www.bayarea.com Posted on Sun, Feb. 23, 2003 By George Avalos CONTRA COSTA TIMES

War fears ease -- markets rally. War jitters grow -- markets slump.

This back-and-forth, up-and-down gyration has become a familiar dance on the periphery of the Persian Gulf crisis. Some economists say consumers and business executives, along with Wall Street's hotshots, have hedged their bets about buying and investing until they can figure out the end game in the standoff over Iraq.

Nobody knows whether there will be a war. No one can say for sure how a war would play out. Would it be over in a week or two? Even if it's over quickly, might oil fields in Iraq be destroyed, which is what Iraqi leader Saddam Hussein did in Kuwait? Will there be a diplomatic solution or a coup that ousts Saddam, any banned weapons, or both? Will the U.S. military encounter unwelcome surprises that bog down the war's progress?

When one gets down to it, the only thing that's clear is that the outlook is murky.

"The current uncertainty and the worry about the war is already taking a toll on the economy," said economist Tapan Munroe, principal owner of Moraga-based Munroe Consulting Group. "Whether it turns out to be a short war or a long war, that has already happened."

Riding a roller coaster

The volatile nature of consumer, business and investor sentiment is underscored by this year's roller coaster for stocks, which have fluctuated wildly depending on news driven by the Iraqi crisis.

"You see the relief with which investors grasp at the straw of some diplomatic solution," said Dan Van Dyke, an economist with Berkeley-based Rosen Consulting Group. "Any glimmer, just the merest little shift, you see the stock market rally or fall."

The buildup to the last gulf war, which came in the middle of an eight-month recession, produced wild swings in the stock market.

On one memorable day, Jan. 9, 1991, stocks soared while U.S. and Iraqi diplomats held a six-hour meeting in Geneva to attempt to find a last-minute diplomatic solution that could stave off a war. But as soon as the U.S. negotiator emerged to disclose that talks had collapsed, stocks immediately plunged and crude oil prices rocketed higher. Once the war began and it became clear U.S.-led forces had the upper hand over Iraq, oil prices plummeted and stocks rallied to finish the year up 26 percent.

The current economic uncertainty is reflected not only in the swings of the stock market but other economic data. Gross domestic product registered a gain of only 0.7 percent in the fourth quarter, down sharply from the third quarter's 4 percent increase. While industrial production rose in January by the largest percentage since July, consumer confidence fell. Overall retail sales fell 0.9 percent last month, but excluding the volatile automobile category, they posted their biggest gain since September 2000.

A shaky Bay Area

The lack of clarity could be especially harmful to the Bay Area. After all, the region is already the consensus pick as the major urban center with the weakest economy in the nation.

"In the Bay Area, except for security-related technology companies, I'm afraid we're not off our lows yet," Van Dyke said. "We are still reaching for a bottom as far as jobs go in the Bay Area. And the uncertainty surrounding geopolitical events definitely doesn't help."

Still, some consumers say they haven't curbed their spending, despite the lack of a visible end game in Iraq.

"Life goes on," said Debbie DeSantis, who resides in Livermore with her husband and two children. "We're still doing stuff. We ordered a new couch. We go on vacation. We're talking about another vacation. We won't hold back. The only thing we won't rush out to buy is duct tape and plastic."

Bob and Kathy Alpert, Concord residents who own Bentelino's delicatessen in the same city, also say they haven't cut back -- yet.

"We bought some recliners," Kathy Alpert said. "We will probably put in some carpeting or new floors for the living room."

But things could change if a war begins. Uncertainty over the outcome could prompt the Alperts to defer some purchases. The big problem is that the economy isn't all that great right now, especially in the Bay Area.

"Gas prices are going up, and the stock market is going down," Bob Alpert said. "There is a lot of negativism in the air. That doesn't help the attitude of consumers. It hurts our deli. We're down a little bit in our business."

Robert Marshall, who owns Postal Annex in Concord, also sees a slump in business.

"As a business person, I'm worried about everyone cutting back," Marshall said. "I'm seeing a lot of people cutting back on their spending."

The quick fix

While the outcome of the crisis remains uncertain, what does seem clear is that there will be some sort of resolution relatively soon to the current limbo of U.N. weapons inspections. That could cause the pace of economic and financial market activity to accelerate.

"A quick resolution would be a tonic," said Sung Won Sohn, chief economist at San Francisco-based Wells Fargo Bank. "We can get back to business. Oil prices would come down. Consumer and business confidence would be restored. Uncertainty is killing us."

Sohn believes a quick resolution of the crisis means the economy could grow at a 5 percent annual pace, which would be at least twice as fast as what's happening now.

"The stock market would zoom up, and the Dow would gain several hundred points or more in a hurry," Sohn said. "Business capital spending would surge, based on all the pent-up demand. Consumer spending would be even stronger."

Donald Luskin, an economist and chief investment officer with TrendMacrolytics, a consulting firm in Menlo Park, also says he is convinced that some definitive resolution would be beneficial.

"It would certainly help the stock market, and the stock market would help everything," Luskin said. "If you just look at the economy, things are doing fine. The recession is over. But with this pervasive mood of uncertainty, it just depresses things. People do less of everything."

Risks and rewards

Luskin believes some of the problems -- which could continue if the crisis isn't resolved in the near future -- may make entrepreneurs less willing to take risks.

This trend might be appearing in the weak activity in venture capital financing for private companies, as well as the dismal market for initial public stock offerings. Venture funding in the Bay Area during 2002 was down a whopping 45 percent, according to the MoneyTree survey. The market for IPOs remains virtually invisible.

"The constant debate over how to resolve the Iraq situation hurt because it doesn't necessarily affect spending decisions, but it does affect risk-taking," Luskin said.

Why? Partly because of the nature of taking risks, such as starting a business or expanding one.

"Risk-taking is partly economic and partly emotional," Luskin said. "If you're a genius working for Intel, and you have a fantastic new product, you might start your own business if you're in a good mood about the economy. But if you're not in such a good mood, and you're down on things in general, you're generally risk-averse, and you tend not to take any action. The wellspring of economic growth is risk-taking."

Worst-case scenarios

But economists also must ponder the possibility of a grim outcome in a new Persian Gulf war. Analysts can't rule out the possibility that Iraq might attempt to destroy its own oil fields. Even worse, Iraq might attempt to destroy oil terminals in Saudi Arabia.

"As much as I would like to think the war will be short, decisive and quick, there is still concern that there will be complications," Sohn said. "It might not be as easy as 1991. Clearly there are two extreme scenarios, the quick resolution and the messy resolution, and there can be many shades and variations in between."

Iraq under Hussein's rule has become a lesser player in the world oil arena. But any disruption of Saudi supplies might make today's gasoline prices, now typically ranging from $1.80 to $2 a gallon, seem like the good old days.

"We would be talking about a double-dip recession, if the U.S. becomes bogged down in a long war, or the oil fields become an inferno, if there's a massive release of chemical and biological weapons," Munroe said. "You would have economic activity slowing, oil prices going up, and inflation could become a problem."

And it doesn't help that Venezuela is producing about one-third of the oil it normally does because of a strike.

Still, some consumers such as DeSantis won't be held hostage to the outcome of any war, or the geopolitical maneuvering that precedes any battles.

"Who knows what's going to happen?" DeSantis said. "We just have to go day by day, and live our lives."

George Avalos covers the economy. Reach him at 925-977-8477 or gavalos@cctimes.com.

www.boston.com By Charles Stein, Globe Columnist, 2/23/2003

When I think of the cost that fear has imposed, I'm reminded of those clever television commercials for MasterCard: duct tape: $7.50, plastic sheeting: $17.95, damage to the American economy: incalculable. It is hard to put a price tag on the assorted fears that we are coping with today: fear of war with Iraq, fear of war with North Korea, fear of terrorism. But make no mistake about it. The costs are real. A fear tax has been levied on the economy and we are paying it, just as surely as we pay taxes on income and sales.

The fear tax shows up in the price of oil, consumer spending, business investment, and stock prices. Add them all up and in the opinion of some economists, the total is significant. ''This is a big deal,'' said Allen Sinai, chief economist for Decision Economics in New York. Sinai estimates that anxiety about the future is reducing annual growth by one percentage point. When you consider that the US economy is expected to grow at only a 3 percent clip this year, one percentage point makes a big difference.

On the business side, fear has led to paralysis. For companies already dealing with weak profits and too much capacity, nervousness is one more reason to hunker down and spend as little as possible. Walt Disney Co. last week blamed war fears for a decision to freeze hiring at its Florida theme park. ''Recent events, specifically uncertainty about war, make it difficult to assess the future impact on our business,'' a Disney spokesman said.

For consumers the picture is more complicated. Consumer spending has held up surprisingly well, given all the troubles in the world and the weakness in the economy. Spending on housing and cars has been particularly strong. But when pollsters question people in routine consumer confidence surveys, they come across something puzzling. Asked about current conditions, consumers say things are not too bad. But when asked about the future, consumers express much more pessimism. Pollsters can't prove it, but they think that gap is mostly about fear, which is lurking not far below the surface. John Gorman, president of Opinion Dynamics, a local market research firm, recently held a focus group on the issue of prescription drug coverage. Out of the blue, one of the participants wondered out loud whether her health insurance policy would cover ailments caused by poison gas.

In the energy world, separating out the impact of war fears from other problems is not easy. Oil prices have been pushed higher by both a strike in Venezuela and cold winter weather. Still, the war premium is real. Joseph Stanislaw, president of Cambridge Energy Research Associates, a consulting firm, thinks fear of war has boosted oil prices by $3 to $4 per barrel. Oil currently sells for about $37 a barrel.

Allen Sinai guesses that anxiety has shaved at least 10 percent off stock prices. Again, you can't prove it, but the conclusion is a logical one. Stocks sell at a multiple of their current earnings. The more optimistic the view of the future, the higher the multiple. With all the clouds hanging over the economy, Wall Street has found it difficult to be optimistic about the prospect for future earnings. Risk taking, another element essential for a healthy stock market, has also been a casualty of war fears.

The next question is obvious: If there is a war with Iraq and it goes reasonably well, will the economy and the market do better? Alan Greenspan thinks so. In his recent testimony before Congress, the Federal Reserve chairman said if the uncertainty surrounding Iraq diminishes, the economy ''was poised to grow more rapidly.'' He didn't say how much more rapidly and he conceded that the economy was wrestling with other ''strains and imbalances'' that could continue to constrain growth.

So the right answer is: We can't be certain what will happen if our fears recede. Still it would be nice to find out. We all pay enough taxes now. The fear tax is one we could do without.

Charles Stein is a Globe columnist. He can be reached at stein@globe.com.

This story ran on page F1 of the Boston Globe on 2/23/2003.

www.washingtonpost.com Sunday, February 23, 2003; Page H02

With premium gasoline at $2 a gallon and rising in Washington and other metropolitan areas, the economy and the seemingly impending war suddenly became one story.

A month-long national strike in Venezuela, colder-than-usual weather in the eastern United States and speculation by energy traders that a U.S. attack on Iraq could send prices skyrocketing have contributed to the 30-cent-a-gallon increase in pump prices over the past 10 weeks. But also a factor is a chronic short supply, reflecting the reluctance of major oil companies in recent years to increase investment in new sources of oil outside the Middle East. The companies fear that crude prices are likely to fall back below $25 a barrel before long, making it difficult to earn a decent profit from oil that will almost certainly be more expensive to find and pump.

It didn't help the mood of energy markets Friday when a barge carrying 4 million gallons of refined gasoline exploded at an Exxon Mobil terminal on Staten Island, sending clouds of dark smoke over New York Harbor and unfounded rumors of a terrorist attack ricocheting around trading rooms. This is a market in which small changes in supply or sentiment can result in big changes in price, and panic buying by nervous traders Friday drove the price of a gallon of crude for delivery next month above $37 a barrel before settling down to $35.50.

Politicians and economic forecasters have learned that they ignore big swings in fuel prices at their peril. It is not just that energy is a cost that affects the price of producing just about everything -- just look at the 1.6 percent increase in producer prices in January. Nor can its importance be fully explained by the fact that, in a country that relies on imports for most of its energy, much of the increase in the price of oil and gas flows outside the country. Just as significant, history shows that big increases in fuel prices seem to have an outsized effect on the psyches of consumers who get angry and apprehensive when the pump rushes past $40 as they stand there filling up their Chevy Blazers.

Don't look for relief anytime soon. With stocks of crude oil and refined products now below their five-year averages, even the disappearance of the war premium could be largely offset by the normal seasonal effect that comes as refiners begin to build gasoline inventories in anticipation of the summer driving season.

www.nytimes.com By PATRICK McGEEHAN

AS the world braces for potential war in Iraq, oil prices are at their highest in more than two years, and the profits of big oil producers and refiners have been rising along with them. But the lagging prices of oil-company stocks illustrate just how tricky it can be to speculate in the energy sector.

Professional oil traders place such bets every day, but few individual investors have been tempted, even as the drumbeat for war has grown louder. The New York Mercantile Exchange tried to attract more small investors last summer, when it introduced scaled-down versions of its main oil and natural-gas futures contracts, but those products "haven't really taken off yet," said Nachamah Jacobovits, a spokeswoman for the exchange.

On average, just 709 of these "mini" oil contracts and only 232 of the smaller natural-gas contracts change hands daily, Ms. Jacobovits said. She said individual investors seemed more inclined to bet on gold, a traditional hedge against inflation and economic upheaval. Trading in gold futures at the exchange is at a record, she said, with average daily volume of more than 61,000 contracts, up 60 percent from last year.

Oil trading is considerably more complicated than the gold market because oil prices are affected by so many forces of supply and demand. Lately, investors have been factoring in labor strife and disruptions in Venezuela and Nigeria, as well as an explosion on Friday at an Exxon Mobil fuel facility in New York.

According to the prevailing view among big investors, any war will probably be short and will be followed by a flood of new Iraqi oil that could halve the price of oil, now $35.58 a barrel, said John S. Segner, manager of the $275 million Invesco Energy fund. That expectation, he said, has been holding back the stocks of major oil companies the fund owns, like ChevronTexaco, BP and TotalFinaElf of France.

ChevronTexaco's stock, whose dividend yield is a healthy 4.37 percent, is down about 30 percent from its 52-week high of $91.60. BP, which yields 4.17 percent, is about 26 percent below its 52-week high of $53.98.

"The valuations of the companies don't reflect $35-a-barrel or even $25 crude, more like $19," said Mr. Segner, adding that he is bullish on big oil and skeptical about a quick and sharp increase in postwar supply. "I don't think it's going to be near as dramatic as that," he said. "The only way I see oil going below $20 is some unforeseen, dramatically negative economic event."

Too many investors are looking back to the Persian Gulf war as a guide, he said, but conditions are quite different now than in 1990. Most notably, he said, the inventory of oil is much lower than it was then, and the United States economy is coming out of a recession, instead of entering one.

Mr. Segner said he expected that a brief, successful war with Iraq would push oil prices back down to around $25 a barrel. At that level, efficient producers should continue to make a lot of money, he said. Unfortunately, he added, the returns on energy stocks diminish when oil prices spike as they have in the last few months. "They don't pay you when the prices get this high," he said.   DESPITE the boom that energy companies have been enjoying in recent months, funds like Invesco Energy have not thrived. The fund lost about 4.3 percent of its value last year, and it has lost almost 1 percent more so far this year.

Although those numbers are relatively strong for mutual funds that specialize in energy stocks, Mr. Segner characterized the flow of money into the fund as "not really going up, not really going down."

Rather than spending time speculating on the short-term direction of oil prices by buying or selling futures contracts, individual investors would be better served by studying the factors that will drive supply and demand, he said. As soon as the war in Iraq — if there is one — is over, oil drillers and refiners will face the challenge of finding and storing enough oil and natural gas to last the year.

"We're going to be struggling all year long just to refill to get ready for next winter," he said. 

www.northjersey.com Sunday, February 2, 2003 By VIOREL URMA associated press

NEW YORK - Some economic predictions for 2003: The United States will not see a true recovery before summer; Asian economies are expected to accelerate later in the year; Europe will pick up only slightly. In Latin America, economic turbulence in Brazil and Argentina will continue.

"Weak financial markets and tepid consumer demand should weigh on the global economy well into 2003," the Organization for Economic Cooperation and Development said in a November report.

In its latest review, the Paris-based OECD said the world's 30 largest economies should grow by 2.2 percent in 2003, compared with 1.5 percent in 2002. The new figures are a downward revision from the group's June report, which had projected 1.8 percent GDP growth in 2002 and 3.0 percent growth during the next year.

The International Monetary Fund also trimmed its expectations for global growth in its latest World Economic Outlook because of increased risks since last spring.

Besides concerns about a growing impact of the U.S. and European stock market declines, the economy also could be hurt by a war with Iraq, a jump in oil prices, and a possible destabilizing plunge in the value of the dollar, the IMF said.

The IMF had forecast the global economy would grow by 2.8 percent in 2002, up only slightly from 2.2 percent growth the year before, which had been the worst performance in a decade. In 2003, the world economy is projected to rise 3.7 percent.

The global growth outlook depends critically on the United States. Most economists expect the U.S. economy to grow about 3 percent to 3.4 percent in 2003, slightly above the estimated 2.7 percent growth in 2002, with real economic momentum not expected until the second half of the year.

In Asia, most economies are expected to remain sluggish early in the new year, though some experts predict things will pick up later in 2003 or at worst by 2004.

"We are looking for growth to accelerate as we go through the year," said Steve Brice, chief Southeast Asia economist at Standard Chartered Bank in Singapore. "Obviously, we are in a bit of a soft spot at the moment."

As always, Asian nations are dependent on stronger U.S. demand for their exports. "We will look for the U.S. to begin to lead in a slow resumption of growth that accelerates, so that by the end of [2003] we're pretty much prepared in 2004 for a return of potential growth on a global basis," said Cliff Tan, director of Asian economics for Citigroup in Singapore.

Strong exports pushed Asian economic growth higher than expected last year, but the growth rate likely will not rise further in 2003, the Asian Development Bank said.

The regional bank, based in Manila, Philippines, upgraded its Asian growth forecast for 2002 to 5.6 percent from its previous forecast of 5 percent in September. The bank, however, lowered its forecast for 2003 to 5.6 percent from 5.7 percent.

The ADB forecast does not include Japan, Australia, or New Zealand.

The bank forecasts China's economy, already Asia's fastest-growing, to expand 8 percent in 2002 but slow to 7.2 percent in 2003.

Indonesia, Malaysia, and Singapore will grow faster in 2003 because of sustained domestic demand, while Thailand and the Philippines are expected to slow, it said.

India, the only South Asian country for which a projection was available, is seen expanding 5.5 percent in 2003, up from the projected 5 percent growth in 2002.

In Japan, the world's second-largest economy, an adviser to the Japanese prime minister recently criticized the government's banking reform program, warning that the economy would worsen in the new year and possibly not recover at all.

"One scenario is that Japan's economy will zoom back in a V-shaped rebound," said Taichi Sakaiya, a former Cabinet member. "But the question remains whether Japan will just drop like a bungee jumper on a severed cord."

Lending is expected to tighten and bankruptcies to worsen. Japan's banks are burdened with massive bad debts and the unemployment rate is at a record high 5.5 percent. Stock market levels continue to hover near 19-year lows.

After contracting 0.7 percent in 2002, the Japanese economy is seen growing 0.8 percent in 2003, the OECD estimates. But Japanese analysts worry that may be too optimistic.

"Japan's economy has stabilized as a whole, but there is still substantial uncertainty toward recovery," the Bank of Japan said in its December report.

In Europe, the European Central Bank has sharply cut its projections for 2003 economic growth in the 12 countries using the euro, citing "persistently high uncertainty" over financial markets and political developments.

The bank cut its projection for the coming year's growth in the sluggish euro zone to 1.1 percent to 2.1 percent for the full year, from its earlier figures of 2.1 percent to 3.1 percent. It also cut its outlook for 2002 to 0.6 percent to 1.0 percent, from 0.9 percent to 1.5 percent. Growth was 1.5 percent in 2001.

The bank said growth prospects were being undermined by uncertainty about up-and-down financial markets and "geopolitical tensions with potential consequences for oil prices," usually interpreted as a possible war against Iraq. Europe's economy is heavily dependent on imported oil.

While most business confidence indicators in the euro zone have stabilized, Germany is struggling with widening budget deficits and lower tax collections from the slow economy. Comprehensive reforms of the country's tightly regulated job market are being urged.

"Germany is the weakest link in the region," said Jacques Cailloux, economist at Barclays Capital Inc.

The nation of 82 million people, and Europe's biggest economy, has been mired in near-zero growth for more than a year. Unemployment, which reached 9.7 percent in November, tops the 4 million jobless mark. The government has slashed its 2002 growth forecast to 0.5 percent from 0.75 percent.

In Russia, economic growth fueled by high prices for oil - a key Russian export - has helped the country dramatically increase its foreign reserves and meet its debt obligations in recent years. But Moscow will face a major test in 2003 when foreign debt payments reach $15 billion. Russian officials insist they are prepared to meet the challenge, even if the price of oil drops.

Economic turbulence in South American giants Brazil and Argentina set the tone for a rocky year in Latin America - where the economy shrank by 0.5 percent in 2002 - and the uncertainty will continue in 2003.

Brazil's new president, former union boss Luiz Inacio Lula da Silva, took office Jan. 1 with promises to create jobs, feed Brazil's 50 million poor, and revive the continent's largest economy.

But Silva also has pledged to generate a budget surplus, meet payments on Brazil's $264 billion foreign debt, and curb inflation that has soared to 10 percent, an eight-year high.

Argentina is groping for ways to solve the most severe economic crisis in its history, after a year marked by a $141 billion debt default, a 70 percent devaluation of the peso, and unemployment that has left one in five Argentines jobless. Talks with the International Monetary Fund over a new aid program have stalled, and the fund may prefer to wait to deal with the successor to President Eduardo Duhalde, who will be chosen in an election April 27.

The outlook is murky elsewhere on the continent.

Paraguay is nearly broke, Uruguay is mired in a three-year recession, and Venezuela, which has the largest oil reserves in the Western Hemisphere, is racked by a political struggle to oust populist President Hugo Chavez.