www.forbes.com Reuters, 02.02.03, 10:59 AM ET Repeating column that initially ran late Friday By Elizabeth Lazarowitz

NEW YORK, Feb 2 (Reuters) - The winds of war have been buffeting Wall Street, sending skittish investors to the sidelines, and the storm is only likely to intensify this week as the White House makes its last diplomatic push for Iraqi disarmament.

With U.S. forces massing in the Middle East and the rhetoric from Washington heating up, the United States appears increasingly on the brink of war. The suspense has plunged key market gauges to their lowest levels in more than three months.

President George W. Bush has said Baghdad has just weeks left to avert war, and Wall Street will be tuned in for anything that might give clues to a timeline for a possible U.S. attack on Iraq.

"Iraq will be the most important issue (this) week -- period," said Hugh Johnson, chief investment officer at First Albany Asset Management. Ordinarily, investors' focus would be fixed on the outlook for the economy and corporate profits, but "(this) week is just not going to be an ordinary week."

While brewing geopolitical events will likely shove nearly everything else to the back burner, a flood of economic reports -- particularly data on the manufacturing sector and the labor market -- could help determine Wall Street's mood. The Institute of Supply Management's closely watched gauge of the factory sector, set for release on Monday, and the U.S. payrolls report on Friday will give investors some early glimpses of the state of the economy in January.

Evidence that the U.S. economy is pulling out of its soggy patch has been spotty, at best, and the increasing possibility of war has whipped up fears growth could stumble as corporate America puts off investment decisions and stubbornly high oil prices bite into corporate profits.

The steady parade of corporate earnings will probably also fade into the background somewhat, but Wall Street will be tuned in for results and, more importantly, forecasts from technology bellwether Cisco Systems Inc. (nasdaq: CSCO - news - people) and No. 4 U.S. long-distance telephone company Sprint Corp. (nyse: CSCO - news - people)

INDEXES DOWN War worries have helped drive the broad Standard & Poor's 500 index <.SPX> down about 8 percent from its high for the year hit on Jan. 14 and into negative ground for the year.

Year-to-date, the S&P 500 and the blue-chip Dow Jones industrial average <.DJI> are both down around 3 percent, and the tech-packed Nasdaq Composite Index <.IXIC> is down about 1 percent. All three finished the week lower after the S&P 500 and Dow posted their lowest closes since mid-October and the Nasdaq ended at its worst level since mid-November on Thursday.

Wall Street will be watching on Wednesday when U.S. Secretary of State Colin Powell goes before the United Nations Security Council to try to persuade doubters Iraq has weapons of mass destruction. Iraq denies it possesses banned arms.

"That stuff is in the way of the market right now. Nobody's going to want to go long in a big way until this Iraq thing gets cleared up," said Michael Vogelzang, president of Boston Advisors Inc. "It's just going dominate headlines. It's going to dominate investor sentiment."

Bush said on Friday at a joint press conference with British Prime Minister Tony Blair that the United States would resist any attempt to drag out the issue for months, but that he would welcome a second U.N. Security Council resolution if it offers a strong signal to Iraqi leader Saddam Hussein.

Bush believes that a U.N. resolution in November gives authority for military force, but he faces opposition from major powers such as France, Russia and Germany.

Worries that a war could disrupt oil supplies, as well as a 2-month-old strike that has crippled oil production in Venezuela, a major U.S. supplier, have helped push the price of crude oil above $33 a barrel.

Those high prices have sparked fears that corporate profits, already tepid, could take another blow as companies and consumers are forced to shell out more for energy costs.

EARNINGS, ECONOMY STILL UNSTEADY The fourth-quarter results pouring in from corporate America have been, for the most part, encouraging. About 67 percent of the companies in the S&P 500 have reported earnings so far, and, of those, 62 percent have beaten Wall Street analysts' expectations and 22 percent have matched them, according to Thomson First Call.

What is troubling, however, is that the outlook for corporate profits in the year ahead remains decidedly murky.

"So far, the guidance continues along the lines of no visibility," said Charles White, president of investment firm Avatar Associates. "Companies don't even want to say anymore that they see things getting better in the second half, because that's what they told us last year."

Results are expected this week from technology bellwether Cisco, Sprint, medical device maker Boston Scientific Corp. (nyse: BSX - news - people), consumer products company Colgate-Palmolive Co. (nyse: BSX - news - people), No. 2 U.S. drugstore chain CVS Corp. (nyse: BSX - news - people), and No. 1 U.S. home appliance maker Whirlpool Corp. (nyse: BSX - news - people).

Beverage and food company PepsiCo Inc. (nyse: PEP - news - people) and Anheuser-Busch Cos. Inc. (nyse: PEP - news - people), the maker of Budweiser beer, also have results on tap.

But with the peak of earnings season now past, the economic picture is becoming increasingly important, analysts said.

The ISM report for January is expected to slip to 53.7 from 55.2 in December, according to economists in a Reuters survey. It would be the third month in a row above the 50 level that separates expansion from contraction, potentially cementing hopes the manufacturing sector is recovering from its slump.

The report on non-farm payrolls will be the economic highlight of the week. Payrolls are seen rising by 70,000 in January after a 101,000 drop in December, while the jobless rate is expect to remain steady at 6.0 percent.

(Wall St Week Ahead appears weekly. Comments or questions on this one can be e-mailed to Elizabeth Lazarowitz, elizabeth.lazarowitz(at)reuters.com) (For the London stock market outlook please click on [.L/O]

Pan-European stock market outlook [.EU/O] Tokyo stock market outlook [.T/O])) Copyright 2003, Reuters News Service

www.thisismoney.com Lisa Buckingham, Mail on Sunday 2 February 2003

HE stock market has ways of making the most sure-footed appear foolish. Even Gordon Brown's reputation for prudence could be sorely tested by the current share price rout.

At the time of the Chancellor's first budget, Brown stealthily removed the tax credit that pension funds had traditionally enjoyed on the dividends* they earned on their shareholdings. It looked clever at the time - to everyone except the pension funds, which sensed the import of what he had done.

The general view was that share prices were rising, and even if the value of pension schemes grew less rapidly, they were still growing.

What the Treasury did not count on was the impact this would have on the behaviour of those funds by encouraging them to put money into gilts* and bonds* rather than shares. This shift was already being advocated by wiser heads in the pensions business. They were reading the demographic runes showing that people were living longer so the cost of providing them with pensions would become greater. With increasingly long-term liabilities, pension funds needed to be sure they could meet payments - rather than using any surpluses in the pension fund to supplement profits in one way or another.

Boots famously became the first big pension fund to make a total shift out of equities* and into bonds in October 2001. But others have quietly been following suit - and share prices have been under pressure as a result of all this selling.

Now the Institute for Fiscal Studies has calculated that the assault on dividend tax credits has deprived pension funds of a stunning £36bn of income over the past seven years. Plunging markets have left pension schemes with a collective black hole of anywhere between £85bn and £150bn, according to your choice of actuary*.

At some stage, companies are going to have to start repairing these deficits if they don't want to condemn their employees to an old age in poverty. This, by some calculations, could cost £10bn a year for the next decade. And that will have to be found from profits.

Because of the slump, Brown's expected tax take from share-dealing - things like stamp duty* and capital gains tax* - is already likely to fall more than £3bn short of what he had hoped for this year.

If companies have to start using profits to pay into their pension schemes, what he can take from business will fall even shorter of his expectations.

Add to this the wallop to consumer confidence and company profits that could accompany this April's tax rises and even Brown's notoriously conservative assumptions could be blown off course.

Clearly, Brown did not cause the collapse in share prices. But the stealth tax on pension funds could prove his most costly mistake.

Fuel's game YOU do not have to believe that President Bush's burning desire to consign Saddam Hussein to the despot dustbin is all about oil. But it helps.

Impending military action against Iraq underlines the West's failure to confront one of the most crucial challenges of the past 30 years - security of energy supplies.

Iraq's massive crude oil reserves - 112bn barrels - mean it is the only country capable of replacing Saudi Arabia as the world's leading petrol station.

An Iraqi regime that looks favourably on the West would go a long way to ensuring that oil keeps flowing cheaply. But even at the best of times the Middle East is a tinderbox; there is no guaranteeing the stability of Saudi Arabia, let alone an Iraqi regime that is seen as the spawn of the Great Satan.

The West has signally failed to respond to the economic threat posed by volatile, and frequently hostile, oil producers housed in the Opec cartel. The civil strife in Venezuela, which is now on the point of imploding, is another ominous example.

The writing was on the wall as far back as 1973 when the infamous Arab embargo quadrupled the oil price in a matter of weeks and pushed the world into recession.

Frenzied policy-making followed in an attempt to break the West's addiction to oil imports. But in the case of the US, the habit has only grown - despite further Middle East-inspired oil shocks.

Bush's pledge in his State of the Union address to provide funding of $1.2bn to help develop hydrogen-powered cars is the latest in a long line of token gestures from the land that brought us gas-guzzling monsters.

In the UK, we may feel smug in our role as a net* oil exporter, though this will not be the case for much longer.

Strategic oil reserves aside and whatever Bush's motives for going to war, the West should now learn its lesson and develop a strategy to lessen its long-term dependence on Opec.

www.gopbi.com By Linzhi Shi, Palm Beach Post Washington Bureau Sunday, February 2, 2003

WASHINGTON -- As the Pentagon gathers forces in and near the Persian Gulf for a potential military confrontation with Iraq, policy-makers and experts in Washington are shifting their focus to the war's possible economic consequences.

In the worst-case war scenario, Americans could face more unemployment, a tumble of stock exchanges, long gas lines and restrictions on electricity use. If it is a quick victory, economists and analysts believe the impact would be minimal and that oil production from both a new Iraq and other countries eventually could bring oil prices down and stimulate the world economy.

Based on two congressional studies, economist William Nordhaus at Yale University estimates the war could cost the United States from $100 billion to $2 trillion and lead the global economy into recession.

The countdown to a possible war with Iraq is taking place at a time when world oil inventories are extremely tight. The U.S. Energy Information Administration recently announced that America's crude inventories had fallen to near-critical levels because of the ongoing strike in Venezuela, which supplied about 13 percent of U.S. oil imports.

Oil dealers are worried a war in the Persian Gulf could cause an upheaval in the market and send oil prices soaring to or beyond the 1991 Gulf War highs of $40 a barrel, which contributed to a global recession in the early 1990s. The current oil price is about $33 a barrel.

Iraq has the world's second-largest proven oil reserve, estimated at more than 112 billion barrels. After a dramatic decline because of sanctions on oil exports after the 1991 war, Iraqi oil output gradually recovered with the introduction of the U.N. "Oil for Food" program, which allows Baghdad to sell its oil under international sanctions to gain cash to buy food and meet other social needs.

Some 3.3 billion barrels of Iraqi oil valued at about $62 billion have been exported under the U.N. program since December 1996. In 2001, Iraq was the fifth-largest crude oil provider to the United States, supplying 8.5 percent of oil imports.

However, fears of war made U.S. oil companies radically cut back purchases from Iraq in the past year. Now, the United States imports a relatively small amount of crude oil from Iraq, less than 3 percent of its oil consumption, according to the American Petroleum Institute.

Experts say war carries two potentials: Stabilizing the Gulf region, lowering world oil prices and stimulating the U.S. economy; or bogging down into a months-long conflict with deep economic, political and environmental consequences.

"The key is which scenario plays out," said Robert Ebel, director of the energy program at the Center for Strategic and International Studies, a Washington think tank.

lshi@coxnews.com

Quick war

A decisive U.S. victory in four to six weeks would interrupt Iraqi oil production and prevent its crude from reaching the market for about three months, experts predict. A quick war reduces the risk of damage to oil-production facilities in the region. Increased production from other countries could offset the loss of Iraqi oil on the world market.

Analysts at the Center for Strategic and International Studies predict oil prices would spike at the start of hostilities. But prices eventually would fall to the low $20 a barrel by the end of the year, as a result of high production from both OPEC and non-OPEC countries.

Some analysts suggest the U.S. economy would grow faster with a quick war than if there were no war, because a decisive victory would ease investors' fears about the future, leading to more business investment and consumer spending.

This is the scenario the Bush administration is betting on, said William Nordhaus, a Yale University economist and co-author of the study War With Iraq: Costs, Consequences and Alternatives. White House strategists assume a quick U.S. victory could lead Iraq to achieve its full oil-production capability, he said.

But the Iraqi oil industry could face many challenges "the morning after" a war, said Ebel, energy program director at the Center for Strategic and International Studies. "Many experienced engineers and geologists have left. Will they return? Might they return? They need drilling and work-over crews. They need the rigs.... They need the latest oil field technology, the know-how, and managerial skills that go along with that technology."

Nordhaus also warns "the speed at which Iraq can increase its oil production should not be overestimated."

In the 1991 Gulf War, Saddam Hussein destroyed many of Kuwait's oil fields as he withdrew. The sabotage shut down Kuwaiti oil production for a year.

"I am almost certain that Saddam Hussein has that in his mind. He will probably set the oil fields on fire before he goes," said David Lesch, a Middle East expert at Trinity University in San Antonio who was a National Security Agency analyst during the 1991 Gulf War.

Prolonged war

Fighting could last six weeks to six months if Iraqi forces mount substantial resistance or Saddam Hussein was to try to use biological or chemical agents against U.S. troops or neighboring countries such as Kuwait, Jordan or Israel. Extensive damage to the oil-production facilities in Iraq and the region could cause oil prices to spike for at least two years.

Analysts at the Center for Strategic and International Studies predict that, in the worst case, Iraqi oil production could stop for the remainder of this year. Oil prices would jump to $80 per barrel and then fall back to $40 a barrel by the end of 2004 -- still substantially above the current level of about $33.

The result would be a U.S. oil shortage, requiring voluntary rationing in the short term. Steps taken during the oil shortages of the 1970s are among the possible schemes for dealing with a new shortfall, including: alternating days of gasoline purchases based on odd/even license plate numbers; limiting purchases to 8 gallons per fill-up; restrictions on heating and electricity consumption; bans on illuminated outdoor advertisements; and encouraging use of mass transportation.

A prolonged war also could adversely affect the economy by driving down stocks and inhibiting consumer spending. The unemployment rate could initially rise to near 7.5 percent and remain above 7 percent at the end of 2004, according to the Center for Strategic and International Studies.

During the 1991 war, the United States did most of the military fighting, yet 80 percent of the $60 billion in war costs was carried by Germany, Japan, Saudi Arabia, Kuwait and other U.S. allies.

Will these countries come forward again to pay the bills in what would likely be a more expensive war, estimated by academics and think tanks to range from $100 billion to $200 billion?

Experts say probably not, because a second Gulf War would be much different from the first.

Most of the burden will fall on American taxpayers this time, they say.

lshi@coxnews.com

asia.reuters.com

War Clouds Gather Over Stocks Sun February 2, 2003 11:03 AM ET By Elizabeth Lazarowitz

NEW YORK (Reuters) - The winds of war have been buffeting Wall Street, sending skittish investors to the sidelines, and the storm is only likely to intensify this week as the White House makes its last diplomatic push for Iraqi disarmament.

With U.S. forces massing in the Middle East and the rhetoric from Washington heating up, the United States appears increasingly on the brink of war. The suspense has plunged key market gauges to their lowest levels in more than three months.

President Bush has said Baghdad has just weeks left to avert war, and Wall Street will be tuned in for anything that might give clues to a timeline for a possible U.S. attack on Iraq.

"Iraq will be the most important issue (this) week -- period," said Hugh Johnson, chief investment officer at First Albany Asset Management. Ordinarily, investors' focus would be fixed on the outlook for the economy and corporate profits, but "(this) week is just not going to be an ordinary week."

While brewing geopolitical events will likely shove nearly everything else to the back burner, a flood of economic reports -- particularly data on the manufacturing sector and the labor market -- could help determine Wall Street's mood.

The Institute of Supply Management's closely watched gauge of the factory sector, set for release on Monday, and the U.S. payrolls report on Friday will give investors some early glimpses of the state of the economy in January.

Evidence that the U.S. economy is pulling out of its soggy patch has been spotty, at best, and the increasing possibility of war has whipped up fears growth could stumble as corporate America puts off investment decisions and stubbornly high oil prices bite into corporate profits.

The steady parade of corporate earnings will probably also fade into the background somewhat, but Wall Street will be tuned in for results and, more importantly, forecasts from technology bellwether Cisco Systems Inc. CSCO.O and No. 4 U.S. long-distance telephone company Sprint Corp. FON.N

INDEXES DOWN

War worries have helped drive the broad Standard & Poor's 500 index .SPX down about 8 percent from its high for the year hit on Jan. 14 and into negative ground for the year.

Year-to-date, the S&P 500 and the blue-chip Dow Jones industrial average .DJI are both down around 3 percent, and the tech-packed Nasdaq Composite Index .IXIC is down about 1 percent.

All three finished the week lower after the S&P 500 and Dow posted their lowest closes since mid-October and the Nasdaq ended at its worst level since mid-November on Thursday.

Wall Street will be watching on Wednesday when Secretary of State Colin Powell goes before the United Nations Security Council to try to persuade doubters Iraq has weapons of mass destruction. Iraq denies it possesses banned arms.

"That stuff is in the way of the market right now. Nobody's going to want to go long in a big way until this Iraq thing gets cleared up," said Michael Vogelzang, president of Boston Advisors Inc. "It's just going dominate headlines. It's going to dominate investor sentiment."

Bush said on Friday at a joint press conference with British Prime Minister Tony Blair that the United States would resist any attempt to drag out the issue for months, but that he would welcome a second U.N. Security Council resolution if it offers a strong signal to Iraqi leader Saddam Hussein.

Bush believes that a U.N. resolution in November gives authority for military force, but he faces opposition from major powers such as France, Russia and Germany.

Worries that a war could disrupt oil supplies, as well as a 2-month-old strike that has crippled oil production in Venezuela, a major U.S. supplier, have helped push the price of crude oil above $33 a barrel.

Those high prices have sparked fears that corporate profits, already tepid, could take another blow as companies and consumers are forced to shell out more for energy costs.

EARNINGS, ECONOMY STILL UNSTEADY

The fourth-quarter results pouring in from corporate America have been, for the most part, encouraging. About 67 percent of the companies in the S&P 500 have reported earnings so far, and, of those, 62 percent have beaten Wall Street analysts' expectations and 22 percent have matched them, according to Thomson First Call.

What is troubling, however, is that the outlook for corporate profits in the year ahead remains decidedly murky.

"So far, the guidance continues along the lines of no visibility," said Charles White, president of investment firm Avatar Associates. "Companies don't even want to say anymore that they see things getting better in the second half, because that's what they told us last year."

Results are expected this week from technology bellwether Cisco, Sprint, medical device maker Boston Scientific Corp. BSX.N , consumer products company Colgate-Palmolive Co. CL.N , No. 2 U.S. drugstore chain CVS Corp. CVS.N , and No. 1 U.S. home appliance maker Whirlpool Corp. WHR.N .

Beverage and food company PepsiCo Inc. PEP.N and Anheuser-Busch Cos. Inc. BUD.N , the maker of Budweiser beer, also have results on tap.

But with the peak of earnings season now past, the economic picture is becoming increasingly important, analysts said.

The ISM report for January is expected to slip to 53.7 from 55.2 in December, according to economists in a Reuters survey. It would be the third month in a row above the 50 level that separates expansion from contraction, potentially cementing hopes the manufacturing sector is recovering from its slump.

The report on non-farm payrolls will be the economic highlight of the week. Payrolls are seen rising by 70,000 in January after a 101,000 drop in December, while the jobless rate is expect to remain steady at 6.0 percent.

(Wall St Week Ahead appears weekly. Comments or questions on this one can be e-mailed to Elizabeth Lazarowitz, elizabeth.lazarowitz(at)reuters.com)

Fog of War Clouds Economic Forecasts Sun February 2, 2003 11:05 AM ET By Tim Ahmann

WASHINGTON (Reuters) - War jitters are clouding the U.S. economic outlook, making it hard to discern the recovery's underlying state of health and difficult to forecast what will happen when the current uncertainty lifts, economists say.

"What happens this year is sort of anybody's guess," said Martin Baily of the Institute for International Economics.

Like many economists, Baily, who served as a top economic adviser to former President Bill Clinton, believes concerns over the potential damage a war could wreak on the economy has already made businesses reluctant to hire and spend.

But he also said the U.S. recovery is being restrained by more than just concerns over a possible war with Iraq.

"We had an excess of (business) investment, we had a way overvalued stock market and we are still working our way through those things," he said.

In the view of economists at the Wall Street firm Goldman Sachs, war fears take a back seat to a hangover from the bursting of a stock market bubble.

"It simply isn't plausible that households or firms are retrenching because there could be a war halfway around the world, a war in which the United States is expected to prevail quite easily," Goldman Sachs economist Jan Hatzius wrote in a recent note to clients.

In a recent survey, the newsletter Blue Chip Economic Indicators found forecasters, on average, looking for growth of 2.8 percent this year, which would mark a slight pickup from last year's sluggish 2.4 percent.

In general, economists see a weak first half of the year followed by accelerating growth once war clouds pass. But there appears to be an unusually large range of forecasts, in part because of split views over what is holding the economy back.

WEIGHING THE RISKS

In announcing its decision to hold interest rates steady at four-decade lows earlier this week, policymakers at the Federal Reserve gave the war-fears argument a nod.

"Oil price premiums and other aspects of geopolitical risks have reportedly fostered continued restraint on spending and hiring by businesses," the Fed said in its rate announcement, adding the economy should improve "over time" as risks lift.

Some analysts said the Fed's phraseology of "reportedly" and "over time" suggested policymakers at the central bank see the recovery saddled with more than just war.

Nevertheless, the central bank reiterated its view that economic risks were balanced between weakness and a possible rise in inflation -- a view some analysts see as disingenuous.

"The economy clearly has a downside risk that exceeds any risk of inflation at this juncture," former Fed Governor Wayne Angell said. "They've misled the market a little on the side that the prospects for recovery may be brighter than they actually think they are," he said.

However, some think the economy could show surprising strength if war-related economic risks fade.

"The risks in the near-term are titled to the downside and they are significant," said Rick Egelton, deputy chief economist at BMO Financial Group. "Longer-term, if this (war) cloud is to rise, I think the risks by and large may be on the upside."

Egelton said extremely low interest rates, coupled with the prospect for stimulative tax cuts, suggest the economy could be growing solidly by year-end.

CRYSTAL BALL

Even some economists who question whether the cloud of war is the main factor restraining growth see better days ahead.

"The dynamics are good," Conference Board Chief Economist Gail Fosler said. A pickup in consumer spending in the final month of last year and the extremely low level of inventories held by businesses suggest production is likely to get a boost early this year, Fosler said.

She also thinks businesses will soon need to raise spending on high-tech gear, which has a relatively short useful life.

"You're getting to the end of being able to implement a kind of break and fix strategy with respect to your (information technology) spending," Fosler said.

"There are clearly downside risks but it would be hard to say ... those risks are predominant," she said.

While it may come as no surprise economists are not speaking with one voice, the range of opinions is striking.

However, forecasters do seem to agree on one point, the U.S. economy, while it may look forward to better days, is not yet out of the woods.

"I'm sorry I don't have a better crystal ball for you, but I actually don't think anybody else does either," Baily said.

www.taipeitimes.com BLOOMBERG Sunday, Feb 02, 2003,Page 6

Crude oil fell after UK Prime Minister Tony Blair said the US should seek a UN resolution authorizing force against Iraq before taking action to disarm the Persian Gulf oil producer.

Blair, the strongest supporter of US efforts to rid Iraq of banned weapons, met with President George W. Bush in Washington today. Oil prices have risen 23 percent in the past two months, spurred by war concern and a strike by oil workers in Venezuela.

The US plans to present evidence of Iraqi arms violations to the UN next week.

Crude oil for March delivery fell US$0.34, or 1 percent, to US$33.51 a barrel on the New York Mercantile Exchange. Prices, which gained 0.7 percent this week, are up 72 percent from a year ago. In London, the March Brent crude-oil futures contract fell US$0.11 to US$31.10 a barrel on the International Petroleum Exchange.

Venezuela's oil production has increased five-fold this month to about 1.055 million barrels a day, strikers said in a press statement. They estimated output at 190,000 barrels a day on Jan. 1. Venezuela was producing about 3 million barrels daily before the nationwide strike began on Dec. 2.