www.globeandmail.com By MICHAEL DEN TANDT

Tuesday, January 28, 2003 – Page B2

Here's a vexatious little puzzle: The markets have known for many months that U.S. President George W. Bush was intent on toppling Iraq's Saddam Hussein. Remember the "axis of evil" speech? Remember the Bush Doctrine of pre-emptive warfare?

And yet here we are, one year later, and investors appear to have just discovered the concept of political risk. The major indexes are getting hit, hard, by the prospect of war -- belying all the smug assertions of Wall Street strategists who've dismissed Iraq as quick blip on the way to a new bull market.

On Friday, the Dow Jones industrial average plunged 238 points, to its lowest level since last October. Yesterday, during the breathlessly anticipated report by Dr. Hans Blix, the top United Nations weapons inspector, the Dow hovered in the negative 50 range.

But within minutes of Dr. Blix's conclusion, after a short, hawkish press conference by the U.S. ambassador to the UN, the index was off 150. The industrials ended the day down 141.45 points, while the S&P/TSX composite index dropped 108.38.

Now, this has to be the most broadly telegraphed conflict in the history of the planet. The Persian Gulf is an armed camp. No one who reads newspapers or watches TV can be particularly surprised that weapons inspectors have gotten less-than-stellar co-operation from Iraq, or that Mr. Bush is now champing at the bit to get on with his invasion. So we can draw only one of two conclusions. Either investors had, until mid-January, been sticking their heads in the sand -- the Dow rose more than 6 per cent in the first two weeks of this year -- or some nagging worry about the specific nature of the coming war has risen to the fore in the past week or two. Or perhaps both are true.

Consider the benign scenario, based on a read of the market response to the first Persian Gulf war in 1990-91. Mr. Hussein's army invaded Kuwait in August of 1990. By November of that year, National Bank Financial's Vincent Lépine pointed out in a report last week, the Standard & Poor's 500-stock index had dropped 13 per cent.

Stocks then ground along a bottom until the onset of Operation Desert Storm, on Jan. 17, 1991. That day, the S&P rose nearly 4 per cent. By the end of the war on Feb. 28, the S&P had surged 12 per cent. Financials rose 19 per cent, information technology 18 per cent, and cyclicals 16 per cent. After that, barring a brief correction late in 1991, it was smooth sailing -- and onward to the greatest bull market ever.

There are parallels between the situation now and then. From mid-1990 until early 1991, for example, the greenback dropped about 10 per cent on a trade-weighted basis, similar to its weakening this time round. The U.S. dollar bottomed in the middle of the 1991 war, Mr. Lépine notes, and had recouped most of its losses by the fall of 1991. Lack of confidence in the U.S. dollar, primarily from overseas, has been a source of recent selling pressure on stocks.

Then, as now, the United States enjoyed an overwhelming military advantage. Indeed, in many respects, that advantage is far greater now, because 70 per cent of Iraq's conventional military was destroyed in 1991 and was never rebuilt, whereas U.S. smart-bomb capability has continued to shoot ahead. Most military analysts expect Iraqi forces will either surrender or be overwhelmed within days.

So why is the market rather suddenly taking this so hard?

For one thing, the United States this time round is politically isolated. Despite bluster to the contrary from senior Bush administration officials, no country -- not even Britain -- is unreservedly backing the U.S. push for war. The lack of a coalition removes a level of restraint.

Second, no one knows what carnage may ensue when U.S. forces move into Iraq's cities. Third, the government of Israel in 1990-91 was compliant and willing to remain sidelined, in the interest of keeping Arab allies on side. The current Israeli regime has sworn to strike back if attacked. Fourth, the oil supply outlook is far tighter now than it was in 1990. Venezuela remains crippled by a political crisis and OPEC has little spare production capacity.

Fifth -- and this is the kicker, for investors -- the S&P 500 was trading at about 15 times trailing-year earnings when the gulf war began. Today, the broad market trades at 26 times.

mdentandt@globeandmail.ca

www.timesdaily.com By FABIOLA SANCHEZ Associated Press Writer January 28. 2003 2:57AM

Customers pass an empty shelf in a supermarket in Caracas, Venezuela, Monday, Jan. 27, 2003, in the ninth week of an opposition-led work stoppage that intends to oust Venezuelan President Hugo Chavez.

Several business leaders said that schools, restaurants and malls may reopen amid fears that a 57-day-old strike called to force President Hugo Chavez's ouster could backfire.

Strike leaders said the work stoppage in the oil industry, which provides half of government revenue, would continue.

"The protest by oil workers will continue because this is the path we are taking to find a solution to the crisis," dissident oil executive Juan Fernandez told a press conference.

Crude output reached 966,000 barrels a day on Monday, according to striking executives at state oil monopoly Petroleos de Venezuela S.A., or PDVSA. Oil production dropped as low as 150,000 barrels per day in December compared to pre-strike levels of 3.2 million barrels per day.

Business representatives expressed concern that discontent with food and fuel shortages caused by the strike could undermine its objective: removing Chavez from office.

Julio Brazon, president of the Concecomercio business chamber, which represents about 450,000 stores and retailers, said businesses need "to recover earnings and avoid labor problems." He said shopping malls and franchises may be permitted to open part-time next week.

Carlos Avila, executive president of Subway de Venezuela, said fast food franchises were considering opening four days a week for limited hours. Each of Subway's 76 branches in Venezuela have lost an average of $30,000 during the strike.

The National Association of Private Education, which represents 911 private schools, convoked assemblies this week to decide whether schools should open Feb. 3.

Strike organizers, who accuse Chavez of dragging this South American country into political and economic chaos, warned that easing the work stoppage would be counterproductive.

"If some sectors of the opposition, business sectors or political sectors, think they can save themselves from this regime by easing the strike, they are totally mistaken," said labor boss Carlos Ortega. The government claims most of PDVSA's 40,000 employees have returned to work, a claim strike leaders deny. In an effort to regain control of the oil industry, Chavez has fired close to 3,000 PDVSA employees.

A waning strike could give Chavez the upper hand in negotiations with the opposition. Negotiations, mediated by the Organization of American States, have focused on whether to hold early presidential elections.

Chavez, a firebrand former paratrooper, was elected in 1998 and re-elected two years later. His term in office ends in 2007.

Government adversaries are now pinning hopes on amending the constitution to allow early elections. They must gather signatures from at least 15 percent of Venezuela's 12 million registered voters to call a referendum to cut the presidential term to four years.

Another option is waiting until August, when the constitution allows for a legally binding referendum on the president's rule.

Opposition parties are organizing a massive signature collection campaign on Feb. 2, the same day a nonbinding referendum on Chavez's presidency was supposed to be held. Citing a technicality, Venezuela's Supreme Court ruled last week balloting must be postponed indefinitely.

While the political impasse continues, Venezuela is slowly turning into an economic wasteland.

The strike has cost Venezuela at least $4 billion so far. The economy could shrink by as much as 40 percent in the first quarter of 2003, the Santander Central Hispano investment bank has warned.

Chavez is preparing to impose currency exchange controls this week to limit the amount of foreign currencies Venezuelans can buy. The measure is aimed at stemming a run on Venezuela's bolivar currency, which has lost a quarter of its value this year.

reuters.com Tue January 28, 2003 02:37 AM ET

SINGAPORE (Reuters) - Oil prices bounced higher on Tuesday as the market focused on Iraqi threats of retaliation against any U.S.-led attack and as President Bush prepared to address the nation.

"Some traders are looking at whether the threat of war has really subsided, and are taking positions in case the State of the Union address is really more aggressive than the previous rhetoric from Bush," said John Hirjee, senior energy analyst at Deutsche Bank in Melbourne.

U.S. light crude for March gained 14 cents to $32.70 a barrel after losing 99 cents, or three percent, in New York on Monday.

The market was less than $3 per barrel below 26-month highs struck last week. Oil has risen some 30 percent since mid-November on concerns war in Iraq could upset supply from the Middle East while a prolonged strike in Venezuela has curtailed oil production and exports.

Iraqi Deputy Prime Minister Tareq Aziz told Canada's CBC television Iraq might strike at Kuwait to retaliate against any U.S. invasion.

"Kuwait is a battlefield and American troops are in Kuwait and preparing themselves to attack Iraq," he said in an interview in Baghdad. "If there will be an attack from Kuwait I cannot say that we will not retaliate. We will of course retaliate against the American troops wherever they start their aggression on Iraq. This is legitimate."

AZIZ PLEDGES COOPERATION

However, Aziz, speaking after U.N. weapons inspectors said Baghdad could be doing more to help their probes, promised Iraq would cooperate more in future.

Aziz said there were only two areas of contention between Iraq and the inspectors -- the question of whether U2 surveillance planes could fly over the country and the conditions under which U.N. inspectors could interview Iraqi scientists.

"All other aspects of cooperation have been met and we promise to be more forthcoming in the future replying to all their needs in (a) way that will satisfy them," he told CBC.

The United States and Britain have launched a massive military build-up in the Gulf region ahead of a possible war to disarm Iraq of alleged illegal weapons.

The world is waiting to hear if President Bush will provide further clues on his next move when he delivers his State of the Union address at 0200 GMT on Wednesday.

Oil prices plummeted on Monday when chief United Nations weapons inspector Hans Blix was unable to corroborate U.S. claims that Baghdad had rebuilt its weapons of mass destruction arsenal, saying he could not give a verdict one way or another.

Blix sharply criticized Iraq for not disclosing all of its long range missile, chemical and biological arms programs.

"It is not enough to open doors. Inspection is not a game of catch as catch can," Blix said. "Iraq appears not to have come to genuine acceptance, not even today, of the disarmament that was demanded of it."

U.N. Secretary-General Annan said arms experts should be given a "reasonable amount of time." "If they need time, they should be given the time to do their work," he said.

European and Middle Eastern allies are pushing the United States to allow the inspectors more time, possibly until March 1, officials and former policy makers told Reuters at the World Economic Forum in Davos, Switzerland.

A debate within the Venezuelan opposition on Monday over scaling back its two-month strike kept a rein on oil prices.

The country's oil industry has been paralyzed by a strike aimed at toppling President Hugo Chavez.

Venezuelan crude output has recovered from the lows of December and strikers said on Monday production was about 966,000 barrels per day, 29 percent of pre-strike levels. Chavez claims production has reached 1.32 million barrels a day.

Tuesday, January 28, 2003; Page E04

AES Corp. in Arlington said it will report a $3.5 billion loss for 2002, reflecting steep write-downs on major energy facilities in Britain and Brazil, and decisions to halt construction on two U.S. power projects, in California and Florida.

The company said the charges do not jeopardize its December agreement with investors and lenders to refinance $2.1 billion in bonds and bank debt until 2005, an extension AES required to stay solvent. "This is reflecting history," said Chief Financial Officer Barry J. Sharp. "There is no impact on our existing financing arrangements."

The fourth-quarter write-downs will total $2.7 billion ($4.96 a share), leaving AES with an annual loss of $6.51 a share for 2002. Excluding the charges, the company said it expects to report a profit from recurring operations of about $550 million (78 cents).

Analysts were not surprised by the news. For more than a year, the global energy company has battled to overcome losses from power operations in drought-plagued Brazil, and from its Drax power plant in Britain, where a long-term power sales contract was canceled last year because of falling electricity prices. The collapse of currencies in Argentina, Venezuela and Brazil, where AES was heavily invested, caused its debt payments to soar.

"It's not good, but it doesn't really add to their plight," said Christopher R. Ellinghaus, a financial analyst at Williams Capital Group. "Cash is the story."

AES said the parent company's operating cash flow last year totaled $1.1 billion, slightly higher than anticipated.

www.timesdispatch.com FROM WIRE REPORTS Jan 28, 2003

CARACAS, Venezuela - A two-month strike against President Hugo Chavez showed signs of waning yesterday as oil production rose and some businesses and schools prepared to reopen.

Crude oil output reached 966,000 barrels a day yesterday, according to striking executives at the state oil monopoly, Petroleos de Venezuela S.A.

That's just under a third of Venezuela's prestrike production but well up from a low of 200,000 during the strike.

El Nacional newspaper reported that the Wendy's International Inc.'s chain of fast-food restaurants will open its 56 locations in Venezuela this week.

An end to the strike, which has curtailed oil shipments from what was the world's fifth-largest supplier, would help bring down oil prices that have climbed to two-year highs.

Trading resumed on the Caracas Stock Exchange for the first time since the strike began Dec. 2.

Shutters at the Centro Lido shopping mall in the nation's capital went up, and owners of many malls, franchises and retailers said they would meet tomorrow to decide whether to open.

As the strike entered its ninth week, Chavez was preparing to impose currency exchange controls this week to limit the amount of foreign currencies Venezuelans can buy and stem a run on the bolivar, which lost a quarter of its value this year.