Stock Exchange-listed. Average daily volume in Nestlé's American depository receipts is modest, at about 150,000 shares. The Swiss shares are more liquid.

A Pink-Sheet listing means investors can't find Nestlé's share price in newspapers, although quotes are easily available online through Yahoo!, Dow Jones' MarketWatch and other sources. It reports results semi-annually, and they conform to Swiss accounting standards.

Nestlé could easily meet NYSE listing requirements by reporting its results based on U.S. accounting standards in addition to Swiss standards, but has opted not to. "We don't perceive any benefit," says a Nestlé spokesman, noting that there are an ample 100 million U.S. ADRs outstanding; Brabeck wasn't available to speak to Barron's.

The listing issue doesn't bother Russo. "Nestlé's accounting is perfectly sufficient for me. U.S. GAAP isn't the only pure standard of accounting."

While there may be a strong asset story here, there isn't yet a break-up story. Nestlé management has shown no willingness to part with its 75% interest in Alcon, now valued at $28 billion, or its 27% interest in L'Oréal, now worth $14 billion. Those stakes account for almost 40% of Nestlé's $111 billion market value. Our calculation doesn't reduce the value of the Alcon and L'Oréal interests to account for any capital-gains taxes. Both Alcon and L'Oréal have been phenomenal investments for Nestlé since they were made in the 1970s. The big Swiss food outfit acquired Alcon for $276 million, and it paid a similar amount for its one-quarter stake in L'Oréal. While it's unclear whether Nestlé would pay any tax on the sale of either holding, it's notable that the Swiss didn't require any tax to be paid when Nestlé sold 25% of Alcon in a 2002 U.S. initial public offering.

Under an agreement with the Bettencourt family, a key L'Oréal shareholder, Nestlé can't buy additional L'Oréal shares before 2007 at the earliest, or sell or transfer L'Oréal stock through 2009.

No such restrictions exist with the Alcon stake. Alcon is a low-profile but phenomenal success story. It sells a range of eye-care products, including treatments for glaucoma, cataracts and infections; intraocular lenses; contact-lens solution; and artificial tears. Its shares have surged to 121 from 33 at the 2002 IPO. Alcon, however, isn't cheap, selling for 35 times estimated 2005 profits. Its $38 billion market value is equal to a stiff eight times annual sales.

Many U.S. investors are biased against European companies because they consider them weakly managed, relative to their American counterparts, and less oriented toward shareholders' interests. Just compare top-notch Procter & Gamble (PG) to its European rival, Unilever (UN) -- which only recently seems to have righted itself after years of restructurings.

Among the knocks against Nestlé is that it's too European, too long-term-oriented, too bureaucratic and too difficult to understand. And Brabeck, a 37-year Nestlé veteran, may not have the charisma of Gillette CEO Jim Kilts, or Hershey's Rick Lenny. That's on purpose. Brabeck has contrasted Nestlé's more deliberate management approach with the CEO-fixated "Anglo-Saxon" style, in which new chief executives often feel the need to shake up their organizations. "I get the feeling that in the Anglo-Saxon environment, the company is at the service of the CEO. At Nestlé, the CEO is at the service of the company," Brabeck said at a June investor conference.

By food-industry standards, Nestlé invests heavily in research and development, as it seeks to transform itself into more of a "health and nutrition company." One of its innovations is Dreyer's Slow-Churned ice cream that has half the fat and 25% fewer calories than regular Dreyer's (also sold as Edy's), yet has a premium-quality taste. Nestlé has shown that being environmentally friendly can pay off. It cut its water use by 37% in factories and energy consumption by 24% per unit since 2000. This plays well in eco-friendly Western Europe.

Nestlé has focused on water, ice cream and pet food. It's also a big producer of frozen foods.

Brabeck has countenanced one American innovation: a share buyback: Nestlé began its first repurchase program in July. It's admittedly modest, at 1 billion Swiss francs ($800 million), and is due to end at the close of 2005. But Nestlé has vowed to step up the buybacks in 2006. Analysts estimate that the buyback could total 2 billion Swiss francs in 2006 and perhaps 4 billion francs in 2007. A Swiss franc is worth about 80 U.S. cents.

Another rap against Nestlé is that it's always on the verge of a major, dilutive acquisition. The reality is that Nestlé has shown restraint in recent years. Its last major purchase came in 2002, when it paid $2.6 billion for Chef America, the maker of Hot Pockets frozen foods. Wolfgang Reichenberger, Nestlé's chief financial officer, has said that Nestlé "doesn't see a major acquisition in front of us." Brabeck says that in several critical areas, like pet food, water and U.S. ice cream, Nestlé has all the scale it needs.

The lack of a major deal has allowed Nestlé to begin its repurchase program because the company has been able to pay down debt related to prior acquisitions with its ample cash flow. Nestlé has an old-fashioned attachment to its prized triple-A credit rating. Net debt, now a very manageable $10 billion, had to come down before Nestlé would consider a buyback program.

For all the criticism of Nestlé's acquisitive ways, its three big deals this decade, Ralston-Purina, Chef America and Dreyer's, have turned out pretty well. The $10 billion Ralston deal, completed in 2001, nearly doubled Nestlé's sales in the high-growth pet food market. The company was shrewd enough to put the management of its entire global pet-food business in the hands of Ralston's talented team, based in St. Louis.

Nestlé's profile on Wall Street has risen somewhat in the past year, for an unfavorable reason. The company got into a well-publicized spat with some big institutional investors over whether Brabeck should also assume the role of chairman, following the retirement of Rainer Gut from that post earlier this year. Nestlé prevailed, in what really amounted a tempest in a teapot, or perhaps a coffee pot. (Nestlé is one of the world's largest coffee makers with its Nescafé brand.)

It's true that Nestlé historically has separated the roles of chairman and CEO, and many companies are deciding that one person shouldn't wear both hats. Yet Brabeck's wish to hold both jobs for a limited time hardly seems an affront to good corporate governance. Nestlé is expected to name a new CEO in several years, while keeping Brabeck as chairman.

OPERATING IN EUROPE, Nestlé doesn't have the same flexibility that American companies do to shut factories and lay off workers, if conditions deteriorate. Nestlé, however, is unwilling to cave in to what it views as unreasonable labor demands. Last year, it threatened to sell Perrier because of a disagreement with a union at its Perrier factory in southern France, which was only about a quarter as productive as its San Pellegrino plants. Nestlé decided to keep Perrier after the union agreed to job cuts and to boost productivity.

The Swiss food conglomerate was founded in 1866 by Henri Nestlé, who had developed a cereal-based infant formula for babies whose mothers had died or couldn't breast-feed. This was a breakthrough, because the children of such mothers sometimes died, since the other breast-milk alternatives used until then weren't sufficiently nutritious. Nestlé grew by acquisitions into the early 20th century, focusing on milk. Milk-related products remain the company's largest revenue source, followed by beverages (mostly water and coffee), frozen and other prepared foods, candy and pet food.

Nestlé entered the chocolate market in the 1920s and developed the first instant coffee, Nescafé, in the 1930s. Nescafé got a big boost during World War II when the U.S. army provided it to the troops.

After the war, Nestlé began expanding into Latin America and the rest of the developing world. Nestlé is now the dominant maker of infant formula outside the U.S. But in the American market, it badly trails Bristol-Myers Squibb (BMY), the maker of Enfamil, and Abbott Laboratories (ABT), the producer of Similac.

Brabeck: "In the Anglo-Saxon environment, the company is at the service of the CEO. At Nestlé, the CEO is at the service of the company."

Nestlé's overseas formula business ignited controversy in the 1980s after critics attacked Nestlé for urging poorly educated mothers in the developing world to forsake superior breast milk for formula -- leading to isolated boycotts of the company's products. Worse, Nestlé's powdered formula required water, which often was unclean. Nestlé has largely defused the formula issue with strict marketing rules. For example, the company acknowledges the superiority of breast milk, and won't advertise or give out free samples in the developing world.

Size can breed arrogance. In infant formula, Nestlé took a long time to reach an agreement with Martek Biosciences (MATK), which produces DHA, a fatty acid critical to brain and eye development that is present in breast milk but not cow's milk, the basis for formula. While Nestlé's rivals, notably Bristol-Myers Squibb and American Home Products, embraced DHA a decade ago, Nestlé didn't seal its deal with Martek until 2003. Nestlé's view, apparently, was that it was so big, it didn't need DHA. DHA-boosted formula now dominates the U.S. market and is growing abroad.

Nestlé is battling throughout the world to maintain its market-leading positions. In the U.S., Nestlé is the No. 1 seller of bottled water, with an estimated 40% share, thanks to a portfolio of solid regional brands, including Poland Spring in the Northeast and Arrowhead in the West. But Coca-Cola (KO) and PepsiCo (PEP), faced with an eroding soda market, have been seeking to expand into the growing water market, using their powerful bottling networks. Coke has Dasani; Pepsi, Aquafina.

"Nestlé's goal is to maintain and defend its share, and it has done a good job," says Bill Pecoriello, the beverage analyst at Morgan Stanley. "Nestlé is the low-cost product because it owns its own springs and produces its own packaging." Nestlé, for instance, dominates the important warehouse-club market, which has a rising share of the U.S. water market.

Looking ahead, analysts and investors see several potential merger opportunities for Nestlé. One scenario floated by Sanford Bernstein's Wood is that the company could ultimately buy the rest of L'Oréal. That likely would cost $40 billion or more. Yet Nestlé could finance nearly all the cost with the sale of its Alcon stake and L'Oréal's 10% interest in the European drug maker Sanofi-Aventis. Such a deal would create a "mammoth" consumer-goods company, with 50% more sales than Procter & Gamble, Wood wrote in a research note. Any action on L'Oréal would have to wait until at least 2007.

A final, mega-deal could involve Coca-Cola. This would be the ultimate merger of equals, since Coke and Nestlé have similar market values. Combining the two would give Nestlé's water and beverage units access to Coke's global bottling network, while providing diversification for Coke at a time when its core soda franchise is eroding. But insular Coke is unlikely to make such a move any time soon.

Then again, Nestlé could keep prospering without making any deals. While many of its rivals are in the doldrums, Nestlé's strong brands and developing-world exposure probably give it the food industry's best outlook.

Making the story even better: Nestlé's Alcon and L'Oréal interests effectively give its stock one of the sector's lowest P/E multiples. It's unusual to find an industry leader with a cheap valuation. Nestlé holders should be dining well in the coming years.

posted by Henry @ 5:37 PM 0 comments

U.S. Focuses on a Macau Bank In Probe Into North Korea Ties

By GLENN R. SIMPSON and GORDON FAIRCLOUGH
Staff Reporters of THE WALL STREET JOURNAL
September 16, 2005; Page A4

The U.S. government's accusation that a small bank in the Chinese enclave of Macau was laundering money for North Korea triggered a run by depositors and appeals for calm by the government there.

The developments came after Secretary of State Condoleezza Rice linked such U.S. enforcement efforts to ongoing talks in Beijing over dismantling North Korea's nuclear program. The talks deadlocked soon after they started earlier this week, with North Korea insisting that the U.S. and others provide a nuclear reactor to generate electricity before it will give up its atomic-weapons programs, a demand Washington has flatly rejected.

The U.S. move this week against the Macau bank, Banco Delta Asia Ltd. is part of a broader investigation disclosed last week in The Wall Street Journal into banks Washington suspects of aiding North Korea. The U.S. suspects the banks of aiding North Korean ventures that include counterfeiting and narcotics and allegedly helping to finance North Korea's nuclear program. "We're not sitting still," Ms. Rice said during an interview with the New York Post. "We're working on anti-proliferation measures that help to protect us," she said, citing the possibility of freezing assets.

The Macau government said it was setting up a special team to investigate the U.S. allegations, which could put Banco Delta Asia on a blacklist as an entity of "primary money laundering concern." The U.S. Treasury Department called the bank a "willing pawn" of North Korea and is proposing to bar U.S. financial institutions from doing business with it.

On Friday, more than $5 million was withdrawn by depositors of the bank, which has about $420 million in assets, Reuters reported. The Special Administrative Region of Macau called on its citizens "to keep calm, do not easily listen to ungrounded rumours, [and] have faith and confidence in the financial system of Macao." It said its banks were well-regulated.

In the nuclear talks, China tried to break the impasse by floating a new draft of a joint statement meant to serve as a blueprint for a final settlement. To placate Pyongyang, Beijing added a paragraph that noted North Korea's assertion of its right to peaceful use of atomic energy and said the parties would further discuss the country's desire for a so-called light water reactor, according to a U.S. official. (See related article.)

The U.S. official said that initial feedback from North Korean delegates, in a "very brief, informal" exchange yesterday, indicated that they weren't satisfied with the changes. The Americans aren't completely happy with the new language either.

The U.S. delegation huddled inside the American embassy late into the evening Friday. "We got some proposals today. We've been discussing them," said Christopher Hill, the chief U.S. negotiator said, returning to his hotel after midnight. "We'll see where we are tomorrow." China asked all of the countries at the talks, which also include Japan, Russia and South Korea, to respond to its proposed draft by Saturday afternoon.

posted by Henry @ 5:20 PM 0 comments

It's Fourth and Long for Stocks

WSJ, By CRAIG KARMIN
September 18, 2005

The stock market is heading into the final stretch of 2005 in what could be the first down year for U.S. stocks since 2002. While there's plenty of cause for concern in the fourth quarter, there's starting to be some reason for hope, too.

First the bad news. Economists are still scrambling to assess the economic damage wrought by Katrina. Bank of America says that the hurricane destroyed national wealth of at least $50 billion, and perhaps as much as $100 billion. Crude-oil prices have been hovering in the mid-60s, stoking inflation fears and worries that consumers are going to spend less if they're paying more at the pump.

Yet the fourth quarter historically has been the best one for stocks, and some investors are counting on history repeating. They say that the economic impact of Katrina could be painful but most likely is temporary. After topping $70 a barrel, oil prices have retreated to $63, and the economy still looks to be in decent shape.

Indeed, most analysts now think the Federal Reserve will feel comfortable enough with economic growth prospects to raise interest rates again when the policy committee meets Tuesday. Moreover, with European and Asian markets chalking up good gains this year, some market pros suggest U.S. stocks are poised to play catch-up over the next three months.

"If you look at the stock market without emotion, you have to wonder why it isn't moving higher like the other major markets in the world," says Jim Paulsen, chief investment strategist for Wells Capital Management. For the year, the Dow Jones Industrial Average is down 1.3%, compared with gains of 12% or more in Tokyo, London and Germany.

Not everyone shares this optimism. Russ Koesterich, senior fund manager at Barclays Global Investors, sees a few dark clouds. For one, the sharp rise in oil prices has come as the U.S. savings rate is close to zero. During previous oil-price surges in the 1970s, he notes, the savings rate was between 7% and 10%. That means consumers have less of a cushion if oil prices start moving up again.

Reading the Signals

Mr. Koesterich also dismisses recent consumer-confidence numbers that showed continued strength -- though the latest confidence numbers, released Friday, were notably weaker in reaction to the aftermath of Katrina. He argues that there's not a strong correlation between those numbers and actual spending habits. Instead, he focuses on same-store sales numbers. "Those are telling us that spending is decelerating," he says.

Just last month, retail giant Wal-Mart shook up the market when it posted its smallest profit gain in about four years and lowered its profit forecast for the remainder of the year, saying customers were spending less because of high gasoline prices.

Even the bond market has been signaling that the economy is due for a slowdown. The Treasury yield curve, which plots the relationship between Treasury debt of different maturities, has been flattening out in recent weeks.

That means the difference has been narrowing between the yield offered by short-term Treasury debt and the yield on the 10-year note. If the two-year note's yield rises above that of the 10-year note, then the yield curve will be said to be inverted -- a phenomenon many economists say signals the economy is decelerating.

Still, Mr. Koesterich thinks the Fed could bail out the stock market. Even if, as expected, the Fed raises rates a quarter percentage point to 3.75% this week, any sign that it may be nearing the end of this tightening cycle would be well received by stocks, he says. "Then we could squeeze out some gains," Mr. Koesterich suggests, "but I'm not expecting fireworks."

The case for bigger gains, others say, is stronger if investors take a closer look at the economy: Economic growth for 2005 should come in between 3% and 4%, long-term interest rates remain low, inflation appears to be largely under control, job creation is rising and the housing market -- despite numerous warnings of a bubble about to burst -- remains firm.

Healthy Profits

Moreover, analysts have been underestimating profit growth for most of the past two years, turning more conservative after being too bullish in the late 1990s. Mr. Paulsen points out that overall corporate profits rose nearly 18% in the second quarter compared with the year-ago period. "That was far better than people expected even 90 days ago," he says.

Lehman Brothers in a report this month also recommends an overweight position in stocks, citing the strong balance sheets at most companies and the relatively attractive valuations of stocks compared with bonds.

At the same time, some analysts argue that the recent headline concerns may be overstated. Ajay Kapur, director of global-strategy research for Citigroup, argues the inflation threat in particular has been overblown. He says high oil prices won't necessarily slow down the economy significantly unless they lead to broader inflation. "No signs yet," he wrote in a report earlier this month.

And as order slowly returns to New Orleans, some economists suggest that the disruption from Katrina may be more contained than once thought.

"Typically, in the immediate aftermath of natural disasters such as hurricanes, the economic impacts -- both their magnitudes and durations -- tend to be overstated," Bank of America chief economist Mickey Levy wrote in a recent report. He is now forecasting a moderate deceleration in economic growth and declines in profits, but "these impacts are likely to remain temporary."

Joseph Battipaglia, chief investment officer for Ryan Beck & Co., agrees, noting in a September report that Louisiana and Alabama account for around 2% of total U.S. economic output. More worrying to the economy, 90% of the Gulf Coast's oil production has been shut. But, he adds, "timely restoration of both output and processing has been established by authorities as a high-priority item."

So what stocks might lead a fourth-quarter rally? Mr. Paulsen thinks energy stocks have had their run this year and instead favors technology shares.

Mr. Koesterich likes companies in sectors such as health care that can raise prices even when inflation is low. Worried that the consumer may be flagging, he would avoid auto makers, mainstream retailers and department stores. Instead, he likes companies in sectors that cater to business spending to take advantage of strong balance sheets, including industrials and technology.

posted by Henry @ 5:18 PM 0 comments

Incremental Decision Making and Corporate Restructuring

Barry Naughton

Economic and business stories have dominated Western press attention to China in 2005, perhaps more so than in any previous year. Perceptions of a dynamic "rising China" have burst into American consciousness in an unprecedented fashion. Ironically, however, leadership decision making on economic policy in China seems to be sliding back toward a more bureaucratically dominated and less imaginative pattern. From a policymaking standpoint, there has been little significant innovation during 2005. This article reviews developments in four areas: currency revaluation, share conversion, consolidation of firms, and the new industrial policy for the steel industry. Taken together, the trends in these areas suggest a move toward cautious, incremental, and bureaucrat-dominated policymaking as well as an effort to step up the pace of corporate restructuring.

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posted by Henry @ 1:06 PM 0 comments

Not the New Deal

posted by Henry @ 4:43 PM 0 comments

China's Benchmark Measure Of Capital Expenditure Rises

By AIPING CUI
DOW JONES NEWSWIRES
September 16, 2005

BEIJING -- China's urban fixed-asset investment grew faster than expected in August, partly because of the low base a year earlier.

But fixed-asset-investment growth continues to ease when compared with recent years, suggesting that authorities won't see a need to rein in economic growth by tightening monetary policy, economists said.

The National Bureau of Statistics said Thursday that urban fixed-asset investment, China's benchmark measure of capital expenditure, grew 28.5% in August from a year earlier, beating expectations of a 24.3% gain, and up from 27.7% in July.

For the first eight months of the year, urban fixed-asset investment totaled 4.12 trillion yuan ($509 billion), up 27.4% from a year earlier.

Fixed-asset-investment growth has been declining from around 40%-50% in 2003 and part of 2004. Economists said that even if fixed-asset-investment growth remains at current levels for the rest of the year, policy makers won't issue fresh measures to curb lending.

"There's no sign of loosening credit right now...looking at the figures for yuan-lending growth or the mid- and long-term lending growth," said Lu Wenlei, an analyst from SYWG Research and Consulting in Shanghai. He noted that yuan-denominated lending at the end of August was up 13.4% from a year earlier, and mid- and long-term loans were up 17.8% from a year earlier.

This shows that the domestic economy is still on track to cool down somewhat, he said.

"Fixed-asset-investment growth will keep declining for the rest of the year," said Zhang Le, an analyst from China Merchants Securities in Shenzhen, though he estimates that fixed-asset-investment growth will stay above 25% for the rest of 2005.

The stronger fixed-asset-investment growth last month comes after China said its key money-supply indicator in August expanded at its fastest year-to-year rate for 2005 so far. The August M2 money supply rose 17.3% from a year earlier, exceeding the central bank's target of 15% for 2005 for the third straight month.

China's national fixed-asset investment grew 25.8% last year, while urban fixed-asset investment -- which includes a large portion of national data -- grew 27.6%. National fixed-asset investment is issued only on a quarterly basis.

posted by Henry @ 4:30 PM 0 comments

Hong Kong Debates Volatility

Critics Fret About Plans
For 'Bull-Bear' Contracts;
'Domino Impact' on Stocks?

By JON OGDEN and NISHA GOPALAN
DOW JONES NEWSWIRES
September 16, 2005

HONG KONG -- Hong Kong's stock exchange regulator plans to introduce an equities derivative that its detractors believe could undermine the city's thriving warrants market, and bring unwanted volatility to leading blue-chip stocks.

The move to introduce callable bull-bear contracts as an alternative to warrants came as regulators ruled out this week calls from some market quarters for stricter regulations governing the issuance of warrants.

The contracts may be introduced within months of getting the green light from the Securities and Futures Commission, said Paul Chow, chief executive of Hong Kong Exchanges & Clearing Ltd., which operates the stock and derivatives markets. That may be as soon as January, according to local newspaper reports.

Warrants, which give the holder the right to buy or sell an underlying equity at a set price, have become popular among investors in Hong Kong. But they have recently drawn criticism on concerns over market manipulation, with calls to regulators for stronger regulations governing their issuance and trading.

While callable bull-bear contracts share some characteristics of warrants, they are structured to have lower volatility than a warrant and greater pricing transparency, removing the possibility for issuers to generate the sort of profit margins that warrants can chalk up. But some are concerned a so-called knockout feature of these contracts designed to limit investors' losses by a stop-loss mechanism could add to volatility in the market when issues are forced to sell their corresponding hedging position of the underlying stock.

SG Securities' senior vice president of equity derivatives, Edmond Lee, said a stock's downward movement could trigger a series of knockout levels of CBBCs and accelerate the fall of the underlying stock as issuing banks are forced to liquidate hedging positions.

"It could have a domino impact on the market," Mr. Lee said.

A trader with an investment bank said CBBCs could certainly drain liquidity from the warrants market as investors perceive them to be a slightly safer bet.

This would be bad news for a number of banks in Hong Kong, including HSBC Holdings PLC and UBS AG, which last week formally made their forays into the warrants market, which typically accounts for at least 20% of the daily volume on the stock exchange.

The Hong Kong exchange has been mulling the introduction of CBBCs for more than a year. Some in the market believe the exchange has dragged its feet over opposition from warrant-issuing banks, which oppose the introduction of a rival instrument. And some believe the exchange is now keen to introduce CBBCs as a way of defusing some of the criticism leveled at the warrants market.

Last week it was disclosed that the Securities and Futures Commission was investigating instances of alleged market manipulation and may review warrant regulations. But at a meeting Wednesday the exchange's board decided not to impose stricter regulations on the trading of warrants.

The exchange concluded that "supply and demand should determine the volume of warrant issues," said Mr. Chow, the exchange's CEO.

posted by Henry @ 4:30 PM 0 comments

China's Uranium Search Attracts Interested Sellers

By DENIS MCMAHON
DOW JONES NEWSWIRES
September 15, 2005

SHANGHAI -- As China moves to line up uranium supplies to feed its planned nuclear-power expansion, it is facing little resistance, sparking interest from countries with deposits of the mineral.

In the next 15 years, China plans to build as many as 40 nuclear plants to supplement the nine it has now. That is part of a plan to become less dependent on crude oil and to develop a wider range of energy sources, a plan that could have China bumping up against the strategic interests of the U.S. and its neighbors.

China's search for oil and gas in nearby waters and as far afield as North and South America has already provoked jostling and political tension.

China isn't alone in adopting a long-term nuclear-energy strategy, though for now its ambitions haven't provoked the hostility from the U.S. that similar ambitions in countries like Iran and North Korea have.

Japan already has 55 reactors, supplying 30% of the country's total energy demand. This should rise to as much as 40% within 25 years, under current government planning.

The U.S. aims to generate an extra 50 gigawatts of nuclear power by 2020, increasing its current capacity by more than 50%. China's 40 new plants will provide 40 gigawatts.

Russia and India also have ambitious nuclear-expansion plans, and other countries may follow suit, given soaring oil prices, concerns about the long-term security of oil and gas supplies and worries about greenhouse-gas emissions.

This renewed interest in nuclear power comes as uranium production from mines satisfies just 60% of global demand. The rest comes from secondary sources, such as reprocessed uranium from nuclear weapons.

For now there isn't any serious competition for uranium that might pit China against existing and would-be nuclear powers, but the situation could change.

Australia, Canada, and Kazakhstan, the holders of much of the world's readily extracted low cost uranium, have been making positive noise about selling uranium to China. This is despite the politically sensitive nature of the ore and, in the case of Australia, historical barriers against exporting it to China.

"China will be the main source of rising demand for the next 10 to 15 years," said Steve Kidd, director of strategy and research at the World Nuclear Association, a not-for-profit advocacy group. "U.S demand is less certain. China is already happening."

And while the administration of U.S. President George W. Bush has been strongly supportive of the use of nuclear energy in America, it still needs to persuade private-utility companies to make the big investments needed to expand the sector.

By contrast, China's central government is able to execute its long-term plans with little resistance, Mr. Kidd said.

China's known uranium reserves stand at 70,000 metric tons. It now consumes 1,500 metric tons a year, and by 2020 this could soar fivefold. Domestic uranium production provides about half of China's annual needs, according to the World Nuclear Association.

China National Nuclear Corp., a state-owned firm responsible for all aspects of China's civilian and military nuclear programs, has been shoring up the country's future uranium supplies.

KazAtomProm, Kazakhstan's national atomic company which already had been supplying China with uranium, signed a long-term agreement last November with China National Nuclear to produce and process uranium.

In addition, KazAtomProm President Mukhtar Dzhakishev said in an email to Dow Jones Newswires that China National Nuclear would take a 30% stake in Kyzylkum, a KazAtomProm unit that has the rights to develop the Kharasan field in the south of Kazakhstan. The field has an estimated 55,000 metric tons of uranium.

Kazakhstan, which shares China's northwest border, sits on 17% of the world's uranium reserves.

China National Nuclear declined to comment for this article.

posted by Henry @ 10:20 PM 0 comments

Wynn Resorts Raises Financing For Gambling Resort in Macau

By KERI GEIGER
DOW JONES NEWSWIRES
September 15, 2005

HONG KONG -- Wynn Resorts Ltd., controlled by U.S. casino operator Steve Wynn, has raised a US$744 million loan to finance the construction and expansion of its gambling resort in Asia's gambling capital of Macau.

Wynn Resorts (Macau) SA, a unit of the U.S. parent, tapped a US$729 million equivalent term loan due 2011 and a HK$117 million, or about US$15 million, revolving credit facility due 2007, the company said. It is also taking out a separate HK$156 million equivalent senior secured loan with Banco Nacional Ultramarino SA, a Macau-based bank.

"This is the largest international bank financing of its type completed to date in Macau," said the loan's joint global coordinators, Deutsche Bank AG, Société Générale SA and Bank of America Corp. The loan will be used to help finance the US$1.1 billion Wynn Macau casino resort, which started construction last year.

U.S. casino operators are spending heavily to grab a share of Macau's gaming industry after authorities offered casino licenses to new players three years ago, ending a decades-long monopoly held by local casino tycoon Stanley Ho.

No pricing details were given, but a person familiar with the deal said both loans were priced at three percentage points above the London interbank offered rate. Once the resort opens, loan costs will decline as the credit quality of Wynn Resorts (Macau) improves on revenue inflows from the resort. Wynn Macau is expected to open in September 2006, with additional facilities opening in the first half of 2007.

About 28 banks, including Chinese banks, participated in the loan deal.

Separately, Australian construction group Leighton Holdings Ltd. said yesterday it had won a 200-million-Australian-dollar, or about US$154 million, contract to expand a new hotel and casino complex it is building in Macau for Wynn Resorts Ltd.

In a joint venture with China State Construction Engineering, Leighton Asia (Northern) will design and construct a second building to house two restaurants, an entertainment facility and additional gaming and meeting space, which will integrate with the original phase of the five-star resort.

posted by Henry @ 10:19 PM 0 comments

Rio Tinto Says Oil Prices to Affect China's Demand for Commodities

By JAMES T. AREDDY
Staff Reporter of THE WALL STREET JOURNAL
September 15, 2005 4:59 a.m.

SHANGHAI – China shows no sign of letup in its appetite for commodities such as iron ore, but high energy prices are among the threats to global growth that could yet impact demand, according to resources giant Rio Tinto PLC.

Paul Skinner, chairman of the London-based company, said Thursday that his customers in China are particularly eager to secure long-term supply of inputs like iron ore and suggest less concern about possible short-term economic hiccups.

Yet, he added, Chinese demand for inputs to run its factories will be dictated mostly by the trends in the world economy. "Unquestionably the level of oil and energy prices currently is something that does pose a threat to global growth," he said.

Rio Tinto's board of directors has spent this week in China, fitting in visits to four large steel producers spread around the country. "The customers were talking about their expansion plans and their demand for high quality iron ore," said Chief Executive Officer Leigh Clifford.

China has emerged as a bellwether for global commodity prices due to a voracious appetite for materials like the iron ore used in steel making that Rio Tinto mines in Australia. China's fixed asset investment in areas like energy and transportation projects has lost some momentum this year but remains at super-strong levels, up nearly 29% in August from the year earlier, the government said Thursday.

In a sign of their confidence about the growth, Chinese companies are increasingly eager to lock up supply by taking equity in foreign mines -- in the same way state companies have moved to buy oil production sources in the U.S., Canada and South America.

But Rio Tinto officials said that aside from their two existing joint ventures with Chinese steelmakers they are resisting equity participation in iron-ore projects. "Our message is mining is our business," Mr. Clifford said. "We're not seeking to invest in the steel industry."

China's own surging metals production has weighed on global steel prices this year. Rio Tinto management said demand for their products from China remains extremely robust in the short term.

The company last month exported its 400th ton of iron ore to China after 30 years of business in the country – though 60 million tons of that was in the past year alone. China accounts for a 15% and growing share of Rio Tinto's global revenue, which amounted to over $9 billion in the first half.

Energy is pinching the company, however. Of the $180 million in cost increases it reported for the first half, Mr. Skinner said, some $60 million was in the form of higher charges for running the trucks and trains used to move its resources. Officials declined to forecast prices for iron ore in the coming year after a 71.5% rise in the benchmark selling price applied to China earlier this year.

posted by Henry @ 10:18 PM 0 comments

China Construction Bank IPO Contends With Leery Investors

By KATE LINEBAUGH
Staff Reporter of THE WALL STREET JOURNAL
September 14, 2005

HONG KONG -- The big guns have had their shot at investing in China's banking story. Now it's everyone else's turn.

Next month brings the initial public offering of China Construction Bank, expected to be one of the biggest IPOs in the world this year. As the first stock offering in one of China's "Big Four" banks, it will serve as a sort of investor referendum on Beijing's vaunted changes in the industry.

The Chinese government has put US$22.5 billion into a bad-loan bailout of CCB, the nation's third-largest bank by assets, as part of an overhaul leading to the IPO expected to raise about $5 billion. Bank of America has made a $3 billion investment commitment, and the Singapore government's investment company, Temasek Holdings, has offered as much as $2.4 billion. All told, strategic investors such as these have committed some $15 billion to gain access to one of the world's fastest-growing financial-services markets.

In October, institutional and individual investors will at last get to vote with their own wallets. They must assess China's drive to transform its major banks from rubber stamps for state-endorsed lending to profit-minded institutions with professional management. With their shorter-term return horizons, they will want to take an especially hard look at the numbers and listen to some of the pros.

"We will not necessarily follow the strategic investors into the banks, since their objectives are different, in the sense that they need to get access to the market early," says Mark Mobius, manager of the $3.3 billion Templeton Developing Markets Trust. "If we look at the valuations of the Chinese banks, they are not necessarily cheaper than what we can find elsewhere."

According to a recent report by Fitch Ratings, Chinese banks' return on assets and return on equity are among the lowest in Asia, with China's banks clocking an average 0.43% return on net assets and 10.89% return on equity, vying with Taiwan for the worst marks in the region.

CCB says its return on net assets last year was 25.4%, a number Fitch says is "somewhat overstated" in light of an income-tax exemption. Most of the bank's profit was earmarked for dealing with nonperforming loans, the Fitch report says. Last year, CCB more than doubled its profit to 48.4 billion yuan, or $6 billion, and says without the tax break the return would have been 17.3%.

To lure investors leery of the risks -- notably, corruption, bad loans and poor accounting -- the banks have been sold at attractive prices. Bank of America paid about 1.2 times book value for its 9% stake in CCB. That compares with the 3.18 times book that a Standard Chartered-led consortium paid for Indonesia's Bank Permata last year. China's Bank of Communications, which sold shares in June at 1.6 times book, has seen its shares rally 40% from the IPO price.

But appearing to be cheaply priced isn't enough, Templeton's Mr. Mobius contends. CCB will also have to show that recent loan growth is strong enough to withstand a possible slowdown in the domestic economy, which has been growing at world-beating rates above 9%. Inflation slowed in August, and there are concerns that domestic demand is weakening. A slowdown would spell trouble for company profits and could lead to a resurgence in bad loans at the nation's banks. CCB says its nonperforming loan ratio is 3.9%, down from 19.2% in 2002.

Separately, another factor to consider is there is "an inherent contradiction in motivations for all these banks," says Andrew Rothman, China macroeconomic strategist for CLSA Asia-Pacific Markets in Shanghai. "On the one hand, they want to become more like real banks. On the other hand, every bank in China is still controlled by the Communist Party, and the party's interests are not always going to be in line with the shareholders' interest."

For its part, CCB is betting that changes it has made in recent years -- such as cutting branches by 30% in three years, reorganizing management and spending more than $1 billion in technology upgrades -- will be enough to make investors set aside concerns over the risks and wager that management can improve profitability.

For a start, the bank, with nearly 14,500 branches and about 310,000 employees, had its 2004 accounts signed by an international accounting firm, KPMG's Chinese affiliate -- a first for CCB. More important, the bank has reorganized its management, separating audit, lending and risk management into different reporting lines. In the past, auditors reported to branch managers; loan officers were also responsible for risk assessment; and loans could be approved by banking outlets in the hinterland.

"One of the big problems was that they were too decentralized, with the branches having too much authority. The same people who were marketing the loans were also approving the loans," says Peter Tebbutt, a ratings analyst at Fitch.

The bank has set up five board-level committees, including three that are headed by independent directors: a related-party-transactions committee, a risk-management panel and an audit group. The committees might help erode the influence the party has over the bank -- influence that the bank's chairman, Guo Shuqing, publicly criticized this year.

Mr. Guo came in from the nation's central bank after CCB's former chairman, Zhang Enzhao, resigned in March amid allegations of corruption. Since then, the bank has tried to show it is cracking down on corruption within its ranks. "The problem of Zhang Enzhao forces the senior management throughout the bank to pay greater attention to being honest and clean," the bank said in a June statement after implementing a new accountability system.

Investors can take heart from such changes but should remain clear-eyed when approaching China's biggest banks.

"Realistically, if you think about the sheer number of people that are involved here, it is going to take a while to change," says Matt Bekier, a partner at McKinsey & Co. "But once they make up their minds to do something, the execution of those projects is pretty good."

posted by Henry @ 10:56 PM 0 comments

Chinese Regulators Review Cap On Foreign Investment in Banks

By KATHY CHEN and REBECCA BLUMENSTEIN
Staff Reporters of THE WALL STREET JOURNAL
September 14, 2005 12:16 a.m.

BEIJING -- Chinese regulators are considering raising the permitted level of foreign investment in Chinese banks, a move that would give foreign banks more of the control they seek as they plough billions of dollars into the sector.

Han Mingzhi, director general of the China Banking Regulatory Commission's international department, said the banking regulatory agency has set up a task force to review its current policy, which limits foreign investment in Chinese banks to just 20% for one investor and less than 25% for all foreign investors.

"According to my understanding, these levels would be lifted" in a gradual approach, Mr. Han said in an interview Tuesday. He said any specific details would likely be announced by the end of 2006.

Any such policy changes in this sensitive sector would require the approval of higher-level leaders.

Talk of potentially increasing foreign ownership levels in Chinese banks comes amid a flurry of recent banking deals. China has been negotiating the sale of stakes in its Big Four state-run commercial banks and smaller urban banks amid a broader overhaul of the banking sector. Foreign investors including Bank of America Corp., Merrill Lynch & Co. and HSBC Holdings PLC have already pledged billions of dollars to take mostly small shares in Chinese banks.

While investments in the sector can provide access to local banks' sprawling national networks of outlets to sell their own products, such as credit cards, many foreign investors are eager to increase their stakes in -- and influence over -- Chinese partners. For decades, Chinese banks have been plagued by bad debt, outdated equipment and poor management and risk controls -- problems that are proving difficult to overcome even under pressure from the banks' biggest shareholder, the state.

Foreign investors buying into Chinese banks also face the risk of their partners taking on a new tranche of bad loans in the wake of Beijing's efforts to cool the economy.

Citigroup Inc. has been in talks with its partner about raising its 4.6% stake in a local lender and would welcome a higher threshold for the industry, said Richard D. Stanley, the U.S. firm's chief executive officer in China. "Further liberalization of the market will only help to accelerate a process that will have profound benefits for the banking system and the Chinese economy," he said.

David Marshall, managing director of Fitch Ratings in Hong Kong, said "a gradual liberalization would make sense (for foreign investors). If they want a meaningful presence in China, they would want to take full control of subsidiaries there." He said any relaxation in investment limits would be most meaningful for China's smaller banks, because foreign investors could take significant control at an affordable price. Also, Chinese authorities may be leery of handing over control of their biggest banks to foreign investors.

Chinese regulators are eager to attract foreign investors into the banking sector for a number of reasons. Under Beijing's pledge to the World Trade Organization, the country must fully open the banking sector to foreign players by the end of 2006. Regulators hope foreign investors can introduce modern management methods and expertise to make Chinese banks more competitive with incoming foreign rivals.

Foreign investors are also providing much-needed cash to the Chinese banks, which must meet more-stringent capital adequacy ratios by 2006, a hurdle that for many banks could prove even more difficult to overcome than the reduction of bad-loan balances. The government has injected capital into three of China's Big Four commercial banks -- Bank of China, China Construction Bank and Industrial and Commercial Bank of China -- but these banks need more cash equity to continue growing their businesses.

"It's a win-win strategy for both local banks and foreign participants," said Mr. Han. For foreign companies, "if you really want to do local business, you should be localized. Chinese banks, on the other hand, can use foreign expertise to upgrade their knowledge and managerial skills."

In many cases, it remains too early to say how effective the foreign-local partnerships will be. Strategic foreign investors, or those who take a minimum 5% stake, may designate executive directors to sit on the board of their Chinese partner bank or send management teams to help oversee operations. HSBC has seconded about two dozen staffers to Bank of Communications in various positions, including an executive vice president. Bank of America has said it will put about 50 staff at China Construction Bank.

Citibank, which holds a stake of 4.6% in Shanghai Pudong Development Bank Co., has used this partnership to develop its credit card business in China. A Citibank executive said Tuesday that the venture is issuing 30,000 new cards per month.

On Chinese banks' bad-debt problem, Mr. Han said that with Beijing's recent efforts to cool the economy, "it's quite possible that non-performing loans will increase a little this year and next." But he said banks have now become more cautious in lending and that they are working hard to reduce both their total amount of bad debts and their NPL ratios. Chinese authorities have over the last year sought to rein in investments in such sectors as property development, construction and steel.

Mr. Han said there are likely to be more banking deals with foreign investors in the pipeline. Industrial and Commercial Bank of China is currently in negotiations with potential foreign partners, as are Huaxia Bank and Guangdong Development Bank. He said Huaxia could announce a deal soon, but declined to provide details.

He said the government has yet to set a timetable for reforming the last of the Big Four commercial banks, Agriculture Bank of China, despite the fact that some potential foreign investors have expressed interest in it. The International Monetary Fund in its annual report on China this week called on Beijing to restructure the agricultural bank.

Regulators are currently conducting feasibility studies on how to overhaul the bank, and the government "hopefully will do a capital injection," Mr. Han said. But "for ABC, we have a large amount of non-performing loans to be resolved," he said. The bank said its NPL ratio last year was 26.7%, compared to less than 5% each for the other Big Four banks.

posted by Henry @ 10:48 PM 0 comments

Chinese Firms to Pay $1.42 Billion For EnCana Oil Assets in Ecuador

By BEN DUMMETT
DOW JONES NEWSWIRES
September 14, 2005; Page A3

A joint venture of Chinese petroleum companies agreed to buy EnCana Corp.'s oil and pipeline assets in Ecuador for $1.42 billion, as China continues to seek energy reserves world-wide.

EnCana, a big Canadian oil-and-natural gas producer, said it agreed to sell the unit to a venture called Andes Petroleum Co. An executive with China National Petroleum Corp. confirmed that CNPC was involved in the deal. It wasn't clear which other companies might be participating.

By buying EnCana's assets in Ecuador, Andes Petroleum is acquiring daily oil production of 75,000 barrels and proven reserves of 143 million barrels. The price amounts to $9.96 a barrel of oil equivalent of proven reserves. Andes is also purchasing EnCana's 36% interest in a 310-mile Ecuadorean pipeline, which has the capacity to handle 450,000 barrels of oil a day.

India had also been interested in the assets, as the two countries seek supplies to feed rapidly expanding economies and satisfy their growing thirst for oil and natural gas. ONGC Videsh Ltd., the overseas-exploration unit of India's state-run Oil & Natural Gas Corp., had expressed an interest in the assets last year.

The two countries' hunt for energy supplies has taken them around the world. Last month, China National Petroleum agreed to acquire PetroKazakhstan Inc., a Canadian company with energy assets in Kazakhstan, for $4.18 billion, beating out ONGC.

In April, Cnooc Ltd., the publicly traded arm of state owned China National Offshore Oil Corp., paid 150 million Canadian dollars (US$126 million) for a 17% stake in closely held MEG Energy Corp., a Calgary, Alberta, energy company with a project involving Canada's oil sands, a technically challenging but potentially lucrative oil source. The following month, China Petroleum & Chemical Corp., or Sinopec, agreed to pay 150 million Canadian dollars for a minority stake in another oil-sands project in Alberta.

But China's biggest effort faltered earlier this year, when Chevron Corp. of the U.S. beat Cnooc in a bidding war over Unocal Corp.

For EnCana, the asset sale is part of a plan to sell more than $10 billion in noncore assets while focusing on its reserves in North America. It entered Ecuador in 1999. EnCana said it plans to use the proceeds to buy back stock and reduce debt.

In North America, EnCana is focusing on so-called unconventional oil and gas reserves, including oil sands.

The sale of the Ecuadorean assets is expected to close before year's end, subject to approval by the government of Ecuador, EnCana said.

============================================

China Asserts Oil Concerns Are Misplaced

A WALL STREET JOURNAL NEWS ROUNDUP
September 14, 2005

BEIJING -- China's rising energy consumption shouldn't worry the rest of the world, a senior Chinese official said, but statistics he released about domestic oil production showed the country will likely rely increasingly on foreign oil imports in coming years to fuel its booming economy.

The comments from Zhang Guobao, vice chairman of the National Development and Reform Commission, come against a background of sustained high oil prices and recent Chinese efforts to acquire major overseas oil assets.

Concerns about the impact of surging Chinese oil demand are misplaced because the country's oil strategy is based on raising production from domestic oil fields, said Mr. Zhang, whose commission is China's top planning agency.

"It is quite unnecessary for the world to overreact to the growth of China's energy consumption, since its dependence on the world is insignificant," Mr. Zhang told reporters. "The fundamental principle of China's energy development is to rely on domestic sources."

Mr. Zhang said China's oil production in 2005 would amount to 180 million tons, or 3.5 million barrels per day, a marginal increase from the 2004 figure. He said China had no intention of buying oil now to fill its planned strategic petroleum reserve because of the current high levels.

"Given high oil prices, it will be risky for China to buy oil now to establish the reserve," he said. "We will look for other ways to fill energy reserves gradually."

Benchmark light, sweet crude-oil futures for October were at $63.58 at noon on the New York Mercantile Exchange, up 24 cents from Monday's close.

Mr. Zhang's remarks came a day after China said imports of both crude oil and refined products fell last month, partly a result of state-owned companies' unwillingness to make up for the widening premium of international products' prices to domestic prices.

The country imported 8.76 million metric tons of crude oil in August, a decline of 6.1% from a year earlier, according to preliminary data released by the General Administration of Customs.

For the first eight months of this year, crude imports rose 3.9% to 83.12 million tons, or the equivalent of 2.51 million barrels a day.

Chinese oil output in recent years has increased much more slowly than domestic consumption, as new developments in western China and offshore have failed to keep pace with declines at older fields in the east. Out of China's total oil consumption rate last year of 6.7 million barrels per day, almost half -- or about 3.2 million barrels per day -- came from imports, according to BP PLC statistics, which are widely used in the oil industry.

China's own statistics put the country's 2004 oil imports at less than two million barrels per day.

Analysts say they can't account for the vast discrepancy in those figures.

Wu Kang, a fellow at the University of Hawaii's East-West Center in Honolulu, estimates that import demand will swell to five million barrels per day by 2010, while Adrian Loh, an analyst at Merrill Lynch in Singapore, believes they will reach twice that level, pushed by rising use of automobiles and continuing high economic growth rates.

In recent months Chinese oil companies have made two attempts to purchase sizable oil properties abroad. An $18.5 billon bid by Cnooc Ltd. for U.S.-based Unocal Corp. elicited widespread opposition in Washington and was spurned in favor of a lower bid from Chevron Corp.

A $4.2 billion offer by China National Petroleum Corp. to buy a major oil producer in Kazakhstan is currently awaiting approval by the Kazakh government.

U.S. critics of China's foreign oil acquisition strategy say it is focused on rogue states like Iran and Sudan, and is aimed at taking control of scarce oil supplies around the world. The critics also blame rising demand from China -- and India -- for rapidly rising oil prices, which recently traded above $70 a barrel.

In his remarks, Mr. Zhang rejected those charges, saying the real reason for higher prices was speculation in the marketplace, political turbulence in key oil-producing areas, and underproduction among some major suppliers.

posted by Henry @ 10:47 PM 0 comments

Some Say 'Sell the Yen' Despite Koizumi's Win

By RON HARUI
DOW JONES NEWSWIRES
September 14, 2005

SINGAPORE -- The outlook for the yen may have turned more bullish in the aftermath of Prime Minister Junichiro Koizumi's landslide election victory, but some analysts say it is time to sell the Japanese currency against others like the Singapore dollar.

Shorting the yen may sound like the wrong strategy to adopt. Mr. Koizumi's victory is widely viewed as helping to accelerate an economic overhaul that will lure more foreign capital into Japanese equity markets in the near term and lead to yen appreciation in the medium term.

At the same time, Japan's economic growth appears to be picking up. Second-quarter gross domestic product grew a revised 0.8% from the first quarter, stronger than expected, and the Bank of Japan has suggested it may move toward ending its ultraeasy monetary policy.

But proponents of short-yen strategies believe that while the euphoria over the election may allow Mr. Koizumi to push through an overhaul of the postal system, his decision to step down next year means other proposed changes such as to the pension system may prove harder to achieve for his Liberal Democratic Party-led coalition. Based on that reasoning, the yen's prospects may not be as bullish as the market is reflecting.

"Since [Mr. Koizumi] defined party membership exclusively in terms of members' views on postal privatization, this does not necessarily imply that the party agrees on much else," HSBC Japan economist Peter Morgan said. As a result, Mr. Koizumi's effective strength in the LDP may be weaker than the election outcome indicates, he said.

The LDP and coalition partner New Komeito Party won 327 seats out of 480 in Sunday's Lower House elections, giving the coalition control over two-thirds of the chamber's seats -- enough to overrule decisions by the Upper House. Analysts like Rabobank's Asia Pacific head of research, Jan Lambregts, think the strong mandate will support Mr. Koizumi's efforts to overhaul the economy.

Nonetheless, said Toru Umemoto, chief currency strategist for Japan at Barclays Capital, "Koizumi's tenure is only for one year, so he's likely to be a lame duck, even if the [postal privatization] bill passes."

Mr. Koizumi's term as LDP president, and thus, prime minister, will end next September. Although speculation that he may extend his tenure has risen following the election victory, he has said that he has no plan to continue beyond that date. Also, regardless of whether his tenure is extended beyond next September, the government is likely to devote itself to fiscal consolidation, including consumption-tax increases, Morgan Stanley's Mr. Umemoto said. "This could be yen-negative" because of its potential for damping the economy, he said.

The U.S. dollar sank as low as 108.97 yen Monday in the wake of the election. But the yen's strength was short-lived, as investors took profits on their holdings of the Japanese currency. In New York yesterday morning, the U.S. dollar was quoted at 110.75 yen, up from 110.27 yen late Monday in New York.

In comparison, prospects for the Singapore dollar look strong both in terms of fundamentals and technical measures.

The Monetary Authority of Singapore has kept a policy of a gradual and modest appreciation of its trade-weighted exchange rate since April 2004 because of potential inflation from rising oil prices. According to traders, the de facto central bank also has been intervening regularly to shore up the Singapore currency.

Since reaching a one-month high of S$1.6904 on Aug. 31, the U.S. dollar has retreated to trade mostly between S$1.67 and S$1.68. In New York yesterday morning, the U.S. dollar was quoted at S$1.6827, up from $1.6776 late Monday.

"The bias...is for the currency to display strength rather than weakness," said Wong Keng Siong, economist at the Bank of Tokyo-Mitsubishi.

According to the monetary authority's quarterly survey of economists published this month, Singapore's economy is likely to grow 4.4% this year, up from 3.8% growth predicted in the June survey. The authority said economists expect the electronics segment to support the recovery in the industrial sector because of improving global demand.

The Singapore dollar's ability to hold to strong support at the Sept. 5 low of 64.99 yen also bodes positively for the currency. Early Monday, it fell to a one-week low of 65.11 yen but bounced back strongly to as high as 65.82 yen early yesterday. Traders who watch technical signs say it has a reasonable chance of retesting strong resistance at 66.03-66.14 yen.

The U.S. dollar received support yesterday from a narrower July trade deficit. In morning New York dealings, the euro slipped to $1.2280 from $1.2285 late Monday in New York. The dollar rose to 1.2604 Swiss francs from 1.2582 francs, while sterling rose to $1.8230 from $1.8193.

posted by Henry @ 10:46 PM 0 comments

China to Avoid Jarring Markets With Yuan Moves

Central Bank Will Keep
To Gradualist Approach
On Currency Restructuring

By J.R. WU and RICK CAREW
DOW JONES NEWSWIRES
September 12, 2005; Page A14

BEIJING -- China's central-bank chief, Zhou Xiaochuan, said the country's foreign-exchange changes will progress steadily, with the central bank intervening less in the foreign-exchange market.

The remarks come just days before Chinese President Hu Jintao and U.S. President George W. Bush are to meet in New York, where currency issues are expected to be discussed.

At the same time, Mr. Zhou, governor of the People's Bank of China, said China doesn't want fluctuations in world financial markets to be caused "by our active composition adjustment of the foreign reserves."

"We will not take any imprudent actions in this regard," Mr. Zhou said. China's foreign-exchange reserves are the second-largest in the world after Japan's, and stood at $711 billion at the end of June. Much of the reserves are invested in U.S. Treasurys.

China's changes to its exchange-rate regime are intended to ease external trade imbalances, boost domestic demand and raise the competitiveness of local companies, Mr. Zhou said in an interview with the Financial News on the sidelines of a central-bank conference in Canada. His remarks to the central-bank-backed Financial News were posted during the weekend on the central bank's Web site.

China's managed floating exchange-rate regime allows the central bank "to act as a filter, doing nothing with the normal fluctuations, but smoothing out the abnormal movements including excessively large or too-frequent changes" in the exchange rate, Mr. Zhou said.

"Such a role of the central bank is adaptive in nature, and may be reduced over time, as the economy gets more resilient to shocks," Mr. Zhou said. He added that the central bank will reduce its purchases of foreign exchange in the market, while companies will keep more foreign exchange.

He also said the central bank will keep to a gradualist approach as it pushes ahead on its foreign-exchange restructuring, but the conditions for adopting a freely floating exchange-rate regime haven't been met.

China isn't well prepared to deal with the possibility of any "sharp and disorderly" adjustments in the global economy, he said.

Mr. Zhou said China's macroeconomic environment is conducive to exchange-rate changes. He said China's consumer-price-index growth is moderate, and that rising interest rates in the U.S. are "an important condition" for yuan exchange-rate changes.

On July 21, China scrapped its policy of effectively pegging the yuan to the dollar. Instead, it revalued the yuan 2.1% against the dollar and started referencing its value to a basket of currencies.

In recent days, central-bank officials have given cautiously optimistic assessments of the July move, but suggested a further official revaluation of the yuan is unlikely in coming months and that the role of market supply and demand is an important factor in setting the exchange rate.

Analysts say the degree of revaluation isn't enough to have any effect on China's ballooning current-account surplus, namely in trade. Critics, especially those in the U.S., have argued the yuan is undervalued and China should do more to allow it to appreciate.

China wants equilibrium in its balance of payments, and statistics in this regard could be improved, Mr. Zhou said, suggesting a possible revision in the calculation for current account that would be composed mainly of transactions of trade in goods and services.

He said that at present the current account also includes items for proceeds and current transfers, which aren't stable and can be distorted by changes in currency-appreciation expectations.

Meanwhile, to complement the foreign-exchange changes, China's insurance regulator issued guidelines during the weekend allowing insurance funds to put money in overseas foreign-exchange investments.

Participants entrusted with insurance funds will be able to conditionally invest in foreign-currency products, overseas shares of Chinese companies and bonds issued by foreign governments, including mortgage-backed securities guaranteed by the government, as well as money-market funds and structured deposits, the China Insurance Regulatory Commission said. The guidelines take effect immediately.

Among the key investments, participants entrusted with insurance funds will be able to invest in foreign-currency products denominated in nine currencies, including the U.S. dollar, euro, Japanese yen, U.K. pound, Canadian dollar, Swiss franc, Australian dollar, Singapore dollar and the Hong Kong dollar, the guidelines said. Products outside of the nine currencies could be approved separately by the regulatory commission, the guidelines said.

posted by Henry @ 5:02 PM 0 comments

Online Phone Services Spur Backlash in China

State Telecom Giant Blocks
Users From PC Calling
Offered by Skype, Others

By JASON DEAN
Staff Reporter of THE WALL STREET JOURNAL
September 12, 2005

Skype Technologies SA and other Internet-telephony companies could face difficulties in one of their most promising markets, as a Chinese state-owned phone company appears to be moving to bar Chinese users from some of the companies' services.

Skype offers two basic kinds of services: one that enables users to make voice calls from one personal computer to another over the Internet, and a premium service that allows people to call regular phone numbers using their PCs.

It is the second type that appears to be triggering a backlash from China Telecom Corp., the country's dominant fixed-line phone company. Skype doesn't offer the PC-to-phone service, called SkypeOut, directly in China, but some users in China have found ways to use it anyway.

An operator in the technical-support office of China Telecom's subsidiary in the southern city of Shenzhen said yesterday that her company has begun blocking customers from using the PC-to-phone service provided by Skype and others. The woman, whose statement was consistent with Chinese media reports in recent days, declined to be named. It wasn't clear whether similar measures have been taken in other Chinese cities.

Internet phone service is threatening established phone companies around the world. China Telecom may be especially sensitive to such competition because it is already dealing with slowing growth in its main fixed-line phone business, said Duncan Clark, managing director of BDA China, an Internet and telecommunications consultancy in Beijing. China Telecom is "in a very defensive position," he said.

Spokesmen for China Telecom couldn't be reached for comment. Hannah McCree, a spokeswoman for Luxembourg-based Skype, said the report of a China Telecom crackdown on Skype "sounds like a rumor and we don't comment on rumors."

Skype says it has 3.1 million registered users in China, making the country one of its top three markets. It began cooperating last November with Chinese Internet concern Tom Online Inc. to provide a Chinese version of Skype's software. Earlier this month, the two companies announced they were expanding their relationship into a joint venture. The existing relationship doesn't include SkypeOut, though the joint venture, according to a Sept. 5 news release, is expected to develop unspecified "premium services" in China.

Chinese government regulations classify Internet telephony as "basic telecommunications" businesses, which its rules dictate can be offered only by China's six major telecom carriers. The operator in China Telecom's Shenzhen office said the company's policy was implemented because Internet phone service has "disturbed the telecom market order." She said customers who violate the policy have their service cut off and can't have it restored unless they sign a pledge not to use it again."

A Tom Online official said his company wasn't aware of any disruption to the PC-to-PC service it offers with Skype in China. The official said Tom Online has been in discussions with Chinese telecom operators about providing Skype but that no deals have been reached.

On its Web site, Skype.tom.com, it says SkypeOut isn't allowed in mainland China. But it also notes that anyone with an international credit card can buy points from Skype's Web site. Chinese media have reported that many Chinese have downloaded the SkypeOut software from overseas Web sites.

posted by Henry @ 5:01 PM 0 comments

China's Producer Prices Climb On Rise in Raw-Materials Costs

A WALL STREET JOURNAL NEWS ROUNDUP
September 12, 2005

BEIJING -- China's producer-price index unexpectedly rose 5.3% in August from a year earlier, the government said. The pace accelerated from the 5.2% rise recorded in July.

The index is regarded as a leading indicator of inflation, because it reflects price increases that may eventually be passed on by companies to consumers. Economists had expected a 5% rise for August.

For the first eight months of the year, the index rose 5.5% from the same period a year earlier, the National Bureau of Statistics said in a statement.

Prices of raw materials and fuel rose 8.1% in August from a year earlier, while prices for copper, aluminum, lead, zinc and nickel increased between 7.5% and 18.1%. Steel-product prices rose between 2.8% and 3.3%.

The bureau didn't elaborate on the factors behind the price increases.

China's producer-price inflation has generally fallen since a peak in the fourth quarter of 2004. Some economists expect this trend to persist as July's yuan revaluation cuts the cost of imported raw materials, though others worry about the rising price of oil.

"Oil prices have gone up, but that has partially been offset by the deceleration in prices of steel, for instance, and even coal prices are starting to fall from recent peaks," said Qu Hongbin, economist with HSBC in Hong Kong. "It seems that consumer prices really haven't picked up that much."

"China has had this massive capacity expansion over the last two to three years, which means that the competition -- particularly in the downstream industries -- is so intense that it's very difficult for them to pass on prices to consumers," the economist said. "I think also the expansion in capacity as well as productivity improvement have made industry more capable of absorbing margin squeezes by high oil prices."

The government was to release the August consumer-price index today. The year-to-year increase is expected to extend the recent trend of less than 2%, as increased capacity keeps upstream price pressures from trickling down.

Year-to-year CPI growth has eased after peaking at 5.3% in August 2004. The index rose 1.6% in June and 1.8% in May.

Analysts said intense competition among makers of products from cars to televisions has helped hold down consumer prices despite the pipeline pressures, but that has squeezed corporate margins. Many economists reckon consumer-price inflation will begin ticking up toward the end of the year.

"The CPI will probably continue to edge up very gradually, as PPI continues to run higher than the CPI numbers, so we will gradually see a bit more pass-through," said Yiping Huang, chief Asia economist at Citigroup in Hong Kong.

"There is an issue of excess capacity in some manufacturing industries. When input starts to rise, sometimes it squeezes more on the margin than pushing up the finished-goods price, so it's a limited pass-through. We are seeing CPI picking up gradually," he said.

posted by Henry @ 4:58 PM 0 comments

How a Formula Ignited Market

That Burned Some Big Investors

By MARK WHITEHOUSE
Staff Reporter of THE WALL STREET JOURNAL
September 12, 2005; Page A1

When a credit agency downgraded General Motors Corp.'s debt in May, the auto maker's securities sank. But it wasn't just holders of GM shares and bonds who felt the pain.

Like the proverbial flap of a butterfly's wings rippling into a tornado, GM's woes caused hedge funds around the world to lose hundreds of millions of dollars in other investments on behalf of wealthy individuals, institutions like university endowments -- and, via pension funds, regular folk.

All this traces back, in a sense, to a day eight years ago when a Chinese-born New York banker got to musing about love and death -- specifically, how people tend to die soon after their spouses do. Therein lies a tale of how a statistician unknown outside a small coterie of finance theorists helped change the world of investing.

The banker, David Li, came up with a computerized financial model to weigh the likelihood that a given set of corporations would default on their bond debt in quick succession. Think of it as a produce scale that not only weighs a bag of apples but estimates the chance that they'll all be rotten in a week.

The model fueled explosive growth in a market for what are known as credit derivatives: investment vehicles that are based on corporate bonds and give their owners protection against a default. This is a market that barely existed in the mid-1990s. Now it is both so gigantic -- measured in the trillions of dollars -- and so murky that it has drawn expressions of concern from several market watchers. The Federal Reserve Bank of New York has asked 14 big banks to meet with it this week about practices in the surging market.

The model Mr. Li devised helped estimate what return investors in certain credit derivatives should demand, how much they have at risk and what strategies they should employ to minimize that risk. Big investors started using the model to make trades that entailed giant bets with little or none of their money tied up. Now, hundreds of billions of dollars ride on variations of the model every day.

"David Li deserves recognition," says Darrell Duffie, a Stanford University professor who consults for banks. He "brought that innovation into the markets [and] it has facilitated dramatic growth of the credit-derivatives markets."

The problem: The scale's calibration isn't foolproof. "The most dangerous part," Mr. Li himself says of the model, "is when people believe everything coming out of it." Investors who put too much trust in it or don't understand all its subtleties may think they've eliminated their risks when they haven't.

The story of Mr. Li and the model illustrates both the promise and peril of today's increasingly sophisticated investment world. That world extends far beyond its visible tip of stocks and bonds and their reactions to earnings or economic news. In the largely invisible realm of derivatives -- investment contracts structured so their value depends on the behavior of some other thing or event -- credit derivatives play a significant and growing role. Endless trading in them makes markets more efficient and eases the flow of money into companies that can use it to grow, create jobs and perhaps spread prosperity.

But investors who use credit derivatives without fully appreciating the risks can cause much trouble for themselves and potentially also for others, by triggering a cascade of losses. The GM episode proved relatively minor, but some experts say it could have been worse. "I think this is a baby financial mania," says David Hinman, a portfolio manager at Los Angeles investment firm Ares Management LLC, referring to credit derivatives. "Like a lot of financial manias, it tends to end with some casualties."

Mr. Li, 42 years old, began his journey to this frontier of capitalist innovation three decades ago in rural China. His father, a police official, had moved the family to the countryside to escape the purges of Mao's Cultural Revolution. Most children at the young Mr. Li's school didn't go past the 10th grade, but he made it into China's university system and then on to Canada, where he collected two master's degrees and a doctorate in statistics.

In 1997 he landed on the New York trading floor of Canadian Imperial Bank of Commerce, a pioneer in the then-small market for credit derivatives. Investment banks were toying with the concept of pooling corporate bonds and selling off pieces of the pool, just as they had done with mortgages. Banks called these bond pools collateralized debt obligations.

They made bond investing less risky through diversification. Invest in one company's bonds and you could lose all. But invest in the bonds of 100 to 300 companies and one loss won't hurt so much.

The pools, however, didn't just offer diversification. They also enabled sophisticated investors to boost their potential returns by taking on a large portion of the pool's risk. Banks cut the pools into several slices, called tranches, including one that bore the bulk of the risk and several more that were progressively less risky.

Say a pool holds 100 bonds. An investor can buy the riskiest tranche. It offers by far the highest return, but also bears the first 3% of any losses the pool suffers from any defaults among its 100 bonds. The investor who buys this is betting there won't be any such losses, in return for a shot at double-digit returns.

Alternatively, an investor could buy a conservative slice, which wouldn't pay as high a return but also wouldn't face any losses unless many more of the pool's bonds default.

Investment banks, in order to figure out the rates of return at which to offer each slice of the pool, first had to estimate the likelihood that all the companies in it would go bust at once. Their fates might be tightly intertwined. For instance, if the companies were all in closely related industries, such as auto-parts suppliers, they might fall like dominoes after a catastrophic event. In that case, the riskiest slice of the pool wouldn't offer a return much different from the conservative slices, since anything that would sink two or three companies would probably sink many of them. Such a pool would have a "high default correlation."

But if a pool had a low default correlation -- a low chance of all its companies stumbling at once -- then the price gap between the riskiest slice and the less-risky slices would be wide.

This is where Mr. Li made his crucial contribution. In 1997, nobody knew how to calculate default correlations with any precision. Mr. Li's solution drew inspiration from a concept in actuarial science known as the "broken heart": People tend to die faster after the death of a beloved spouse. Some of his colleagues from academia were working on a way to predict this death correlation, something quite useful to companies that sell life insurance and joint annuities.

"Suddenly I thought that the problem I was trying to solve was exactly like the problem these guys were trying to solve," says Mr. Li. "Default is like the death of a company, so we should model this the same way we model human life."

His colleagues' work gave him the idea of using copulas: mathematical functions the colleagues had begun applying to actuarial science. Copulas help predict the likelihood of various events occurring when those events depend to some extent on one another. Among the best copulas for bond pools turned out to be one named after Carl Friedrich Gauss, a 19th-century German statistician.

Mr. Li, who had moved over to a J.P. Morgan Chase & Co. unit (he has since joined Barclays Capital PLC), published his idea in March 2000 in the Journal of Fixed Income. The model, known by traders as the Gaussian copula, was born.

"David Li's paper was kind of a watershed in this area," says Greg Gupton, senior director of research at Moody's KMV, a subsidiary of the credit-ratings firm. "It garnered a lot of attention. People saw copulas as the new thing that might illuminate a lot of the questions people had at the time."

To figure out the likelihood of defaults in a bond pool, the model uses information about the way investors are treating each bond -- how risky they're perceiving its issuer to be. The market's assessment of the default likelihood for each company, for each of the next 10 years, is encapsulated in what's called a credit curve. Banks and traders take the credit curves of all 100 companies in a pool and plug them into the model.

The model runs the data through the copula function and spits out a default correlation for the pool -- the likelihood of all of its companies defaulting on their debt at once. The correlation would be high if all the credit curves looked the same, lower if they didn't. By knowing the pool's default correlation, banks and traders can agree with one another on how much more the riskiest slice of the bond pool ought to yield than the most conservative slice.

"That's the beauty of it," says Lisa Watkinson, who manages structured credit products at Morgan Stanley in New York. "It's the simplicity."

It's also the risk, because the model, by making it easier to create and trade collateralized debt obligations, or CDOs, has helped bring forth a slew of new products whose behavior it can predict only somewhat, not with precision. (The model is readily available to investors from investment banks.)

The biggest of these new products is something known as a synthetic CDO. It supercharges both the returns and the risks of a regular CDO. It does so by replacing the pool's bonds with credit derivatives -- specifically, with a type called credit-default swaps.

The swaps are like insurance policies. They insure against a bond default. Owners of bonds can buy credit-default swaps on their bonds to protect themselves. If the bond defaults, whoever sold the credit-default swap is in the same position as an insurer -- he has to pay up.

The price of this protection naturally varies, costing more as the perceived likelihood of default grows.

Some people buy credit-default swaps even though they don't own any bonds. They buy just because they think the swaps may rise in value. Their value will rise if the issuer of the underlying bonds starts to look shakier.

Say somebody wants default protection on $10 million of GM bonds. That investor might pay $500,000 a year to someone else for a promise to repay the bonds' face value if GM defaults. If GM later starts to look more likely to default than before, that first investor might be able to resell that one-year protection for $600,000, pocketing a $100,000 profit.

Just as investment banks pool bonds into CDOs and sell off riskier and less-risky slices, banks pool batches of credit-default swaps into synthetic CDOs and sell slices of those. Because the synthetic CDOs don't contain any actual bonds, banks can create them without going to the trouble of purchasing bonds. And the more synthetic CDOs they create, the more money the banks can earn by selling and trading them.

Synthetic CDOs have made the world of corporate credit very sexy -- a place of high risk but of high potential return with little money tied up.

Someone who invests in a synthetic CDO's riskiest slice -- agreeing to protect the pool against its first $10 million in default losses -- might receive an immediate payment of $5 million up front, plus $500,000 a year, for taking on this risk. He would get this $5 million without investing a dime, just for his pledge to pay in case of a default, much like what an insurance company does. Some investors, to prove they can pay if there is a default, might have to put up some collateral, but even then it would be only 15% or so of the amount they're on the hook for, or $1.5 million in this example.

This setup makes such an investment very tempting for many hedge-fund managers. "If you're a new hedge fund starting out, selling protection on the [riskiest] tranche and getting a huge payment up front is certainly something that's going to attract your attention," says Mr. Hinman of Ares Management. It's especially tempting given that a hedge fund's manager typically gets to keep 20% of the fund's winnings each year.

Synthetic CDOs are booming, and largely displacing the old-fashioned kind. Whereas four years ago, synthetic CDOs insured less than the equivalent of $400 billion face amount of U.S. corporate bonds, they will cover $2 trillion by the end of this year, J.P. Morgan Chase estimates. The whole U.S. corporate-bond market is $4.9 trillion.

Some banks are deeply involved. J.P. Morgan Chase, as of March 31, had bought or sold protection on the equivalent of $1.3 trillion of bonds, including both synthetic CDOs and individual credit-default swaps. Bank of America Corp. had bought or sold about $850 billion worth and Citigroup Inc. more than $700 billion, according to the Office of the Comptroller of the Currency. Deutsche Bank AG, whose activity the comptroller doesn't track, is another big player.

Much of that money is riding on Mr. Li's idea, which he freely concedes has important flaws. For one, it merely relies on a snapshot of current credit curves, rather than taking into account the way they move. The result: Actual prices in the market often differ from what the model indicates they should be.

Investment banks try to compensate for the shortcomings of the model by cobbling copula models together with other, proprietary methods. At J.P. Morgan, "We're not stupid enough to believe [the model] is omniscient," said Andrew Threadgold, head of market risk management. "All risk metrics are flawed in some way, so the trick is to use a lot of different metrics." Bank of America and Citigroup representatives said they use various models to assess risk and are constantly working to improve them. Deutsche Bank had no comment.

As with any model, forecasts investors make by using the model are only as good as the inputs. Someone asking the model to indicate how CDO prices will act in the future, for example, must first offer a guess about what will happen to the underlying credit curves -- that is, to the market's perception of the riskiness of individual bonds over several years. Trouble awaits those who blindly trust the model's output instead of recognizing that they are making a bet based partly on what they told the model they think will happen. Mr. Li worries that "very few people understand the essence of the model."

Consider the trade that tripped up some hedge funds during May's turmoil in GM securities. It involved selling insurance on the riskiest slice of a synthetic CDO and then looking to the model for a way to hedge the danger that the default risk would increase. Using the model, investors calculated that they could offset that danger by buying a double dose of insurance on a more conservative slice.

It looked like a great deal. For selling protection on the riskiest slice -- agreeing to pay as much as $10 million to cover the pool's first default losses -- an investor would collect a $3.5 million upfront payment and an additional $500,000 yearly. Hedging the risk would cost the investor a mere $415,000 annually, the price to buy protection on a $20 million conservative piece.

But the model's hedge assumed only one possible future: one in which the prices of all the credit-default swaps in the synthetic CDO moved in sync. They didn't. On May 5, while the outlook for most bond issuers stayed about the same, two got slammed: GM and Ford Motor Co., both of which Standard & Poor's downgraded to below investment grade. That event caused a jump in the price of protection on GM and Ford bonds. Within two weeks, the premium payment on the riskiest slice of the CDO, the one most exposed to defaults, leapt to about $6.5 million upfront.

Result: An investor who had sold protection on the riskiest slice for $3.5 million had a paper loss of nearly $3 million. That's because if the investor wanted to get out of the investment, he would have to buy a like amount of insurance from somebody else for $6.5 million, or $3 million more than he was getting.

The simultaneous investment in the conservative slice proved an inadequate hedge. Because only GM and Ford saw their default risk soar, not the rest of the bond world, the pricing of the more conservative slices of the pool didn't rise nearly as much as the riskiest slice. So there wasn't much of an offsetting profit to be made there by reselling that insurance.

This wasn't really the fault of the model, which was designed mainly to help price the tranches, not to make predictions. True, the model had assumed the various credit curves would move in sync. But it also allowed for investors to adjust this assumption -- an option that some, wittingly or not, ignored.

Because numerous hedge funds had made the same credit-derivatives bet, the turmoil they faced spilled over into stock and bond markets. Many investors worried that some hedge funds might have to dump assets to cover their losses, so they sold, too. (Some hedge funds also suffered from a separate bad bet, which relied on GM's bond and stock prices moving in tandem; it went wrong when GM shares rallied suddenly as investor Kirk Kerkorian said he would bid for GM shares.)

GLG Credit Fund told its investors it lost about 14.5% in the month of May, much of that on synthetic CDO bets. Writing to investors, fund manager Jean-Michel Hannoun called the market reaction to the GM and Ford credit downgrades too improbable an event for the hedge fund's risk model to capture. A GLG spokesman declines to comment.

The credit-derivatives market has since bounced back. Some say this shows that the proliferation of hedge funds and of complex derivatives has made markets more resilient, by spreading risk.

Others are less sanguine. "The events of spring 2005 might not be a true reflection of how these markets would function under stress," says the annual report of the Bank for International Settlements, an organization that coordinates central banks' efforts to ensure financial stability. To Stanford's Mr. Duffie, "The question is, has the market adopted the model wholesale in a way that has overreached its appropriate use? I think it has."

Mr. Li says that "it's not the perfect model." But, he adds: "There's not a better one yet."

posted by Henry @ 4:57 PM 0 comments

KPMG Names Two To Head Up Its Tax Practice

By JONATHAN WEIL
Staff Reporter of THE WALL STREET JOURNAL
September 12, 2005; Page C1

KPMG LLP has selected new leaders for its tax practice, tapping two senior partners with no apparent ties to the tax shelters at the heart of the accounting firm's recent legal problems.

In the second management shuffle at the division since early 2004, Shaun T. Kelly, 46 years old, will take over as the firm's vice chairman of tax services. Frederick S. Smith, 49, will become vice chairman of tax-services operations, the tax practice's No. 2 post. The firm notified its tax partners of the appointments, which take effect Sept. 30, at a meeting last week in Dallas. A public announcement is expected today. Mr. Kelly is a mergers-and-acquisitions specialist, and Mr. Smith joined the firm in 2002.

Messrs. Kelly and Smith succeed James Brasher, 51, and John Chopack, 57, respectively. According to a copy of the announcement to be released today, Mr. Brasher "will assume other significant duties within KPMG's organization," and Mr. Chopack "will retire as previously planned in early 2006." Reached Saturday, Mr. Brasher declined to comment. Mr. Chopack didn't return phone calls.

The selections come two weeks after KPMG avoided a federal indictment by admitting to criminal wrongdoing and agreeing to a $456 million settlement with the Justice Department over the firm's sales of questionable tax shelters to hundreds of wealthy Americans from 1996 to 2002. A grand jury in New York has indicted eight of the firm's former tax professionals, including three former KPMG vice chairmen, all of whom last week entered not-guilty pleas.

KPMG said the management changes had been planned since June, when the firm's partners elected Timothy P. Flynn to succeed Eugene O'Kelly as chairman and chief executive, shortly after Mr. O'Kelly was diagnosed with advanced-stage cancer.

In the statement to be released today, the firm said Mr. Flynn in June "had informed Messrs. Brasher and Chopack, the KPMG board of directors, as well as government officials, that he would effect a series of structural, organizational and leadership changes, including in the tax practice, which would be finalized and implemented upon resolution of the Department of Justice investigation." Today's announcement, the firm said, "is the culmination of the plan as it relates to the tax practice."

In the statement, Mr. Flynn said Messrs. Brasher and Chopack "have served with unquestioned integrity and professionalism, successfully instituting a series of profession-leading risk management and business practices reforms, and reinforcing a commitment to quality in KPMG's tax practice." Mr. Flynn said Messrs. Kelly and Smith "are well prepared to take on their new responsibilities," and "have a steadfast commitment to quality and client service, as well as strong team-building skills."

As reported in an Aug. 10 Wall Street Journal article, Messrs. Brasher and Chopack, in jobs prior to their 2004 appointments as vice chairmen, helped oversee KPMG's sales of corporate-tax shelters that the Internal Revenue Service subsequently challenged as abusive tax-avoidance schemes. It's unclear whether either man knew the shelters could be problematic at the time, and there has been no indication that either one is the focus of any government investigation.

Mr. O'Kelly promoted the two men as part of a January 2004 management shake-up that included the departures of former KPMG deputy chairman Jeffrey Stein and former KPMG vice chairman Richard Smith, both of whom were indicted last month on charges of conspiracy to commit tax fraud. Prosecutors last week said they intend to seek indictments of at least a dozen more people by Oct. 17 as part of the government's continuing KPMG tax-shelter investigation.

Mr. Kelly currently holds the title of "global transaction services chairman." A native of Belfast, Northern Ireland, he joined KPMG's Dublin office in 1980, moved to San Francisco in 1984 and was named a partner in 1999. He currently is based in Chicago.

Mr. Smith, now based in Philadelphia, joined KPMG three years ago after a career at the accounting firm Arthur Andersen LLP, which ceased operations in 2002. Currently, he is the firm's area managing partner for tax services for the firm's Mid-Atlantic region, which covers four states and the District of Columbia. In their new posts, Messrs. Kelly and Smith will work at KPMG's New York headquarters.

posted by Henry @ 4:56 PM 0 comments

What the World Needs Now

By SANDRA WARD

THE READERS WERE RESTLESS. Summer's nearly over, and yet we hadn't published what's become an annual chat with one of Wall Street's more successful and seasoned investors. As ever, we found the now 91-year-old at his desk at Glickenhaus & Co., the investment firm he founded in Manhattan 44 years ago and has presided over ever since. In that time, he has built an enduring reputation for finding winners and delivering superior performance and has seen his assets under management swell to $1.25 billion as a result. He graciously cleared his schedule for us -- after also chiding us for not calling sooner -- and we graciously allowed him to sound off, as is his wont. Is he mellowing with age? Time will tell.

Barron's: So what do you make of events lately?

Glickenhaus: I think we are all quite distressed with what has occurred in New Orleans.

What about the economy and the stock market?

Let me list the negatives for the economy and the stock market, and then I'll address the pluses. The first negative is the huge military spending, both for peace purposes and war. Under a $400 billion-plus budget for a peacetime army, they are building a new fighter plane that is totally redundant and unnecessary and will cost us eventually hundreds of billions.

We don't get goods and services that are really important in our defense. That's true of the new submarines we are building in Connecticut and elsewhere, as well as the new aircraft carriers.

At 91, this Wall Street patriarch has no shortage of energy or opinions.

What would be more necessary?

A portion of it could be spent in better defense. Training young people in foreign languages is an area in which we are sorely lacking. That could make us much stronger by improving our intelligence and ability to infiltrate terrorist groups. The war itself is a war that occurred without any planning. The public is becoming increasingly disaffected with it, because we don't see any purpose in keeping our soldiers there. We are obviously unable to train the local people. We are spending huge sums every day to maintain the war, and we don't get any worthwhile goods or services or other offsetting asset.

Roughly 41 million people lack health care in this country. Some of the money spent on defense could be spent for that.

Then there is our school system, which is well below average, relative to the rest of the world. Any country that has a mediocre or worse school system is not going to be successful economically in the future. We should be paying teachers vastly more. We should only hire people to teach who are in the first third of their class, who not only know their subject matter, but also can inspire children to want to learn. Those people are not going into education today. They are going in to the law. They are going into engineering. They are going to Wall Street.

There is a dearth of public housing, and it takes eight to nine years between the time you apply for an apartment and you get it.

By inundating us with paperwork from the SEC, the government is failing to help businesses.

Then there's the greenhouse effect and global warming. Neglecting global warming is going to have the most incredible economic consequences -- mostly bad. Our farm areas will eventually be too warm to produce wheat and corn. The South will be even hotter.

Seth, you have raised many of these concerns in our past interviews.

I certainly have. But I do it because we as a country are very proud that our gross national product is up 4% or whatever on an annual basis. This is a great misstatement of the well-being of our economy. It doesn't take into consideration our depletion of capital, or the depletion of minerals, the depletion of fish, the depletion of raw materials or businesses that no longer exist. It gives a false picture. All it reflects is the amount of sales. If they sell oil at a higher price, why, that goes into the gross national product. The fact that you are using up an asset isn't accounted for. The disparity of income that has grown between the very wealthy and the poor is creating a bad situation.

It shocked me to see the July savings rate went into negative ground in the United States. That implies people are digging into their savings to maintain their spending. In other words, they are not only going into greater debt, but there is no offsetting savings. This is a great negative and eventually will catch up with us.

How about some pluses?

The pluses, for one, include population growth: There is built-in demand with 3% per annum growth on a world basis. Greater numbers of people, in India, China and Africa, are earning enough to join those of us who spend money for various products. Many of our corporations are being run far more efficiently than ever before. They are getting rid of marginal plants, they are getting rid of marginal employees and they are hiring people who are better trained. Overall, despite the many negatives, I am very optimistic. The surprise is going to be that the so-called bubble in housing is not going to go away. Immigrants are a big driver of the housing boom.

But the home-affordability level is at its lowest level since 1991, so are those homes really available to them?

Prices have gone up, but somehow this group saves money and takes extra jobs. Everything I've seen indicates the backlogs are there in housing and there will be continued demand. Same with cars.

In the past, you've been concerned that low interest rates meant we were stealing demand from the future in terms of demand for housing and autos.

I was wrong. As soon as General Motors reduced the price of their cars, they sold 25% more cars. Apparently, the demand is extraordinarily elastic and much bigger than we realized. In my youth, if you owned a car, even if it was a low-priced car, you were considered among the wealthy people. Today, it seems everyone owns a car. Underneath it all, the economy is much stronger than the negatives would have you believe. Somewhere along the way, some of these negatives are going to catch up with us but, for the time being, our economy is much healthier.

You noted that the consumer is going into greater debt to continue spending.

He has been doing this for a long time, and the savings rate has been very low for a long time. It is now getting worse than ever.

Right, so doesn't that jeopardize sales of houses and cars down the road?

Down the road may be five years off. Look, the old business cycle hasn't been repealed. But you've had many more negative articles written about the economy, and the public is on alert. By the time the public realizes there may be a giveback and there may be a recession, it has an odd way of not happening, because the public has prepared for it, to some degree. The conventional wisdom is much more pessimistic than I am. I have found that anytime I look at the conventional wisdom, if I do the opposite, I make much more money. If everybody is pessimistic, that's the time to buy stocks. The retail figures have been surprisingly good, and they continue to be good, despite all the pessimism emanating from Wall Street.

What's your outlook for stocks?

As far as the stock market is concerned, the majority of stocks are either fairly priced or overpriced. You have to be very selective. Still, with 3,000 to 4,000 companies listed on the Big Board, there are a heck of a lot of bargains even though many stocks are overpriced. The disparity is almost as great as the disparity of income between Bill Gates and other people. In other words, there are some stocks that are grossly underpriced and very, very attractive.

It is a market of averages, and the averages are invariably overpriced because there is so much money that pours into them because they want average performance. As soon as something goes into the Standard & Poor's 500, the stock goes up 10% almost automatically. They will continue to be overpriced and mediocre values and that is where most of the money will flow. In the meantime, investors overlook a lot of companies. Our customers are always calling and saying, 'Seth, I've never heard of that company.'

One of the stocks I would rank among the five or 10 outstanding success stories in America over a period of years continues to have a brilliant future.

What's that?

Countrywide Financial [CFC].

I knew you were going to say that. But you have owned that for years and it can't be a surprise to your investors. Hasn't that come down a lot as interest rates have risen?

It has gone from around 5 to 40 and is now at 34.13. It is holding up very well, and I think it has finally bottomed. The pessimism around it is enormous.

Talk about the pessimism.

There's concern that housing is peaking and there's greater risk because of all the ingenious mortgages devised to satisfy public needs and that people who can't really afford a home have been encouraged to buy one. The mere fact that some of the mortgages are interest-only with deferred amortization does not mean they are bad loans or questionable loans.

GLICKENHAUS' PICKS Company Ticker Recent Price Countrywide Financial CFC $34.13 Intel INTC 25.66 Eagle Bulk Shipping EGLE 13.20 Enterra Energy Trust EENC 19.53 Source: Bloomberg

This stock sells a little over eight times earnings. It is a company that in five years is apt to double the business they are doing in the mortgage world. They also have a bank that is growing in leaps and bounds. Countrywide will earn, conservatively, $4.00 a share this year and possibly as high as $4.40, the way things are going. Everybody was afraid of high interest rates. But now, after the hurricane, intermediate and long-term bonds have been very strong, and the yields have dropped.

As a result of the hurricane, Chairman Greenspan's team at the Federal Reserve will have to pause somewhat in jacking up short-term interest rates. This is a great paradox. The figures show remarkably contained inflation but, between us girls, that is sheer nonsense. The average person is well aware that the inflation rate is much above what the government puts out. But despite that, the Federal Reserve will pause now for political reasons and practical reasons. Don't forget, rates have gone from 1% to 3½% in a relatively short period of time. There is no reason the Fed can't pause and they will pause, especially when the full costs and the problems of this hurricane become apparent. Plus, the experts believe there are going to be at least four more hurricanes before this season is over.

Has your view on oil changed? You didn't believe higher oil prices would have much of an impact.

So far it doesn't seem to have had much of an impact if you look at retail sales and home sales and auto sales.

What other companies can you recommend?

Eagle Bulk Shipping [EGLE] is one. They have 11 handymax boats, dry cargo boats, of which a good number are super handymax models. These are relatively new ships, six years old on average and some are brand new. The company is new and it is run by a very strong group.

The stock, which closed recently at 13.11, is going to pay an annual dividend of about $2.24 and it should stay at that rate for at least six quarters. That's a yield of about 17% or more. Their dividend policy is to pay out all the money they earn. They have enough capital from having sold stock in an initial public offering to pay the dividends. The stock came out at 14, below the 16 to 18 range that was expected, and it is now down to around 13. It is at a bargain price.

This company is going to expand very successfully. I am very impressed with their management.

Does your outlook for the stock depend on shipping staying strong?

A big product they ship is iron ore. China has an almost insatiable demand for iron ore. They also ship coal, fertilizer, wheat and corn. Eagle Bulk's ships are modern and very low-cost. The company has very little debt. It is possible to unload these ships without bringing them into piers where there is a big waiting time. I like this stock a great deal.

What's hurt its stock price?

There's been a whole raft of little companies that came public at the same time and the market was flooded.

What else do you like?

Enterra Energy Trust [EENC]. It is preposterously cheap. They've raised their dividend, and they pay a huge dividend. Their goal is to raise the dividend a penny a share every three months and they have been able to do it. They now pay 16 cents a month, or $1.92 a share a year.

It is a fine company. They've got about 135,000 net acres of undeveloped land with over 120 identified drilling locations.

Their success ratio in drilling in west central Alberta and northeast British Columbia is around 97% or very close to that. They just took over another company and that is one of the reasons why the stock has receded to 19 from 26. It has a 9% yield. Their current overall production is over 10,000 barrels of oil a day. They just bought a 50% working interest in an exploration well that flows at a rate of 10 million cubic feet a day with limited drawdown.

Their proven reserves should last for 8 years and their natural gas assets have a reserve life of 8 to 10 years. It is a stock that will double in a year and a half as it has more or less in the last year and a half.

Are you more focused on dividends in this environment than you have been?

I certainly am because sooner or later I think the bond market could deliver very big yields and I want to own stocks that have good competitive yields as well as a great potential for going up.

How long before the bond market gets to that point?

That's a tough question. We are at the mercy of foreigners to maintain our bond market. The odd thing is that the foreigners believe their own countries are in worse shape and want to invest here. Bonds are absurdly overpriced at the present time but there is no sign of them going down. There have been fortunes lost on the short side of the bond market.

How about a stock you haven't recommended before?

To be truthful, the stocks that I would like to mention have gone up too much to talk about. We have been great bulls on natural gas and the price is now at $11.62 per cubic feet. To think I used to suffer with it at $2. We have stocks such as Burlington Resources [BR] that we bought from 12 to 18 to 20 to 25 to 30. It closed recently at around 77.56. I cannot recommend it at 77.56.

Are you taking profits in energy stocks?

No, we haven't started taking profits. Even though the stocks are up a great deal, the price of the commodity is up much more and, in some cases, they own the only domestic natural gas there is, and it will be at least three years before liquid natural gas is an alternative.

And are you betting on liquid natural gas companies?

Yes, to a minor degree. But even those stocks have gone up a great deal, and I don't want to recommend them at this price. I much prefer Eagle Bulk Shipping.

What about all the bargains in the market you mentioned earlier?

I gave you three of them.

But only one is new to your portfolio.

There is one in the technology field I think is attractive.

Not Texas Instruments again?

Intel [INTC] at 25-26 is a buy. It is the leader in its field. It has an enormous profit margin and the stock is down from around 29 even though their last quarter was a good one because they were more cautious about the ensuing quarters.

But they are developing new products all the time and doing a brilliant job of maintaining a preeminent share of the market.

Seth, how is your health?

I'm as healthy as the devil.

That's good to hear. Thanks for taking the time to talk to us.

posted by Henry @ 2:54 AM 0 comments

Urban Renewal : As Japan Votes, Aid to Countryside Hangs in Balance

Mr. Koizumi Aims to Remove
Crutches for Rural Areas;
An Airport With 4 Flights

Hiwa's Elderly Ponder Future

By SEBASTIAN MOFFETT and GINNY PARKER WOODS
Staff Reporters of THE WALL STREET JOURNAL
September 7, 2005; Page A1

HIWA, Japan -- In elections this Sunday, Prime Minister Junichiro Koizumi is betting he can win a mandate to engineer a shift no other Japanese leader has ever dared. His goal: To cut off the decades-long tradition of propping up Japan's declining countryside, and channel resources into the nation's successful cities and industries instead.

To achieve that vision, Mr. Koizumi plans to dismantle one of the countryside's biggest crutches, the huge and unusual post office, which in addition to selling stamps also acts as a bank and insurer. It is a vast network of 26,000 offices with 280,000 public employees, plus $3 trillion in savings and life-insurance deposits. The deposits are typically funneled into public-spending projects that have boosted rural economies.

That system has long been a boon to remote villages like Hiwa in the mountains of western Japan. Hiwa's 600 residents are mainly elderly and get around on electric wheelchairs. Its only industry is rice farming.

Hiwa has benefited from many public-works projects through the post office, such as a new tunnel and a smooth road partly connecting the village to a neighboring town -- even though there's hardly any traffic. When the weather is bad, the local postmaster helps residents by withdrawing their cash from the post-office bank and delivering it to their doors.

"It would be tough if the post office went away," says 88-year-old Shizue Miura, who walked 20 minutes to the post office recently to withdraw money. Without the branch, Ms. Miura says she would have to travel more than six miles to the next village to get her money from a different branch.

Mr. Koizumi says bitter medicine is the only way for Japan to survive. The country's central government stoked rural economies for more than three decades with road and bridge projects, trying to haul up the countryside to city levels of prosperity. But the attempt to invigorate the rural economies failed. The spending added to snowballing national debt, which is now 163% of gross domestic product, the highest level among major industrialized nations. In the U.S., national debt is 66% of GDP, according to the Organization for Economic Cooperation and Development.

So Mr. Koizumi is withdrawing support for villages like Hiwa. Since taking office in 2001, he has promoted a small-government recipe for Japan, slashing subsidies to the regions. "They said there's no money anymore," says Katsumasa Miyake, who leads policy planning for the prefecture government of Shimane, where Hiwa is located. "Part of the process of putting the national finances right is that the regions have to suffer."

Mr. Koizumi is betting Japan's future on proven successes. That means big cities like the capital Tokyo, which is emerging from the nation's "lost decade" of economic gloom and is bustling with new office and shopping developments. It also includes private corporations, many of which have reported record profits over the past two years, spurred by deregulation and lowered corporate taxes that Mr. Koizumi put in place.

Mr. Koizumi's attempt to overhaul Japan is crucial to the world's second-largest economy. The country entered a long slump in the early 1990s after its stock and property bubbles burst. When Mr. Koizumi took office, prices of land, industrial products and consumer goods were falling steadily in the economy-shrinking phenomenon known as deflation. Japan's financial system was also jammed with bad loans made during the bubble era.

Since 2003, the economy has brightened, fueled by corporate cost cutting and surging exports to China's roaring manufacturing sector. Mr. Koizumi's policies have also helped. Following a bank-cleanup package in 2002, bad loans are now less than half their 2002 total of $480 billion. Unemployment has fallen to 4.4% from a 2002 peak of 5.5%. The economy grew 2% in 2003 and 1.9% in 2004, and economists are expecting similar growth this year.

Still, Japan's fast-aging population and declining birthrate are causing a long-term decline in the size of the total work force. With fewer workers, the country could find it hard to grow. One solution is to use resources more efficiently so each Japanese worker produces more.

Mr. Koizumi called the election last month after failing to pass bills to privatize the post office. He has vowed to revive the plan if he wins. In the bills, Mr. Koizumi proposed splitting the post office into four separate and privatized businesses -- one each for mail delivery, banking services and insurance, with a fourth handling employee salaries and managing post-office properties. If the plan had been put in place, postal workers would have lost their civil-servant status. The privatization process would have kicked off in 2007, and the post office would sell shares in its four companies by 2017.

The bills were rejected largely because of the workings of parliamentary politics. The main opposition Democratic Party of Japan voted against the bills because they favor a different form of post-office privatization. In a crucial swing vote, some rebel lawmakers from Mr. Koizumi's ruling Liberal Democratic Party also opposed the bills.

Postal privatization has since gained public support because Mr. Koizumi's risky and dramatic decision to call an election over the issue appealed to voters. According to the most recent poll by the daily newspaper Sankei Shimbun, 38% of respondents supported Mr. Koizumi and the LDP, compared with just 20% for the opposition Democratic Party. If his party and a coalition fail to win a majority of seats, Mr. Koizumi says he will resign, clouding the future of his plan.

All of this leaves provinces like Shimane on edge. The prefecture thrived under Japan's old system. With its local industries -- silver mining and charcoal -- long dead, Shimane received a steady flow of public-works projects from the central government, some of which were financed by savings in the post-office bank. The prefecture has two airports, even though it is sparsely populated. Public investment is 15.7% of the prefecture's gross domestic product, compared with 2.1% for Tokyo, according to the San-in Economics and Management Institute, a research center affiliated with Shimane's biggest bank.

But these projects failed to spark momentum. One airport has just four flights a day. A 50-acre industrial estate set up near Hiwa in 1997 attracted one company. The estate is now being converted into a prison complex. Five years ago, a city government built a $60 million bridge to a nearby island with 324 inhabitants. It said it planned to build a fish breeding center there, but the facility hasn't materialized.

Since Mr. Koizumi took office, the value of public works in Shimane has been cut sharply. In 2004, the spending fell to $998 million, down 32% from $1.5 billion in 2002. It is set to halve again by 2008.

While reducing subsidies to the regions, Mr. Koizumi has lowered corporate taxes and boosted tax breaks for technology investments. In response, more than 760 large Japanese manufacturers surveyed by the nation's Ministry of Economy, Trade and Industry recently said they plan to increase domestic capital investment by 21% in the fiscal year through March 2006 over the previous year. Foreign firms such as Pfizer Inc. and Cisco Systems Inc. are also increasing their investment in Japan. Mr. Koizumi has "crafted a lot of policies that benefit companies," says Yoshiharu Obata, an official at the Keidanren, Japan's largest business organization.

As Shimane struggles, Tokyo is thriving. Tokyo's land prices began rising this year for the first time in 13 years, while Shimane's continued to fall. Tokyo's population has grown to 12.2 million, up 5.2% from 11.6 million in 1997. Shimane's population has fallen 20% to 749,000, down from a 1955 peak of 929,000. A quarter of its residents are over 60, making Shimane Japan's oldest prefecture.

The migration to cities will likely increase as Japan's population declines and ages, says Hiroyuki Tada, general manager of the Space and Environment Institute, a research institute at Mitsui Fudosan Co., one of the country's largest real-estate developers. He says the elderly will relocate to urban areas where medical care is concentrated. Younger people are also moving to cities to find jobs.

That trend is apparent to Shimane resident Toshimitsu Fukushima. The 70-year-old worked for telephone company Nippon Telegraph & Telephone Corp. in Shimane's biggest city, Matsue, where he met his wife nearly half a century ago. He maintained wireless equipment and she worked in the telephone exchange. "Fifty years ago there were more jobs," he says. "Now there is no need for those kinds of jobs."

All three of Mr. Fukushima's children have moved to the Tokyo area. His son, Masao, 41, works for a big shipping company and says in an interview that he plans to spend his working life in the city. He envies high-school friends who stayed in Shimane for their spacious homes with yards, while he lives in a small apartment in central Tokyo. But, he says, "I couldn't return home to Shimane if I wanted to -- there's hardly any work there."

Shimane voters are split over Mr. Koizumi's plans. In the past, they always delivered an LDP representative to the national parliament in Tokyo. But this time, postal reform has complicated matters.

Mr. Koizumi is refusing to let the rebel LDP politicians who voted against the postal bills to stand as party candidates. One of those is Shimane politician Hisaoki Kamei, 65, who is now running as a candidate for a small, newly formed party in the western part of the prefecture, which includes Hiwa.

Mr. Kamei's posters call him the "Friend of the Common People." He doesn't like Mr. Koizumi's administration, which he says has widened the gaps between the city and country, large and small business, and the rich and poor. "You have to have public infrastructure that allows people everywhere -- in the cities and the country -- to have the same quality of life," he says. "Otherwise, the countryside is just going to become harder and harder to live in."

Mr. Kamei's opponent, the official LDP candidate, is Wataru Takeshita, half-brother of a former prime minister. Mr. Takeshita supports postal privatization.

One voter, Kazuharu Shimogaki, is president of a construction company in central Shimane, and did well out of Japan's old system. At its peak in 1995, his company, Shimogaki Construction Co., generated $5.5 million of revenue from publicly funded civil-engineering projects.

Today, such work brings in just a tenth of that amount. Mr. Shimogaki has branched out to new businesses like growing blueberries, which are popular among Japan's elderly after reports several years ago that the fruit may be good for eyes.

Mr. Shimogaki accepts the days of big public works projects are over, and thinks it's time to move on and develop new businesses rather than cling to the past. So he has decided to vote for Mr. Takeshita as a way of backing Mr. Koizumi. "Japan has come to a turning point," he says.

In Hiwa, many residents aren't as confident. Mr. Koizumi's postal bills provided some funds to maintain the post-office network. But because a privatized organization would have to try to make a profit, village locals assume those funds wouldn't last. Eventually, many believe, branches such as Hiwa Post Office would disappear.

Hiwa Postmaster Chikashi Teramoto, the local postmaster for the past 16 years, won't say which way he plans to vote. But the 46-year-old admits to being concerned about the future of the shrinking village. The automated teller machine at the local agricultural cooperative, the only one in the village besides the one at the post office, is scheduled to disappear next year. After that, without the post office, villagers would have to travel through a 1.5-mile tunnel to the next village to withdraw their pension money.

"What would happen if a wheelchair battery went dead in the tunnel?" Mr. Teramoto says.

On a recent outing, Mr. Teramoto surveyed Hiwa. An elderly couple struggled to gather the first rice of their harvest from a paddy field. He pointed to a building that looks inhabitable. "That's an empty house," he said. "They've gone to Osaka," the biggest city in western Japan. Further along the road, he pointed again: "They've gone to Hiroshima."

posted by Henry @ 2:27 AM 0 comments

U.S. Expects to Indict At Least 12 More Over KPMG Shelters

By JONATHAN WEIL and KARA SCANNELL
Staff Reporters of THE WALL STREET JOURNAL
September 7, 2005; Page C1

NEW YORK -- The lead prosecutor in the KPMG LLP tax-shelter investigation said the government expects to seek indictments against at least 12 more individuals in the coming weeks, on top of the nine people who were arraigned yesterday in a federal court in Manhattan.

The additional defendants will be named as part of a superseding indictment and could include additional charges against the nine people whose bond requirements were set yesterday by U.S. District Judge Lewis A. Kaplan. The government's lead prosecutor, Assistant U.S. Attorney Justin Weddle, said the additional charges in the superseding indictment likely would include obstruction of justice, as well as tax evasion, in addition to the existing conspiracy count that the government unsealed last week.

KPMG CASE • Nine Are Charged in KPMG Tax-Shelter Case • See the federal indictment and the I.R.S.'s 2004 civil lawsuit against KPMG seeking to enforce summonses against the company as part of its original tax shelter probe, by arrangement with FindLaw (www.findlaw.com).

Prosecutors didn't identify who the additional defendants might be. Possibilities include additional former KPMG partners, as well as others outside the firm who were involved in the sale or use of four shelters that KPMG sold to hundreds of wealthy Americans from 1996 to 2002. The shelters went by the names Blips, Flip, Opis and Short Option Strategy.

At yesterday's arraignment hearing, Mr. Weddle said the government believed that some of the nine defendants already named in the case used allegedly fraudulent KPMG shelters to shave their own personal tax bills.

He also said tax-evasion charges would be sought against some defendants who allegedly helped KPMG clients evade taxes by creating and marketing the shelters.

Prosecutors asked for three months to seek the superseding indictment, citing Justice Department procedures for tax-fraud prosecutions. In denying the government's request, Judge Kaplan said, "You're going to have to move a lot faster. It's not clear to me why you can't." He added, "Multibillion-dollar takeovers get litigated in that time. You can do it." The judge set an Oct. 17 deadline for the government to file its superseding indictment and scheduled trial proceedings to begin May 1, 2006.

Prosecutors estimated that a trial of the nine people arraigned yesterday could take three months.

At the same time, Judge Kaplan said that the "chances of having a single trial" for more than 20 defendants "are not too great." Some of the defense lawyers at yesterday's hearing, including a lawyer for former KPMG Deputy Chairman Jeffrey Stein, said they believed the case should be broken up into different groups of defendants for multiple trials.

Of the nine defendants arraigned yesterday, eight are former KPMG tax professionals, including Mr. Stein. Other defendants include former KPMG Vice Chairmen Richard Smith and John Lanning, and Raymond J. Ruble, a former New York partner at the law firm Sidley Austin Brown & Wood LLP.

Under the terms of a $456 million settlement last month, KPMG admitted criminal wrongdoing in connection with past shelter sales, but it will not be criminally prosecuted so long as it complies with certain requirements, including continued cooperation with prosecutors.

The nine defendants were released yesterday on their personal recognizance and have two weeks to meet additional bond requirements. Judge Kaplan set Mr. Stein's bond at $3.5 million, the highest among the nine defendants.

Prosecutors described Mr. Stein as one of the leaders of the alleged conspiracy at KPMG to sell fraudulent tax shelters to wealthy Americans, and they had asked that his bond be set at $5 million. Among other things, prosecutors cited a severance payment of more than $9 million that they said Mr. Stein received from KPMG last year, after he had been notified that he was under criminal investigation. Mr. Stein's attorney said that KPMG, under pressure from the government, reduced the severance package; he declined to offer details.

Five of the defendants' bonds were set at $1 million each, while two others' bonds were set at $300,000 and $500,000, respectively. Mr. Smith's bond was set at $1.5 million; his bond must be co-signed by his wife and secured by their home and any real estate his wife owns. All nine defendants must surrender their passports.

In setting the May 1, 2006, trial date, Judge Kaplan warned Mr. Weddle about his three-month trial estimate. "You're going to put the jury to sleep and lose them completely," he said. "The name of the game is to boil this down and move it."

posted by Henry @ 2:25 AM 0 comments

Pondering the Chances Of a Nuclear Attack

"The Numbers Guys" column in WSJ
July 7, 2005

Several news organizations ran some scary headlines recently about threats from terrorism and war. The stories cited a new survey that found, in part, a 29.2% chance of a nuclear attack in the next decade. The survey also put odds on an attack using a biological weapon, such as anthrax.

But how do you predict the likelihood of an event that has never happened before?

The past is the baseline for predicting the future. In forecasting company revenue, economic indicators and hurricane counts, experts start with prior numbers and adjust them higher or lower to reflect expected future trends. When it comes to estimating the chance of a terrorist attack using biological or nuclear weapons, it's hard to go beyond an educated guess.

Two weeks ago, Sen. Richard Lugar (R., Ind.), chairman of the Senate Foreign Relations Committee, released the results of an ambitious survey of arms experts. The study was conducted in late 2004 and early 2005. On average, the 85 respondents predicted a 29.2% chance of a nuclear attack in the next decade, with 79% saying that such an attack was more likely to be carried out by terrorists than by a government. Sen. Lugar said in the report that "the estimated combined risk of a WMD attack over five years is as high as 50%. Over 10 years this risk expands to as much as 70%."

The survey received wide press coverage. CNN reported that "arms experts say there is a high chance of an attack with a weapons of mass destruction. A new survey out says there's a 70% chance of a WMD attack somewhere in the world within the next 10 years." In a teaser at the beginning of Tucker Carlson's MSNBC show, he said, "Just how vulnerable are we to a nuclear attack? The answer may terrify you" -- though during the show he questioned the report for potentially raising hysteria. Agence France Presse headlined its report, "Survey of weapons experts finds sharp rise in chance of nuclear attack," though there's no clear reference to what the chance of a nuclear attack used to be. Reuters also ran the story, quoting a Lugar aide who said 70% was "a very conservative estimate." (Numbers Guy reader John Pinto saw some of the reports and suggested I write about the Lugar study.)

Other analysts have taken similar approaches. Last August, former Secretary of Defense William Perry told New York Times columnist Nicholas Kristof there was a 50% chance of a nuclear terrorist attack by 2010. Mr. Kristof also cited a widely quoted prediction by Graham Allison, a Harvard professor who wrote in his book "Nuclear Terrorism" that there is a greater than 50% chance of a terrorist attack in the next 10 years, barring major mitigating steps. (Mr. Kristof placed a $5 bet with Mr. Allison against those odds, writing, "If I were guessing wildly, I would say a 20% risk over 10 years. In any case, if I lose the bet, then I'll probably be vaporized and won't have much use for money.")

ABOUT THIS COLUMN The Numbers Guy examines numbers and statistics in the news, business, politics and health. Some numbers are flat-out wrong, misleading or biased. Others are valid and useful, helping us to make informed decisions. As the Numbers Guy, I will try to sort through which numbers to trust, question or discard altogether. And I'd like to hear from you at numbersguy@wsj.com. I'll post and respond to your letters. WSJ.com subscribers can sign up to receive email when new columns are published (nonsubscribers click here to sign up), and you can read more columns at WSJ.com/NumbersGuy.

Bias in the Results

It's understandable why politicians and the media would turn to arms experts for their predictions, because they're about as well-equipped as anyone to weigh the available data. Yet there are also drawbacks. As well-informed as arms experts are, and as well-intentioned, I'd argue they have a natural bias toward overstating risk -- greater risk increases the value of their expertise, and, therefore, their prominence and even funding. Politicians who commission such predictions likely do so because they want to raise awareness, a goal best served by alarming results.

"If you survey the boys who cry wolf, they cry wolf," said Anthony Cordesman, former director of intelligence assessment in the Office of the Secretary of Defense and current Arleigh A. Burke Chair in Strategy at the Center for Strategic and International Studies in Washington, D.C. Professor Cordesman was surveyed by Sen. Lugar. "That doesn't mean there aren't wolves and they won't show up tomorrow, but it certainly doesn't help you know when they'll show up." Mr. Cordesman said in an email that he didn't answer many of the questions about percentages because "the questions were too imprecise to have meaningful results, and were semantically loaded in ways that would produce misleading and exaggerated probabilities of attack." He declined to make available his survey responses.

"It was not our intention" to elicit overstated terrorism risks, says Dan Diller, who oversaw the survey. Mr. Diller, deputy staff director of the Senate Foreign Relations Committee, pointed out some of the surveyed arms experts predicted probabilities of attack that were low, or even 0%.

The report also stated, "This study is not meant to be a scientific poll of the entire national security community." The survey excluded administration officials, "given the provocative nature of some questions and other factors," and many of the respondents were former officials and think-tank scholars. As a result, its results don't reflect much information outside the public domain. "We feel like the folks who served in past administrations and scholars who spent a good deal of time looking at proliferation issues are equipped to answer these types of questions," Mr. Diller said.

Predicting the Unpredictable

But how did the experts attempt to predict the chance of unprecedented catastrophe? To find out, I emailed about two-thirds of the 85 respondents last week, and heard back from more than a half-dozen. None said they used any sort of computation. "My answers were not based on statistics or models," said Michael Krepon, co-founder of the Henry L. Stimson Center, a nonpartisan Washington think tank focused on international security. "They were based on judgments derived from working in the field and assessing how well or badly efforts to control bad things are going."

James Dobbins called his responses "guesstimates." Mr. Dobbins, director of RAND's international security and defense policy center, added, "I expect it was not a scientifically selected sampling, and that a different group of equally informed people, perhaps from the technical rather than policy community, might come to different conclusions." John Wolf, president of the Eisenhower Fellowships, said his response was an "educated guess" with "lots" of uncertainty. (Respondents declined to reveal their survey responses to me.)

I also asked respondents what value the survey's results had, and some of their responses made plain the dual role of the survey as prediction and as public-awareness tool. Mr. Wolf called it a "wake up call to policy makers all around the world."

"When you measure something, you also change it, and just as speeches, news articles, polls, etc. impact on politics, this survey has/will do the same," Gerald Steinberg, a professor of political studies at Bar Ilan University in Israel, and one of the Lugar survey's respondents, said in an email. He added that the value of the survey is "in drawing public attention to the continued threats."

Richard Falkenrath, senior fellow in foreign policy studies at the Brookings Institution, said in a telephone interview that the study has some value in comparing probabilities of different attacks -- for instance, experts' median predicted probability for a radiological attack in the next decade was 40%, twice that for a biological attack, a result that could direct government priorities. "You have some leg to stand on when you're making comparative probability estimates, but you have no leg to stand on when you're predicting an absolute number," says Dr. Falkenrath, who participated in the study.

A 'Considered Judgment'

None of this means the experts haven't extensively studied terrorism nor that they don't have good reasons for their predictions. Prof. Steinberg sent me a lengthy explanation of the reasoning behind his survey responses, comparing the process to an effort he was once involved in to "estimate the probability of catastrophic malfunctions of complex technical systems" like nuclear reactors. "The process involves attempting to build relevant scenarios, breaking down the various dimensions of each scenario, and estimating the probability for each stage and factor -- such as the odds of a given terror group obtaining the necessary materials or completed weapons, their ability to deliver them, the role of deterrence and retaliation on their decision making, etc., and, on the other side, intelligence capabilities to detect diversions, active and passive defense, etc.," he says.

Professor Allison, the Harvard professor who was referenced in the New York Times column, said that there is "no established methodology; no statistical sample from which to derive," so he looked at the "who? what? where? when? how?" and arrived at a "considered judgment," as explained in his book.

In the book, Mr. Allison buttresses his argument that a nuclear attack is likely in the next decade with frightful imagery and anecdotal support. The introduction notes that much is uncertain about future terrorist attacks, but what is certain is the devastation such an attack would bring to a U.S. city -- he describes a firestorm engulfing Rockefeller Center and Carnegie Hall, or seeing San Francisco landmarks vaporized. Mr. Allison even quotes billionaire investor Warren Buffett, who controls the holding company Berkshire Hathaway Inc. and whom he calls "a legendary oddsmaker in pricing insurance policies for unlikely but catastrophic events like earthquakes," as having said that a nuclear terrorist attack is "the ultimate depressing thing. It will happen. It's inevitable. I don't see any way that it won't happen."

As it turns out, when Mr. Buffett said that in a 2002 interview with Fortune, he was talking about any nuclear explosion, not just a terrorist attack. He also told me in a phone interview, "When I say it is certain to happen, I am talking about the next century, not any five-year or 10-year period."

The reported probability of WMD attacks "can't be meaningful," Mr. Buffett said. "I would not regard any specific number as being meaningful. I would regard the importance of reducing the probability as terribly meaningful."

posted by Henry @ 1:52 PM 0 comments

Outsourcing Fears Help Inflate Some Numbers

"The Numbers Guys" column in WSJ
August 26, 2005

A year after outsourcing was debated during the U.S. presidential election, fear of losing technical jobs to lower-wage Asian countries still runs high.

To get a handle on the threat, many commentators and journalists cite vast numbers of engineers produced each year by China and India -- some estimates range as high as 600,000 for China and 350,000 for India, compared with the fewer than 100,000 degrees granted annually in the U.S. The implication is that the U.S. must increase investment in engineering and attract more bright students to the technical fields in order to compete.

But this is one of those cases where big numbers take on a life of their own through repetition. The lofty estimates have been repeated for years, often without evidence to back them up, and it turns out they vary considerably from figures reported by official sources.

ABOUT THIS COLUMN The Numbers Guy examines numbers and statistics in the news, business, politics and health. Some numbers are flat-out wrong, misleading or biased. Others are valid and useful, helping us to make informed decisions. As the Numbers Guy, I will try to sort through which numbers to trust, question or discard altogether. And I'd like to hear from you at numbersguy@wsj.com. I'll post and respond to your letters. Also, you can sign up to receive email when new columns are published, and you can read more columns at WSJ.com/NumbersGuy.

Last month, Fortune reported that for 2005, "in engineering, China's graduates will number over 600,000, India's 350,000, America's only about 70,000." No source was cited. Last week, the Fortune number was cited by an Orange County business magazine and the Austin Chronicle.

A spokeswoman for Fortune referred questions to the article's author, Geoffrey Colvin, who was traveling and said he wasn't able to review his notes for the article by my deadline. He told me by email, "I do recall finding, as you found, that there are lots of varying numbers on this topic."

Often Repeated

Indeed, I found the 600,000 figure mentioned in several other articles and speeches from the past few years. Some of the publications cited each other, but none cited original sources. It's unclear where the number got its start, but some researchers I talked with suggested it may have come from an October 2002 speech by Ray Bingham, who was then chief executive of semiconductor company Cadence Design Systems. Mr. Bingham said at a technology conference, "China produces 600,000 engineers a year and 200,000 of them are electrical engineers."

The figure got wide media attention, showing up as far away as Taiwan, in the Taipei Times. Mr. Bingham, who has since retired from Cadence, told me he used "a variety of sources" for that number, not all of which he now recalls. All of his sources, Mr. Bingham says, "made the point that China is deeply committed and very productive in the area of engineering education, and the West is lagging far behind."

Mr. Bingham said one source he could remember using was a CNET News.com article from July 2002 that said 700,000 engineers were trained yearly in China. A spokeswoman I reached at CNET said the statistic came from a group called the China Education and Research Network. My email to the Chinese group seeking more information wasn't returned.

A Different Approach

Bill Gates used different numbers to make the same point in a February speech, saying that China has "six times as many graduates majoring in engineering" as the U.S. When I contacted the Gates Foundation, a spokeswoman cited a January editorial in the Seattle Post-Intelligencer, which attributed the data to Washington's Office of Superintendent of Public Instruction. Kim Schmanke, a spokeswoman for the office, told me that the data came from conversations the superintendent has had with various business groups, but Ms. Schmanke wasn't sure of the source and said the superintendent was unavailable for comment.

Regardless, it appears the Chinese numbers are inflated. The National Science Foundation, which tracks degrees granted in the U.S. and many other nations, says that China has been granting only about 200,000 degrees each year. NSF gets the numbers from the Chinese Ministry of Education.

It is more difficult to pin down a figure for India. That country's government last gave statistics to the NSF 15 years ago, when it issued 29,000 engineering degrees. But the country has seen a boom in private engineering schools since then. Still, researchers I spoke with said the actual number of degrees is likely nowhere near the 350,000 figure that turns up in speeches and elsewhere. That number appears to be the number of "seats" allowed each year by the government. That's different from the number of degrees awarded -- not all approved spots are filled, for instance, and some students quit programs or take extra years to graduate.

Ron Hira, professor of public policy at the Rochester Institute of Technology, puts the actual number of graduates at 120,000 to 130,000, based on his study of the question in a visit to India. Ashish Arora, a Carnegie Mellon professor who also has studied the issue, estimates the number is closer to 200,000. A World Bank report published in 2000 estimated that 65,000 Indians received technical or engineering degrees in 1997 (see page 46 of that report).

Numbers Guy reader Barry Ritholz emailed me about the Gates speech and suggested that the numbers are misleading here, because China and India have far more people than the U.S. -- 1.3 billion and 1.1 billion, respectively, according to the United Nations -- and noted that per-capita, the U.S. still graduates more engineers. Still, it's worth pointing out that that the bulk of engineering doctoral degrees awarded in the U.S. go to foreign nationals, according to NSF.

Digging for Data

For a recent study of engineering graduates, Richard Heckel, founder of the Houghton, Mich., consultancy Engineering Trends, requested information from about 70 embassies in Washington, D.C. "The one thing we learned from doing our study is that getting credible data is a difficult thing to do," he says. "Some of the data we were able to get on our own didn't match the data from other sources."

Even U.S. numbers are misunderstood. Many op-eds and news articles lament the decline of the American engineer, based on the latest available numbers from the NSF, which puts degrees at about 59,000 annually. But those figures are for 2001. Since then, data from engineering organizations suggest that engineering degrees have made a comeback, to near all-time peak levels.

The American Society For Engineering Education and the Engineering Workforce Commission, which conduct annual surveys of U.S. engineering schools, both have found that the number of bachelor's degrees awarded in the U.S. has surged since 1998. The EWC says the number of degrees has climbed to 76,003 in the 2003-2004 academic year, the most since 1985-1986. (The organizations show a few thousand more bachelor's degrees than NSF's data does in 2001, in part because they leave the definition of "engineer" to the schools.)

Joan Burrelli, senior analyst at NSF, says in an interview, "We think that EWC's numbers are great; we use them all the time. If someone is looking at engineering trends, EWC's [figures] are the place to look." Why is NSF three years behind the other groups in releasing numbers? Dr. Burrelli blames a transition to a new computer-database system, and red tape. "It's bureaucracy, basically," she says. "We will never be as quick as the other two groups are."

I asked Dr. Hira, of the Rochester Institute of Technology, why the inflated foreign numbers persist. "CEOs ... have nothing to lose," he said. "There's only an upside for them. It deflects attention from the fact that they're offshoring more work. And there's no cost to them -- government is going to foot the bill [by subsidizing engineering schools]. The increase in supply of engineers is going to keep wages down."

Dr. Heckel, of the engineering consultancy, says that lately he's received a lot of calls from journalists who seem to have been pitched articles by companies about the decline of U.S. engineers. When one writer called recently, "I told him the basis for that article was not valid," he says.

Even the most reliable numbers on engineering graduates deserve to be examined with nuance. Not all engineering graduates are created equal; it's unclear whether two-year degrees or technical degrees are counted in the figures from China and India. And some recent media reports from India indicate that many young people who have paid for degrees at the bustling private engineering colleges are having trouble finding work.

"I'm certainly not opposed to looking at this in a more honest way and concluding that we need to produce more engineers," Dr. Hira says. But he adds, "The discussion of quantity just misses the boat. It's misunderstanding the phenomenon."

---------------

More than half of engineering doctoral degrees awarded in the U.S. go to non-U.S. citizens, according to the National Science Foundation. U.S. citizens earn the majority of bachelor's and master's degrees in engineering. An earlier version of this column incorrectly said that the bulk of all engineering degrees awarded in the U.S. go to foreign nationals.

posted by Henry @ 1:48 PM 0 comments

Coming to Grips With a Grim Count

"The Numbers Guys" Column in WSJ
September 7, 2005

In the weeks ahead, one of the myriad tasks facing the ongoing Gulf of Mexico recovery effort is tallying a grim number: Katrina's death toll.

With the search for survivors still under way, and weeks of water-pumping ahead just to restore dry land, government agencies have barely begun to count the dead. There have been scattered reports of death counts, almost none from New Orleans, which likely suffered the bulk of the deaths.

If other recent disasters are a guide, it will likely be months before there is a credible number capturing the human toll. There is, so far, no reported official tally of missing persons; the evacuees who would file many such reports are spread over hundreds of miles, and many themselves could, in turn, be reported missing. There are also likely to be many reports that prove to be false; initial counts of people missing in the wake of the World Trade Center's destruction turned out to be inflated by more than 100%.

ABOUT THIS COLUMN 1 The Numbers Guy2 examines numbers and statistics in the news, business, politics and health. Some numbers are flat-out wrong, misleading or biased. Others are valid and useful, helping us to make informed decisions. As the Numbers Guy, I will try to sort through which numbers to trust, question or discard altogether. And I'd like to hear from you at numbersguy@wsj.com3. I'll post and respond to your letters. Also, you can sign up4 to receive email when new columns are published, and you can read more columns at WSJ.com/NumbersGuy5.

The death toll may not matter to the rescue effort, but it will be critical in assessing the government's response to Katrina and in preparing for future disasters. Years from now, it will also be attached to every account of the storm in history textbooks and news articles.

Without much of a functioning city government remaining in New Orleans, it's not even clear yet who will accept reports of people feared dead. Representatives of the Louisiana state police and the state's Office of Homeland Security & Emergency Preparedness didn't know yet who would coordinate gathering the names of missing persons. (Trooper Chavez Cammon said people could call the state agency, at 800-434-8007, and the names would likely be forwarded to the Federal Emergency Management Agency.)

Direct death tolls can't always be measured; for some of history's most fatal man-made horrors, widely accepted casualty figures are derived indirectly from broad population changes -- basically, subtracting population counts after the event from those before it, and adjusting for unrelated births and deaths. (I wrote an earlier column⁶ about similar methods used to quantify the number of Armenians who died in deportation and mass killings during and after World War II.)

But in the U.S. today, it is considered feasible to identify every casualty and report an exact count -- given months of time. And in the meantime, numerical shortcuts for calculating Katrina's death toll, like subtracting the number of evacuees from the city's population, aren't likely to yield accurate results. Widely repeated estimates of the evacuation rate from New Orleans and the number of refugees in other cities are far from precise.

A week ago, New Orleans Mayor Ray Nagin said he thought about 80% of the city's 480,000 residents had obeyed his evacuation order. But it's not clear how the city could have made such a count. I made several inquiries to his press office, relocated to Houston, over the weekend and Tuesday about the number. His spokeswoman, Tami Frazier, said she didn't know how the estimate was arrived at, and that she wasn't sure she could reach Mr. Nagin to ask him. Varying counts placed tens of thousands of people in both the Superdome and New Orleans convention center, and rescuers are finding that many other city residents stayed in their homes.

As for counting evacuees, shelters can produce exact tallies of how many people they have taken in, but it's more difficult to track people who have gone to hotels or people's homes. Baton Rouge arrived at its count of 150,000 evacuees by surveying a few hotels and other sites, and extrapolating those numbers. "It's a rough estimate," Walter Monsour, chief administrative officer of the state capital, told me.

Officialdom abhors a numbers vacuum, and several elected officials have begun to speculate publicly about the death toll. Asked⁷ on NBC's "Today" how many might have died, Mr. Nagin said Monday that "it wouldn't be unreasonable to have 10,000." (On Thursday, he had said in a radio interview that 1,000 had died and 1,000 more were dying every day.) That echoed a statement Friday⁸ by U.S. Senator David Vitter: "My guess is that it will start at 10,000, but that is only a guess."

Educated guessing is an entirely understandable response, and it may help brace the public for the actual number. But that number could be very different.

"There's plenty of speculation. There's a thousand numbers out there, to say the least," Trooper Johnnie Brown, a spokesman for the Louisiana state police, told me on Sunday. I asked if any of the death counts were official numbers. "An official may have said it, but there has been no count," he said. He emphasized that more important work remained to be done: "We don't have anyone who can sit there and be a counter."

By Tuesday, now that the counting has begun -- and a few hundred deaths have been reported -- the state's medical examiner's office will take the lead, with a special FEMA group called the Disaster Mortuary Operational Response Team helping to gather and identify remains. Meanwhile, authorities likely will gather reports of missing persons and eliminate duplicates and false reports. Then the rising body count and diminishing missing-persons count will slowly converge.

It could take two months to gather missing-persons reports from scattered survivors, and three months to recover bodies, estimates Barbara Butcher, director of investigations and mass fatality management for the New York City medical examiner's office, who helped manage the recovery process at the World Trade Center site and is advising authorities coping with Katrina. "At this time, there's still a command-and-control issue," she said Tuesday.

There are more than 23,000 posts on the New Orleans Times-Picayune's online forum⁹ for missing persons, and over 2,000 listings in a separate database¹⁰ for missing-persons reports, but neither is a reliable indicator of the number of dead: Some posts are duplicates and others contain more than one name and there is no way to know how many have already been found.

Some of the news media has shown restraint, either not repeating officials' guesstimates or providing the appropriate context of uncertainty. That wasn't always true in the aftermath of the World Trade Center attack and the Asian tsunami. Those disasters' human tolls weren't fully understood for months, and for both, some early estimates proved to be poorly founded and overstated.

In the first days after the World Trade Center attacks, anonymous officials speculated to the press that 10,000 or more people may have died. Later, the police department began an official count based on missing-persons reports, including often-conflicting numbers from foreign embassies. The count started above 6,000; it remained at about 4,000 two months later. A joint panel representing the police, the medical examiner's office and other agencies put the final official toll¹¹ at 2,749, including those on the planes and in the towers -- in January 2004, more than two years after the attacks.

In last December's tsunami, about 180,000 people died and about 50,000 others are still unaccounted for, according to official reports from the affected countries. But no exact death toll will ever be known, in part because in Indonesia -- which reported more than two-thirds of all deaths -- many bodies were bulldozed into mass graves in the early days of recovery, to prevent the spread of disease. The Indonesian Red Cross nonetheless reported precise figures, but their accuracy was always unclear; the Associated Press reported¹² in March, "At one point, the Indonesian toll jumped by 20,000, only to be corrected downward by 12,000 because an official misheard the number." In April, the Indonesian death toll suddenly plummeted by more than 50,000 when the government removed that many names from its list of the missing, leaving about 164,000 who are thought to have died or gone missing in Indonesia.

Finding an accurate number in New Orleans will, in some ways, be easier than after those previous disasters, and in other ways more difficult. Recovery teams at the World Trade Center found few intact bodies, which won't be the case in New Orleans. Also, Indonesia had less resources and technology to bring to bear than FEMA, whose body-recovery specialists will aid local officials, according to the New Orleans Times-Picayune¹³.

However, New Orleans is still a flooded city, whereas the tsunami waters quickly receded into the ocean. And while most of New York's capabilities and equipment survived Sept. 11, New Orleans is flooded and badly damaged throughout.

Sergeant Nicholas Stahl, of Louisiana's Homeland Security & Emergency Preparedness agency, said Saturday, "We're not worried about counting right now." How soon might the greater emphasis be placed on counting and identifying dead bodies, I asked? His response underscored the challenges facing any such effort: "Probably as soon as we can get the ground crew to build buildings to collect them," he said.

posted by Henry @ 1:47 PM 0 comments

Compromising Trade

WSJ, Opinion
September 6, 2005

European officials struck a textile deal with China yesterday, agreeing to share the "burden" of a massive accumulation of Chinese-made garments in European warehouses.

It is difficult to see just what it is that European leaders see as burdensome in allowing their own retailers to receive shipments that they ordered months ago for the fall and winter collections. But Chinese and Europeans alike will pay for both the problem and solution that the European Union has created here. The garments will be freed, at a steep price: The amount of certain Chinese-made goods allowed into the EU next year will be reduced significantly.

This "compromise" amounts to a double victory for the European manufacturers -- and their protectionist national governments -- who bullied the EU into re-imposing quotas this June. They were highly unlikely in the first place to receive contracts to replace the goods that had been blocked. Now that some quotas for Chinese production in 2006 have been partially met, they will have a better shot at getting other work next year that otherwise might have gone offshore. One can only hope that European producers will accept this gift for what it is and not as another excuse to avoid making their businesses more competitive, however painful that might be.

For their part, retailers are saying publicly that this deal is satisfactory insofar as it unblocks goods that they already paid for in many cases, and gives them sufficient lead time to plan for next year. Of course, that's what they thought when the global system of quotas on Chinese-made textiles expired on Jan. 1 in line with an agreement signed a decade earlier. Yesterday's deal ultimately will be judged on whether it is actually honored by the EU.

For all its shortcomings, this might be the only politically feasible compromise available. The textile-producing EU member states -- notably the Czech Republic, France, Italy, Poland, Slovakia and Spain -- have wielded a great deal of clout with Brussels. Just last week they scuppered another deal.

This case provides a good insight into how the European Union runs trade policy, and the picture isn't pretty. EU Trade Commissioner Peter Mandelson worked frenetically to reach a compromise before a summit later yesterday between Chinese President Hu Jintao and Mr. Mandelson's compatriot and close personal friend, British Prime Minister Tony Blair. But the commissioner will be hard-pressed to make any negotiations worthwhile if he cannot first convince all member states of the benefits of free trade.

And there is perhaps no greater testament to how much industrialized countries hurt their own interests when they refuse to engage in free trade with China than the more than 75 million pieces of Chinese-made clothing items sitting in European ports and warehouses. The retailers that ordered these goods -- and their employees -- are just as European as the manufacturing workers whose interests the EU is ostensibly trying to protect.

Of course, Europe has not been the only large textile market playing this game with China. Even yesterday's bittersweet compromise is better than what the United States has achieved so far. When U.S. and Chinese negotiators couldn't come up with a compromise last week, Washington slapped China with fresh import quotas on Chinese-made textiles. In doing so U.S. officials were ignoring the interests of millions of American families who could use less costly shopping, especially with the Christmas rush looming in three months.

It's nice to see that David Ricardo's theory that nations have comparative advantages is alive and well, and has taken hold inside a free market such as the EU. Imagine what the benefits would be if the playing field were enlarged and countries such as China and India -- indeed the whole world -- were allowed to take advantage of this division of labor as well.

posted by Henry @ 1:43 AM 0 comments

Economy Shows Resilience in Face Of Massive Jolt

Fuel Stockpiles, Temp Firms, Fed's Credibility All Serve, Vital Shock Absorbers

By JON E. HILSENRATH and GREG IP
Staff Reporters of THE WALL STREET JOURNAL
September 6, 2005; Page A1

The U.S. economy's shock absorbers kicked in within days of one of the worst natural disasters in its history, offering hope that the massive jolt to the country's energy and transportation systems won't produce a long-lived, serious economic contraction.

The release of emergency oil and gasoline from global stockpiles, created in the 1970s to counter supply interruptions, sent crude-oil prices down to about pre-hurricane levels in European trading. Long-term interest rates fell despite the prospect of higher inflation, cushioning home buyers and businesses. Temporary-help agencies began to place some workers displaced by the storm. New Orleans's main newspaper, the Times-Picayune, kept publishing on the Internet when printing on paper was impossible. Computerized logistics enabled railroad CSX Corp. to reroute freight normally exchanged with Western railroads at New Orleans to be sent north.

Hurricane Katrina is the biggest test in years of the economy's resilience. But recent history offers encouraging, though by no means definitive evidence of the U.S. economy's ability to bounce back from shocks. Economic growth has become significantly less volatile during the past two decades, a trend some economists dub "the Great Moderation."

The past five years have witnessed a burst stock bubble, terrorist attacks, corporate scandals, wars in Afghanistan and Iraq, and a doubling in crude oil prices. Yet the economy, after a mild recession in 2001, has embarked on a solid expansion with little inflation. Katrina came at a time when the economy was in solid shape. In August, the unemployment rate fell to 4.9%, a four-year low, from 5% in July, and nonfarm payrolls grew a respectable 169,000, the Labor Department said Friday.

"We expect the trend in growth will prove more resilient than is now widely feared," UBS Securities analysts told clients Friday.

Employment and output are likely to take a sizable hit in the next few months; the question is the duration and severity of the blow. Economists surveyed last week by Macroeconomic Advisers LLC, a St. Louis forecasting firm, said the storm would result in growth of only about 3.5%, at an annual rate, in the second half of the year, down from pre-storm expectations of 4%. It grew 3.6% in the first half.

And the economy does have some worrisome vulnerabilities. The storm hit when world oil producers and U.S. refiners were operating near capacity and they remain highly sensitive to any loss of supply. Higher gasoline prices will act like a tax on consumers who are already stretched: In July their saving rate turned negative as spending exceeded income. Spending might be further hurt if consumer confidence erodes.

As a result, some analysts still believe the economic impact might be severe. "What we're witnessing now is going to turn out to be a really huge shock," said Stephen Cecchetti, an economist at Brandeis University. Businesses may also find it hard to adapt to shifts in spending caused by higher energy prices, much as Detroit found it hard to shift to smaller cars in the 1970s.

But there are several factors in the economy's favor. It's more energy-efficient: The gross domestic product has more than doubled since 1979, but petroleum consumption has risen just 9%, according to the Energy Department. Policy makers have reduced, rather than increased, regulatory constraints on supply. In the 1970s, gasoline price caps and other regulations created shortages and waiting lines. Last week, the federal government temporarily eased environmental and transportation regulations so existing gasoline inventories could reach U.S. customers more easily.

The release of oil and gasoline from the U.S. Strategic Petroleum Reserve and similar stockpiles in Europe has helped contain the rise in oil prices. Benchmark Brent crude oil for October delivery fell $1.22 in London yesterday to $64.84, around where it stood before Katrina. U.S. markets were closed for Labor Day. Wholesale gasoline prices fell sharply Friday from midweek peaks though they remain well above pre-storm levels due to Gulf Coast refinery closures.

The growth of the temporary-staffing industry has helped redeploy workers displaced by both economic and weather events. Terri Blue Edwards, 41, stayed behind in New Orleans with a sister who refused to leave. By Thursday, she says, she, her 23-year old son and her sister waded out of a building in chest-high water, wandered along a scorching-hot highway and found their way to an abandoned dairy truck, which they and more than two dozen others, packed shoulder-to-shoulder, and rode to Austin.

Another son raised money to fly her to Huntsville, Ala., she says, to be reunited with her husband, Leon, who had left New Orleans with elderly parents before the storm. Mr. Edwards was a maintenance engineer in a municipal building, earning $13 an hour. Ms. Edwards didn't work. She says she has health problems but she's going to work now to make ends meet.

By Saturday, Mr. and Mrs. Edwards had landed $7-an-hour jobs at a Huntsville manufacturer through Adecco SA, a Swiss-based temporary staffing company. Mr. Edwards says he was making nearly twice as much in New Orleans. But the job "came right on time," he says. "You need a job to survive."

The transportation system is proving to have some flexibility. The storm wiped out large sections of CSX's tracks and bridges along the Gulf Coast. But within a couple of days, the railroad, based in Jacksonville, Fla., was rerouting freight north, thanks to advances in information technology and deregulation that enable it to reroute shipments in a quarter of the time it would have taken two decades ago. Separately, the lower Mississippi's maritime hub continued to recover as the Coast Guard reopened its main shipping channel to ocean-going vessels Saturday.

The development of new financial instruments has ameliorated the risk that regional stresses could trigger local bank failures. In Baton Rouge, American Gateway Bank, a small regional lender, sells about three-quarters of the mortgages it underwrites to larger banks like J.P. Morgan Chase & Co. or Bank of America Corp., who package the loans into larger, diversified pools of credit sold to investors around the world. That has helped keep credit flowing to real estate even after disaster struck less than 80 miles away.

Oil shocks in the 1970s became embedded in wages and prices, eventually requiring the Fed to raise interest rates dramatically, triggering deep recessions. But those drastic actions eventually cemented its credibility, and in recent years workers and companies haven't responded to higher oil prices or easy money by immediately pressing for higher prices and wages. "One of the benefits of having that credibility is it increases [the Fed's] ability to...stabilize the economy and insulate it from major shocks like this," said J. Alfred Broaddus, former president of the Federal Reserve Bank of Richmond, Va.

While the Fed is unlikely to cut rates, it may choose not to raise them at its Sept. 20 meeting as had been previously expected. The Fed has raised its short-term-rate target to 3.5% from 1% in the past 14 months.

Fed officials say it's too soon to assess the storm's impact on interest-rate moves. Even so, long-term interest rates have declined in anticipation that the Fed will raise rates more slowly or not as high. By keeping mortgage rates down, that, in turn, offered support to the still-strong housing market.

posted by Henry @ 1:38 AM 0 comments

KPMG Partners Lucked Out -- Thanks to Enron and Arthur Andersen

By Allan Sloan

Tuesday, September 6, 2005; D02

There's one group of people who should be giving thanks daily for the Enron scandal: the partners of KPMG, one of the Final Four accounting firms. That's because the fallout from Enron is what allowed KPMG to extract a favorable settlement from the Justice Department last week. The firm agreed to fork over less than a year's profit in return for not being indicted on a zillion counts of cheating the government by peddling sleazy, dishonest tax shelters for six years.

The government didn't dare file criminal charges against KPMG because an indictment alone would have driven it out of business, leaving us with too few big accounting firms to go around. KPMG was in this strong bargaining position because of the collapse of Enron's accounting firm, Arthur Andersen, which the government foolishly indicted on criminal charges three years ago.

Even though the indictment was on narrow grounds and the government ultimately lost the case, a criminal indictment is guaranteed to send any major accounting firm to the big ledger in the sky. Partners and clients flee when there's an indictment, and some states yank licenses. The Securities and Exchange Commission's rules of practice ban convicted firms, which means that almost no board of directors is going to ask shareholders to approve hiring an indicted firm. The right approach would have been to wipe out the partners' capital and pursue criminal charges against individual miscreants, while letting Andersen reorganize its auditing practice. Indicting the firm was the wrong approach, because it set off an uncontrolled collapse.

Absent Andersen, no sensible person is going to risk indicting any of the Final Four, which would leave us with the Last Three. "We . . . recognize the importance of avoiding collateral consequences wherever possible," Attorney General Alberto R. Gonzales said at last week's news conference.

Andersen would have failed even without a criminal indictment, and it deserved to. It had shelled out major money to settle its screw-ups at Sunbeam and Waste Management. Settlements for its Enron, Global Crossing, Qwest and Baptist Foundation of America disasters would have wiped out the remainder of its capital. But forcing Andersen out of business rather than allowing the honest remnant to reorganize has produced an unhealthy lack of competition among big accounting firms.

In an unpublished paper, Emilie R. Feldman, a doctoral student at the Harvard Business School, makes a compelling case that the Final Four firms absorbing Andersen's business would have violated antitrust guidelines had it involved a sale rather than a collapse.

Feldman (disclosure: her family and mine are close friends) says having the Final Four absorb Andersen's business added 455 points to the Herfindahl-Hirschman Index, a tool that antitrust mavens use to measure business concentration. Any increase bigger than 50 points would have violated the relevant guidelines, she says.

In other words, a collapse brought about by the Justice Department prosecutors allowed the Final Four to acquire at no cost business that the Justice Department antitrust enforcers would never have let them buy. You have to love it.

To be sure, the penalty imposed on KPMG isn't chopped liver. It's $456 million, which is real money. But it's less than it seems to be, even though the deal forbids KPMG from deducting any of the money from taxable income.

KPMG wouldn't help me put the $456 million into context. So I consulted the folks at Inside Public Accounting, an industry trade journal. And you don't need a CPA to see that this deal is one of the bargains of the year.

The journal's publisher, Martha Sawyer, says that KPMG generated $3.8 billion of revenue in the year ended Sept. 30, 2004. She estimates that between 35 and 48 percent of that was pretax profit, which works out to at least $1.33 billion, an average of $787,000 per partner. But remember that the penalty is after taxes. So we'll assume an unrealistically high tax rate -- 40 percent -- for KPMG's partners. This would leave after-tax profit of about $470,000 per partner. The $456 million is about $276,000 per partner. So KPMG's partners are paying less than a year's profit to avoid being destroyed by a criminal indictment. Pretty slick.

The firm and the government say none of KPMG's payments will be covered by insurance. But the settlement calls for the government to get 50 percent of the first $288 million of insurance proceeds, should KPMG get any. (KPMG would keep anything above $288 million.) The settlement, the first $256 million of which was due last week, may end up costing KPMG less than the stated $456 million by the time it finishes paying next year.

So it's time for KPMG's partners to thank the gods of greed for creating the Enron scandal. Because if we hadn't had Enron, we might not have KPMG.

Sloan is Newsweek's Wall Street editor. His e-mail is sloan@newsweek.com

posted by Henry @ 1:15 AM 0 comments

Where Cash Flow Is King

MONDAY, SEPTEMBER 5, 2005

That's Using The Ol'Beane

By CHRISTOPHER C. WILLIAMS

Where Cash Flow Is King | And the Victor Is...

FUND MANAGERS Richard Cervone and James Wiess righted the stumbling Putnam Investors Fund (ticker: PINVX) three years ago, by focusing on quality stocks undone by scandals or short-term concerns. Regional bank Commerce Bancorp (CBH) and search engine Google (GOOG) have been big winners. Cash flow is king to these stockpickers. A close second is Billy Beane, general manager of the Oakland A's. Cervone explains.

What's the allure of Billy Beane?
We try to see value where others don't. Beane is trying to spot players that are better than other scouts think they are. Beane builds a winning team with players that don't cost much, that are, in effect, "undervalued." We're doing the same thing in the stock market -- and we do that by focusing on long-term cash flow.

Warren Buffett remains a strong influence, however?
Yes. We study the great investors and, if appropriate, incorporate what we learn into our investment process. Buffett, quoting Benjamin Graham, says: In the short term the market is a voting machine. In the long-term, it's a weighing machine. That means it's cash flow in the long run that'll determine the value of a business.

How do you get cash-flow estimate right?
We try to quantify how much a business would be worth under different scenarios, assigning probabilities to each. We buy stocks that are trading at the lower end of our fair- value range, building a margin of safety into our purchase price. We always ask: If we were a private investor, how much would we pay for that business?

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Where Cash Flow Is King

FORGET WARREN BUFFETT. Investment pros are channeling baseball executive Billy Beane as much as the Oracle of Omaha these days when they go scouting for stocks. The Oakland A's general manager has struck a chord on Wall Street with his ability to build a winning team on a shoestring budget by using unconventional methods to spot talent.

The Beane way has found a natural home with baseball fans and money managers Richard Cervone and James Wiess, who have driven their Putnam Investors (ticker: PINVX) large-capitalization blend fund to the top of the three-year performance rankings by, like Beane, finding value where others don't. To unearth their diamonds in the rough, they look for stocks they believe are selling below the estimated value of the companies' free cash flow. Just as Beane argues that Major League Baseball owners overpay for certain talents, such as strikeouts for pitchers, while underpaying for others, such as a hitter's ability to draw walks, Cervone and Wiess believe investors tend to pay too much for, say, short-term earnings momentum. The managers' 99-stock portfolio includes companies that have been undone by scandals, such as insurer American International Group (AIG), and gold-plated brand names tripped up by passing concerns such as declining consumer spending. In that camp: Nike (NKE) and Harley-Davidson (HDI).

"We don't pay any price for growth," says Cervone. "Free cash flow is what creates value. We put all our efforts in what free cash flow will look like in a few years."

The laser-like focus, reinforced by fundamental and quantitative analysis, propelled the $4 billion fund to a 12.96% annualized return in the three years through Aug. 31, putting it ahead of almost 80% of its peers and slightly in front of the S&P's 500 Index. In an overall lackluster market, Putnam Investors has posted a 4% return this year, through Aug. 31, versus the S&P's 2%. Big winners this year: office-supply retailer Office Depot (ODP), up 73%, and oil and gas producer Amerada Hess (AHC), a 61% gusher. Fannie Mae (FNM), off 29%, has been a downer. The managers' flexibility to pick among growth and value stocks and their measured move into the hot energy sector with recent bets on gas producer Occidental Petroleum (OXY) could boost Putnam Investors' performance sharply by the end of the year, especially if an uptick in consumer spending unleashes the power of holdings such as home-improvement giant Home Depot (HD).

James Wiess, left, and Richard Cervone have drawn inspiration from the talent-acquisition philosophy of the Oakland A's general manager, who believes Major League Baseball is overpaying for some skills while undervaluing others. For the managers of Putnam Investors, Wall Street tends to overvalue growth and undervalue free cash flow.

"We're finding a lot of good ideas," especially in financial and consumer cyclical, says Cervone. Enough, evidently, to share with the Putnam Tax-Smart Equity fund (PATSX), to equally glowing effects. That $285 million offering, also managed by Cervone and Wiess with similar investment strategy, has returned almost 13% over three years through Aug. 31.

Putnam Investors might, itself, qualify as an undervalued asset. Despite its solid three-year performance, the fund is getting little love from investors and Chicago-based Morningstar, which gives Putnam Investor a low rating of two stars, in part because of its sorry five-year record. Over that span, the fund has posted an annualized loss of 8%, dropping it in the performance basement in its category.

The fund's size has shrunk from $8 billion in assets at the end of 1999 and inflow has been flat this year. Investors have soured on Putnam offerings in general, yanking out more than $10 billion out of Putnam's funds during the first half of the year, despite the relatively solid performances of many funds. In contrast, T. Rowe Price (TROW) has pulled in $8.3 billion.

Many Putnam funds crashed after the bull market, and in 2003 some managers at Boston-based Putnam Investments, a division of Marsh & McLennan Cos. (MMC), were accused of market-timing. The firm agreed to pay fines, though it admitted no wrongdoing. Chief Executive Officer Charles Haldeman is trying to repair Putnam's image by, among other things, keeping funds' expenses low (Putnam Investors' 1.05% expense ratio is below the category's 1.21%) and creating funds that "deliver consistent and dependable performance."

Putnam Investors represented much of what plagued Putnam's offerings. During the 1990s, it made outsized bets on growth stocks; it paid dearly when they misfired. In 2001, the fund slumped 25%. The next year, Haldeman installed Cervone, now 39, and Wiess, now 45, two managers whose appreciation for risk and astute reading of quantitative and fundamental analysis mirror his own. One of their first steps was to jettison the fund's growth tilt in favor of more modest sector bets. "Before," Cervone explains, "the fund tried to hit home runs all the time. We try never to have a terrible year." Apart from 2002, when the fund lost 24% in a brutal market, Putnam Investors has been firmly in the black.

Haldeman is counting on the flagship fund to pull investors back to Putnam. "Large-cap core," underscores the CEO, "is a big area of interest for investors."

Morningstar analyst Laura Pavlenko Lutton is warming to the revamped offering. "The fund has performed admirably since the April 2002 transition with reasonable volatility," she says.

Cervone, a Boston native, "fell in love with investing" while working as an architect in New York City and decided he'd prefer designing portfolios to buildings. After getting an MBA from Columbia University, he worked for two years as an equity analyst with Loomis Sayles before joining Putnam in 1998.

Wiess has 18 years in the business, spending eight as portfolio manager at J.P. Morgan Investment Management before joining Putnam in 2000. The New York City native is also chief investment officer of Putnam's U.S. Core team.

Cervone and Wiess have recently been taking profits in some winners to load up on what they call "mispriced" gems. They've trimmed their stake in Amerada Hess, though they remain fans, expecting earnings to increase about 50% next year. Up 65% over the past year, Amerada trades for around 134, well above the managers' average cost in the mid-60s, but still well off the 150 they estimate is its intrinsic value.

They also more than halved their holdings in highflier Google (GOOG) in recent months. After doubling over the past year, Google is trading for 286. The managers' average cost is 190, but Cervone says, "It's not difficult to see fair value in the 350-400 area." Adds Wiess, "We still get a lot of skepticism when we talk about Google." And for good reason: The shares sport a forward price-earnings ratio close to 40. But they believe the Web's top search engine will benefit mightily from increased Internet ad spending.

Apple (AAPL) has also been on a tear. But, like Google, it's still a favorite of Cervone and Wiess, who peg its intrinsic value at 50 to 60, versus the recent 46. Apple commands a forward P/E ratio of 29, which isn't as expensive, notes Cervone, if you strip out its $8 a share in cash. Apple is more than the iPod digital music player. The fund managers see a company unveiling a broader product line at lower price points and with the power to double its 2% share of the PC market over the next several years.

Table: Putnam Investors Fund Top 10 Holdings

In loading up on Occidental Petroleum, the managers are betting the producer's Middle East operation will boost production beyond expectations and continue to fire up the stock, which is up 59% to 84 in the past year.

Another recent buy, Bank of America (BAC), has seen its shares slide 8% this year, to 43, on concerns about bank earnings and the flat yield curve. But Cervone thinks the bank's acquisition of credit-card issuer MBNA will create long-term value. "The stock is worth around $62 on a base-case forecast," says Cervone.

Such a recovery in Bank of America could help Putnam Investors post its third straight year of positive gains. That would be a winning season for Cervone and Wiess, even if their beloved Red Sox and Billy Beane's A's end theirs on a losing note.

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And the Victor Is …

CLOSED-END FUNDS have won a concession that gives minority shareholdlers a greater say when funds try to change managements.

"This will increase the value of all closed-end funds and allow retail investors to be heard rather than having deals simply rubber-stamped," says Thomas Herzfeld, president of Miami-based Thomas J. Herzfeld Advisors. Herzfeld and other minority investors had written to securities regulators, objecting to the proposed $437 billion deal under which Citigroup (ticker: C) will swap its fund unit for Legg Mason's (LM) retail-brokerage network. The objections hinge on how the deal affects management of about $8 billion in 24 closed-end funds, almost half of which trade at discounts of at least 9% to the value of their securities holdings.

THE BOTTOM LINE: With a 12.96% annualized return over three years, beating almost 80% if its peers, the fund has been paring back on big winners like Google and adding "mispriced" gems.

"Unless the change in management is coupled with measures to narrow or eliminate persistent discounts to net asset value in several of the funds, we will have to oppose the new management agreements when they come up for shareholder vote," Herzfeld had warned. For some of the funds, the vote comes up Oct. 21.

Herzfeld learned of his victory obliquely, when Cecilia Gondor, a principal in his firm, noticed it in an SEC filing connected with the swap. So far, Citigroup and Legg Mason have done little to sweeten the lot of the investors in the discounted funds. The New York Stock Exchange usually lets brokers vote their customer proxies at "routine" shareholder meetings.

The precedent-setting reversal has generated a new rule, said a Big Board spokesman. It makes transactions such as a change in a fund investment-advisory contract non-routine, assuring that brokers can't vote without instructions from shareholders.

---- Jack Willoughby

posted by Henry @ 3:51 AM 0 comments

Dedicated short sellers

By SANDRA WARD

THESE TWO LONGTIME partners in $100 million-plus Mikles/Miller Management, based in Los Angeles, are a rare breed today: dedicated short sellers. Though last year was their most dismal on record, down 13% net of fees, they've overall provided an important hedge for investors. So far this year, returns are break-even. If the dire predictions they make in this interview come true, look for short selling to be back in vogue and for these savvy practitioners to lend an assist in protecting capital.

Barron's: What makes a couple of very private guys want to go public with their views?
Mikles: We think we are at a huge inflection point that needs to be talked about. It is really misunderstood, or as we like to say, under understood. We think we've got something very important to say and are willing to say it for the first time in a very long career. Collectively, we've been in the securities industry 45 years and we've been in the hedge fund business as partners for 15.

Q: Why do you think we are at an inflection point?
Mikles: Bottom line, the consumer is broke and he doesn't know it yet. But he is about to find out. All the buckets that propelled consumer spending are empty now, whether it is the increase in mortgage debt, the increase in consumer debt or the reduction in the savings rate. No one statistic will tip the scale at the end of the day. But one very obvious and very curious statistic is that we have dipped into a negative savings rate for the first time. That is not only unsustainable, it is sustainable only for a few months. That's important to note because it tells you consumers are borrowing money to make debt payments. The U.S. consumer has become payment driven. He is driven not by the aggregate amount of debt he possesses but by the amount of the payment. And now the consumer has not only taken his savings rate to nothing, it has turned negative.

Miller: Every month there is some increase in consumer borrowing that has to occur just for the consumer to stay level. The consumer is treating his balance sheet much the way the government is treating theirs, but, of course, the consumer can't create currency like the government can. The point is the consumer cannot continue to borrow to make his debt-service payments for very long. How did we get here? We got here because of the huge differential between wage growth and what we spend and what we consume.

Mark Miller

Q: What about the argument that consumers may not be saving but the appreciation they have seen on their houses is a form of savings?
Mikles: The consumer doesn't know he is broke because his house hasn't stopped going up yet. It hasn't starting going down, it just hasn't stopped going up. Once it stops going up, the consumer will immediately -- and I mean a matter of months -- find out that he is, in fact, broke.

Miller: We have been studying wage growth in relation to housing. In the 30 years starting in 1971 and ending in 2001, home-price appreciation shadowed wage growth. They were both up 138% in that period. Since then, home prices have exploded and wage growth hasn't. The housing explosion has made people think of their house as an investment class. But it is a two-sided argument, and people only see it as an investment class when house prices are going up. As soon as they start going down, houses will be considered shelter. The problem with viewing houses as shelter is that it doesn't allow you to tap your house for a mortgage refinancing to make your credit-card payments or any of your debt payments.

Mikles: The argument is really pretty simplistic. If you consider housing as an asset class, then it makes sense to run the math as you would on any other asset class. It costs about 8% in the current environment to carry a home: That's mortgage, insurance, taxes, maintenance and ultimately a disposition cost. That's a conservative estimate. What it means is the home has to double every nine years for that consumer to stay even. Every year that house doesn't appreciate 8%, the consumer is losing ground if he is going to call it an investment. With wage growth at 2%, that's unsustainable. Common sense tells you house prices and wage growth have to track one another. All of a sudden they have monstrously decoupled. Just look at San Diego. House prices there are up over 150% since 1996. Wage growth during the same period in the same metropolitan area is up 22%. In the last five years we have the biggest disconnect we have ever had since these statistics have been compiled.

Lee Mikles

Q: So what's the fallout from this scenario?
Miller: Housing construction is about 5% of gross domestic product. That will fall. If housing construction fell off by the levels it did in 1981 and "82 that would imply a direct loss of two points of GDP. About 70% of GDP is consumer driven. You have to factor in an additional drop in GDP due to a falloff in consumer spending. So if housing just stops going up, we could pull 4 1/2 points from GDP, which would define a recession for sure.

Q: Any other evidence for why we might be heading into a recession?
Mikles: The big hook has been set. And the big hook is the following: Corporate America is flush with cash. The economy looks very strong. There doesn't seem to be any evidence of any hyperinflation anywhere. The scenario looks very good and the markets could get very excited about this and head to some short-term blowoff top. But at the same time, the consumer has just tipped over and the bells are ringing, but nobody is hearing it. The big lie in the economy has been the following: that the consumer was smart to elongate his liabilities and lower his payments by taking other consumer debt and putting it into his mortgage. He has got a lower payment now that is a 30-year liability and not a revolving liability. Well, statistically and empirically, that's incorrect. In the last 10 years, consumer debt is up 77%. Mortgage debt has more than doubled. There are hundreds and hundreds of billions of dollars of cash-out refis that have taken place and that money has all been spent. It's already in the gross domestic product retrospectively. Prospectively, where is the money going to come from to pay the obligations that remain?

Miller: As in every cycle, the consumer will panic. Consumers will look to increase their savings rate at any cost. That in itself will lead to a reduction in spending that will have a substantial impact on GDP. The consumer is going to get his very own 12-step spending program: de-leverage, increase savings and live within your means. All the things our parents told us about but no one has listened to for the last 20 years. That's the trap. The only saving grace could be that rates start going down again. But if rates go down, it will be because we are going to enter into a recession.

Q: Isn't wage growth trending up?
Miller: Yes, but only a couple of% a year.

Q: But if the job market gets tighter, won't wages grow faster? Would that offset your thesis?
Milkes: We would have to get in excess of an 8% wage growth rate, which is implausible because of globalization. The pressure is on wages. Wages are getting more attractive for the employer not the employee.

Q: Does the impact from Hurricane Katrina affect your outlook?
Mikles: It is too early to know. Our past experience suggests events like this give air cover for a period of time to previously established trends.

Q: What do you make of the burgeoning number of hedge funds? Are hedge funds partly responsible for convergence of asset classes and the low-return environment?
Miller: That's a broad and difficult question to answer. It has substantially increased volatility in specific, individual stocks. There are those who are shorting stocks and making decisions based on models that are quite dissimilar than we've had in the past. There is increased volatility associated with that type of decision making. That's where we've had to really work on our business and our ability to manage a portfolio. This is a change, and it is a big change in the course of the last five years. We didn't have a very good year last year, and part of it was because of the proliferation of new hedge-fund managers and the amount of money in hedge funds and increased volatility, and at the end of last year it really ripped our heads off.

Q: So how have you positioned your portfolios now?
Miller: We can't make money specifically from GDP declining 4%. We can make money from individual stocks and the analysis that we do specifically on those stocks and the events that make them go up and down. I'm not going to mention any of the small stocks we're invested in because hedge funds can whip them around and make life miserable. There are some more liquid big-economy-type names and themes that I think will play out. We've seen a big crack this year in the auto industry. General Motors [GM] and Ford Motor [F] have had a tough time, and Ford has been working for three years trying to fend off a credit-rating downgrade, but they've done everything they can possibly do. They have taken $2 billion out of their suppliers' pockets to try to make their auto operations profitable and they still lose money selling cars. Going forward, Ford is in serious trouble. If you look at Ford and GM, they are both losing market share. GM has a leg up on Ford because they have a fantastic product line coming, and they hired Robert Lutz at the right time. His fingerprints are all over General Motors now. Ford has serious pressure and serious problems. Ford is a money-losing auto operation and a finance company. An increasing-rate environment is going to be very difficult for Ford.

Q: Haven't Ford shares come down quite a bit this year?
Miller: Yes, the stock is down quite a bit. But the economy is as good as it's going to get, in our view. Ford has done everything they can, to this point. They made all these restructuring actions, and their credit was still downgraded because the bottom line is they have overcapacity. They have bad contracts and they have legacy costs. They can't operate their business profitably. That's not going to change. It is going to be very difficult for them to make it out of this. We'll see if they can do a kick save. Among the suppliers, Lear [LEA], which makes seats, gets more than 40% of their revenues from Ford and GM. They're just seeing the first cracks of this production decline. They were unprepared for the decline. The bullish guys on the Street are thinking the restructuring actions are somehow going to save Lear. The fact is, when we get down to some sustainable level of auto sales, Lear's earnings power will be substantially less than what people expect. I'm not trying to make a case for Lear going out of business, but their level of business will be much lower than what people think.

Q: What about other suppliers?
Miller: Visteon [VC] and Delphi [DPH] have to survive. They're super-leveraged to each of the manufacturers because they are spinoffs from each of them. Visteon is trying to renegotiate with the United Auto Workers and Delphi has jumped on that same bandwagon. Both Visteon and Delphi are companies making products that Ford and GM have to have. You can't put those guys out of business. You can restructure them all you want, but they are not closing down. At $4 a share or so, Delphi is something I would be long, not short.

Q: What else are you shorting?
Mikles: When you look at the mortgage industry contracting the way it is and you look at the pain that is going to be dealt the consumer in this 12-step program, the way to go is to determine who owns the risk. All companies say they've laid off their risk by securitizing it on Wall Street. But someone owns this risk. Those are the guys you want to be short. Now whether it is a Wall Street firm or a mortgage originator or a mortgage wholesaler, whoever owns this stuff at the end of the day is the guy that is going to get stabbed in the back.

Q: Who do you think has most of the risk?
Milkes: When a lot of these aggressive mortgage originators converted to mortgage-REIT status, that was the last-ditch Hail Mary play. Whether it be New Century Financial [NEW] or NovaStar Financial [NFI], everybody down that food chain will be affected pretty dramatically. Quarter by quarter we are starting to see margin compression in these companies, but they keep reaching for volume. New Century and NovaStar will be the first targets to be picked off, and then you could go right down the line to everyone else who holds these last-in-cycle mortgage creations on their balance sheet. Everybody has the same bet on: house appreciation.

Q: Any other areas to highlight?
Miller: An area I'm focused on that dovetails with our overall thesis is the airlines. Things can't get much better economically, and yet everyday we are reading in the paper about the potential for bankruptcy. Right now it is because of oil prices. Well, oil prices are high because economies are doing so well. It isn't because of speculators or anything else. I talked recently with a friend in China who said in southern China they are limiting people to five gallons of fuel and people are waiting two hours in line to get the fuel. This isn't fake demand. The airline companies that are fully hedged on oil prices over the course of the next three to six months have a chance realistically to knock the others off. Southwest Airlines [LUV] and Jet Blue Airways [JBLU] both have excellent fuel-hedging programs. American Airlines [AMR] has no fuel-hedging program. They're paying spot prices for fuel. All the bankrupt carriers are in the same boat. They won't let them hedge forward because they don't know if they are going to be in business in two months. If oil prices don't put the airlines out of business first, eventually their customers will stop showing up at the door. People buying airline stocks today on the premise that their restructuring will be successful have their timing off. Realistically, two years from now things will be quite a bit different. The way we fly will change.

Q: No one could accuse you of being contrarian.
Mikles: We are very stock-specific and balance-sheet-and event- specific. Most people think short sellers are inherently bearish. We are not bullish, nor are we bearish. The environment is what it is. To think Ford is cheap because it is $10 and it was $30, you know, could be a mistake. Stocks often are much better shorts at 10 then they ever were at 30.

Table: Mikles and Miller's Pans

Q: What would prevent or delay this scenario from playing out as you think it will?
Miller: As I said earlier, if rates go down somehow, this can all be sustained. But that is going to have to happen relatively soon, and it doesn't appear to be in the cards. The history of decision makers at the Federal Reserve is that they always overshoot in each direction. I doubt we are at that point of overshooting yet. They are raising rates so they have the ability to lower them later. And so taking them back from 4% is probably not what they had in mind. It is very, very difficult to figure out a scenario by which we wriggle out of this trap. Maybe oil goes back to 50, but then if oil goes to 50, it is only because the economy stopped or something really big happened. The bigger question is whether our timing is right.

Q: What if the savings rate turns back up?
Miller: It would actually encourage our suspicion that we are right, because it would imply to us that the consumer is pulling back and trying to do the right thing.

Mikles: In 1989, the savings rate was 9 1/2%. In the 10 previous years, it was 8 1/2%. We drove that number to negative territory, so we've stolen all the money we can.

Q: Thank you, gentlemen.

posted by Henry @ 3:50 AM 0 comments

Damage to Oil and Gas Facilities Pushes U.S. Closer to Energy Crisis

By RUSSELL GOLD and THADDEUS HERRICK
Staff Reporters of THE WALL STREET JOURNAL
September 2, 2005; Page A1

Hurricane Katrina's continuing disruption of a substantial portion of the Gulf Coast's vast network of refineries and pipelines is pushing the U.S. closer to a 1970s-style energy crisis, straining the oil industry's ability to deliver gasoline from Florida to Colorado, sending prices into uncharted territory and triggering panic among drivers in some areas.

Long gas lines were reported in Denver, Indianapolis, Hartford, Conn., Atlanta and Orlando, Fla., among other cities. In Charlotte, N.C., between 13% and 15% of stations had no gasoline and prices have soared as much as 70 cents a gallon in those stations that still have fuel to peddle, said Tom Crosby, a local AAA official there.

President Bush took the unusual step yesterday of urging Americans not to buy gasoline if they don't have to. "Americans should be prudent in their use of energy," he said in brief Oval Office remarks. "Don't buy gas if you don't need it."

The president also made it easier for tankers to bring in gasoline from Europe, which has excess capacity for the fuel as motorists there increasingly buy diesel-powered cars. Wednesday, Mr. Bush temporarily lowered U.S. environmental standards that also eased the way for European gasoline.

The core of the unfolding situation is that four days after Hurricane Katrina pummeled the Gulf Coast, eight major refineries are still shut down and several could require a month or more to restart. In addition, there are early rumblings in the industry of significant, unreported damage to offshore pipelines, energy-gathering hubs and producing platforms that could take months to repair.

Neither Exxon Mobil Corp. nor Chevron Corp. released more than the briefest details about their offshore facilities. Royal Dutch Shell PLC reported damage to three key facilities: offshore producing platforms Mars and Cognac and a hub facility that gathers oil and gas from large deep-water platforms.

Shell reported yesterday that its Convent, La., refinery could initiate a restart in "about a week." Chevron said its large Pascagoula, Miss., refinery had been saved by a dike built in 1998 that "prevented catastrophic damage." Exxon said its giant Baton Rouge refinery was having pipeline and transportation issues and running at "reduced rates until normal feedstock supply and product movement is restored."

Last year, Hurricane Ivan, a less-powerful storm, hurt oil production for months, pushing up energy prices world-wide after it upended pipeline networks in the Gulf of Mexico. The price of crude rose from $44 to above $50 for two months.

There was some good news. Valero Energy Corp. said power was restored to its St. Charles, La., refinery and Marathon Oil Co. said its Garyville, La., refinery could be producing gasoline by early next week. Two idled pipelines that had hampered fuel deliveries to the East Coast are now being brought back on line. Colonial Pipeline Co., knocked out of action by Katrina, said it was operating at 40% of capacity, with about 61% of capacity expected by day's end. Plantation Pipe Line Co., which is majority-owned by Kinder Morgan Energy Partners LP, said it resumed limited service Wednesday. Plantation said it had been able to restore about 150,000 barrels of capacity per day, or nearly 25% of its average daily throughput.

Whether a true energy crisis emerges -- with persistent fuel shortages, soaring gas prices and a wallop to the economy -- will depend on how quickly the onshore and offshore infrastructure gets back up and running, how deftly the industry and government handle fuel distribution in the meantime and, critically, whether large numbers of consumers panic.

A rush to fill gasoline tanks in large parts of the country would quickly drain stockpiles, leading to shortages, hoarding, long lines and even sharper price spikes. If every driver in the U.S. fleet of 220 million vehicles topped off his tank with 10 gallons, that would be an additional 2.2 billion gallons of demand for gasoline and diesel inventories that stood on Aug. 19 at 8.19 billion gallons and 3.23 billion gallons, respectively.

"In terms of the scale and impact on the American market, this is comparable to the oil embargo" of 1973 and 1974, said Jay E. Fakes, head of the federal Energy Information Administration from 1993 to 2000. The only answer, he says, is immediate conservation. His call for drivers to cut back was echoed by such oil-industry heavyweights as the American Petroleum Institute and the Petroleum Marketers Association of America.

The industry's ability to snuff out the gasoline-price spike is critical because if the crunch persists, it has the potential to significantly slow the U.S. and global economies or even trigger a recession. American consumers kept spending strongly through this summer even as crude-oil prices soared, largely because other factors -- low interest rates, rising home values and cheap imports -- offset the sting of higher prices at the pump. Their spending has been a linchpin of world-wide economic growth.

But signs of stress are emerging. Home values may be peaking. The government reported yesterday that the personal-saving rate dipped into negative territory for just the first time since the weeks after the Sept. 11, 2001, terrorist attacks, suggesting consumers are going into debt to support their spending habits. A sustained gasoline-price shock, many economists warn, could help tip the economy into a recession.

Gasoline stations in some parts of the country say supplies are drying up. Worst hit are the unbranded retailers -- stations that aren't affiliated with a major oil company such as Exxon or Chevron but still account for about one-third of U.S. gasoline sales. Jenny Love, a spokeswoman for Love's, an Oklahoma City-based chain of 160 interstate and highway locations, said some of the company's outlets were out of both gasoline and diesel fuel. "The unbranded retailer is at the bottom of the totem pole," she said. "There's nothing we can do about it."

Some service stations in gas-crimped areas like Atlanta were charging in excess of $5 a gallon for gas, before a gubernatorial state of emergency forced them to lower the price. The White House warned that federal officials would have "zero tolerance for price-gouging."

Cary Gavant, a 58-year-old Atlanta broker, says he conserved fuel last night by driving more slowly than usual on the 50 miles north on I-75 toward his suburban home from Atlanta and noticed that many other drivers were doing so, too. "The thought of not having gasoline was terrifying," he said.

While the triggering event for the country's energy squeeze was the destruction Katrina unleashed on the vital gasoline-producing region of Louisiana and Mississippi, the scene was set for this catastrophe by both drivers and the energy industry. U.S. drivers pump 11% of the world's crude oil into their tanks in the form of gasoline, and increasingly over the past couple of decades they have been buying gas-guzzling SUVs and pickup trucks.

At the same time, the oil industry has been reluctant to invest in new refinery capacity because of historically low returns, even while refiners have pared back inventories to beef up margins. This reluctance has shrunk U.S. and international spare refining capacity, creating a world-wide gasoline-delivery system hard-pressed to cope with a major disruption such as the one wrought by Katrina.

Even though these twin trends were well-known, the scope of the disruption has caught even long-time oil-refining veterans by surprise. "In my 30 years, I do not remember a time like this," says Tom O'Malley, former chairman of Premcor Inc., a major U.S. refiner acquired this year by Valero. "It is absolutely clear that a significant amount of refining capacity that is currently down will take time to come up. And I don't think it's a matter of days. For some refineries, it could be a matter of months. There is certainly going to be a domestic product shortfall."

Still, Mr. O'Malley doesn't believe the U.S. is headed for an energy crisis. The rocketing wholesale and retail gasoline prices should fall back soon, as tankers full of gasoline from Europe begin arriving. "I think the industry, you will find, will do an amazing job of coming up with supply. It's a question of weeks, but this is no long-term problem."

Industry experts said they expect the refineries hardest hit by the hurricane to be out of service for more than a month since flooding can ruin the electric pumps that send crude oil through a refinery's complex system of pipes. "It looks quite serious," said Bob Funk, who recently retired as head of planning from Citgo Petroleum Corp., a U.S. refiner and subsidiary of Venezuela's national oil company. Mr. Funk expressed particular concern for a plant run by Exxon Mobil and Petroleos de Venezuela in Chalmette, La., which is on the Mississippi River near downtown New Orleans. Exxon Mobil said it couldn't provide any information on potential damage at the Chalmette refinery.

The extent of the probable damage to the plants struck by the storm, he says, is likely to be more than the Gulf Coast work force can repair, meaning refiners will have to bring workers in from other parts of the country. That and the extensive flooding are likely to slow refinery repair efforts. Even when the refineries are up and running it is unclear whether they will have adequate staffing, given the flood damage in surrounding communities and neighborhoods where workers live.

And while European traders reported as many as 20 bookings in the past two days for tankers to carry gasoline across the Atlantic, the shipments won't provide immediate relief. The ships are scheduled to load gasoline at European ports later this month but will take as long as three weeks before reaching East Coast ports like New York. On top of that, traders are finding it difficult to find available ships. Rates for trans-Atlantic voyage have soared in the past few days as shipbrokers try to line up tonnage.

While most attention was on the onshore infrastructure, there were ominous signs of damage to the offshore platforms and pipelines that produce one-quarter of U.S. oil. Shell reported that its West Delta 143 platform, which serves a pipeline hub, needed substantial repairs. Less than 20% of energy production within the Gulf of Mexico had been restored yesterday, according to the federal Minerals Management Service. Four days after Hurricane Ivan last year, 60% of production had been restarted, the agency said.

Ivan scrambled numerous critical underwater pipelines, essentially leaving functional producing platforms with no way to get the oil and gas to shore. Robert Bea, Shell's former chief engineer in the U.S. and a longtime student of the impact of hurricanes on the Gulf's energy infrastructure, says he has heard from a network of oilfield workers that the damage to pipelines and platforms could be "10 times what we saw in Ivan."

Even before Katrina, the refining industry faced a severe capacity crunch, a problem that promised to limit the prospects for cheaper gasoline, diesel and jet fuel for at least several years. Nor is it exclusively a U.S. problem: Growing demand for oil from China, India and other rising powers is aggravating the shortfall in refining and threatening to keep prices elevated for years.

While global demand is expected to grow by nearly two million barrels a day this year -- from 82.5 million barrels a day last year -- the world's capacity to refine and process crude oil is expected to grow by less than half that, according to the Petroleum Industry Research Foundation.

For these reasons, Larry Goldstein, president of the Petroleum Industry Research Foundation, a New York-based group, said that the release of oil from the Strategic Petroleum Reserve and increased gasoline imports from abroad won't fundamentally address the situation. "How could this not be a major problem for an indefinite period of time?" he said. Mr. Goldstein said he expects sustained high gasoline prices as demand exceeds supply. "It's powerful and it's ugly," he said. "But it's true."

posted by Henry @ 3:37 AM 0 comments

Shakeout in China Real Estate Could Offer Chance to Buy In

By LAURA SANTINI
Staff Reporter of THE WALL STREET JOURNAL
September 2, 2005

Investors befuddled by China's volatile property market should pay attention to sales volumes of residential and commercial units in October, traditionally one of the hottest sales months of the year. If sales are weak, Chinese developers are likely to miss third-quarter earnings estimates -- perhaps creating an opportunity to buy shares, according to some analysts and investors.

In real estate, publicly listed shares tend to trade ahead of trends in the physical-property market. Property shares have bounced higher this summer, while the value of physical real estate, especially residential space, hasn't kept up. Nationwide, residential-property prices rose 1.9% in the second quarter, compared with a 2.8% gain for the first quarter, according to Morgan Stanley.

To some professional investors, bubbly share prices suggest an imminent recovery in the physical market. So some investors see stronger stock performance ahead for the property sector -- and they say a short-term stumble in October could provide deft buyers with even bigger gains later on.

"The next couple of months are key," says Kenny Tse, property analyst at Morgan Stanley. Chinese government measures to curb bank loans and speculation earlier this year have had an effect, and many developers have ceased building for lack of cash. Now, the focus has turned to consumers. If demand ebbs, developers may find themselves crunched again by slow sales.

The shakeout, if it happens, will give healthy real-estate companies a chance to expand by snapping up struggling rivals and taking over distressed projects. It may be an opportune moment to buy shares of companies with strong balance sheets and corporate governance, says Peter Churchouse, who manages a real-estate hedge fund for Hong Kong-based LIM Advisors. He thinks China Resources Land, in particular, fits in this category.

The stock also appears cheap right now, despite a recent rebound in its price. Shares of the Hong Kong-listed company are trading at a substantial discount to its peers, at 7.3 times next year's projected earnings, compared with an industry multiple of 8.2. On a price-to-book basis, which factors out cyclical fluctuations in earnings, the stock is valued at 0.6 times, a rare instance in which a company's total net assets per share are higher than its stock price. The industry average for stocks of Chinese property developers is 1.28 times book value. Morgan Stanley recently resumed coverage and is predicting the stock could rise as much as 28% in the coming year.

Although Mr. Tse thinks management has been slow to adopt an effective strategy, he sees evidence that China Resources is ripe for a turnaround, citing the formerly Beijing-focused company's diversification into Shanghai and several secondary cities, such as Chengdu, Wuhan and Hefei, in an Aug. 25 report.

China Resources Land happens to own a 13% stake in another highly regarded developer, China Vanke, whose B shares, which foreigners can buy, trade in Shenzhen. China Vanke, known for sound management -- by Chinese corporate standards -- has been able to use its financial strength to push ahead with development plans, while local competitors have grappled with tighter bank lending.

China Vanke's B shares aren't cheap, trading at 11.7 times earnings and 2.44 times book value. In addition, B-share trading is cumbersome, and agile investors may find it difficult to get out if the market moves unfavorably.

A third option is Hong Kong-listed Shanghai Forte Land, the shares of which receive a richer valuation than those of China Resources Land but still trade relatively inexpensively at 5.2 times next year's earnings. Shanghai Forte shares exceed the industry average of price-to-book, at 1.65.

But not all investors are waiting for October's sales figures. Earlier this month, Hopson Development Holdings Ltd. sold a 16.7% stake to Tiger Global Management and Temasek Holdings, the Singapore government's investing arm, for $125.4 million. In a public disclosure, Hopson said it would use the proceeds for debt payments, working capital and expansion of business on the mainland.

Private-equity funds, which this year have raised piles of cash to invest in Asia, are deploying some of it in publicly listed property developers. In some cases, they have made it possible for developers to access the public market for needed capital. Guangzhou R&F Properties, the biggest real-estate developer in the southern Chinese city of 10 million, nearly had to shelve plans for an initial public offering. The real-estate market had fallen out of favor in late spring, and the company's investment banks, Credit Suisse First Boston and Morgan Stanley, had difficulty mustering institutional-investor interest in the IPO.

Instead of abandoning the offering, R&F sought financial assistance from private-equity fund Warburg Pincus Asia LLC. More than a year ago, Warburg Pincus had offered to invest a chunk of money in Guangzhou R&F but was rebuffed. The property market back then was soaring, and the developer wasn't as hungry for additional capital. In July, with its IPO prospects grim, R&F and its bankers approached Warburg, which still liked the company's plum position in one of China's largest cities. The fund invested $65 million, buying 25% of the IPO shares.

Rodney Tsang, a CSFB investment banker who worked on the deal, expects to see more private-equity funds taking equity in publicly traded companies, including those in sectors outside real estate. "Private-equity funds have to be more creative in sourcing different types of deals," Mr. Tsang says.

Softbank Asia and Carlyle Group's venture-capital fund also have leapt into real estate recently, betting on growth in secondary property sales in China. The funds have invested $30 million and $15 million, respectively, in Sunco China Holdings' real-estate brokerage business.

posted by Henry @ 3:35 AM 0 comments

日本與中韓台〝技術戰爭〞開打，優勢能撐幾年？ 　

台灣日本綜合研究所總編輯　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　　李中邦

　技術是企業的核心力量，就如同科學是國家重要的國力之一。企業擁有越寬廣、越尖端的技術，「本錢」就越雄厚，這不是炒股票、炒房地產的金錢、數字遊戲，而是真刀、真槍的實力，為什麼有的企業能製造出劃時代的新產品？為什麼有的企業就是品質精良？為什麼有些企業有創意？產品外型美觀、獨特……，簡單的說，這些都跟企業的技術能力有關。

　　而企業之間或許也有銷售戰、廣告戰，但勝負關鍵終究都會回歸到技術戰上來。技術戰是沒有硝煙的戰爭，可是它非但涉及企業的命脈，也關係著龐大的商業利益。

　　企業之間或許也有所謂的「技術合作」，但檯面上技術合作，私底下通常是你踢我、我踹你，爾虞我詐。這是企業間永遠的宿命。企業戰就是技術戰。

　　技術是企業的核心力量，集眾多擁有尖端技術的企業則是國家經濟的核心力量。這是環環相扣的，所以先進國家、力爭上游的國家都視企業技術研發為重寶。

　　21世紀是「知的世紀」，日本人認為科技是生存、是熬下去的最大憑依。當台灣政府還在熱中以意識形態監控“違法投資大陸”的企業時，另一場更大範圍的東亞國際“技術戰爭”早就開打了。這可以說是日本對技術的保衛戰，也可說是中韓台向日本的技術挑戰。無論如何，這場技術戰爭揭開序幕，以前的國家技術“秩序”在未來一會重新洗牌。

一、東亞各方的技術實力與動向

1. 日本

　　戰後很長一段時間，日本向歐美購買了許多技術，付出龐大的專利使用費。不過，1993年是日本「技術貿易」的轉捩點，該年日本技術出口4003億日圓，進口3629億日圓，首次轉為黑字。此後，日本的技術黑字額就持續增長。日本成為不僅是產品，技術方面也具壓倒性優勢的出超國家。可以說，日本企業的努力研究開發，開花結果了。（本文為節省篇幅，不做貨幣統一或換算，僅在此提供匯率換算參考值：107.69日圓＝1美元，2005年6月6日）

　　日本技術出口的最大對象是美國，其次是中國，第三是英國，四位以下則是泰國、台灣、韓國、印尼等亞洲國家、地區（到02年）。亞洲各國與日資合資的公司很多都有支付給日本總公司技術指導費等，凸顯出當地的廠商很依賴日本的技術。

　　日本對中國大陸的技術出口額，1992年為165億日圓，到2002年攀升到858億日圓，10年間成長了5倍多；同一時間，日本對台灣的技術出口額，也從217億日圓膨脹到648億日圓。

　　02年，日本由世界收到的專利使用費、技術指導費等技術貿易的出口額達到1兆3867億日圓。當然，日本也有向外國購買技術，進口額為5417億日圓。值得注意的是，日本技術貿易賺到了8450億日圓的黑字。而04年的黑字很有能突破1兆日圓了。但即使如此，日本還是很在乎韓、中、台的技術提升，深怕威脅到其霸主的地位，而展開一系列的措施。

2. 韓國

　　韓國的技術成長是最具意義的。日本對韓國的技術出口額，1996年到達最高峰的696億日圓，之後便開始減少，02年下降到370億日圓。隨著韓國強化獨自的研究開發能力，韓國從日本進口的技術確實減少了。韓國在亞洲的技術競爭中，是目前追趕日本追得最兇猛、成績最突出的國家。拿擁有近「2100位博士」的三星（SAMSUNG）電子為例，即可以了解韓國的企圖心了。以三星電子為核心的三星集團，從90年代起，每年新聘用一百位以上的博士，其總數現在已突破了兩千人。三星對這些在專業領域有博士學位的人才，徹底執行「成果主義」，使得研究開發很快就追上來了；即使在公司的職位低，只要能提出劃時代的研究成果，年收入甚至可以超過社長（總經理）。此一高學歷、績效主義政策短時間就使得三星的技術水準提昇到令日本的日立、NEC、東芝等驚慌的境地。

　　其中，最有進展的是半導體。04年9月，三星宣布，可以做到60奈米（1奈米為10億分之1公尺）回路（電路）線幅度的微細加工技術已實用化，成功生產出具有8gigabit記憶容量的快閃記憶體，向世界展現其技術實力；接著同年12月打出未來6 年內，光是半導體事業就要投資2兆5000億日圓的方針，震撼了世界半導體業界。

　　韓國強的還不單是三星。LG的電漿面板有超越三星的趨勢，且其整個家電業均很強。電子業以外的領域，韓國鋼鐵業有亞洲三強之一的浦項鋼廠；汽車業有生產規模成長到與本田（HONDA）旗鼓相當的現代起亞汽車。浦項鋼廠、現代起亞皆是在同業裡，世界排名10名以內的廠商。

3. 台灣

　　台灣的模式跟韓國是不同的，集中在生產規模龐大的IT相關企業，如：半導體的台灣積體電路（TSMC）、聯華電子（UMC），個人電腦的廣達電腦、仁寶電腦工業，液晶面板的友達光電、奇美電子等。有別於韓國的是，大半都是來自歐美、日本等大電子廠商的OEM（用顧客的商標銷售）生產。半導體是鑄造工廠（foundry）、個人電腦等電子機器是採取所謂EMS（受委託生產廠商）的事業型態。這是以生產成本低廉為武器，接受訂單，再集合數家公司的訂單，提高生產線的作業運轉率，調度零件也居於優勢的一種戰略。這樣的作法與其說是技術實力，倒不如說是以規模的優勢來建構競爭力。

　　戴爾、惠普（HP）、日本的NEC之類世界級的廠商，大多數都是廣達電腦等的客戶，其在中國大陸所建的工廠等，實質上生產著世界近半數的電腦。台灣製造商過去的接單方式是由發訂單客戶附帶設計圖與一部分生產技術，只做量產，近三、四年才步入設計、有獨自技術的階段。但都不是有開發能力的基礎技術，只是屬於製造產品階段猶如各種加工的應用技術、生產過程技術（製程技術），萬一產品掀起革命性的變化或需要自行開發某種產品，恐怕就心有餘而力不足了。

4. 中國大陸

　　中國是處在更初步的階段，絕大多數是模仿的廠商，有獨自開發技術能力的企業屈指可數。即使是在網路用路由器、行動電話基地台設備等具有相當高競爭力，被譽為中國IT產業之星的華為（Huawei）技術有限公司（廣東深圳），因頗多是擅自使用路由器的頂尖廠商──美國Cisco Systems公司的技術，去年在美國被告侵害專利而遭到禁止進口。

　　一位日本電子機器廠商的幹部指出，「如果與先進國家相當的保護智慧財產規範適用於中國的話，中國當地的產業就會像骨牌那樣一個個倒台」。隨著中國加入世界貿易組織（WTO），大陸市場會加速對外資開放，那麼中國廠商勢必得加緊趕上技術，模仿自然可比自行開發技術跑得快些。【註1】

二、涉及「技術」的收購案日本頗不是滋味

　　去（04）年8月，中國大陸的上海電器集團收購了日本工作機械公司池貝。1889年創業的池貝是一家歷史悠久、技術力強、曾首先製造出日本第一台車床而帶動日本工作機械業的名門廠商。一旦被中國企業買去，日本總覺得一大批珍貴的技術會流落到競爭力正在挺升的大陸公司之手。03～04年中國企業對日本企業投資的著名案件尚有電器、電子業的海爾對三洋電機，海信對住友商事。

　　不過，最令日方震驚的是，去年12月，先前在日本默默無名、中國最大的個人電腦廠商聯想（lenovo）集團宣布收購美國IBM個人電腦事業部（談判時間長達1年多，定案金額為12億5000萬美元）。

　　IBM個人電腦事業世界排名第三，與戴爾（Dell）、惠普（HP）同樣居於「火車頭」的地位，惟近年赤字連連，01年赤字3億9700萬美元，02年1億7100萬美元，03年2億5800萬美元，04年光是上半期就達到1億7100年美元，合計三年半赤字9億6500萬美元。【註2】

　　而這之前的聯想是中國大陸、也是除日本以外亞洲最大的個人電腦廠商，但是，聯想在個人電腦、軟體上並不是擁有值得稱道的技術的公司，由日本看來，它只不過是一家在北京、上海與廣東惠陽有大量生產個人電腦的工廠，搭配灌入適用於中國市場的軟體，透過強力的銷售網銷售電腦的企業（大陸有4000 多家銷售店，市場佔有率約27％，年銷售電腦320萬台左右，是IBM的十倍【註3】）。正由於聯想發揮不出什麼先進性，因此才想盡辦法將在電腦設計上擁有連惠普都跟不上腳步的技術團隊的IBM個人電腦事業。

　　而事實上，IBM行銷世界的個人電腦，大都是日本IBM大和事業所（神奈川縣大和市）開發出來的【註4】，譬如：近年在全球上班族間十分受歡迎的「ThinkPad」即為日本IBM的傑作；該公司和具有高密度實裝技術、走在世界頂端的日本零件廠商合作，設計世界品質最佳、能應付性能要求甚嚴苛的日本使用者。也就是說，美國IBM公司開發個人電腦的重心事實上是集中在日本。所以日本人深信，聯想真正想要的，其實是日本IBM個人電腦的開發部隊。

　　連帶的，今年1月美國政府單位「對美外國投資委員會」一度表示，聯想收購IBM「可轉用在軍事等方面的最尖端技術有洩漏給中國之虞」，並展開調查，到3月沒找到這方面的證據才核准此一併購案。

　　接下來的變化很戲劇化，聯想收購IBM個人電腦事業的手續今（05）年5月1日完成，5月2日日本IBM六百四十名員工正式轉入聯想旗下掛牌營運，更名為「lenovo Japan」。5月4日美國IBM總部即宣布下半年要裁員10000～13000人，雖是以歐洲地區為主，但公司經營是很現實的，如果日本IBM仍在美國IBM之下，誰知道會不會受波及，聯想連日本IBM一起收購，等於是救了日本IBM眾員工的飯碗，不是嗎？

　　日本新生lenovo的經營負責人（CEO）向井宏之曾對媒體表示，握有PC技術的大和事業所等研究開發據點未來會更強化，再加上lenovo原本的開發人員，可以讓「ThinkPad」更進化，以後要打「ThinkPad」、「ThinkCenter」的品牌。

　　可以想見的是，未來要是聯想的低成本生產和IBM的高品質成功結合，日本企業大概又會作“威脅論”的文章了。

三、日本與韓、台專利糾紛不斷

　　戰後自50年代後半，日本就一直是亞洲產業界的霸主，而韓、台、中是從白色家電（指電冰箱、洗衣機、微波爐之類多為白色的家用電器）、自行車等的模仿品開始逐步提升製造業的水準，然後擴展到現今超薄顯示器、半導體等尖端領域。韓、台、中模仿自日本廠商的家電產品、自行車的性能、品質，跟日製產品落差很大，品牌力也弱，對日本企業的打擊有限。

　　但是，當競爭項目變成顯示器、半導體等尖端產品，問題就不一樣了，可產生性能差異的生產技術融入到生產設備裡面，則產品就不大會有什麼明顯的差異。即使有較佳的品牌，性能、品質類似的產品大量流到市場上，仍不免會造成價格滑落。

　　原先技術力遙遙領先的日本廠商，被韓、中、台廠商追趕，像DVD、半導體，就算有先進產品，韓國、中國生產量馬上追趕上來乃至超越，被追得經營上沒賺頭甚至陷入困境，結果就會發生打官司、訴請禁止進口之類的對戰。近一年多來，日本和韓國、台灣、中國大陸間的技術戰爭正式啟動，對簿公堂的事例連連。中國大陸多屬新興公司的仿冒，在中日一般的經貿對談、交流場合已經常被提及，因此比較少受到注意。規模、影響較大的則是以下幾個案例。

　　一、電漿面板（PDP），04年4月，富士通同時在日、美兩地控告三星SDI侵犯專利權，日本依據關稅固定稅率法，首度執行了禁止進口令。

　　富士通稱得上是締造電漿技術的鼻祖，掌控著電漿的基本專利，02年起就向三星要求支付專利費，未獲回應，便告上法院。結果6月上旬雙方達成和解，三星讓步，同意富士通的主張；雖然和解內容未公開，但外界判斷是用不均衡相互專利（兩家公司可以互相使用對方的專利加三星向富士通支付部分費用）的方式解決的。

　　這案子當時造成不小的話題，也是一個發端，日本產業界開始注意智慧財產權問題，要「避免技術外流」的輿論升高了。日本有人認為，說不定數年後，這次富士通的出擊會被視為“日之丸智慧財產戰略”的轉捩點，在歷史留下一頁呢！

　　二、也是04年4月，液晶面板方面日本拿台灣開刀。液晶電視世界佔有率第一的夏普（SHARP），控告台灣家電大廠東元電機（TECO）所生產、日本AEON（イオン）集團在家電賣場當作促銷特賣品銷售的低價液晶電視20型侵犯了專利權，向東京地方法院申請禁止進口的假處分，6月下旬請求東京海關執行。其理由是，東元電機產製的液晶電視，採用了台灣液晶大廠友達光電（AUO）的液晶面板，而夏普認為其畫素缺陷修正技術的專利遭到友達光電侵犯。AEON集團立刻停止銷售東元電機的液晶電視。

　　禁止進口是一項強烈的手段，其附帶的“阻擋”效果很大。因為日本是液晶電視最大的市場，夏普此舉可防止日本國內市場被瓜分──牽制其國內沒有大型面板製造技術的廠商向友達光電等夏普以外的廠商調度液晶面板。而這回連帶挫傷到銷售東元電機製液晶電視的AEON則純屬意外拖累。

　　事情至此尚未了結，夏普「了解尚有新的侵犯專利」，判斷「僅僅一件專利非常難審查」，遂於05年3月2日撤銷禁止進口的假處分，追加其他侵犯專利的部分，正式向東京地方法院控告東元電機設在日本的公司三協（東京，港區），謂東元電機生產的液晶電視侵犯專利，提起禁止生產、進口、銷售及損害賠償等的訴訟。而三協則是認為「沒有侵犯夏普專利的事實」，「如果沒有先前的官司，在超市，光是AEON應該就可以賣到大約8000台」，而於4月12日向東京地方法院提出要求夏普賠償損失、登報道歉的訴訟。

　　4月21日夏普繼續開啟另一場官司，謂三協12日 提出的訴訟，所公布的資料裡包含虛偽的情事，損害到夏普的品牌，要求5億日圓的賠償，並刊登「謝罪」廣告（道歉啟事）【註5】。一場你來我往的大混戰目前正在審理中。

　　三、東京海關接受松下電器產業認為韓國LG電子公司製造的電漿面板（PDP）侵犯了放熱技術專利的申訴及禁止進口的要求，於04年11月11日停止了LG電子公司製電漿面板的通關手續。另一方面，LG也進行報復，11月29日向韓國貿易委員會請求禁止進口松下生產的電漿面板。遂形成LG產製的電漿面板不能出口到日本，松下產製的電漿面板也進不了韓國的僵局，這兩家居世界電漿電視市場佔有率一、二名的廠商（04年10～12月）嚴重對立，兩敗俱傷，終於在今（05）年4月2日達成和解，條件是LG向松下支付專利使用費之外，彼此也商量未來互用專利【註6】。但總體來說，松下靠政府權力打擊LG，LG也請出政府反咬松下，乃至逼和松下，已將損傷降低了。（台灣有此魄力？）

　　四、04年12月初，研發薄型顯示器的日本半導體能源研究所（SEL，神奈川縣厚木市）向東京地方法院申請對西友和音響製造商iriver Japan（アイリバー・ジャパン，東京，千代田區）從10月起開始銷售、裝配了台灣奇美電子（CMO）所製造液晶面板的液晶電視「DURA」27型禁止進口的假處分，而且於15日正式控告西友，謂液晶電視「DURA」27型裡面，奇美電子產製的TFT（薄膜トランジスタ）液晶面板顯示部分的保護電路侵犯了專利，西友馬上從當天停止銷售，並撤掉遭指控的所有液晶電視。雖然日本半導體能源研究所針對的是西友，但真正打擊到的卻是奇美，無疑的，這對奇美過去在日本辛苦建立的商譽及企業形象，殺傷力非常大。奇美短期內恐怕極難重返日本市場。

　　奇美電子對日受此重挫，遂於今年4月13日改和美國電機大廠Honeywell簽定液晶面板技術專利的權利授權協定，向Honeywell買技術且尋求日後的合作【註7】。

　　值得玩味的是，過去80年代後半到90年代初，日本技術抬頭、經濟興旺，汽車製造業等行業在美國市場開疆拓土，企業大舉收購美國企業，使得美國亦曾對日本展開一連串的“專利戰爭”，其背景是美國政府對逐漸提高的日本的“存在、躍升”有危機感所策動的國家戰略，那時美國政、經界乃至社會都充斥著「圍堵日本」、「日本威脅論」、「黃禍論」、「人種差別主義」之類的言論和意識，英國和美國的投資摩擦比日本多，可是美國的矛頭卻是對著日本，當時美國的反應和作法，可說在當前籠罩著對韓國、中國、台灣的“存在、躍升”有危機感的日本身上重現了。

　　之所以會發生一連串的專利糾紛，日本以一先進國家、凌駕於亞洲的立場來看，是因為除日本之外亞洲特有擅自使用專利的“習慣”，即買來日本公司的優異產品，將之分解，做出從零件設計、製品結構到外觀幾乎都極類似的模仿品，這是韓國、台灣、中國製造商品的一大特色。韓、台、中企業與先進國家競爭，品牌（商標）力薄弱，就以低價格來彌補；向世界市場滲透，模仿是最快速、省事的。當然，這也盡可能避開了支付專利使用費。

　　日本企業覺得，大約是從10年前，日本技術開始外流到亞洲的韓、台、中，現在有的已超越日本，這「技術外流10年戰爭」是到了該反擊的時候了，於是逮到機會就發動膺懲。

四、日本認為技術外流的幾個管道

　　曾經有一段時間，所謂「技術外流」，是指裝置製造商將技術秘訣（recipe）外流出去。而事實上，除了“侵犯專利”，還有諸多人來人往的「管道」，日本方面摸索、歸納，大體知道有下列幾種模式。

　　一、企業員工以技術指導的名義去外國企業“打工”。常見的情況是，一些日本知名企業的半導體技術人員、液晶技術人員，利用星期六、星期天跑到漢城（首爾）、北京、上海、台北等地的企業“打工”（星期五下班後或星期六一大清早搭機出發，坐星期天晚班飛機返日），一年去個幾趟，做些解決、排除生產線上的困惱（trouble）之類深具技術內涵的工作，而換得是殷勤地“招待”和接近年收入的豐厚報酬（去一次就有比月薪還要高的“打工費”）。有些日本公司擔心技術外流，索性要員工將護照交給公司保管，赴國外出差時才從保險箱裡取出，儘管守得這麼緊，照樣有人能夠“突破封鎖線”。這種方式最大的受益者是距離最近的韓國企業。

　　著名的危機顧問公司Kroll International, Inc東京分公司的外籍總經理Michael B. O`Keeffe指出，「日本人對“招待”的戒心很差，太愛說了，讓對方很輕易地就能取得情報」。據說，韓國企業的頭頭會親自在餐廳宴請來自日本的技術人員，並且很坦率的表示「這是新事業，希望你無論如何都一定要來幫忙」，如此受重視，聽者泰半都會心動【註8】。

　　二、企業重組、裁員、合併，特別是在無預警的情況下，心生不滿的技術人員也會大量流向韓國（較多）、中國企業。像松下電器產業、SONY進行的提早退休優待制度，即造成不少人員乾脆換工作。

　　三、在一些集會場所不經意地透露機密。有時候，技術人員洩漏機密，並不限於去“打工”或離職後，Michael B. O`Keeffe強調，「（公司技術）在安全上最危險的是“人”」，他認為，在世界各地競爭對手企業與會的展示會、演講乃至閒聊場合，日本技術人員尤其會“講太多”，沒什麼防備而容易抖出機密。

　　四、能力也不錯，但在粗糙的能力主義、成果主義下未受到重視或良好待遇的技術人員，亦很容易把技術流到外國，因為其技術在日本得不到傳承，於是待價而沽，將技術教授給重用他們的東亞企業。

　　五、韓國企業活用日本技術，某些項目後來居上，大幅縮短開發的時間，DRAM就是個成功的例子。

五、日本政府和企業防禦技術外流的手段

　　面對「技術外流10年戰爭」中韓台的緊追，日本有一種吃了虧的感覺，姑且不論此一認知正確與否，現在的日本確實將「技術立國」、「智慧財產立國」視為國家戰略的一環而轉守為攻了，主動布建措施，而且是政府和民間企業共築防衛技術的機制巨網。

甲、政府作企業維護智慧財產的側翼

　　由前述日本企業申請禁止進口行動可知，為了防止技術外流，除了企業本身的措施外，日本政府也扮演著重要的角色，亦即作企業的後盾，在司法、行政方面樹立支持企業主張權利的環境。

　　司法方面──2003年4月實施、經過修正的「關稅固定稅率法」，其申述禁止進口制度的對象追加了專利權、圖案設計權等項目，從而，日本企業可透過此項法律，就專利權受到侵犯，向海關申請禁止侵犯其專利的外國公司的產品進口。以前日本企業都要跑到美國的法院控訴，至此專利權的訴訟只需對東京、大阪兩地的地方法院申述，便能夠請海關禁止進口。這對為技術外流所苦的日本企業是一大“福音”。04年改由東京高等法院一手承攬。審理期間也從1997年的將近20個月，縮短為平均約9個月。

　　05年4月，日本更繼美國、德國之後，正式成立「智慧財產高等法院」，向亞洲鄰國展現注重智慧財產的訊息【註10】。該法院配置18位這領域專業的法官，並委託大學教授等一百位以上的專家擔任專門委員，提供專業知識諮詢，協助做判斷。

　　侵犯專利權等的智慧財產訴訟是非常專業的。而這類訴訟，爭執點往往都是最尖端的技術【註11】。

　　行政方面──日本政府02年3月召開首次的智慧財產戰略會議，在7月3日的第五次智慧財產戰略會議中擬定了智慧財產戰略大綱，11月制定智慧財產基本法（12月4日生效），03年3月在內閣設置推動智慧財產戰略本部，一步接著一步落實，替日本企業撐腰，佈建讓企業能夠保護智慧財產、主張法律權利的體制。可說是官民並舉，一起提昇維護智慧財產的意識。

乙、高科技廠商「智慧財產戰略」各有一套

　　日本企業防範技術外流，大都是依照本身的想法、需求，建構不同的策略，有的是在企業內固守技術機密，有的是跨海出擊，有的是已付諸實行的措施，有的則是顧問、評論家建議的點子，總之，各有各的“招數”，茲舉八個典型的例子──

　　一、黑箱作業化：最典型的就是夏普04年初開始生產作業、位在日本三重縣的龜山工廠。這是一座具有 “投資回歸（日本）國內” 象徵的工廠──之前韓國曾給予破例的超好選地、建廠條件，夏普還是斷然拒絕而就龜山。目的是著眼於，即使海外生產幾乎佔了一半，仍要將核心技術鎖在國內。因此，其特色就是，製造技術等know-how徹底地作機密、隱匿而「黑箱作業化」。

　　夏普基於液晶電視、面板事業來自國內及韓國、台灣的強力攻勢，「防衛」技術不僅針對外國，連日本同業也涵蓋在內。夏普龜山工廠有7個東京巨蛋那麼大（約33萬平方公尺），裡面量產著世界最大的「第六代」面板基板（長1.5公尺 × 寬1.8公尺），而且從液晶面板到電視採取一貫作業生產，堪稱夏普金字招牌最新銳的生產基地。1998上任的町田勝彥社長強調，「生產技術如同鰻魚店秘傳的配料，是絕對不能亮出來的」，所以一座一座廠區用面板收訊裝置銜接、聯絡，從生產、檢驗產品到出貨，公開的是極小的一部分。實際上，能夠看到整個工廠的，自町田勝彥社長以下，僅僅只有一部分高級幹部和負責人；就算是工廠的作業人員也不容易進入非關業務的部門或區域，為了防止偷拍，甚至嚴禁員工攜帶附有攝影功能的行動電話；怕員工成為「獵人頭公司」挖角的對象，規定員工不得和訪客交換名片；……，名堂多多。總之，場內包括設計等一切都是「企業機密」。

　　03年夏普的液晶面板世界佔有率為35.7％，自從1973年首先推出液晶顯示功能的計算機之後，接著有液晶畫面攝錄機等多項領先其他公司的產品，始終居液晶事業的龍頭，為了延續「液晶王國」的寶座，龜山工廠的know-how簡直就是「秘中之秘」，遂要藉黑箱作業化，防堵獨門的技術外流。

　　夏普另一個支撐製作產品的哲學是，要獨創，不讓別家公司追趕、仿效的「only-one」戰略。

　　二、不申請專利：儘管理論上新的發明、技術申請了專利是能夠保護公司的權益，出售專利或出售使用權也可以賺取使用專利費，可是一旦申請了，等於宣告了本身的技術水平、訣竅和研發方向，況且專利使用久了，競爭者還是可以改進、繞道超越，因而，現在不少日本企業覺得，光是申請專利並不是維護權利的唯一之道。像夏普為了要讓別的公司無法全然了解其製造工程，技術乾脆不申請專利。韓國半導體業界的下個目標是數位相機核心的CCD（Charge Coupled Device，電荷結合元件），迎戰的日本企業在各項工程零零散散擁有許多秘訣，為徹底防範技術外流，連製造手冊、介紹冊子都不做了。

　　電子零件大廠村田製作所也頗有帶頭不申請專利的味道，因為電子零件業界競爭力強弱的關鍵在調配原（材）料的know-how和自行設計、製造的生產機器設備；原料調配很難在專利上獲得有效的認可，所以生產機器設備才是絕不能出廠房大門的。一些日本企業以後申不申請專利，會先比較、考量划不划得來。

　　三、跨國打擊仿冒品：遏止技術外流的手段，一是技術人員等「人」的對策。另一個則是「產品」的對策。要採取禁止進口，歸根究底就要從此處著手。03年4月修正、申請禁止進口制度加入了侵犯專利權、圖案設計權項目的「關稅固定稅率法」是日本企業的利器之一。前面所提富士通和夏普運用禁止進口手段的案例雖然備受矚目，但事實上真正發動次數最多的是Canon（佳能）。從03年秋天到04年3月，短短七、八個月的時間，22件禁止進口申請案中，Canon就包辦了20件。厲害的是，Canon的戰略不僅在“邊陲”──仿冒品已來到自家門口──進行阻擋，還更進一步深入打擊仿冒品的“源頭”，也就是跑到中國大陸、東南亞去取締仿冒品。尤其是中國，隨著經濟發展，仿冒品也劇增，而且仿冒技術越來越精湛，一般消費者根本無法區分真偽。Canon認為，仿冒品侵犯商標、圖案設計，不去揭發的話，就沒辦法阻止其擴大。於是Canon在各地區的銷售公司運用當地的職員和調查公司，賦予其收集情報的機能，再將情報匯集到智慧財產權本部，建立管制體制。01年Canon在中國設置兩位日籍專職負責人，加強舉發活動。其常務智慧財產法務本部長田中信義表示，「比什麼都沒做的時候有顯著的抑制效果」。Canon2000年申報5件侵害案件，設了專責人員，01年成長到42件，02年180件，03年上升到幾近一天一件的363件。現今中國大陸的行政、公安單位對申請取締訴訟都不會推辭了。Canon的智慧財產權本部也開始聘用中國人、韓國人，組建能迅速因應當地狀況的體制。

　　不過，他們的對手並非弱者，雙方就像在比武，不斷出招─回擊、再出招─再回擊。近日出現的新花樣是，跟Canon沒有開發契約，卻銷售著和Canon正牌產品很類似的商品的企業（third party，第三方）。Canon又得祭出「第三方對策」，而這只能透過侵犯專利的訴訟，阻止對手活動。基於此一狀況，Canon在中國的專利申請迅速飆升，02年不過200件，03年一下子增加三倍到663件，04年逾800件。從前Canon的專利戰略曾經以互相允諾專利的相互專利權（cross licence）為主，可是面對今天的「第三方」，便停用相互專利，完全靠打官司來解決。

　　田中信義深信：「最後護衛企業獨門技術的是智慧財產權」。而專利戰略要隨著時代改變方式，在當地不厭其煩的展開訴訟，亦為日本企業改變智慧財產權著眼點的象徵之一。

　　四、開放專利，以流通取勝：相對於前述目前較風行、類似Canon的作法──「智慧財產戰略＝圍堵」，也有日本企業逆向思考，認為流通、開放智慧財產更有力量；防止技術外流到亞洲，是企業提高競爭力的手段之一，然而，太過懼怕外流，什麼都一味地用僵硬的圍堵，很可能會招致本身技術下滑，如果最後落得被亞洲企業M＆A（併購），豈不是更好笑。三菱電機就是持這一套戰略的典型公司。

　　三菱電機將智慧財產戰略擺在經營核心，有多達370位專職的負責人，扛起以專利為首的整個智慧財產戰略。其戰略重點之一是「可以開放的積極開放」，即與其專利被侵犯，倒不如提供使用許可證（license），好好地課徵使用費，這樣既能強化競爭力，進一步又可以和防止技術外流結合。具體的作法是，除了在公司網站的homepage公開開放的付費專利之外，還以地區的中小企業為對象，積極在技術市場展示可開放的專利。凡是「獨家的技術」，只是不給競爭對手，如果有其他用途的話，一定積極開放。從另一個角度來看，等於是將技術賦予“商品性”，拿它來做掙錢的工具。當然，什麼該流通、什麼不該流通，無論如何判斷都必須俐落地盤算清楚智慧財產。這是一種採取「主動、攻勢」，活用智慧財產的戰略。

　　五、只供應零件，不出模具、設計圖等：日本技術力是強在模具、塗裝（噴漆）等，日本在這方面累積了大量的基礎技術。此一日本強項，是韓國等國家沒有的。尤其，模具是支持日本製造物品的基石、是左右產品競爭力的重要技術。

　　擔任日本模具工業會會長、大垣精工社長（總經理）的上田勝弘表示，「和其他國家比較，90％已沒有差別了，但剩下10％的差異則可說是日本模具的優異性，這些正是藉著長年累積的經驗和知識，所得出秘傳的“鰻魚店配方”」。

　　但日本模具業界也有嚴重的技術外流問題。原因是廠商轉移到中國生產；屆齡退休的人員退休後仍想繼續工作或礙於生活壓力需多賺些錢；不景氣遭裁員、解雇等。技術都是從這裡外流的。而缺乏累積的海外企業都非常渴求能從日本找到技術精湛、熟練的老手。

　　日本模具業界甚至覺得，在國外突然做出不錯的東西，大概都是日本人做的，人才外流嚴重。有的人是就算懷著熱誠在日本工作，還是被裁員裁掉，如果韓國等外國企業用很優厚的待遇力邀，這些人自然會力求表現，回過來讓日本公司好看。上田指出，日本模具廠在外國廠保養維修時，經常被拜託「因為忙，幫忙畫個設計圖」，而一旦將這個交給生意上有來往的海外企業，這企業就以該圖為基礎，在中國、東南亞以廉價做出模具。結果，日本模具公司就會陷入訂單減少的惡性循環。

　　為防止外流，大垣精工採取的對策之一是，不單是生產模具，也生產零件。上田說，「由於朝全方位、全能生產發展，因此不賣模具，而賣所生產的零件產品」。

　　04年日本數位家電、汽車、工作機械業界景氣甚佳，模具業界亦呈現活絡。上田相信，「複雜的東西、難易度高的東西、最棒的東西只有日本做得出來」。上田抱持的觀念是，為了保護“秘方”、“絕活”不跑出公司大門，對技術人員的待遇十分重要，希望能近乎「終身雇用」。日本戰後所建構的雇用型態，實際上部分原因也是著眼於防止技術外流。

　　而上田也不諱言「技術外流是個問題，日本在培育人才上很大意。韓國現在在大學設置模具科系，人才輩出。也追趕上來了」。

　　六、追求日本技術成為標準：這是Canon公司的顧問兼律師丸島儀一提出來的策略。他認為，為了防範技術外流，光是守著日本市場是不行的。對中國，若只是靠在邊境的阻止，就一定會讓日本的出口品遭遇反擊。

　　丸島認為，為了在海外市場擁有競爭力，最重要的是自己來樹立世界的技術標準。在數位化之下，掌握標準、取得多數的專利，而專利亦可創造收入。這跟類比時代是不同的，現今不管做出多少好東西，要是被排斥在標準之外，就鐵定會出局。因此，「日本企業首先要在標準化活動做協調，之後再激烈競爭是比較好的」，「所謂國家的智慧財產戰略就是標準化戰略」。

　　換言之，就以日本的技術為技術，不符合者、不是日式技術者一律不得上場，則日本就可完全稱霸市場，這是極狠的一招。

　　七、頒發天價的專利發明獎金：纏訟數年、甫於今（05）年1月11日落幕的「中村修二職務發明訴訟事件」，對日本企業內技術人員的待遇開啟了新的意義。 1990年時任職於日亞化學工業的中村修二在困乏的工作環境中研發出製造發藍光二極管（LED）的技術，當時所屬公司僅給他兩萬日圓的獎金。該項技術1993年投入生產、97年獲得專利。日亞化學工業獲利甚豐。2001年8月，已轉到美國加州大學聖塔巴巴拉分校擔任教授多年的中村修二向東京地方法院提起訴訟，要求日亞化學歸還專利。東京法院一審判決日亞化工應支付給中村200億日圓的發明報酬補償金。日亞方面不服，提出了上訴，1月11東京高等法院以日亞化學向中村支付8億4000萬日圓而和解結案。

　　為防止骨牌效應，日本不少大企業最近都改革了發明獎金制度。現在日本電機業界、醫藥業界不少大廠都對技術研發人員，大幅提高專利發明獎金到猶如天價般的優渥。此舉一方面是要避免企業與創新技術人員為發明報酬對簿公堂，一方面也是要用優渥的待遇將技術及具有技術的人員固守在企業內。

　　現在日本某些擁有高科技的公司，已開始在錄用從事高機密性作業的新進人員時，要求繳交一旦離職和在幾個階段會保守機密的誓約書。真是防備萬一的功夫到家。

　　八、終極防護技術的策略是，快速開發一代代新產品：日本料準，中、韓、台想要從日本取得的技術，清單上還排得滿滿的，個人電腦、家電、半導體等各領域，已拉近和日本的距離，下一波瞄準的就是日本“最後一座城池”的精密零件、電子零件。譬如：三星匯集了行動電話用攝影方面的技術人員，而電子零件──關鍵零件的HDD（hard disk drive）也想自行生產，以增強實力。可是HDD核心技術的磁頭是日本廠商固若金湯的碉堡，三星一定會伸手來接觸日本這方面的技術人員。

　　歸結到最後，這又會回到技術等智慧財產該如何運用的問題。如果做技術出口，或許可以賺到巨額的專利使用費，但外國企業的大量生產會使價格下跌以及日方廠商出口減少，加加減減，營運上未必划算！

　　那麼，日本的生存之道在哪裡呢？技術評論家森谷正規一語道破：日本「應該以蘊蓄、儲備來取勝」。所謂適合日本的技術，諸如高級車用高級的零件等，可以發揮綜合的力量。森谷強調，「中國、韓國的蘊蓄、儲備以個人為單位的情形頗多，日本則是蘊蓄、儲備在組織（公司企業）裡，應該較容易保留下來」，換句話說，森谷是在提醒日本人要打其最擅長的組織戰、集體戰、整合戰。同時，要注入全力開發下一代的產品──做出別國企業用錢也做不出的產品，等賺了錢再繼續開發更下一代的產品，終極防衛技術的辦法就是連綿不斷地快速開發一代接一代的新產品【註12】，讓外國競爭企業疲於追趕。

　　就像夏普的領導人從反省「之前對技術沒有防備」，到尖端工廠不對外公開等，現今的日本企業對技術外流是充滿戒心甚至有點神經質了。

六、日本憂心韓、中技術勁升

　　不容否認，迄至目前，日本保有技術優勢的領域還是最寬廣的，那麼，只要保護智慧財產的策略不發生失誤，再搭配企業本身的作為，日本是不是即可安安穩穩持續領先？顯然並非如此，否則日本也不會如此緊張。的確，比起過去的睥睨全亞洲，今天日本的優勢已日益被韓、中、台稀釋掉了。

　　而儘管韓國、中國、台灣跟以前不一樣，但看在日本人的眼裡，還是有層次的差異。日本就韓國、中國、台灣企業的追趕，對台灣是最“放心”的，因為台灣的強項僅是（晶圓）“代工”，而沒有紮實的基礎技術。倒是韓國、中國，讓日本備感威脅。

1. 韓國：數項技術嶄露頭角，挖掘、培養人才有一套　　韓國和日本地理位置接近，是日本技術外流最大的受益者，本身也很用心地在培育、爭取人才。從前述日本松下電器和韓國LG電子公司互咬侵犯專利的鬥爭可知，韓國企業是會藉由政府的幫助反擊的，而且韓國企業也真有反擊的實力和魄力。不像台灣企業，對方一出手，就只能處在挨打的狀態，政府不但不會伸手救援、保護，自己還會修理意識形態不同、前往大陸發展的公司。

　　一般人的印象裡，所謂技術外流是指技術從高的地方流向低的地方，如今韓國的技術能力在某些領域有點出頭了，譬如韓國的Zenesis公司【註13】，其影像處理等技術已開始反過來賣給日本，傲岸的日本人感覺那是「逆流現象」。

　　講到韓國企業，最膾炙人口的仍屬三星。儘管整體技術上，除了半導體的細微加工等之外，依舊是日本遙遙領先；三星支付給日本、美國、德國廠商的專利費，一年超過1500億日圓。三星跟在影像、音響領域擁有世界專利件數最多的SONY訂立了「相互專利權（cross license）」契約，而SONY回應該契約的是，和競爭對手相比，已晚了、成為致命傷的液晶面板開發、生產，才仰賴與三星合資的公司，有點“沒盡義務”的味道；況且SONY在超薄電視商品化的階段，有差別、優於其他公司的技術，完全排除在「相互專利權」契約之外。其爾虞我詐之烈可以想見。但即使如此，三星現在已是半導體記憶體、液晶面板世界佔有率第一位，電漿面板第二位，行動電話終端機第三位，躍居為IT業界的巨頭了。

　　再者，三星「獵人頭（此指挖掘有頭腦、有技術者）」的大手筆是很出名的，尋找好的人才，目光不只是看著日本，而是望向全世界。對日本的技術人員，如果是無論如何都得網羅到的人，三星會長（董事長）李健熙會不惜親自在赤坂的高級餐廳設宴款待，以三顧茅廬之禮相迎。他曾說過「一個優秀的人才可吞掉10萬人」，可見他多麼重視人才。韓國優秀學生在求學時代他就用獎學金“下訂金”，漢城（首爾）大學每一屆頂尖的100名學生，幾乎都會成為三星的開發部隊一員。

　　李健熙會長的信念是，經營陣容應以出身技術領域的人為主流，經營者必須熟悉技術，要很清楚地知道自己公司需要什麼技術，而去找有這種技術的人。據說，李會長以前曾經買來日本電視，自行拆解，「這種零件日本做得出來，為何我們公司不會做」，於是雷厲地下令盡速改善。　　在媒體、分析家的眼裡，三星的體質還有一項特色──「秘密主義」，一方面很貪婪地攫取別家公司的know-how，一方面強力約束自己公司的情報絕對不能外洩。一旦發現員工向外洩漏公司的情報，立刻會遭到解雇【註14】。

　　03年的研究開發費比率，三星是8.1％，日本松下、NEC、夏普是7％，SONY、東芝5％，可見三星是很肯投注資金的，而有意思的是，現在中國企業正在“瞄準”三星的技術人員，未來技術很可能會從韓國流到中國。

2. 中國：“人海戰”加“海龜派”，潛力雄厚　　中國大陸和韓國的情形不太一樣，韓國是個別企業突出，研究人員數量有限、集中在特定領域（台灣也是如此），而中國則是人數眾多、年輕又增長速度快，這更令日本擔憂，因為日本正面臨人才不足等窘境。

　　當前世界各國的研究人員數量（包括人文科系在內），美國126萬人、中國81萬人、日本75萬人、韓國14萬人、德國27萬人……，就人口比率來說，日本研究人員的比率是很高的，每年大學理工科系的畢業生日本比美國多也是事實。但是，日本最恐懼的就是中國大陸，其研究人員總數已超過日本，2000年以來，由於大學入學人數增加，2～3年之後，研究人員的數目每年就會以10～20萬人的速度增加。另一方面，日本社會因普遍少子化、高齡化，研究人員數會日漸減少；況且，日本企業現在的技術領導階層可說皆為嬰兒潮世代（1947～49年）的技術群，07年起嬰兒潮世代的人員將開始陸續60歲屆齡退休，總數約為670萬人，以後日本技術是否能像過去那樣領先，頗有疑問。而目前尚處於稚嫩程度的中國則是在快速追趕。

　　現今帶動中國科學技術的還有一大群被稱為「海龜派」的年輕生力軍。「海龜派」這個帶點戲謔、好玩的詞兒是一語雙關，「海龜」與「海歸（從海外歸國）」同音，而「海龜」在沙灘出生，悠游大海一段時日，又會回到沙灘產卵──意味著他們在中國出生，到先進國家學習，其成果帶回中國繼續運用在研究或創業上。增多、培育「海龜」是中國正在推動的「國家政策」，海外留學生都被擺在「人才資源」的位置，給予資金協助、創業支援，獎勵他們回國。迄今已有15萬人以上返回中國，大部分都是留美幫。

　　此一「海龜政策」的巨大作用，不單單只是留學所獲得的知識，還建構、拓寬了與留學國家科學界聯繫的管道。

　　中國科技的快速發展，連執科學技術牛耳的美國亦相當重視。去（04）年12月，美國產業界與學術界代表組成的「美國競爭力評議會」提出了一篇標題為「革新美國（Innovate America）」的報告，其主要總匯整人且列名的是IBM最執行長Samuel Palmisano，因此又稱「Palmisano Report」。在該報告裡明確的建議，應將中國、印度等視為「技術革新的新興勢力」；並指出「在競爭對手急劇增強實力期間，美國竟採取了使競爭力衰弱的政策」──也就是說，美國在同一時間的911之後，限制了接受外國留學生、移民等，使得優秀人才流向別國，頗有「智慧空洞化」的傾向。成長中的中國，連美國也充滿危機感。

　　日本文部科學省的官員表示，「中美科學技術競爭激烈化的話，日本一定會遭埋沒，現在若不採取對策，以後就麻煩了」。以科學技術立國的日本，根基大受動搖【註15】。

　　日本不願意讓出亞洲第一技術大國的寶座，其擔憂不是沒有道理的。

　　中國北京中關村科技園區有幾乎東京23個區一半大的廣大面積，裡面聚集了北京大學、中國科學院等三百所以上的大學研究機構，超過一萬五千家的高科技企業，被譽為「中國的矽谷」。2001年中關村的技術、工業、貿易收入就大約有2兆6000億日圓，對北京市的的產業發展貢獻率達到六成。

　　一年多前，北京邀集了上千位的科學家，進行一個月的集中研討，主導擬定計畫的就是總理溫家寶。

　　還有，大陸科技界「元始的創新」意識也萌芽了。中國雖還在追趕的階段，但已開始意識到要有創造性的研究和開發。以前的主要目的是“追趕”，而新的�