www.theledger.com

WASHINGTON If President Bush gets his way, investors will receive their dividends tax-free. You'd figure that one sector to benefit would be gas and electric utilities, which, through the years, have offered consistently high dividends.

Right now, the yield on the average utility stock is 4.5 percent. Compare that to the 2.9 percent yield on a five-year Treasury note. Now imagine that the utility's dividends, which historically have risen a bit each year, aren't taxed. Investors in an average tax bracket would be able to put about 21Ú2 times as much money in their pockets with the utility as with the Treasury security.

"The timing of a dividend tax change could not be better for the utility sector," wrote Steven Fleischman, of Merrill Lynch, in a letter to clients. There's no guarantee Bush's proposal will pass Congress, but, even so, utility stocks ought to be soaring. They're not.

Franklin Utilities A (FKUTX), a mutual fund that invests mainly in U.S. electric companies, is down 2 percent this year. Exelon Corp. (EXC) of Chicago, the only Midwest or Eastern utility that's rated above-average by the Value Line Investment Survey, has dropped 4 percent, and Dominion Resources (D) of Virginia, the only utility among the 43 stocks in Morgan Stanley's U.S. model portfolio (and a favorite, as well, of Fleischman's), is down a few cents.

What's wrong with utilities? A lot. Many investors view them as downright toxic, and even the prospect of tax-free dividends doesn't seem to help. But it is the very fact that utilities are being shunned that makes them attractive. It's no accident, for example, that Berkshire Hathaway Inc. (BRK), chaired by super-investor Warren Buffett, has purchased Mid-American Energy, with 5 million gas and electric customers.

But most investors want nothing to do with such companies, and for apparently sound reasons. The main problem is that utilities are no longer safe, defensive stocks, producing a secure stream of income. They are something else, but no one is quite sure what.

In the past, utilities accepted strict regulation in return for geographic monopoly franchises. They generated not just electricity but a delightful flow of cash, dispensing about 80 percent of their profits to shareholders. When the economy was good, demand for power increased, so profits rose; when the economy was poor, demand fell, but, since borrowing costs dropped, too, utilities maintained decent profits.

In the early 1990s, this cozy little world began to change with deregulation. Ending monopolies, allowing utilities to expand beyond local borders and into new businesses, and reducing price controls -- all of those steps are ultimately good for consumers and for the economy. But the steps also threw this conservative industry into turmoil.

Suddenly, as Vincent Muscolino wrote in a recent letter to clients at the Cambridge, Mass., investment firm of David L. Babson & Co., companies gained the authority to "unbundle and repackage the three basic components of service: power generation, transmission and distribution." Especially with a rash of mergers, it became hard for investors to determine the strategic direction each utility company would take, or the competition and continuing regulatory obstacles it would meet along the way.

In addition, utilities lost much of their financial security. Instead of being content to disgorge their profits as dividends, they were pressured to reinvest them in new plant and equipment to achieve the double-digit earnings increases that investors were now expecting from a transforming industry that had gained sex appeal.

Despite these uncertainties (or maybe because of them), utility stocks started to rise powerfully in the mid-1990s. They were behaving almost like technology stocks. The Dow Jones Utility Average rose 129 percent between the start of 1995 and the end of 2000, then lost all of its gains by October 2002. The stocks rallied over the next three months, but they have since leveled off or dipped. The utility average today remains nearly 50 percent below its high.

Here's what happened: In the early years of deregulation, Wall Street was impressed. New capital arrived, and -- not surprisingly -- the industry became overbuilt. Supply exceeded demand; profits dried up. Old-fashioned managements couldn't handle the changes. As Fleischman says, the industry is "still digging out of excess leverage, a difficult credit environment, and a spending binge on power plants."

Meanwhile, the angry political reaction to electricity shortages and manipulation in California in 2000 and the Enron scandal in 2001 (which involved a pipeline company that decided to make a living trading energy futures and anything else it could get its hands on) added still more regulatory uncertainty.

It's a miserable situation, but that's precisely why you should pay attention. Many of these stocks are absurdly cheap. In a recent roundup, Dow Theory Forecasts found that 14 of 62 electric utilities had price-toearnings (P/E) ratios of 9 or less. The average was 12, or slightly more than half the P/E of the Dow Jones Industrial Average.

Of course, many of these companies deserve their low valuations. Aquila Inc. (ILA), for example, earned $2.35 in 2001 but trades today at just $1.85(down from $37.80) after a disastrous year. Stay away.

On the other hand, Wendell Perkins, who manages the Johnson Family Small-Cap Value Fund (JFSCX), which has returned an annual average of 8 percent over the past three years (whipping the S&P by 22 points), has lately been buying shares of Alliant Energy (LNT), a utility that also suffered a big drop in earnings last year. Alliant made what Perkins calls "some dumb, dumb international purchases," particularly in Brazil, but the company, with a solid Midwest franchise, is returning to its senses.

For total return (that is, dividend plus potential price appreciation), Dow Theory Forecasts recommends Duke Energy (DUK), a battered North Carolina-based electric utility yielding 6.4 percent; KeySpan (KSE), a Brooklyn-based gas utility with a yield of 5.2 percent; Questar (STR), a solid company whose stock has actually doubled over the past three years; and Vectren (VVC), which distributes natural gas in Indiana and Ohio and yields 5 percent. With the potential for so much volatility among the 80-plus electric and gas utilities, diversification is essential. Unfortunately, most mutual funds with "utilities" in their names are loaded with telecommunications stocks -- another sector entirely. Franklin may be the best pure play. The "A" shares carry a 4.25 percent load but has annual expenses of only 0.8 percent. Average annual return for the five years ending Dec. 31, 2002, was 1.5 percent, about two points ahead of the S&P.

No, utilities aren't what they used to be. The idea of sitting back and enjoying a tax-free dividend of 5 percent really isn't in the cards. These companies, undergoing massive changes, carry major risks. But where there are major risks, there are often major rewards.

James K. Glassman's book, "The Secret Code of the Superior Investor," was recently published in paperback. His e-mail is jglassman@aei.org. He invites correspondence, but cannot answer everyone.

Last modified: February 02. 2003 12:00AM

www.hinduonnet.com

THE PREVALENCE of low interest rates in the developed countries, a continuing decline in the external parity of the U.S. dollar vis-à-vis the major currencies and improvement in India's creditworthiness in world markets have been responsible for an unprecedented upsurge in forex reserves. It would not have been expected in 1991, when forex reserves were only $5.83 billion, with foreign exchange assets accounting for $2.24 billion, that there would be an upsurge in these reserves from the middle of the Nineties.

In a little over nine and half months in 2002-03, forex assets have risen by $18.70 billion to $69.75 billion during the week ended January 24, 2003 as compared to only $11.50 billion in the whole of 2001-02.

The revaluation of foreign exchange assets held in euro and other currencies, after taking into account the depreciation in the greenback in recent months, has had an exaggerating effect to the extent of 17 per cent. Even allowing for this adjustment, net additions to foreign exchange assets have been embarrassing to the Reserve Bank. This is because difficulties will be experienced in redeployment of these reserves, if the debt content proves to be sizable.

However, with a smart rise in invisible receipts and a current account surplus of $2.5 billion up to November on current account and other non-debt inflows on capital account, the monetary authorities have indicated that the handling of forex reserves has not presented any serious difficulty.

It is now being discussed in forex market circles to what extent the uptrend in forex reserves will be sustained and whether the $100-billion-mark will be reached even by March 2004 from around $76 billion at the end of March this year after allowing for revaluation including gold reserves.

Higher value of gold holdings

As there has also been a spurt in gold prices in World markets, the reserves held by the Reserve Bank in the Issue Department are being revalued at the end of every month and the value of these reserves has risen to $3.44 billion during the week ended January 17, 2003 from $3.05 billion at the end of March 2002. It is likely that the value of these holdings will rise in a pronounced manner, as World price for the yellow metal has risen by 30 per cent in recent weeks. However, it is necessary to remember in this context that the same quantum held by the Reserve Bank get appreciated in value with monthly adjustments.

With the highly comfortable Balance of Payments (BoP) position and the prospect of a current account surplus emerging again in 2002-03, notwithstanding a heavier oil import bill, the restrictions on the use of foreign exchange by individuals and institutions have been relaxed. NRIs also have been provided incentives for increasing their investments in India. This process of liberalisation towards capital account convertibility of the rupee may not, of course, get reflected in any noticeable utilisation of foreign currencies for various purposes.

External debt reduction

The Union Finance Ministry has, therefore, decided to effect repayment of foreign loan of $1.54 billion due to the International Bank for Reconstruction and Development (IBRD), the developmental financing wing of the World Bank, and another loan of $1.25 billion to the Asian Development Bank (ADB) prematurely. These repayments will be helpful in minimising the interest payments in respect of outstanding foreign debt and there may also be a net decline in the external debt.

The real decline in the outstanding external debt may not get revealed, as foreign bonds are being lodged with the Reserve Bank.

What is heartening to note is the continuing rise in software exports and larger inflows due to remittances from expatriates, a higher level of foreign tourist traffic and other favourable developments. It will be necessary, therefore, for the Reserve Bank to devise measures for effective use of the portion of free reserves for augmenting investment in vital sectors of the Indian economy.

The oil import bill had not, of course, got reflected in an enlargement of the trade gap in April-December 2002, as the increase in the oil import bill by $2.10 billion and non-oil imports by $3.47 billion could be financed more than fully with export earnings of $6.45 billion. As a consequence, the trade deficit for the nine-month period has even declined by $875.80 million.

Even taking into account the impact of higher prices for crude and petro products, due to special factors, the trade deficit may not get enlarged by more than $1.5 billion in a whole year. The Organisation of Petroleum Exporting Countries (OPEC) members are also inclined to raise output for offsetting the reduction in supplies with a drop in output of Venezuela.

Rupee appreciation

The surging forex reserves have resulted in an appreciation of the rupee against the U.S. dollar and less pronounced depreciation against other major currencies. The Indian currency has, thus, improved by 2.55 per cent against the U.S. dollar and also against other ASEAN currencies in varying degrees since June 4, 2002. But it is still at a discount in other major currencies and it is believed that the export effort will not be adversely affected by the rising rupee, as the inflation rate also has remained low at around 3.5 per cent.

Sizable accretion to bank deposits

The accretions to the deposits of the Scheduled Commercial Banks (SCBs) have enabled bank executives to lend liberally for worthwhile purposes and invest at the same time large amounts in new loans issued by the Central and State governments. The Central Exchequer has not, thus, had any difficulty in increasing the net borrowing through new loans on a cheaper basis. Though aggregate borrowing will be higher than the Budget estimate, the fiscal deficit may not get unduly enlarged even with a sharp rise in non-plan revenue expenditure due to liberal assistance extended to the States for overcoming the impact of the drought.

Fiscal deficit may constitute an all time record

The fiscal deficit has, of course, declined to Rs.86,269 crores in April-December 2002 from Rs.89,014 crores even with an increase in total revenue expenditure to Rs.2,18,506 crores from Rs.1,99,249 crores. The revenue deficit has got enlarged modestly to Rs.68,018 crores from Rs.66,559 crores. In spite of the serious bid made by the Union Finance Ministry to prune an undue enlargement of the fiscal deficit, it will constitute an all time record at over Rs.1,45,000 crores. This situation is in strong contrast with the comfortable BoP.

Will fiscal deficit be reduced in stages?

It remains to be seen how the Finance Minister Jaswant Singh will adopt measures for contracting the fiscal deficit gradually with a pruning of subsidies, downsizing Government employees and the like. There should also be a streamlining of the structure of indirect and direct taxes for boosting revenues even while providing the necessary fillip to saving and investment and creating conditions, which would be helpful to the Planning Commission to achieve the postulated average gross domestic product (GDP) growth of 8 per cent in the Tenth Plan Period.

P. A. Seshan

www.forbes.com Reuters, 02.02.03, 5:51 PM ET By Susan Schneider

NEW YORK, Feb 2 (Reuters) - Emerging sovereign debt is set for a mixed and troubled week as investors await fresh signals from the United States on the timing of a possible military strike against Iraq, as well as clues to how much international support the nation may have if it goes to war.

Brazil may provide a ray of hope in the midst of the war worries with the government's release of a 2003 primary budget surplus target, widely expected to rise from the 2002 goal, but analysts said the key events would unfold on the geopolitical front.

A key focus for investors will be U.S. Secretary of State Colin Powell's visit to the United Nations Security Council on Wednesday, when he has said he will provide evidence that Iraq possesses banned weapons.

"The reaction of global financial markets (to the global environment) will set the tone for emerging markets, and in particular for Brazil," which is vulnerable to increased risk aversion among investors because of its reliance on capital flows, said Graham Stock, head of sovereign strategy for Latin America at J.P. Morgan.

The Iraq uncertainty has sunk U.S. equities and battered the dollar in recent weeks as investors worry a protracted conflict would pummel an already tepid U.S. economy. The feeble U.S. markets have also weighed on Latin America's currencies and sovereign bonds, erasing a piece of an early January rally inspired by optimism for Brazil's new president and fresh, turn-of-the-year funds.

"The sooner the war happens and is over, the better for the market," said Ricardo Amorim, head of Latin American research at research firm IDEAGlobal. "What can scare the market is if there is any kind of sign after a war starts that it may take longer" than expected.

Another piece of the war puzzle is the magnitude of international support. Investors will be looking for clues that the United States can convince a deeply divided Europe to join an Iraqi mission since it would improve the chances of a shorter war. So far, a number of countries say there is insufficient evidence to justify an attack on Iraq.

"The stronger the coalition, the more likely it is that the war is going to be fast," said Amorim.

Within emerging markets themselves, Brazil is set to be the key focus. Finance Minister Antonio Palocci is widely expected to peg the primary surplus goal above last year's goal of 3.75 percent of gross domestic product, a move that would cement confidence by showing rookie President Luiz Inacio Lula da Silva is sincere about bolstering Brazil's financial health.

"They've suggested it will be between 4.2 percent and 4.5 percent (of GDP), so we would expect it to come in that range," said Stock. "If it comes in toward the bottom end of that range there's room for some disappointment, but that doesn't mean that the final result at the end of the year won't be stronger," Stock added. "What we've seen in the last few years is the government outperforming these targets."

MIXED VIEW OF VENEZUELA Venezuela remains on investors' radars as they look for signs of a resolution to a two-month strike waged by foes of resident Hugo Chavez, said analysts.

The shutdown has strangled oil production, once the source of half the government's revenues, and fueled investor fears the cash-strapped Chavez administration may not have the cash to pay its debts.

But even though oil workers are maintaining their protest, Chavez's use of replacement crews has helped recover some of Venezuela's oil output, allaying such fears. Some restaurants, stores and businesses have also rolled back their participation in the strike in a bid to avert bankruptcy.

While the strike's easing spells good news for Venezuela's finances, it carries a negative note for investors hoping Chavez would be forced from office. The loss of strike momentum suggests Chavez, whose anti-free market sentiment has not made him popular on Wall Strike, is likely to remain firmly in power for the medium-term, said analysts.

On Sunday, Chavez declared victory over the strike while the opposition turned out to sign a petition for early elections.

www.forbes.com Reuters, 02.02.03, 5:51 PM ET By Susan Schneider

NEW YORK, Feb 2 (Reuters) - Emerging sovereign debt is set for a mixed and troubled week as investors await fresh signals from the United States on the timing of a possible military strike against Iraq, as well as clues to how much international support the nation may have if it goes to war.

Brazil may provide a ray of hope in the midst of the war worries with the government's release of a 2003 primary budget surplus target, widely expected to rise from the 2002 goal, but analysts said the key events would unfold on the geopolitical front.

A key focus for investors will be U.S. Secretary of State Colin Powell's visit to the United Nations Security Council on Wednesday, when he has said he will provide evidence that Iraq possesses banned weapons.

"The reaction of global financial markets (to the global environment) will set the tone for emerging markets, and in particular for Brazil," which is vulnerable to increased risk aversion among investors because of its reliance on capital flows, said Graham Stock, head of sovereign strategy for Latin America at J.P. Morgan.

The Iraq uncertainty has sunk U.S. equities and battered the dollar in recent weeks as investors worry a protracted conflict would pummel an already tepid U.S. economy. The feeble U.S. markets have also weighed on Latin America's currencies and sovereign bonds, erasing a piece of an early January rally inspired by optimism for Brazil's new president and fresh, turn-of-the-year funds.

"The sooner the war happens and is over, the better for the market," said Ricardo Amorim, head of Latin American research at research firm IDEAGlobal. "What can scare the market is if there is any kind of sign after a war starts that it may take longer" than expected.

Another piece of the war puzzle is the magnitude of international support. Investors will be looking for clues that the United States can convince a deeply divided Europe to join an Iraqi mission since it would improve the chances of a shorter war. So far, a number of countries say there is insufficient evidence to justify an attack on Iraq.

"The stronger the coalition, the more likely it is that the war is going to be fast," said Amorim.

Within emerging markets themselves, Brazil is set to be the key focus. Finance Minister Antonio Palocci is widely expected to peg the primary surplus goal above last year's goal of 3.75 percent of gross domestic product, a move that would cement confidence by showing rookie President Luiz Inacio Lula da Silva is sincere about bolstering Brazil's financial health.

"They've suggested it will be between 4.2 percent and 4.5 percent (of GDP), so we would expect it to come in that range," said Stock. "If it comes in toward the bottom end of that range there's room for some disappointment, but that doesn't mean that the final result at the end of the year won't be stronger," Stock added. "What we've seen in the last few years is the government outperforming these targets."

MIXED VIEW OF VENEZUELA Venezuela remains on investors' radars as they look for signs of a resolution to a two-month strike waged by foes of resident Hugo Chavez, said analysts.

The shutdown has strangled oil production, once the source of half the government's revenues, and fueled investor fears the cash-strapped Chavez administration may not have the cash to pay its debts.

But even though oil workers are maintaining their protest, Chavez's use of replacement crews has helped recover some of Venezuela's oil output, allaying such fears. Some restaurants, stores and businesses have also rolled back their participation in the strike in a bid to avert bankruptcy.

While the strike's easing spells good news for Venezuela's finances, it carries a negative note for investors hoping Chavez would be forced from office. The loss of strike momentum suggests Chavez, whose anti-free market sentiment has not made him popular on Wall Strike, is likely to remain firmly in power for the medium-term, said analysts.

On Sunday, Chavez declared victory over the strike while the opposition turned out to sign a petition for early elections.

www.bangkokpost.com

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 US 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 is killing stocks and has plunged key market gauges to their lowest levels in more than three months.

Ordinarily, investors' focus would be fixed on the outlook for the economy and corporate profits, but the coming week was ``just not going to be an ordinary week'', said Hugh Johnson, chief investment officer at First Albany Asset Management.

A modest rally lifted most stocks on Friday but Wall Street ended a third straight negative week and was in the red for January despite a promising start.

The Dow Jones industrials closed up 108.68 points (1.37%) at 8,053.81, shrugging off a weak start. The Standard and Poor's 500 advanced 11.09 points (1.31%) to 855.70 but the Nasdaq fell 1.43 points (0.11%) at 1,320.92.

The markets closed out January with a loss, despite conventional logic about a ``January effect''.

Tom Schrader of Legg Mason Wood Walker dismissed the Wall Street adage that performance in January foreshadowed the trend for the year. ``I don't think there is any statistical proof to back it up,'' he said.

But Brian Piskorowski, equity strategist at Prudential Securities said January's direction had predicted the market's annual course with 92.3% accuracy.

The parade of corporate earnings will fade into the background somewhat this week, but Wall Street will be tuned in for results and, more importantly, forecasts from technology bellwether Cisco Systems Inc and No. 4 long-distance telephone company Sprint Corp.

While brewing geopolitical events will likely shove nearly everything else to the back burner this week, economic reports _ particularly data on the manufacturing sector and the labour market _ could also affect the mood.

The Institute of Supply Management's gauge of the factory sector, set for release today, and US payrolls data on Friday will give investors some early glimpses of the state of the economy.

Evidence that the US 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.

Wall Street will also be watching on Wednesday when Secretary of State Colin Powell goes before the UN Security Council to try to persuade doubters that Iraq has weapons of mass destruction.

Worries that a war could disrupt oil supplies, as well as a two-month strike that has crippled production in Venezuela, have pushed the price of crude 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.

But the 2002 fourth-quarter results from corporate America have been, for the most part, encouraging. About 67% of the companies in the S&P 500 have reported earnings so far, and, of those, 62% have beaten Wall Street analysts' expectations and 22% 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.''

In addition to Cisco and Sprint, results are expected this week from medical device maker Boston Scientific Corp, consumer products company Colgate-Palmolive Co, No. 2 US drugstore chain CVS Corp, and top US home appliance maker, Whirlpool Corp.

Beverage and food company Pepsico Inc and Anheuser-Busch Co, the maker of Budweiser beer, also have results on tap.

European markets closed out a dreadful January though prices were mostly higher on Friday after positive US economic data coaxed bargain-hunters back into the market. Most bourses still ended up posting their worst January performance in years as the countdown to war picked up.

The FTSE Eurotop 300 index of pan-European blue chips, coming on the back of three straight years of losses, ended the month more than 7% down _ its worst January performance since the index's records begin in 1986.

The DJ Euro Stoxx 50 index of leading euro-zone shares was up 0.45% on Friday to 2,248.17 points. The German DAX 30 index gained 2.01% to 2,747.83 points and the French CAC 40 added 0.81% to 2,937.88 points. The British FTSE 100 eased back 0.32% to 3,567.4 points. The euro fell to $1.0740 while oil prices were steady.

``The dollar is continuing to do a bit better than before and that also helped the European markets. But the Iraqi problem continues to create negative sentiment,'' said a dealer in Paris.