Market Advisory Features

Stage Set for Bulls to Return in 2001 Soros Sees Hard Landing for U.S. Economy
Waging World War III Dark Economic Clouds ..................................


Sunday December 31
Stage Set for Bulls to Return in 2001

By Jan Paschal

NEW YORK (Reuters) - Don't look now, but the stage is set for the bulls to run down Wall Street once more in 2001. No, they won't kick their heels up as high or run as fast as they did in the past five years. But the bears will be put to sleep sometime in the first half of the new year and the bulls will rule again, market experts predict.

Driving the market's comeback will be attractive stock prices, more money flowing early in the new year, plus likely lower interest rates and a tax cut to revive the economy, market strategists say.

``The stock market is about as undervalued as I've seen for quite some time,'' said Hugh Johnson, chief investment strategist for First Albany Corp. ``The broader market, the S&P 500, is about 12 percent undervalued, which just means on average that stocks are trading at levels that are arguably cheap.''

Not all stocks are cheap, of course, Johnson cautioned. But ``it's easier to get a rally when stocks are undervalued,'' Johnson said. ``A lot of investors feel a lot more comfortable buying IBM and Microsoft at these levels.'' International Business Machines Corp. (NYSE:IBM - news) now trades for about $85 a share, down from its 52-week high of $134-15/16 and not far above its year low of $80-1/8. Microsoft Corp. (NasdaqNM:MSFT - news) is trading for about $44 a share, down from its 52-week high of $119-15/16 and, like IBM, not far above its year low -- in this case, $40-1/4. Both IBM and Microsoft are among the 30 stocks that make up the Dow average, while Microsoft is one of the most heavily weighted stocks in the Nasdaq composite.

2001: ``A Good Year For Stocks''

``It will be a good year for stocks,'' Johnson said of 2001. ''But you're going to need to be good at timing. I think it will be weaker in the first half and stronger in the second half. ``The big assumption, of course, is that the economy only slows, with no recession, and earnings continue to grow, albeit at a much slower pace.'' For every bull whose portfolio got gored in 2000, Johnson's words are welcome ones, indeed.

For 2000, the Standard & Poor's 500 Index (^SPX - news) is on track to finish about 9.6 percent below its 1999 close. The Dow Jones industrial average (^DJI - news) is poised to end 2000 about 5.7 percent below its close on Dec. 31, 1999.
The tech-driven Nasdaq Composite Index (^IXIC - news) is closing out the year about 38.6 percent below its 1999 settlement -- and over 50 percent below its March 10, 2000, record close of 5,048.62 -- making this the worst year in the Nasdaq's 29-year history.

So why will 2001 be better?

``The headwind the market faced in December -- with that headwind consisting of tax-loss selling and (profit) warnings from companies -- is beginning to let up,'' Johnson said. ''That's somewhat encouraging.'' The so-called ``January effect,'' which combines a year-end rally with a rise in stocks in the first month of the new year, will help get 2001 off to a good start, Johnson said. A lot of money will be flowing, in the form of year-end bonuses paid in January and funds flowing into (401)k plans and other pension plans. All that cash needs some place to go and one of the most likely places is the stock market, Johnson pointed out. ``The Federal Reserve will be reducing interest rates at some point in the first half'' of the year, Johnson said. ``Sometime in the first half, the bear market will end and a bull market will begin,'' he predicted.

A Friendly Fed And A Tax Cut In The Wings

Anthony Chan, managing director and chief economist of Banc One Investment Advisors, said policy, shaped by a friendly Federal Reserve and the Republican President-elect George W. Bush (news - web sites), will give bulls more than a helping hand in 2001. ``We've already seen the Fed fast-forwarding to an easing bias,'' Chan said.

At the Dec. 19 meeting, the Fed's policy-making body, the Federal Open Market Committee (FOMC), ``bypassed the 'neutral' directive and went right to an easing bias,'' Chan said. ``That tells me they're on a one-way train to easing -- ASAP.'' An interest-rate cut could occur before the FOMC's next meeting on Jan. 30-31 -- if the December unemployment rate is ``north of 4.2 percent and we get a gain below 50,000 in non-farm payroll'' jobs for the month, Chan said. The December employment report is scheduled for release on Friday, Jan. 5. Otherwise, both Chan and Johnson expect the Fed will cut interest rates in January and again in March.

On Jan. 20, George W. Bush, the former governor of Texas and the son of former President George Bush, will be sworn in as the 43rd president of the United States. A promised tax cut, of course, played a central role in George W. Bush's campaign for president. ``Possibly, there will be a tax cut, by the middle of the year,'' Chan said. ``I see the consensus on the tax cut rising. ``I see it now north of $500 billion, or half a trillion dollars, that is, the size of the tax cut over 10 years.''

Bush has proposed a tax cut of $1.3 trillion and ``he says he'll keep explaining it until people understand it,'' Chan added. ``This is very bullish for the overall stock market,'' Chan said, referring to the combination of lower interest rates and a tax cut. ``It's positive for the economy.'' But it won't all be smooth sailing for the stock market, he warned. ``There will be a tug of war in 2001 between two forces -- policy and profits,'' Chan explained. ``The fundamentals, with respect to policy, will improve. We have positive fiscal policy in the cards. And we have easier monetary policy ahead.'' The reality check will come from Corporate America's report cards, otherwise known as quarterly earnings reports. ``We'll see profits growing only 5 percent to 7 percent for all of 2001, compared with 2000, for earnings per share of the companies in the S&P 500,'' Chan said.

That's in contrast with 2000, when ``we saw profits still rising, but stocks were underperforming,'' he added. The torrent of companies warning in 2000, especially in the third and fourth quarters, that profits and revenues would be below their own forecasts or Wall Street's expectations drove stock prices down to new lows, in many instances. In 2001, ``there's an end in sight to the nightmare. ``We'll probably see a 6 percent to 8 percent gain in the share prices of the S&P 500 companies in 2001,'' he predicted.


It's hard to picture Fed Chairman Alan Greenspan (news - web sites) dancing the limbo. But Greenspan and his merry band of Fed policy-makers have all but shouted their intent to loosen up monetary policy in the near future. ``In January, they could go as much as 50 basis points,'' Chan said, noting that such a move would bring the fed funds rate target down to 6.0 percent.

If that happens, Chan predicts the Fed will enact another rate cut of 25 basis points in March. ``But if they only do 25 basis points in January, then they'll do 50 in March,'' Chan said. First Albany's Johnson said he believes the FOMC will lower the fed funds rate target to 6.25 percent from its current 6.50 percent level in January, although ``they might go to 6 percent.'' He agrees with Chan that the December non-farm payrolls figure ''will be very important in guiding the Federal Reserve. ``If the economy remains as soft as it is now, then yes, following up at their March meeting, the Fed will cut again. By the second quarter, 6 percent will be the fed funds target.''

2001 Shaping Up As ``A Transitional Year''

The flip of the calendar to Jan. 1, 2001, will mark the start of ``a transitional year,'' in Chan's opinion. ``The easing'' that the Fed does in 2001 ``will impact the economy the most in '02. And the tax cut will impact the economy mostly in '02.'' Any gains by the stock market in 2001 or 2002 are likely to ''pale in comparison with what we saw in 1995 to 1999,'' when double-digit gains per year were the norm.

In 2002, ``stock prices will rise in excess of profit growth,'' Chan said. That's because there's usually a lag, often described as about nine months, between Fed action and the full impact on the U.S. economy. So it will take until 2002 for the Fed's expected two rate cuts in 2001 to start showing up in improved earnings and better stock prices, Chan said.

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Sunday December 31
Soros Sees Hard Landing for U.S. Economy

SANTIAGO, Chile (Reuters) - Billionaire U.S. financier George Soros said the United States was in for a ``bouncy and hard'' landing as the world's largest economy slows, but his main concern was for spillover turmoil in emerging markets, according to a local newspaper report on Sunday.

In an interview with Chile's influential El Mercurio newspaper, Soros also said he expects the U.S. Federal Reserve to lower key interest rates aggressively at the start of 2001 but that a new global crisis was inevitable. ``I believe that it (the landing) will be bouncy and hard. A hard landing means a slowdown and could eventually turn into a recession or in low growth for a couple of quarters. We are in a fairly classic slowdown cycle in the United States,'' he said. ``But I am much more worried about the consequences on the edge of the system because this edge has been weakened because of the 1997-1998 crisis, and I believe will have more serious repercussions in distant regions, such as southeast Asia,'' the Hungarian-born fund manager turned philanthropist said.

No Crash After A Crash

Asked if he saw a second Asian crisis looming, he said: ''No, I do not think so, not to the same degree or depth as before. The markets are already down, which means you cannot have a crash after a crash.''

In Chile on vacation, Soros said global markets have been predicting -- ``better said accelerating'' -- a slowdown. ``I think this time the (U.S.) Federal Reserve is more following the market than leading the market. But I believe it will lower rates very aggressively at the beginning of next year,'' he said. Soros said the problem with the looming crisis this time was inadequate capital flows from industrial nations to emerging nations. ``The last crisis was the product of a boom of investments in emerging markets, followed by a very steep fall. Now the problem that the world faces is inadequate capital flows from countries at the center to countries on the periphery. ``It is going to be a chronic, not a temporary crisis, and I believe it is already underway,'' Soros predicted. Crisis Cannot Be Avoided

Asked if a new crisis could be stopped, Soros said: ``It cannot be avoided, but I believe that positive incentives can be created that could promote investments in emerging countries and those should be put in place by the international financial institutions.''

On Argentina, Soros said South America's second-largest economy was going through a difficult time ``because it is trapped with an overvalued currency, which cannot be corrected because there is no escape from monetary parity.'' Argentina has its peso currency pegged to the dollar -- one peso per dollar. Concerns about a looming debt default have forced the Argentine government into accepting economic reforms, such as spending freezes and wages cuts and privatizations, in return for a $39.7 billion bailout plan backed by the International Monetary Fund (news - web sites) (IMF). ``Any notion of devaluing makes no sense, because it would only create a financial crisis and would not resolve the problem of overvaluation,'' Soros said.``An even bigger problem for Argentina is the high cost that Argentina has to pay to fulfill its existing debt obligations. The IMF has come out with a fairly large package, larger than expected, which really should help Argentina to survive, but it might not necessarily allow it to grow.''

``I think Argentina has to pass through an adjustment process that is going to be painful. Eventually it will emerge, as long as there is no fall in the global economy.''

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Waging World War III
November 6, 2000
by John Mangun

As convenient as it might be to focus on domestic issues and problems as a cause for the declining Peso and stock market, in truth, the Philippines is simply at war with the United States once again. The most prominent battlefield is the financial market. But this war has just begun and will spread to other areas.

In fact, this first year of the new millennium marks a 'cold' economic war turning quickly into a 'hot' economic war, with the United States actually pitted against the rest of the world.

Not since the defeat of the Spanish Armada by the British in 1588 has a single nation been so economically powerful as the United States is today. In the 16th century, the British dominated the world by ruling the oceans and in effect controlling world trade and thereby world economies. London became the financial capital of the world. During the early part of the 20th century, New York took the place of London as the hub of the world monetary wheel primarily because of new technology. But a disastrous escapade in Viet Nam, coupled with poor domestic policy, saw New York teeter. In the 1980's, it looked like Tokyo would eventually emerge as the center of wealth and therefore power. From the U.S. holding leadership, at one time nine of the top ten world banks were Japanese owned. But an archaic and lazy monetary and fiscal policy saw Japan miss the opportunity. Then with the collapse of the Soviet Union, the U.S. was able to turn towards an economic offensive rather than a military strategy to dominate.

As Americans go to the voting booth next month, they will elect not only the President of the United States, but a man and an administration that comes as close to a 'world' president as when the Emperor of Rome once ruled Europe and all the countries surrounding the Mediterranean Sea. And like the Roman Empire of 2000 years ago, very little can be done to stop this juggernaut of world economic domination by the United States. Every single country in the world is dependent on the United States for its economic well being. The two-fold U.S. strategy is to force other nations to trade with the U.S. and to make them rely on the U.S. Dollar. The Philippines is no exception.

Although the decline in the value of the Peso is continually attributed to a lack of confidence, primarily in the performance of President Estrada, we are more the victims of an economic policy that demands a strong U.S. Dollar. The Australian Dollar is trading at a ten year low. The British Pound Sterling is at a ten year low. The Deutschmark is at a ten year low. The economic policy of the United States has been to encourage Americans to buy foreign goods through a strong Dollar. This in turns captures the foreign economies by making them dependant on the U.S. market for their exports. Even a country like China is eventually brought to its knees, begging (while trying to sound like they are bullying) the U.S. for inclusion in the WTO to be able to sell to the Americans. Although Malaysia's Mahtahir is regarded as a bold and independent thinker, in fact he surrendered two years ago to U.S. domination. The Ringget is fixed to the Dollar so in effect the Dollar is the official currency of Malaysia. Even here in the Philippines, there has been talk of pegging the Peso to the Dollar. If you can not beat them, join them. The U.S. Dollar is now the world's currency.

The only exception to this strategy has been Japan. The Yen is not allowed to weaken because the U.S. needs the Japanese to buy its government debt papers at an interest rate that is five times higher than Japan's domestic rates. Japan now owns some three trillion Dollars worth of U.S. Government debt. But Japan suffers too, as money is drawn out of their domestic economy to buy the debt as witnessed in their stock market which has fallen 60 per cent since the mid 1990's. But then again, that high interest rate helps mitigate any oil price increases. Notice that around the world there have been protests against high crude prices. . .except in Japan.

And speaking of crude oil prices, this is where the real economic domination will come into play over the next few years. OPEC needs high prices now to face reduced revenues that will happen when Iraq starts pumping again. The U.S. controls that decision. But also the giant U.S. dominated oil companies need to raise cash from consumers this year to begin the biggest oil exploration program in history. In the long run, prices of oil will drop to very low levels, perhaps back to pre 1970 levels of $3.00 per barrel. This is because there is a potential for the proven oil and gas reserves to double in the next five years. The southern republics of the former Soviet Union are just being looked at for their potential oil reserves. The outlook says that the 21st century will be even more dominated by oil as the fuel of choice. Remember, if not for the Soviet Union during the 60's, the U.S. would have continued to 'own' the oil rich Arab producing states. The U.S. will 'own' the new oil producing states that come on line over the next five years. And in this new economic war, you will either be an ally of the U.S. or an 'enemy'. An ally will have the U.S. as its 'benevolent dictator'. Enemies, who will be very, very few, will simply be ignored. Look at recent 'political' policy. If a country does not play ball with the U.S., they are economically isolated from the U.S. market. During the past 'cold' economic war, the U.S. had to have the cooperation of others. In the year 2000 and the 'hot' war, the U.S. can go ahead unilaterally without fear since everyone needs the U.S. market and the U.S. Dollar.

Do you really think the economic fate of this or any country is self-determined? Think again.

John Mangun can be reached at Fax Number 634-2349 or e-mail at

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Dark Economic Clouds
November 13, 2000
by John Mangun

It is somewhat ironic to note that, as of this writing, neither Filipinos nor Americans are sure who is going to be their president next year. However, in my opinion, both countries are going to be in worse economic shape regardless of who sits in the White House or Malacaņang in 2001.

Ultimately, a political decision by the voters always comes down to economics. I think there would be less political whirlwind if the people felt that the Philippine economy was moving forward at the fastest rate possible. Likewise in the US, if their stock market were near 15,000 instead of 11,000, Al Gore would have won the presidency without even campaigning. But our economy is not booming and neither is their stock market and a change (or no change) in leadership here or there is not going to right the situation.

About a month ago, I wrote that the U.S. was waging economic war primarily through the weapon of a strong Dollar. I said that the US had mounted the war to insure and strengthen its economic domination. And during a war, problems are created for the victor as well as his opponents regardless of the eventual outcome.

The economic policy of the Clinton administration, under the command of Allan Greenspan, has been to strengthen the Dollar particularly in the last four years. The purpose of this was to insure that Americans would be induced to buy foreign products. This in turn would insure that the other economies around the world would become more dependent on the US consumer market. The key to this strategy was to keep the US Dollar strong primarily by keeping interest rates high. Normally an economy cannot grow as the US has, if rates are high. Initially, because of high productivity, high rates did not dampen growth. The reduction of interest rates after the first Asian Crisis was not an act of mercy towards Asia. The US could not afford these countries to reduce their exports to the U.S. and therefore become less US dependent.

While the US interest rate weapon has succeeded in bringing the world more 'in line', it has, in 2000, created economic problems at home. Like in a shooting war, manufacturers are forced to build tanks instead of automobiles, thus creating a shortage of cars, the rate weapon is hurting the US. The stock market is falling and corporate profits are not doing well. The official nonsense that high rates were necessary to control inflation is only partially true because the most basic cause of inflation, wage increases, have risen recently at a somewhat high rate.

I believe that the effect of high real interest rates over the last four years is going to create terrible consequences for the US economy over the next year or so. I believe that the US stock market could fall to as low as 7000 from its current 10,000+. There is also the possibility that the US could even slip into a recession. And neither Bush nor Gore will be able to do much about it.

If and when the US economy drops off, the initial response will be to lower interest rates, but the effect of that reduction will be slow and will not be felt until 2002 and the next US election for Congress.

Where does the Philippines figure into all of this? First, on the geopolitical front, if Bush wins, relations with the Philippines will cool. Filipinos in the US are strong Democratic Party allies. Filipino appointees in the Clinton's Democratic administration will drop under Bush. With Gore, there is another problem. He is already under a black cloud for illegal campaign contributions and the presumed extradition of Mark Jimenez on similar charges could make Gore wary of continued close associations with Asians and Filipinos in particular.

On the economic front, a slower US economy directly affects us. Some estimates are that a one-percent drop in the U.S. means a one-half percent drop here. If the US falls from five-percent growth to no growth, our economy falls by two and half percent and that means NO growth in real terms based on our population increases. We had the first taste of this last month when our exports slowed. And that slowdown had nothing to do with any political problems we have here. It had to do with beginning economic problems in the US.

Now, there may be some beneficial offsets from US economic problems if it occurs. The Dollar should weaken over the next months. That will reduce our costs for imported raw material and essential products like crude oil. If our exporters can move quickly to other markets like they did in 1997, we may be able to keep our export earnings on the rise. A weaker Dollar will also force the US to put pressure on OPEC to reduce crude oil prices. Right now, the US could not care less, as high oil prices force countries to export to the US to earn Dollars to pay for the crude oil. Even a slight reduction in oil prices would significantly help our economy.

The other benefit for us may be in our stock market. And we may have had an indication of that last week. As a consultant for I.B. Gimenez Securities, I watch our stockmarket as closely as anyone does. Some, but certainly not many, foreign fund managers rushed into our market. They are coming here now, I think, knowing that in six months our political problems will be reduced or resolved AND that by then, the US will be less attractive for investment.

Very little was done to protect the Philippines from the dramatic rise in oil prices accompanying the Gulf War. Little if anything was done in the last ten years to protect us against this new oil price increase. And the political wrangling of the past year, culminating in the current situation, has done nothing to protect this country from what may be a much bigger crisis than occurred in 1997.

As some in the business community were hurt badly when unprepared for the crisis of 1997, I wonder how much more so now as they preoccupy themselves with a political rather than economic agenda?

I see black economic clouds forming in the US that may turn into a storm. And if so, that storm will reach super typhoon magnitude when it hits the Philippines. If we are unprepared, I wonder who the politicians and the business groups will blame then.

John Mangun can be reached at Fax Number 634-2349 or e-mail at