news.ft.com By Toby Shelley Published: March 12 2003 9:21 | Last Updated: March 12 2003 9:21

The oil market remained on a knife edge with tight stocks and low surplus capacity meaning war against Iraq could tax the ability of the system to cope, said the International Energy Agency.

In its monthly oil market report the Organisation for Economic Co-operation and Development's energy security watchdog said that excluding Iraq and Venezuela, effective spare production capacity is 900,000 barrels a day. This is well below Iraq's export volume.

The IEA cautions that any notional spare capacity in Venezuela has to be discounted while the country rebuilds output after two months of disruptive strikes against the government.

However, the report notes that a seasonal drop in global oil demand is only weeks away as the northern hemisphere winter draws to an end. The 1.6m b/d quarter-on-quarter fall in demand translates into a lower "call" on Opec members for crude, so boosting their available spare capacity. The lower call on Opec "has the potential in itself to offset current oil-for-food exports".

But that raises concerns for Opec members, the report notes. If Venezuela rebuilds output more rapidly than forecast and war against Iraq is launched later than has been expected, the market would be oversupplied and prices would collapse.

In February world oil production surged by 1.96m b/d, 1.5m b/d of which came from Opec. Some 850,000 b/d came from Venezuela as it ramped up output. Industry stocks fell 44m barrels and provide forward cover of 50 days, 5.5 days less than this time last year.

The IEA said its forecast for 2003 demand for oil is unchanged at 78.01m b/d.

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On the not-so-good-but-important news front, we're beginning to see how economic woes can beget further economic woes.

First, we had ailing corporate profits and rising unemployment, part and parcel with a struggling economy. Now, our nation's reduced economic activity has translated into lower corporate and personal tax revenue, resulting in the largest U.S. state budget deficits since World War II, according to Bloomberg.

The backlash of these deficits will be a combination of reduced government spending at the state level and higher state taxes -- both of which are a drag on the economy. In case you're wondering, most state constitutions disallow running budget deficits, so that's not an option. Economists cited by Bloomberg predict that the total economic impact of states' efforts to right-size their budgets could total $80 billion to $100 billion. That's enough to effectively offset President Bush's economic stimulus package.

Read on about the implications for investors.

American Airlines Flying Low If you want to know how a business is really doing, ask the employees on the front line. Their intuition is usually better than most, and their collective information (by the time they share what they know with each other) is often comprehensive.

Flight attendants at American Airlines, run by parent company AMR Corporation (NYSE: AMR), were among the first to publicly suggest the company would seek bankruptcy protection. Today, the airline's flight attendants' union said bankruptcy could come in the near future, even as American's management refused specific comment.

The numbers aren't encouraging. CEO Donald J. Carty has said for a long time that American must cut $4 billion in operating costs annually in order to avoid financial meltdown. Management suggests $2 billion could be saved by changing routes and flight schedules, cutting salaries, and through additional streamlining (redistributing half-eaten snack bags, perhaps?), but the other $2 billion must come from unions.

The stock is tumbling because the writing is almost on the wall: Either the unions concede to nearly $2 billion in wage and benefit concessions (which they have been reluctant to do), or AMR has little recourse but to seek bankruptcy protection. The company lost $3.5 billion in 2002, and is burning about $140 million a month, giving its available cash balance about 12 months to last.

Management remains hopeful it can avoid bankruptcy through union negotiation, but if AMR does file, it will join major carriers United Airlines (NYSE: UAL) and U.S. Airways, both of which filed last year. U.S. Airways hopes to emerge from bankruptcy by March 31, and United is still struggling with restructuring and planning, for one thing, a discount air carrier.

Everything might get even more difficult. Today, the Air Transport Association warned that U.S. airliners could cut 70,000 jobs and lose up to $4 billion quarterly if war starts with Iraq and the government doesn't offer more industry aid. Airlines are already struggling with higher fuel prices, new taxes, and lower traffic loads.

To end on a positive note, some profitable airlines remain, including Southwest (NYSE: LUV), and where one company fails, there's hope another will step in and do a better job.

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Pay for Performance?

A study published in the Academy of Management Journal shows no correlation between a company's performance and the amount of stock or options owned by its corporate executives.

The research, led by four professors from Indiana University and Texas A&M, looked back over 229 similar studies from 1971 to 2001. They found that compensation designed to motivate executives had no effect on such things as return on assets or stock price performance.

While the researchers did not mention specific companies, USA Today did when reporting on the study. The paper ran its own analysis of Fortune 1,000 companies in search of a connection between insider stock holdings and return on equity (ROE, a common measure of a business' performance), and found little or no correlation. Instead, dozens of companies underperformed the competition "despite their CEOs being laden with stock and options."

Big Mac, Side of Email

Want free, in-store wireless access with that? That's the question some McDonald's (NYSE: MCD) customers will soon hear when they order an Extra Value Meal. Yes, friends, McDonald's is going WiFi.

In a move set to coincide with tomorrow's unveiling of Intel's (Nasdaq: INTC) Centrino, a new, wireless-ready laptop chip, McDonald's joins several other companies announcing impending wireless availability. Borders Books (NYSE: BGP), a host of hotels, and two large airports will all boast wireless Internet access by summer. Another restaurateur, Starbucks (Nasdaq: SBUX), has offered wireless access in many locations for some time now, and is working to expand to more.

The McDonald's offering is a unique one, though. By ordering an Extra Value Meal, customers can get one hour of wireless access right there in the store. Use up the hour and want more? Simply order another combo, or pay $3 for another hour.

McDonald's will first roll out the program in 10 Manhattan locations, and then in 300 locations in New York City, Chicago, and an unannounced California city. (Who will be the lucky one? San Francisco? Los Angeles?) 

Will customers bite? Coffee shops and bookstores are logical fits for laptop users and wireless access. Students, for example, already spend time there, tapping away on essays and research papers. But a fast-food restaurant? Bellying up to your laptop while juggling greasy fries and a dripping burger sounds less than appealing, but maybe people are so time-pressed that they'll go for it.

Then there's the question of demographics. Does the average Mickey D's customer own and carry around a laptop? If not, will wireless access draw new customers? McDonald's, in need of novel ways to drive store traffic, certainly hopes so. Plus, the demographics are likely more selective at the "chosen" locations.

It will be interesting to watch how the program unfolds. McDonald's may yet become a cool hangout for laptop and Big Mac lovers. Or customers may find that greasy fingertips and computer keyboards, combined with too many Extra Value Meals, give them indigestion, thereby disconnecting from McDonald's. 

Quote of Note

"Public and private food in America has become eatable, here and there extremely good. Only the fried potatoes go unchanged, as deadly as before." -- Luigi Barzini, O America, 1977

Oil's Slick Producers Profit

At some point, who hasn't dreamed of being an oil sheik? They control much of the world's most sought-after commodity, next to money itself. You could buy an island and blanket it with private jets and swimming pools, just because.

Today, members of the Organization of  Petroleum Exporting Countries (OPEC) suggested that oil output is adequate, and it will not support suspending output quotas. What OPEC didn't admit is that quotas are partly being ignored anyway, as countries "pump up the volume" in order to take advantage of today's crude oil prices before the spring thaw. 

At $37 per barrel, oil is near the $41 record high reached during the 1990-1991 Gulf War. But war drums aren't the only problem. From December to February, oil production in Venezuela tumbled from 3.1 million barrels per day to 1.4 million in politically motivated work stoppages. A war in Iraq might add to the decline in production.

The world consumes 77 million barrels of oil daily, and OPEC supplies 24.5 million, or 32%. Iraq supplies 1.7 million barrels per day. Oil fields in Kuwait producing 700,000 barrels daily would be closed in the event of war, meaning between Iraq and Kuwait, 2.4 million barrels per day would be lost. Whether this shortfall can be replaced by OPEC is hotly debated.

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Quick Takes

Shares of drug maker King Pharmaceuticals (NYSE: KG) plummeted over 22% after the company announced the SEC has subpoenaed documents regarding its drug pricing and rebates related to Medicaid. The company's CEO reportedly said, "As far as we know, we didn't do anything inappropriate." Because the Justice Department is investigating Schering-Plough (NYSE: SGP) for Medicaid-related practices, the SEC involvement suggests additional concerns at King.

Former ImClone Systems (Nasdaq: IMCL) CEO Samuel Waksal agreed to partially settle the SEC's civil case against him for insider trading. Waksal will pay over $800,000 for the losses he avoided by selling shares ahead of bad FDA news in December 2001, and he will be foreclosed from serving as an officer of any public company. New charges included show that Waksal behaved worse than previously thought: He not only sold company shares to avoid losses, but also bought put options to profit from his own company's coming stock drop. What a weasel!

St. Louis Federal Reserve President Bill Poole warned that Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) don't maintain enough capital to protect them against loan risks. Both companies have been subject to enormous debate -- most recently in Warren Buffett's annual letter to Berkshire Hathaway (NYSE: BRK.A) shareholders -- over their government-sponsored status, capital requirements (higher reserves mean lower profits), and derivatives risk.

Finland-based telecom equipment maker Nokia (NYSE: NOK) issued a Q1 earning warning today, saying its results would be at the low end of prior estimates. The company said the worst hits would come in sales of networking equipment and 3G telecom equipment. Shares initially dropped, but recovered to finish the day up almost 2%.

sg.biz.yahoo.com Wednesday March 12, 2:17 AM By Allison Bisbey Colter Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--The California Public Employees Retirement System has completed the sale of stocks in three emerging markets it decided to shun last year on the advice of a consultant.

Indonesia, Malaysia and Thailand were excluded from Calpers' investment universe in connection with the pension plan's decision last year to move $1.1 billion of its $1.6 billion of emerging market assets from a passively managed portfolio to three active money managers - AllianceBernstein, Dimensional Fund Advisors and Genesis Asset Managers Ltd.

The $125 billion pension plan also adopted a new policy of investing only in stocks of countries that meet strict criteria for political stability, financial transparency and labor standards.

As a result, Hungary and Poland were added to the list of permissible countries, while Indonesia, Malaysia and Thailand were deleted.

The Philippines was initially struck from the list of permissible countries as well, but Calpers decided to retain its investments in that country after public officials provided evidence that the economy was solid.

Despite concerns raised by its consultant Wilshire Associates, the pension fund affirmed its decision to remain in the Philippines at a board meeting last month.

Other investable markets include Argentina, Brazil, Chile, Czech Republic, Hungary, Israel, Jordan, Mexico, Peru, Poland, South Africa, South Korea, Taiwan and Turkey.

Calpers is also shunning investments in India, Morocco, Sri Lanka, Columbia, China, Egypt, Pakistan, Russia and Venezuela.

Calpers bought and sold stocks in four tranches over a six-month period from July through December 2002, according to information posted on its Web site this week. A total of $873.2 million of stocks were acquired and $750.1 million of stocks were sold. Another $231.9 million in stocks were transferred from Calpers' internally managed emerging-market index fund to the outside investment managers.

The pension fund didn't disclose how much it bought or sold in individual markets. However, spokesman Brad Pacheco said Calpers' $30 million of Philippine investments were unaffected by the transition. "None of the assets had been sold by the time we changed our policy to include the Philippines," he said.

AllianceBernstein, Dimensional Fund Advisors and Genesis Asset Managers each now manage about $400 million for Calpers.

-By Allison Bisbey Colter, Dow Jones Newswires; allison.bisbey-colter@dowjones.com; 201-938-5298

reuters.com Mon March 10, 2003 01:13 PM ET

NEW YORK (Reuters) - NYMEX crude oil futures trimmed losses midday on Monday on news that Baghdad has placed explosives at oil fields in northern Iraq to prevent them from being taken over if the U.S. attacks, traders said.

The market earlier retreated as the United States faced an uphill battle to gain support for a new U.N. resolution authorizing war against Iraq.

At 12:45 EST, NYMEX April crude CLJ3 traded 18 cents lower at $37.60 a barrel, as it traded in a tight range from $37.30 to $37.75.

"The news of the explosives placed in Iraq oil fields is taking us further away from the day's lows," said a NYMEX floor trader.

Iraq has placed explosives at the Kirkuk oil fields in northern Iraq so they won't come under U.S. control in the event of a U.S. invasion, a U.S. official told Reuters on Monday, adding the Iraqi action took place "recently."

Traders were also watching OPEC, ahead of a formal meeting on Tuesday in Vienna, as the group was split over plans to suspend output limits should the U.S. strike Iraq.

News that Venezuela's refined oil products output could return to full capacity "within 10 days" according to Energy Minister Rafael Ramirez, also factored into the day's prices, they said.

"Taken together the early news in the oil front today was bearish, but the war could dislodge a significantly large amount of Iraqi barrels... and it is uncertain whether OPEC can fill that up," said a NYMEX floor trader.

An early Monday comment from U.S. Energy Secretary Abraham Spencer that the U.S. would act "instantaneously" to release oil from strategic reserves, if national supplies were threatened, had been digested, traders said.

"In any case, Abraham said any decision to release would only made in case of 'severe disruption' in supply, which repeats his position from last week," one trader said.

Despite a new Russian veto threat, President Bush worked the phones to foreign leaders on Monday in an effort to win support in the U.N. Security Council for a resolution authorizing war against Iraq. A vote could come as early as Tuesday.

Bush needs nine votes out of the 15-member U.N. Security Council to win support for the resolution that would give Iraq a final deadline of March 17 to disarm or face military action.

But veto-holders France, Russia and China have said they want more U.N. arms inspections, rather than war at this time.

Britain said on Monday it may modify the draft resolution in an attempt to gain a critical mass of support on the council. Prime Minister Tony Blair's official spokesman suggested that the deadline set in an amended resolution could be moved, although not by much.

The United States and Britain have amassed about 300,000 troops in the Gulf, along with dozens of warships and nearly 600 strike aircraft, in preparation for an attack.

In Vienna, Gulf OPEC powers Saudi Arabia and Kuwait are hoping to get backing at Tuesday's meeting to set aside production quotas if war stops Iraqi exports, currently at about 1.7 million barrels per day (bpd).

Iran said it opposed a bid by Western-friendly OPEC states for a policy that Tehran says implies support for a U.S. attack, by controlling oil prices.

NYMEX April heating oil HOJ3 was up 1.25 cents at $1.1210 a gallon, trading $1.0930 to $1.130.

Temperatures in the heating oil-dependent U.S. Northeast will be 8-15 degrees below normal on Monday, gradually working to 2-4 degrees below normal by Friday, private forecaster Meteorlogix said. It said readings in the next six to 10 days after that would be near normal.

NYMEX April gasoline HUH3 traded 0.92 cent lower at $1.1475 a gallon, moving $1.1270 to $1.1550.

www.canada.com Canadian Press Monday, March 10, 2003

TORONTO (CP) - Overseas stock markets were down and Wall Street index futures were weak Monday, on the third anniversary of the peak of the technology-stock craze and a week before the March 17 deadline envisioned by the United States in a proposed United Nations ultimatum to Iraq.

American State Secretary Colin Powell said he is close to rounding up the votes for the disarmament deadline, and warned that a French veto would have "a serious effect on bilateral relations."

European stock markets were down, on war worries and after Deutsche Telekom reported the worst corporate loss in European history.

Europe's largest telecommunications company said Monday it lost 24.6 billion euros ($27.1 billion US) in 2002. The net loss was largely on writedowns of such holdings as wireless company T-Mobile USA, but chief executive Kai-Uwe Ricke acknowledged: "There is no way to put a good face on it."

The Deutsche Telekom loss - reported on the third anniversary of the Nasdaq's technology-bubble peak - exceeded the records set last week by France Telecom, at 20.7 billion euros, immediately overshadowed by Vivendi Universal, which lost 23.3 billion euros last year.

The German DAX index was down 1.7 per cent early in the afternoon. The Paris CAC-40 declined 0.8 per cent, while London's FT-SE 100 index was little changed, slipping 3.4 points to 3,488.2

Asian stocks closed down. The key Nikkei index in Tokyo fell to a new 20-year low, down 101.86 points, or 1.25 per cent, to 8,042.26, led down by banks.

The Hong Kong Hang Seng index declined 45.23 points to 8,861.87.

South Korea's main index closed 0.33 per cent lower after North Korea test-fired a missile into the sea in what was seen as a move to raise tensions further over its nuclear programs.

The Canadian dollar was trading at 68.37 cents US, up 0.13 cent from Friday's 32½-month high, after gaining 0.85 cent last week.

The currency got an additional boost Monday morning as Canada Mortgage and Housing Corp. reported that housing starts last month were up 34.5 per cent over the January level.

The euro was solidly above its four-year highs of $1.10 US, while the yen strengthened to 116.5 to the American dollar amid fears that war will wound the already shaky American economy.

In Canadian corporate news, business software maker Cognos has announced an alliance with the Giuliani Group, a consulting firm headed by former New York mayor Rudolph Giuliani.

Canada's largest pension-fund manager, the Caisse de depot et placement du Quebec, reports Monday on what is believed to have been a bad year. Reports say the Caisse lost more than $2 billion on telecommunications investments last year, mostly on cable company Videotron.

Analysts suggest the fund lost $10 billion in 2002, out of $133 billion in assets. The fund's report precedes an expected