SPEC: UTILITIES

PROFESSIONAL INVESTORS HAVE VERY little use for utilities right now. Merrill Lynch's latest monthly fund manager survey revealed that 49% of respondents claimed to be underweighted in utility stocks. It's understandable, given the vogue-ish interest in cyclicality and upside earnings volatility. But this bias may be somewhat short-sighted.

Stephen Goldfield, managing director of Imperium Capital Management, focuses on utilities and other energy-related issues, playing both the long and the short side. And he believes right now that the market is not fully appreciating some trends favorable to utility stocks.

Goldfield also thinks the summer blackout (and the official report on it last week) has helped focus regulatory attention on bolstering electrical infrastructure and away from crimping utilities' returns with negative rate-increase rulings. Finally, the energy bill in Congress should effectively revoke the Public Utility Holding Company Act and eliminate PUHCA's perceived discouragement of industry consolidation.

On his list of potential takeover candidates in the smaller-cap arena are CH Energy, Dayton Power & Light, Scana, Vectren and PNM Resources. Among larger companies, Goldfield points to PPL, First Energy and XCEL. The last, he points out, could be a logical add-on acquisition for Berkshire Hathaway, which bought Mid-American Energy not long ago. Berkshire's Warren Buffett has been outspoken about his interest in more utility investments, and about his reluctance to make any until the PUHCA is repealed.

Among stand-alone investment plays, Goldfield names OGE Energy, Ameren Energy, Pinnacle West and Scottish Power. Pinnacle West is favored for its 4.8% dividend and its fast-growing Arizona territory. Scottish Power, with 60% of revenue from the U.S., falls through the cracks in Wall Street research coverage, has a 5.1% yield and an attractive valuation.

SPEC: VIDEO GAMES
Ryan Jacob, The Jacob Internet Fund (JAMFX)

Take-Two Interactive Software (TTWO) is another attractive business and the fund's largest position. Jacob also owns Electronic Arts (ERTS), but Take-Two trades at a lower multiple.
Jacob also likes the company's prospects to capture a recurring revenue stream as online video game sales take off. Said Jacob, "We feel pretty confident over the next year or two we'll see a big boom for Net gaming."
Shares of Take-Two closed on Thursday at $33.40, up 71 cents.

THEME: FREE TRADE/CHINA
Chinese premier is coming....

The escalating spat threatens to put a damper on Chinese Premier Wen Jiabao's first visit to Washington in early December. Officials in both countries had hoped Wen's trip would be a high-visibility confirmation of a transpacific relationship that had improved dramatically because of China's support of the U.S.-led war on terrorism and the prominent role its leaders have played in defusing tensions on the Korean peninsula.

THEME: FREE TRADE/EU
Shocking comments from the EU...

The European Union (news - web sites) is threatening sanctions on up to $6 billion of U.S. goods in a transatlantic trade row, and EU Trade Commissioner Pascal Lamy said the 15-nation bloc was prepared to hit back at the United States.

"Retaliation is the last resort that the system provides, the final tool that can be used to incentives compliance," Lamy said.

"Retaliation clearly hurts...But we are ready to retaliate if necessary," he told the Irish Institute of European Affairs in Dublin ahead of the start in 2004 of Ireland's EU presidency.

And China too...

Italy, current holder of the rotating EU presidency, indicated it might want Europe to adopt a tougher stance.
China has been a cause of complaint for Italian Finance Minister Giulio Tremonti, who says the playing field is not level because of the Asian giant's less-regulated labor market.
"Europe must copy America. If it pretends nothing has changed, the prospects look rather negative," Tremonti told a labor meeting in Rome.

THEME: DEBT BUBBLE/DOLLAR

Analysis: Euro strong but endangered

WASHINGTON, Nov 21, 2003 (United Press International via COMTEX) -- The Cato Institute's 21st annual monetary conference Thursday, on the future of the euro, achieved more or less unanimous consensus: the euro can be expected to be very strong against the dollar in the next two years, soaring to $1.50 or more, but is in severe danger of disintegration in the long term.

As Kenneth Rogoff, former chief economist of the International Monetary Fund said, ther euro was "a religion" and many of the reasons for inventing it in 1998 were non-economic. Nevertheless, it has had a fairly successful first 5 years, and now looks likely to be very strong against the U.S. dollar, because of the U.S. trade deficit, now 5 percent of gross domestic product, and the likely increase in the share of central bank reserves denominated in euros. According to David Hale, former chief economist for Zurich Financial Services, the euro was now the currency of 30 percent of international bond issues, up from 25 percent in 1999, and 25 percent of global bank liabilities, up from 20 percent. The largest non-government borrowers in euros were American, with Fannie Mae having $45 billion of euro liabilities (presumably the majority having been swapped into dollars.)

As the foreign exchange markets for euros deepen, and the U.S. current account deficit continues to increase, the euro is likely to be startlingly strong. The United States now has foreign debt, net of foreign assets, equal to 25 percent of gross domestic product and that figure is increasing by 5 percent per annum because of the trade deficit. Hale pointed out for comparison that Britain, holder of the world's last reserve currency, had in 1914 net foreign assets of 150 percent of gross domestic product. With Japan's public sector debt rising above 140 percent of its gross domestic product, thereby causing continuing credit problems, and China facing a banking crisis, extreme strength of the euro appears inevitable.

Rogoff suggested the likelihood of a 40 percent rise over the next 2 years, above $1.60, a figure with which Hale and University of Virginia professor Leland Yeager appeared to agree, although National Bureau of Economic Research's Anna Schwarz was somewhat less bearish on the dollar. This is quite contrary to current market expectations and would have a huge effect on world trade patterns.

In the longer term, however, the euro has serious structural weaknesses, because of the unfounded pension liabilities in a number of eurozone countries. This would not be such a big problem if all countries of the euro zone had the same problem; the currency would simply enter a period of serious structural weakness and substantial inflation, as the problem was overcome.

Jose Pinera, Chilean health minister 1978-1980, and instigator of the world's first privatized pension system pointed out that in the eurozone this was not the case. Some eurozone countries, Finland, Ireland and Luxembourg, have sound public finances, and others, such as the Netherlands (and, outside the eurozone, Britain) have substantial well funded private pension systems. However, there are a number of core eurozone countries, in particular Germany, France, Italy, Spain and Austria that have pay-as-you-go public sector pension systems, which appear attractive in their early years but the bills for which are now coming due as baby boomers retire and birth rates have fallen substantially below replacement levels. Immigration may mitigate the problem somewhat but is unlikely to solve it, since a solution would require that in 2030-50 young immigrants would be paying very high taxes to fund the social costs of aged locals -- a prospect unlikely to be politically feasible.

The long term solution to this, according to Pinera, is for these countries to move to a privatized, fully funded pension system, similar to that now found in 23 countries, and abandon the pay-as you go system, originally invented by German Chancellor Otto von Bismarck, who now "threatens to damage Europe in the 21st Century by this invention as much as he damaged it in the 20th by his other invention of a militarized German super-state."

Laurence Kotlikoff, former assistant secretary of the United States Treasury, presented the results of a study in which he had been involved while at Treasury, which showed that the United States' net unfunded deficit, taking into account Social Security and Medicare liabilities, was $45 trillion, or four times gross domestic product. The eurozone countries with unfunded pension systems have relatively an even larger problem, for two reasons: they allow much earlier retirement than in the United States (often at 50-55), and they do not benefit from the U.S.'s replacement level birth rate and high immigration.

In the short term, the eurozone countries with unfunded pension problems will start to run into serious budgetary difficulties around 2010, at a level that will make the current problems of budget deficit overruns above the levels of 3 percent mandated by the euro's Stability Pact seem tiny. At that point, those countries will need inflation to reduce the real value of their liabilities (though this will be difficult because many of the liabilities are indexed) and will seek through the common currency to offload costs on other euro members which don't have pension problems - an asymmetric shock, in other words. Because of its asymmetric nature, this shock is likely to result in either a breakup of the euro or massive fiscal transfers between countries, only possible within a wholly united Europe.

As Nobel laureate James Buchanan pointed out the euro, because it is now in existence, is "constitutionally efficient" and is unlikely to disappear other than through an enormous economic trauma. However, he welcomed the continuing existence of competing European currencies, sterling, the Swedish krone, and the Swiss franc, since they would provide a convenient alternative store of value and means of payment in case of difficulty.

MEME: Thanksgiving/Santa Claus Rally/January Effect

For 35 years prior to 1987, the stock market performance on the Wednesday before Thanksgiving and the Friday afterward had a great track record, except for two occasions, according to the Stock Trader's Almanac.

Since then, only half of the days before and after the holiday have been strong, but, "going long into the weakness Wednesday and staying in through the following Monday improves the record immensely," the Almanac said.

While past isn't always prologue, the day before and after Thanksgiving generally have been positive for the market, yielding net gains in 42 of the last 51 years, according to The Stock Traders Almanac. "We attributed the Thanksgiving strength to the 'holiday spirit' and to the fact that November has been a top performer since 1950," the Almanac says.

December, in fact, on average has been the best month of the year for stock gains, according to Ned Davis Research, a stock-market-research firm in Venice. The Dow Jones Industrial Average has risen in 72 percent of Decembers since 1900, going up 1.5 percent on average. By either measure, that is more than any other month.

Meanwhile, late-November isn't too soon to start thinking about the "Pre-January Effect" -- that tendency, some traders say, for small stocks to lag their larger peers in December. With the small-cap Russell 2000 index already up 37.3% this year, "traders will be quick to sell the small-cap stocks in which they have big gains this year," notes Larry McMillan of McMillan Analysis Corp.

THEME: CHINA/GOLD

China, which is a major influence on many commodity prices, but is so far a small player in the gold world, may yet emerge as a bigger factor on gold prices. A representative of China's central bank, the People's Bank of China, told a gold conference in London yesterday that China may buy more gold for its central bank reserves.

China has increased its gold holdings by a third in recent years to 600 tonnes worth about $12.4bn, or a fraction of its $380bn in official foreign reserves. (3.2%)

THEME: CENTRAL BANK GOLD

On Friday May 7th 1999, the UK Treasury announced it was to sell 415 tonnes from its 715 tonnes of gold reserves, leaving 300 tonnes balance.
The sales will reduce the proportion of gold in UK official reserves from 16.7% to about 7%.
In July 1998, the European Central Bank announced that 15% of its currency reserves will be held in gold, and as at January 1999, the Eurosystem, which comprises the ECB and the eleven member's national central banks, held 12,574 tonnes of gold making it the world's largest holder of gold, with over one third of total world reserve holdings, a total of about 34,000 tonnes. It is followed by the USA which keeps 53% of its reserves in gold.

THEME: CHINA VS MEXICO

Mexico Fears China Leads Export Market
By MARK STEVENSON
Associated Press Writer

November 23, 2003, 3:38 PM EST

MEXICO CITY -- It's a trade war being fought in the streets: Mexico's army of 1.6 million street vendors is resisting police attempts to confiscate imports from China, and the government has responded with everything from buy-Mexican ads to a special anti-import police squad.

Long known for the work of its artisans, Mexico now imports such handicrafts as painted figurines of Mexican saints and leather sandals from China. This year, China also displaced Mexico as the second-biggest exporter to the U.S. market, leaving Mexicans feeling cheated and worried the country is being left behind.

"It's not just fear, it's panic," said Mexico City historian Lorenzo Meyer. "We were supposed to be the ones moving ahead. We had free-market reforms, and now we're losing out to a communist-run country. In 500 years, this country has never been able to get ahead economically."

Newspapers regularly run stories on the threat. "The Chinese want Mexico's oil," "Chinese products proliferate in handicraft markets," and "Border factories fight Chinese threat" are just a few recent examples.

Mexico's frustration at being outmaneuvered in low-wage manufacturing has generated a rising tide of anger at the Asian giant. Textile and shoe workers have begun trashing Chinese goods in the streets. The government has started airing "Buy Mexican" ad campaigns, and police have rounded up Asian vendors and staged increasingly violent raids against street stalls selling contraband imports.

The anger isn't just over imported goods. Since 2000, Mexico has lost more than 200,000 maquiladora, or manufacture-for-export, jobs, with many factories moving to China.

The damage is everywhere. China is producing statuettes of Mexico's patron saint, the Virgin of Guadalupe. And plastic Chinese flip-flops are the preferred footwear in many parts of rural Mexico, replacing Mexican leather sandals that had been worn here for centuries.

In the north-central state of Guanajuato, dozens of shoemaking businesses have closed recently, including Botas Fox, the family business of President Vicente Fox. Shoemakers complain they are being driven out of business by cheap Chinese imports.

"We just can't compete with the labor costs," said Sandra Santamaria, project director for Mexico's Apparel Industry Chamber. "Labor in China costs 48 cents per hour, and in Mexico it's $1.20."

Mexico has imposed dumping duties of more than 500 percent on Chinese apparel, but that hasn't stemmed the influx. Many Chinese goods are smuggled in or imported under labels from other countries. Not including these clandestine goods, China currently runs a trade surplus with Mexico of more than $5 billion.

Some Mexicans blame themselves. "We've never been able to defend ourselves against the Americans, or the Chinese," said one anti-import sign posted outside a Mexican clothing store. "But, then again, we haven't seen any Chinese. All we see are disloyal Mexicans who don't want to pay for Mexican goods."

Fox, who has described China as "an opportunity, not a threat," created a special anti-contraband police squad in October, but it remains to be seen how effective it will be.

In one recent raid in Mexico City, police rounded up Koreans -- who allegedly run many of the import operations -- and deported 11 of them, drawing complaints of discrimination from the Korean community.

Earlier this year, police raids on contraband markets in Mexico City earlier this year met with resistance from vendors who hurled sticks and stones and trashed vehicles to defend their merchandise.

Some have said it's not a bad thing that low-wage jobs are fleeing to China.

"It forces Mexico to do more value-added, better-educated work," Deputy Economy Secretary Angel Villalobos said.

The Chinese have argued Mexico should improve its own products, rather than complaining about other countries.

"China was inundated with foreign products, but we did not blame those countries. Instead, we learned how to produce like them," said Xingmin Yin, the deputy director of Fudan University's China Center for Economic Studies in Shanghai.