www.canoe.ca Saturday, February 15, 2003 By MALCOLM MORRISON, CP

TORONTO -- Stocks finished higher yesterday as investors swooped to buy beaten-down shares in what's perceived to be an oversold market amid uncertainty about what will happen next with the Iraqi crisis. The Canadian dollar closed at 65.66 cents US, down 0.23 after a half-cent gain, and gold fell $5.70 to $351.30 US an ounce in New York. Stock markets took heart from a relatively positive assessment of Iraqi compliance from chief United Nations chief weapons inspector Hans Blix, who said yesterday UN inspectors haven't found any weapons of mass destruction. On the other hand, Blix said, many banned military materials remain unaccounted for and U.S. Secretary of State Colin Powell asserted "the threat of force must remain" -- causing markets to initially give up their early gains. Still, the Dow industrial average was up 158.93 points to 7,908.8 late in the day. The blue-chip barometer edged up 44 points on the week. The Nasdaq was ahead 32.73 at 1,310.17 for a gain of 27.7 points this week and the S&P 500 index rose 17.52 to 834.89. Gains in information technology helped balance weakness in the gold sector to give the S&P/TSX index a gain of 34 points to 6,487.13, adding 9.39 points this week. The junior TSX Venture Exchange was up 8.36 at 1,095.49. On the Toronto Stock Exchange, Nortel Networks advanced 11 cents to $3.53. The financial sector was also stronger as Royal Bank rose $1.30 to $56. The gold sector fell 2.6 per cent. Barrick Gold lost 87 cents to $24. Crude oil futures edged up 44 cents to a 29-month high of $36.80 US a barrel on the New York Mercantile Exchange. Crude prices have been pushed up by the Iraqi crisis and a general strike in Venezuela, another major petroleum producer. Analysts were doubtful the gains of the session would stick since the Blix report didn't convince markets that war would be averted. "The running assumption in the markets right now is there will be a war, it will happen -- happen very quickly -- and the second half of the year will be very strong," said Mark Chandler, financial markets economist at Scotiabank. The U.S. market was supported by a solid earnings report Thursday from Dell Computer. The No. 2 maker of personal computers reported record fourth-quarter sales and a profit of $603 million US, up 32 per cent. Its shares rose $2.54 to $25.77 US. In economic data, American industrial production rose 0.7 per cent in January after a 0.4 per cent drop in December. But the University of Michigan consumer confidence index fell to 79.2 for February, its lowest level since September 1993. A reading of 82.5 had been expected. Analysts said the confidence number had little effect on the markets, perhaps because previous swings in the index have not been reflected in consumer spending. "What they tell the polls is very different from what they do at the shopping mall," said Patricia Croft, managing partner at Sceptre Investment. "So I pay more attention to what they do than what they say." On the Toronto market, advances beat declines 545 to 496 with 225 unchanged. Active Toronto stocks included ATI Technologies, ahead 27 cents at $6.43, Bombardier, up 15 cents to $5, and Inco, down 47 cents to $31.43. Toronto volume was 143.8 million shares worth $1.61 billion. The Nasdaq Canada index was up 2.31 points to 222.25.

www.nj.com Saturday, February 15, 2003

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Revlon shares took a 6 percent hit on the news.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Charles Frank is the Herald's business editor.

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

www.gulf-daily-news.com LONDON:

A long war in Iraq will hurt the likes of Brazil and Turkey, which depend on overseas finance, rather than more creditworthy Gulf states like Kuwait, Qatar and Bahrain, ratings agency Standard & Poor's said yesterday.

A short war would have little impact on current sovereign ratings but a longer war could have a large impact, which may not yet be priced in by emerging market investors, the ratings agency said in a report.

"Every time something unexpected happens, you hear the same mantra. People this time are looking at credit risk in a way they did not before," said David Beers, S&P's global head of sovereign ratings.

"What we are looking at is the capacity of governments to ride out a period when they do not have access to markets," Beers said after the release of the S&P report.

So far the reaction of emerging market debt investors to war has been muted, with shifts to relative safe havens like Russia and away from the likes of Brazil and Turkey, but there has been no big sell-off as there has been in equity markets.

The risk premium for holding emerging market debt rather than safe-haven US Treasuries has actually fallen since November 8 when the UN Security Council approved resolution 1441 to 719 basis points (7.19 percentage points) from 854 bp.

The S&P report had little direct impact on emerging market debt prices as most investors and analysts have been pondering the impact of a conflict in Iraq for some time and have been recommending a shift to safe havens like Russia, Malaysia and eastern Europe.

Brazil is rated B-plus by S&P and Turkey is rated B-minus, while among the Gulf states close to Iraq which are rated by S&P, Kuwait is rated A-plus and Bahrain and Qatar are both A-minus.

Kuwait kept on paying its debts even after it was invaded by Iraq in 1990.

Brazil, which many analysts reckoned last year was only 18 months from default, has won a huge funding programme from the International Monetary Fund and has elected the one-time bete noire of markets leftist Luis Inacio Lula da Silva as president.

Since taking office, Lula's government has surprised the financial community by imposing tough measures like imposing $3.9 billion of spending cuts so as to exceed the IMF mandated budget targets.

Nonetheless, Brazil still faces interest rates on its external debts in excess of 1,300 basis points over Treasuries, a burden which makes the debt unsustainable in the long term.

If those risk premiums do not fall in response to the implementation of a credible economic programme, Beers said there would be calls for the IMF to step in.

Turkey, which is asking the U.S. to put its hands in its pockets to help offset the effects of any war, with figures being mooted up to $15 billion, could face a tougher task.

"What we are concerned about is not whether the IMF or U.S.

give additional financial support, but whether this (new) Turkish government is going to be able to use its political advantage to achieve an enormous fiscal correction which can be sustained," Beers said.

Apart from Brazil and Turkey, S&P said Guatemala, Israel, Jamaica, Lebanon, Morocco and the Philippines could also see problems.

As well as constrained financing, there will simply not be the ability to achieve lower spending and budget reduction if the war is long and there was the risk of political disturbance in some states, S&P said.

BY K.P. LEE

FUND managers are confident that the return of CalPERS to Malaysia, should it decide to do so at its meeting next week, will boost the KLSE and may encourage other large global investment funds to consider Malaysia in their investment horizons. Current geopolitical concerns, however, could cloud the issue in the short term, they said. 

Michael AuyeungThe CalPERS decision, if favourable, would follow recent reassessments of Malaysia by a number of other global funds and rating agencies such as Standard & Poor's and Moody's which have upgraded their weightings and outlook on Malaysia following its success in tackling the Asian financial crisis of 1997–98 and its economic recovery. 

Before the Asian financial crisis, foreign funds had accounted for an estimated 20% share of the equities held in the KLSE. After the crisis, foreign holdings fell to as low as 3% to 4 % before improving to some 7%–8% now. 

“Obviously, if CalPERS makes the decision to reinvest in Malaysia, it would be a vote of confidence for the local market,” said Michael Auyeung, chief executive officer of Pacific Mutual Fund Bhd. “But any real impact will be seen in the medium to longer term.” 

The California Public Employees’ Retirement System, or better known as CalPERS, is the world’s second largest and America’s biggest pension fund with assets totalling US$132.6bil. It exited the Malaysian market a year ago in February 2002. 

Yeoh Keat SengA CalPERS board meeting scheduled for Feb 18 will decide whether to act on a report by its investment adviser Wilshire Consulting, which has recommended a return to certain emerging markets, including Malaysia and Thailand, deemed to have met the fund's investment criteria. These criteria include country and market factors such as political stability, transparency and capital market liquidity and openness. 

Fund managers contacted by StarBiz yesterday were generally optimistic that a positive decision by CalPERS would result in improved sentiment on the KLSE. 

“The move is positive in terms of sentiment. It shows that we are deemed to be investment grade by foreigners again,” said CMS Dresdner Asset Management Sdn Bhd executive director Raymond Tang. 

Thomas Yong of Fortress Capital said a decision in favour of Malaysia would stimulate foreign interest in the country as a viable destination for funds headed for this region. 

The fund managers, however, cautioned that even if CalPERS did return to Malaysia, the impact may not be immediate and prospects for the KLSE would be better in the longer term. 

”There will not be an immediate cash inflow although there might be some short-term support for the market,” said Pacific Mutual’s Auyeong, who said the positive news of CalPERS’s return could be mitigated by the current geopolitical concerns of an impending war in Iraq. 

Commerce Trust Bhd chief executive officer Yeoh Keat Seng said he expected the impact of CalPERS’s return to be “negligible” as the amounts invested may not be significant. He expected not more than RM100mil to come in. 

CMS Dresdner’s Tang agreed that the initial investment of CalPERS may not be large. “In the Philippines, for example, it had only invested about US$30mil (RM114mil),” he said. (The Philippines is one of the emerging markets that Wilshire has recommended to be dropped in favour of Malaysia and Thailand.) 

Tang added that, as a comparison, Valuecap Sdn Bhd’s commitment of RM10bil (US$2.63bil) in new money to the local equity markets already far exceeded the entire CalPERS emerging markets portfolio of US$1.8bil. 

Nevertheless, the fund managers were upbeat about the positive signals for investing in Malaysia should CalPERS return.  

“It helps to build a credible case for investing in Malaysia,” said Tang. “We are aware of a number of other foreign funds that have returned to or increased their weightings in Malaysia, although I cannot disclose their names.” 

Fortress Capital’s Yong said although the outlook for the KLSE had been muted since last year, selling pressure was easing off, especially for large cap stocks. “This indicates that the fear factor is not there,” he said. 

Yong was confident that when stability returned after resolution of the Iraq crisis, the KLSE would not miss out on the rally in the regional stock markets. 

Last year CalPERS stunned Asian markets when it followed Wilshire's recommendation to divest from a number of emerging markets, including Malaysia. It adopted rigorous new standards that included consideration of the degree of civil liberties, press freedom and political risk after board members argued that investing in more stable countries with liberal practices would provide better returns over the long term. 

However, the markets that met their investment criteria had actually underperformed between last April, when CalPERS instituted the new policy, and the end of the year. An investment in CalPERS’ target list of emerging markets lost 19.8% over that period, compared with a 16.4% loss for a fully diversified basket of emerging markets. 

Wilshire said limiting the number of countries permitted for investment appeared to have restricted CalPERS' ability for diversification. 

The consultancy's latest report recommends investments in 20 countries – Argentina, Brazil, Chile, Colombia, the Czech Republic, Hungary, India, Israel, Jordan, Malaysia, Mexico, Morocco, Peru, Poland, South Africa, South Korea, Sri Lanka, Taiwan, Thailand and Turkey. Among the countries excluded were China, the Philippines, Pakistan, Indonesia, Venezuela, Russia and Egypt.