www.nj.com Saturday, February 15, 2003

Factories were humming in January, but consumer anxiety deepened in early February, according to reports that showed a modest economic pick-up overshadowed by the prospect of war.

Manufacturing activity at the nation's factories rebounded by a stronger-than-expected 0.7 percent, as automakers cranked up production and utilities boosted output to cope with an unusually cold winter. But prospects for future growth were clouded by a drop in consumer sentiment to a nine-and-a-half year low as the nagging threat of war ate away at consumers' outlook for the economy. The University of Michigan's preliminary February sentiment index fell to 79.2 from 82.4, below analysts' expectations.

The sour confidence numbers were the first downbeat reading after several positive reports on the economy in recent days that have had economists revise higher their expectations for growth both late last year and in the first quarter.

Oil rallies Oil prices set fresh two-year highs yesterday after Chief U.N. Inspector Hans Blix said Iraq still had failed to account for weapons of mass destruction, fueling war concerns. U.S. crude futures hit a high of $36.85 a barrel and ended up 39 cents at $36.75. The U.S. price is now within $5 of 1990-1991 Gulf War highs. London Brent futures gained 7 cents, to $32.53 a barrel.

Hours before Blix's statement, Iraqi President Saddam Hussein decreed a ban on weapons of mass destruction, meeting a U.N. demand for Iraq to adopt such national legislation. Gold prices fell on that news.

Thin fuel stocks in the United States, a strike in Venezuela and the looming threat of war in the Middle East have pumped prices up by 45 percent in three months. Oil industry analysts said a stock release may be needed to cap prices in the $40s if war starts on Iraq, the world's eighth largest oil exporter, within a month.

Merrill research director quits Merrill Lynch said Deepak Raj, deputy director of global securities research and economics, has resigned, a week after his boss, Robert McCann, head of global securities research and economics, announced his own resignation.

The changes come as the firm is trying to get past the investigations into conflicts of interest between its investment banking and stock research units. New York State Attorney General Eliot Spitzer last year accused Merrill analysts, including former Internet star Henry Blodget, of misleading investors by issuing biased research geared to win investment banking deals. Spitzer won a $100 million settlement from Merrill. The firm has had a number of high-level defections recently within its research department, including media analyst Neil Blackley, bank and brokerage analyst Judah Kraushaar, and software analyst Chris Shilakes.

Justice asks ADP for more Automatic Data Processing Inc. said the Department of Justice requested more information about its proposed acquisition of ProBusiness Services Inc., which will extend the waiting period for the deal between the payroll-processing companies.

ADP said it and ProBusiness plan to respond promptly to the request, made in connection with the Department of Justice's review of the proposed $500 million acquisition.

ADP and ProBusiness said in early January that they had entered into an agreement on the acquisition. ADP said it would buy ProBusiness Services for $17 per share in cash.

General Mills ups cost- cutting goal General Mills Inc. is increasing its goal for cost savings through productivity gains as it absorbs Pillsbury by an additional $300 million, raising its 10-year savings goal to $1 billion. Eighty percent of the savings will come through innovations, while 20 percent will result from cost-cutting.

General Mills, the nation's No. 2 cereal maker behind Kellogg, acquired Pillsbury from Diageo in 2001. Since then, the company has taken a hard look at the Pillsbury supply chain and determined more savings can be achieved, it said.

The company is raising its productivity savings target at a time when it's under pressure to raise its stock price. Under the $10.5 billion deal with Diageo, General Mills must make an additional payment if the average price of General Mills stock is below $49 per in April share, a payment capped at $395 million if the average is $44. General Mills closed at $45.27, up $1.12, down from a 52-week high of $50.40 in April.

S&P dings Revlon Revlon Consumer Products Corp., the cosmetics maker controlled by financier Ronald Perelman, was downgraded by Standard & Poor's on concern about its "weak" operating performance, ability to raise cash and $1.74 billion debt load.

The credit rating agency cut Revlon's credit rating one notch to CCC+, its fifth-lowest junk grade other than default, from B-. It also cut its credit rating for REV Holdings one notch to CC, three levels below CCC+. Revlon is an indirect unit of REV, which S&P said has $80.5 million of debt.

S&P's outlook for both entities is "negative," meaning another cut is more likely than an upgrade.

S&P took action after Revlon accepted an $150 million cash infusion from MacAndrews & Forbes, a Perelman-controlled entity. MacAndrews is also making a $65 million credit line available to the company.

Revlon is trying to return to profitability by boosting advertising spending, with celebrities like Halle Berry, and eliminating some products. The company faces fierce competition from Procter & Gamble's Cover Girl and Max Factor brands and L'Oreal's Maybelline.

Revlon shares took a 6 percent hit on the news.

And finally ... Warren Buffett, the Oracle of Omaha, has acquired a stake in PNC Financial , according to Berkshire Hathaway's latest SEC filing. ... Wal-Mart formed an office that will help the retailer get U.S.-manufactured products into its stores overseas. There are nearly 1,300 Wal-Mart stores abroad. ... J.M. Smucker Co. , the country's largest maker of jams and jellies, said its profit surged in the latest quarter as sales more than doubled on the strength of its newly acquired Jif and Crisco brands. It raised its outlook for fiscal 2003. ... Krispy Kreme Doughnuts Inc. shot up after it said earnings in the current fiscal year would jump 35 percent in the coming year. It will report Q4 earnings and fiscal 2003 earnings March 18. ... Graphics chip maker Nvidia share's surged 17 percent after the company handily beat fourth-quarter expectations. -- Star-Ledger wire services

www.canada.com Charles Frank Calgary Herald Saturday, February 15, 2003

With a war in Iraq drawing ever closer, the burning question remains: what's going to happen to the price of oil?

In recent weeks, international oil prices have pushed past the $36 US-a-barrel level, prompting record gasoline prices, increases in home heating fuel prices and fears of even greater commodity price spikes once hostilities break out.

"Why are oil prices where they are? Fear," says analyst Peter Gignoux of Salmon Smith Barney succinctly.

He's right. Consumers across the country are on the verge of a nervous breakdown in the wake of gasoline prices that are in excess of 80 cents a litre; home heating bills that have doubled along with $6 US natural gas prices; and spiking electricity rates that have short-circuited homeowners' budgets.

But the chances of oil prices soaring well past $50 US a barrel, as a handful of fearmongers are postulating, remain remote.

In fact, most reputable industry observers are convinced that war in Iraq -- especially if it is a relatively short engagement -- will cause only minor, short-term oil price disturbances.

And that oil prices will quickly fall back to the range of $25 to $30 US per barrel, once the hostilities are ended.

(In the last Gulf War, for example, oil prices actually plunged $10 US a barrel on the first day of the war.)

"If a war breaks out in Iraq, crude oil prices could spike to $50 US a barrel," acknowledges Vincent Lauerman, global energy analyst with the Canadian Energy Research Institute here in Calgary. "But any war is expected to be short and oil prices would settle back down to the $25 US a barrel level by the summer."

That is, of course, comforting news. For both consumers and for the Canadian economy, which has been among the strongest in the G-8, but which must ultimately reflect economic conditions in the United States, our largest trading partner.

The U.S. economy, as most everyone is aware, has been foundering since Sept. 11, 2002. And a long-term escalation in oil prices could easily undermine the tenuous recovery now taking place.

But a quick look back to 1990 when Iraq unilaterally invaded Kuwait, ultimately bringing about a military response from a U.S. led UN coalition, suggests that, after an initial period of volatility, oil prices are likely to stabilize at a comfortable level.

As researchers at Raymond James and Associates argued this week: "Creeping uncertainty prior to the actual invasion of Iraq (similar to the circumstances today) caused oil prices to rally in the weeks prior to the actual attack. Once the tanks started rolling, however, oil prices began to decline and by the time a ceasefire was declared (six weeks later), prices were actually below the levels they were prior to the original Iraqi invasion of Kuwait."

There are, of course, significant differences between today's volatile global circumstances and events in 1991.

For starters, there is no international consensus in support of an invasion of Iraq, a circumstance that could lead to a longer period of hostilities than was the case 13 years ago. That could extend the time needed to resolve any conflict. There is also legitimate concern the Iraqis will damage their own oilfields, which are responsible for roughly 3.4 per cent of world oil supplies -- a scenario that is especially critical in light of the civil unrest in Venezuela.

And, of course, there are fears that should Iraqi strongman Saddam Hussein employ the biological or chemical weapons he is said to harbour -- especially against Israel -- the conflict could easily escalate beyond Iraq's borders.

Those are not unreasonable concerns. And they are likely to keep oil prices at current or slightly higher levels until events begin to unfold in Iraq.

What will happen if the war drags on or takes an unanticipated turn or two is, of course, a whole other issue.

However, Organization of Petroleum Exporting Countries could -- and will -- raise crude-oil production by three million barrels a day within a month to make up for any global supply shortfall caused by a U.S.-led attack on Iraq, Algeria's oil minister insisted this week.

That would be enough to insure the continuation of current oil pricing levels, which have jumped about 45 per cent since the beginning of January, while keeping global economies from overheating.

The bottom line? It remains in the interest of everyone involved -- oil producers and consumers alike -- to keep the world running on a business-as-usual schedule while Iraq and Saddam are dealt with as expeditiously as possible.

Charles Frank is the Herald's business editor.

He can be reached at frankc@theherald.southam.ca or 235-7370.