www.chattanoogan.com Irby Park posted February 25, 2003

Four things impacting interest rates have been perfect for low rates for the past nine years, but major changes could put upward pressure on rates in the next year to year and a half, said John Garrett, UTC Foundation professor of economics.

Speaking at the monthly luncheon of the Mortgage Bankers Association (MBA) of Chattanooga at The Loft, he cited the vital role education plays in economic development and then turned to a discussion of four things that impact interest rates.

The four, he explained, are monetary policy determined by The Fed and Chairman Alan Greenspan, fiscal policy of the government including what the government is spending and how much they’re borrowing, inflation which he described as “a real wild card” and the international value of the dollar.

“The economy doesn’t like it when the federal government goes from a big deficit to a big surplus,” the economics professor stated. With the government depressing the economy, he continued, The Fed kept lowering interest rates to stimulate the economy.

At the same time, the dollar was overvalued and attracted lots of overseas capital. The inflation rate dropped to 0.1 percent and was trending downward. With interest rates low and the economy prosperous, “it can’t get any better than this,” he said.

But in the last few months, the federal government has gone from a $200 billion-plus surplus to a $307 billion deficit in the fiscal year ending in October. This, he said, will “definitely exert upward pressure on interest rates” and push the economy up, stimulating inflation.

But the impact of these factors, he added, will likely be a year to a year and a half away. While looking at some of the things that can determine trends, he emphasized that it is “impossible to predict interest rates. Anytime you say it is going to be higher or lower next week, you have exactly a 50-50 chance” of being right.

However, looking at the various factors, it is possible to get a good idea of the long-term trends over the next few years.

While discussing government and fiscal factors impacting the economy, he said, “Lots of people have said lots of things about economic development in Chattanooga. I’ve watched them hire out-of-town consultants to do study after study and spend good money that really doesn’t return a lot.”

He said there is an abundance of economic literature that can provide help in planning economic development. One thing that stands out as a contributor to economic development is education.

“You get education right and your economic development comes automatically,” he said. He emphasized the need to get higher education right, and “not only higher education, but graduate education.”

Chattanooga, he said, is one of 256 recognized statistical metropolitan areas the federal government keeps track of and Chattanooga is in the bottom 2 percent in the number of college places available.

The labor force, he added, is in the bottom 10 percent in the number of college graduates in the local work force. UTC, he continued, does a fine job, but Chattanooga is not growing because the state is not putting the money into education here as much as in other areas of the state.

Chattanooga leaders, he said, don’t seem to recognize the relationship between education and economic development.

To produce a college graduate, he stated, costs $40,000 in state money. That graduate, over a lifetime, will realize increased earnings of about $3 million.

In discussing economic trends, inflation and interest rates, he described inflation and the value of the dollar as “wild cards” in determining interest rates.

Every year since 1983, he said, this country has built more international debt. The world loaned us trillions of dollars because the dollar was considered safe and “we pay back our debts with interest.” Foreign countries bought bonds and other U.S. assets.

However, it the dollar looks like it is getting weak, investors will move their investments to overseas markets. Money will flow out and the value of the dollar will drop.

This country for the past year has a $500 billion trade deficit. “Every year we set a new record,” he added. No one has ever had a trade deficit as big as the U.S. has had in the past four years.

Inflation couldn’t be any better than the present 0.1 percent, but gas prices are going up. Part of the gas price rise is blamed on problems in Venezuela, he said, but it is nothing compared to what will happen in case of war.

He said he heard one economist “guesstimate” that without a war the federal deficit could hit $450 billion, pushing the economy up and prompting The Fed to raise interest rates to combat inflation.

But he emphasized that there are a lot of factors that impact the economy and it’s impossible to predict what is going to happen with any accuracy.

cbs.marketwatch.com By Thom Calandra, CBS.MarketWatch.com Last Update: 1:22 PM ET Feb. 25, 2003

SAN FRANCISCO (CBS.MW) - Energy investors will face a jolt of reality if Iraqi leader Saddam Hussein sidesteps a looming physical assault on his nation, says a financial author and money manager.

CBS MARKETWATCH COMMENTARY

THOM CALANDRA (WEEKDAYS) Ignoring political news, energy markets set to tumble TOMI KILGORE (MONDAYS) A lack of volume is negating some positive signals BAMBI FRANCISCO (TUESDAYS) Why Ma Bell should buy Covad MIKE TARSALA (WEDNESDAYS) The tech guidebooks are all wrong DAVID CALLAWAY (THURSDAYS) Osama and the great duct tape conspiracy JON FRIEDMAN (FRIDAYS) What am I offered for CNN?

"If indeed Saddam does capitulate, this is the major story that most of the Western media are missing," says Joseph A. Duarte, author of "Successful Energy Investing" and president of River Willow Capital Management in Dallas.

Duarte was watching energy futures and other market bellwethers from his snowed-in Dallas office Tuesday. Natural gas futures alone were rising 10 percent in early trading, then losing that gain and falling another 10 percent, all this after a 38 percent gain Monday. The Dow Jones Transportation Index (26099605: news, chart, profile) Tuesday morning was falling 1.5 percent, taking the key industrial barometer below 2,000 for the first time since September 1996.

Duarte also uses shares of energy companies Lone Star Technologies (LSS: news, chart, profile) and Apache Corp. (APA: news, chart, profile) as ciphers on the geopolitical landscape. Both, like energy futures, are up sharply since the start of the year, with Lone Star logging a 35 percent gain. "Both have predictive abilities in terms of the energy futures," says Duarte, who is also a practicing medical doctor and anesthesiologist.

Duarte says many investors, especially those looking for continued gains in the stratospheric crude-oil market, will require anesthesia in coming hours or days because they are deducing simplistic probabilities from the Iraq situation. He relies on several little-known news outlets to form a thesis that soaring energy markets may soon crash.

One of those news outlets, subscription service Strategic Forecasting, is run out of Austin, Texas, and goes by the name Stratfor.com. George Friedman, a former Director of the Center for Geopolitical Studies at Louisiana State University, started the service in 1996.

"Iraq exports 1.7 million barrels of oil a day," Friedman explained to me Tuesday morning. "In the event of a total catastrophic war, the world markets will lose just 1.7 million gallons at a time when Venezuela oil is coming back online and many producers, like Saudi Arabia, want to fill that capacity. The rising oil market is acting how it always does in the short term, irrationally."

Strategic Forecasting's reports on the evolving influence of France, Germany and Russia in the Iraq conflict are getting almost no attention from U.S. newspapers and broadcasters. One article, published late last week, describes a nearly three-decade personal relationship between French President Jacques Chirac and Saddam Hussein.

In late 1974, then-French Premier Chirac traveled to Baghdad and met then-Vice President Saddam Hussein. "In September 1975, Hussein traveled to Paris, where Chirac personally gave him a tour of a French nuclear plant," said the article. France later sold two reactors to Iraq - "in other words, enough weapons-grade uranium to produce three to four nuclear devices."

Duarte also monitors The Moscow Times for reports about Germany and Russia. He says, "There has been documented evidence of correspondence between Saddam and Chirac over the years and the French government has not denied there have been personal letters."

Duarte, who gets credit for being among the first, along with Friedman's Stratfor.com, to recognize the political problems that shut down Venezuela's oil industry late last year, says several political figures face their greatest challenges in the next several weeks.

The money manager points to reports, ignored in the American press, that the German government admitted holding back evidence of smallpox-virus arsenals in Iraq. The news organization Frankfurter Allgemeine Zeitung says German authorities may have been worried that news of the arsenals would ruin Chancellor Gerhardt Schroeder's re-election effort.

Schroeder on Wednesday will visit Moscow at the invitation of Russian President Vladimir Putin. The Russian leader this past weekend sent a former prime minister, Yevgeny Primakov, to meet with Saddam in Baghdad. Stratfor describes Primakov as a friend of Saddam.

Duarte in the past 18 months has forecast accurately the growing volatility of energy markets. He also has laid out the growing importance of Russia and the diminishing influence of the Organization of Petroleum Exporting Countries on supply and demand in the oil marketplace.

"Look, Saddam does have smallpox, the virus, and it is a biological weapon, and Germany knows about it," he says. "As these things start coming out in the open, and Putin gets involved, a lot of personal things that can be politically damaging will shape events. Over the last two or three days a lot of reports have come out that are damning to a lot of people."

France, Germany and Russia have submitted a proposal to the United Nations calling for a step-by-step disarmament of Iraq. At the same time, intelligence reports, according to Duarte, suggest Russia's Putin may be preparing an Iraq message to U.S. and British oil companies, inviting the multinationals back into the oil-producing country.

Duarte says it is in the interests of several world leaders to promote a peaceful resolution to the Iraq crisis. "If we don't see a solution, then a lot of things are going to unravel for a lot of people. Political futures are being shaped here for Putin, Chirac, Schroeder and President Bush. This is like the Winston Churchill stage of World War II. It is no longer just about war, it is about the people, and this is when things start to happen."

Duarte sees some signs that energy markets may be "topping out." He says the futures prices of heating oil, crude oil, gasoline and natural gas have been "parabolic, and they can't keep going straight up, regardless of a war or a cold winter." One anecdotal sign a plateau is near for energy futures come from the bold statements of Devon Energy 's (DVN: news, chart, profile) chairman and chief executive, J. Larry Nichols. He said in a conference call that natural gas prices will be "permanently" higher.

"We've permanently moved into a new era of gas prices," Nichols said Monday. Natural gas futures on the New York Mercantile Exchange Tuesday were selling for as much as high as $8.63 per one million British thermal units. Devon, seizing the day, says it will buy Ocean Energy for about $3.5 billion worth of common stock.

For those who don't follow energy markets, such bold statements and actions are something like Internet giant Yahoo buying Geocities, a multi-billion purchase that happened during the hysteria that surrounded the growing use of online services and the World Wide Web in the late 1990s. On the energy scene, the Devon purchase would make the Oklahoma company the largest independent producer of oil and natural gas on American shores.

"Whenever anyone says something is headed permanently higher, smart investors should be looking over their shoulder," says Duarte. "Everyone is talking about yesterday's news, but I think it may pay to start thinking about what happens when the futures prices crumble."

In that event, shares of energy beneficiary Apache, a Houston company that is near an all-time price high, easily could lose 15 percent to 25 percent of their value in a short span.

Coming Wednesday: An interview with Stratfor.com's George Friedman.

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moneycentral.msn.com CNBC Market Dispatches 2/25/2003 4:02:51 PM

Consumer confidence plunges, and so do stocks -- but only for a few hours. Bulls regain control late in the day. Is the see-saw action a prelude to a big drop? After hours, H-P beats Street. AdvertisementA dismal consumer confidence number whacked stocks this morning, but by session’s end, the market had snatched victory from the jaws of defeat. Both the Dow Jones industrials and the Nasdaq Composite Index closed comfortably in the green. Fast filing = fast refund! Do your taxes online. Why the turnabout? With little volume on Wall Street, it can be hard to pinpoint. Among the explanations: short-covering, asset reallocation, and a rumor that Russia might be breaking ground on a disarmament deal with Iraq. Another factor: Technicians have seen buying support come into the market at the Dow 7,850 level before, and some traders began buying again today in hopes of catching a quick market bounce. Among the sectors gaining for the day: transports, tobacco and consumer stocks. For a detailed sector look, click here. After the bell, Hewlett-Packard (HPQ, news, msgs) posted pro forma earnings that beat analyst projections by a slight margin. Revenue for the giant maker of computers and printers fell a bit short of estimates. The see-saw scenario What to make of the see-saw market? Market strategist Philip Erlanger, author of the Erlanger Squeeze Play Web site, says we may just have to get used to it -- at least in the next few weeks. In his posting today, Erlanger writes that “The one-day-up and one-day-down scenario is what the market does to grind both bulls and bears out of the market. We saw this action for most of the first half of last year before the eventual collapse. We wouldn't be surprised if the same thing happened this year, especially since the best the bulls can offer is the hope that a post-Iraq conflict will give the market a lift a la 1991. “For us, that's ‘slim pickins’ in terms of bullish factors for investors." The confidence vote The Conference Board said its index of consumer confidence fell sharply to 64 in February from a revised 78.8 in January. That's the lowest reading since 1993. Economists were expecting the index to edge down to 77. The consumer confidence numbers landed in a market already on the run. Traders fretted early today about the latest geopolitical development, reports of a missile test in North Korea. Meanwhile, the United States and Britain worked to line up U.N. Security Council votes in support of resolution authorizing an attack on Iraq So just how bad were the numbers on consumer confidence? About as bad as they could be, Conference Board economist Delos Smith told CNBC, with all the numbers you want to go down rising. "It's a grim report any time you're down 15 points, any time you're in the range of the 60s," he said. "It is Iraq, it is terrorism. Then you add things like oil prices. People are shocked at $2 (per gallon) gas prices," Smith said. Other numbers in the report, based on a survey of 5,000 U.S. households, looked nearly as bad as the headline index. The gauge of consumer expectations six months down the road fell from 81.1 to 65.6. Ominously, the number of consumers making plans to buy homes fell, too. And more consumers reported that jobs were getting harder to find. Strong consumer spending and home sales have been strong positives in the slumping U.S. economy. By coincidence, just today, the National Association of Realtors said existing home sales rose to 6.09 million in January from 5.9 million in December, ahead of forecasts. But that makes the forward-looking confidence numbers still more worrisome. "You just have a very, very nervous consumer. It is not just New York and Washington, it is all over," Smith said. "We need to know solutions on Iraq. We need to know the resolution." Qwest for justice The SEC filed suit against seven former and one current executive at Qwest Communications (Q, news, msgs) for allegations involving the telephone company's accounting practices. They're accused of "a fraudulent scheme orchestrated to meet at all costs Qwest's predictions of double-digit revenue growth," Reuters reported. And the Justice Department charged for former Qwest execs with booking millions in phony revenues. (For a complete report, click here.) What's moving One of today's biggest positive moves today came from the downtrodden pipeline giant El Paso (EP, news, msgs), which jumped about 10% after announcing a huge new financing deal and plans to sell more assets. Mind you, El Paso is down 30% year to date and 90% over the last 12 months. Other noteworthy names: European retailer Ahold (AHO, news, msgs) continued the plunge that began yesterday, driven by news that two key execs had resigned over accounting irregularities. The stock was down again by about 16% today. Dow component Home Depot (HD, news, msgs) reported fourth-quarter earnings of 30 cents per share, 3 cents better than expectations. The company affirmed 2003 sales growth targets of 9% to 12%, but said it would only provide annual guidance from now on. Despite the solid quarterly performance, Blaylock & Partners analyst Mark Mandel told CNBC’s Squawk Box that he prefers Home Depot’s arch-rival Lowe’s (LOW, news, msgs). Mandel said while Lowe’s is expanding into metropolitan markets and attracting upscale customers, Home Depot “has a lot of work to do” turning around its 1,500 existing stores. He also said Home Depot may still be trying to grow too fast. How high can oil go? Soaring oil prices continue to worry consumers and weigh on the equity market. Yesterday crude jumped to a 27-month high, approaching $37 per barrel. Concerns about a cut in supply during a war with Iraq have been compounded by especially cold weather in the United States, which has driven the price up. “Bring on global warning, we could use it right now,” said Phil Flynn, crude oil analyst at Alaron Trading. Flynn said prices could rise above $40 per barrel since people have underestimated the effect of the Venezuelan strike and the United States has a very limited supply at the moment. “We’re a cigarette butt away from shortages,” Flynn said. But he said that could be alleviated if the United States taps its 600 million barrel strategic petroleum reserve. Flynn expects the government to do just that if a war breaks out. Could oil prices rise above $50 per barrel? Flynn said for that to occur, Saddam Hussein would have to not just set fire to his oil fields, but somehow completely destroy his oil fields. He said that scenario, combined with a revolution in Venezuela could send prices through the roof, but also said the chance is very unlikely.

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www.vheadline.com Posted: Tuesday, February 25, 2003 By: Robert Rudnicki

The Caracas Stock Index (IBC) dropped 0.54% or 43.60 points to 8,095.00 in a relatively quiet days trading.

The Industrial Index fell 66.92 points to 7,186.03 and the Financial Index ended flat on 13,392.79.

A total of Bs.82.8 million worth of stocks were traded in 43 transactions as two stocks rose, three fell and six traded flat.

CANTV added Bs.44.00 to Bs.2,445.00 while Electricidad de Caracas lost Bs.5.00 to Bs.161.00 and Sivensa fell Bs.0.49 to Bs.3.61.

www.forbes.com Reuters, 02.24.03, 6:11 PM ET By Jan Paschal NEW YORK, Feb 24 (Reuters) - Stocks fell in most of the world's major markets on Monday while U.S. bonds rose as investors sought safe-haven investments after the United States and Britain circulated a U.N. resolution setting the stage for war with Iraq. Tokyo proved to be the exception to falling-stocks syndrome, with the Nikkei finishing higher following Friday's rally on Wall Street. The yen hit its highest level against the dollar in almost a month on word that Toshihiko Fukui, a conservative on policy, would be the next governor of the Bank of Japan. Fears of a U.S.-led war with Iraq pushed the dollar down against the euro, Europe's single currency. France and Germany are among the U.N. Security Council members opposing U.S. plans to use military force, instead of diplomacy, to oust Iraq's President Saddam Hussein. "War talk is putting the market on the defensive," said John Person, head analyst with Infinity Brokerage Services. In New York, crude oil futures jumped in reaction to concerns that a war in Iraq could disrupt supplies, already thinned by a strike in Venezuela. A bitter cold snap and forecasts for more of the same in the northeastern United States drove up heating oil futures prices and spilled over into the crude market. Gold futures soared in New York, buoyed by a tide of safe-haven investing sentiment. WALL STREET HIT BY WAR DRUMS The blue-chip Dow Jones industrial average <.DJI> fell 159.87 points, or 1.99 percent, to close at 7,858.24, according to the latest available data. The broader Standard & Poor's 500 Index <.SPX> lost 15.59 points, or 1.84 percent, to 832.58. The technology-laced Nasdaq Composite Index <.IXIC> dropped 26.64 points, or 1.97 percent, to 1,322.38. After two straight weeks of gains on Wall Street, worries of a military strike against Iraq sidelined investors once again as Washington and London circulated a new resolution at the United Nations on Monday. The measure declares Baghdad in violation of U.N. demands to disarm peacefully. British Foreign Secretary Jack Straw said the U.S. and Britain would allow two weeks for a U.N. decision on the new resolution, reinforcing long-held market suspicions that an attack on Iraq was likely sometime in March. "You have the Iraq decision, which keeps getting moved out. It's like water torture," said Michael Murphy, head of equity trading at Wachovia Securities. "Until then, there is no rhyme or reason to get out there in stocks." Retail stocks slid after top retailers J.C. Penney Co. Inc. (nyse: JCP - news - people) and Federated Department Stores Inc. (nyse: JCP - news - people) cut their February sales forecasts, saying severe winter storms hurt business over the Presidents Day weekend. J.C. Penney lost 95 cents to $19.39. Federated shed 76 cents to $24.82. Wal-Mart, a Dow stock, lost $1.26 to $47.64. FROM EUROPE, A WHIFF OF ENRON In addition to the prospects of war in Iraq, another factor that rocked European equities on Monday was news that retailer Ahold <AHLN.AS> (nyse: AHO - news - people) of The Netherlands had found accounting irregularities at its U.S. Foodservice unit and its chief executive and chief financial officer had resigned. The FTSE Eurotop 300 index <.FTEU3> slipped 8.99 points or 1.14 percent to 777.13. In Amsterdam, Ahold shares lost up to 68.3 percent of their value. On the New York Stock Exchange, the U.S.-listed shares of Ahold fell 61.09 percent, or $6.53, to finish at $4.16. "It's a shock," said Gert de Mesure, head of equity strategy at Delta Lloyd Securities in Antwerp. "The company will find it more difficult to finance all its debt, and Ahold now will have to find a new credible management and guarantee the continuity of the business." The DJ Stoxx 50 index <.STOXX50> fell 23.09 points or 1.04 percent to 2,196.99. In London, the FTSE 100 index <.FTSE> declined 25.3 points, or 0.68 percent, to close at 3,701.8. Monday's session was not kind to drug stocks on either side of the Atlantic. In Germany, shares in Bayer AG fell nearly 10 percent after The New York Times reported in its Saturday edition that Bayer's senior executives know of the risks associated with its cholesterol drug, Baycol, long before the medicine was recalled. Bayer, part of the blue-chip DAX index <.GDAXI>, fell 9.73 percent to close at 14.29 euros, its lowest level since July 1993. The DAX fell 2.93 percent. On the Nasdaq, shares of vaccine maker VaxGen Inc. (nasdaq: VXGN - news - people) sounded another downbeat note, sinking as much as 55 percent after its president said a trial of the first AIDS vaccine to be tested in people was overall a failure. VaxGen sank $6.16 to $6.86. In Tokyo, the benchmark Nikkei average <.N225> closed at 8,564.95, up 51.41 points or 0.60 percent. BONDS, GOLD, OIL RALLY; DOLLAR FALLS In the U.S. government bond market, the benchmark 10-year note <US10YT=RR> rose 11/32 to 100-6/32, taking its yield back down to 3.85 percent from 3.89 percent late on Friday, and back toward the year low around 3.84 percent. The 30-year bond <US30YT=RR> climbed 15/32 to 108-17/32 for a yield of 4.81 percent, down from 4.85 percent on Friday. "The market is priced somewhere in between a war and a major disaster," said Mark Mahoney, fixed-income strategist at UBS Warburg. "We're not priced for a peaceful solution. We're not priced for a quick resolution." In late U.S. currency trading, the yen <JPY=> traded at 117.85 per dollar, up 0.60 percent from 118.69 at Friday's close. Earlier in the day, the yen rose as high as 117.60 per dollar, its highest level in almost a month. The euro <EUR=> rose to $1.0789 against the dollar from $1.0765 on Friday. On the New York Mercantile Exchange, crude oil for April delivery rose 90 cents to settle at $36.48 per barrel, not far from its 29-month high of $37.55 hit last Thursday. NYMEX heating oil for March delivery jumped 3.47 cents to settle at $1.0475 a gallon. In London, April Brent crude gained 91 cents to $33.18 a barrel. COMEX April gold surged $4.60 to end at $356.40 an ounce.