By Gwynne Dyer SPECIAL TO THE JOURNAL Sun, January 5, 2003

The past year has been dominated by a U.S. obsession with Iraq which, remarkably, seized the Bush administration only three months after the terrorist attacks on the United States in September, 2001. In my year-end survey 12 months ago, just after the U.S. occupation of Afghanistan, I simply wrote that Middle Eastern Muslims were waiting to learn "which of their countries the United States would hit next: Iraq, Somalia or Sudan." Washington was clearly looking for a fresh target, but nobody had a clue which way it was going to jump.

Whatever the original motives for the choice of Iraq, the project now has an almost unstoppable momentum within the introverted world of Washington politics, and the Bush administration almost certainly will attack Iraq, probably in the next few months. But the weird thing about 2002 is that the international news has been virtually monopolized by a non-event. There has been no fighting in the Middle East apart from the familiar cycle of violence between Israelis and Palestinians, and no regimes have toppled. Indeed, nothing tangible has yet changed in the region, apart from a gradual increase in the usual pace of U.S. and British bombing in Iraq's "no-fly zones."

Almost unnoticed amidst all the media hype about coming events, there was dramatic progress in closing down the real wars that have been ravaging whole regions and killing huge numbers of people. First came the 27-year-old Angolan civil war, which suddenly ended in April after the rebel leader, Jonas Savimbi, was caught in an ambush and killed. Next, in July, there was a breakthrough in peace negotiations in Africa's oldest war, between the Arabized Muslim northerners and southern, mostly Christian, Africans of Sudan. There is not yet a definitive cease-fire in Sudan, but a war that has killed 2 million people over 33 years finally seems to be subsiding. Then, still in July, a peace agreement in the Democratic Republic of Congo (formerly Zaire) ended what has been called "Africa's First World War.. Most of the six foreign armies have already gone home, and the fighting that caused more than 2 million Congolese deaths in four years has subsided to sporadic outbreaks of banditry.

The miracles then moved east, to the two longest-running wars in Asia. In September, the Liberation Tigers of Tamil Eelam dropped their demand for a separate state for Sri Lanka's Tamil minority, opening the way for negotiations to end the 19-year war that has devastated the island nation. In December, Indonesia signed a peace deal with the separatist rebels of Aceh in northern Sumatra, ending a 26-year war by granting the provincial governments of the region a 70 percent share in Aceh's oil and gas revenues. Also in December, the Tutsi-dominated government of Burundi signed a power-sharing agreement with the largest of the Hutu opposition groups, which gives the Central African country its best chance for peace since 1963.

There was bad news, too: A new civil war broke out in once-stable Ivory Coast in September, and the Maoist insurgency in Nepal, gaining strength by the month, threatens to produce a new Year Zero in that impoverished and misgoverned country. But from 15 wars only five years ago, Africa is now down to only three or four (depending on whether Sudan is really over), and Asia is down to just three (in Nepal, Kashmir and the southern Philippines). Even allowing for one civil war in the Arab world (Algeria) and one in Latin America (Colombia), the world is a more peaceful place this month than it has been at any time since September 1939.

More peaceful, but far from out of the woods. The most terrifying confrontation of the past year was the summer stand-off between India and Pakistan, two newly fledged nuclear powers that have fought each other three times already. If they were to do so again, using their new weapons, the death toll would exceed the total losses in all the other wars of the past 10 years in a matter of days. New Delhi and Islamabad have stepped back from the crisis for the moment, but huge armies still face each other across the border.

There has been one great change in the world this year, however, not in the Middle East at all, but in Latin America. An unsuccessful U.S.-backed attempt in April to overthrow the continent's one existing left-wing leader, President Hugo Chavez of Venezuela, was notable for the speed with which the poorest section of the population came to his defense, despite his failure to improve their economic plight. That was followed by the imposition of a state of emergency in Paraguay and widespread looting and bank closures in Uruguay in July, and an electoral upset in Bolivia in August that gave over a third of the seats to candidates of Indian descent and brought Evo Morales, the leader of the Movement Towards Socialism, to within a hair's breadth of the presidency.

Then in quick succession came the victory of Workers' Party leader Luiz Inacio Lula da Silva in the October presidential elections in Brazil; populist Lucio Gutierrez's capture of the presidency in Ecuador's November elections, less than two year after he was jailed for leading an attempted leftist coup; and a renewed confrontation between Hugo Chavez and Venezuela's right-wing white elite that halted oil exports from one of America's largest suppliers in December. Almost half of Latin America's people now live under left-wing governments. While the Bush administration has been focusing obsessively on the Middle East, it has lost control of its own back yard.

The United States remains the great conundrum of the planet. Americans have been so traumatized by a single terrorist attack on their own soil that they have handed the country over to an administration with a radical right-wing agenda for domestic change and foreign expansion, though fewer than a quarter of them voted for it. The question is whether the American people can recover their balance without having to go through some painful and expensive, though ultimately instructive, experiences in the Middle East. The answer, at the moment, appears to be no, so a great deal of the rest of the world's business is being put on hold.

Knight Ridder News

WASHINGTON - Tiny Central America may soon benefit from an outsized eagerness in Washington to energize the march toward a free-trade area stretching from Alaska to Argentina.

This week, the Bush administration will launch formal talks with five Central American nations to strip away trade barriers. The goal: reach a free-trade accord by the end of the year.

The five Central American nations have tiny economies. But taken together, the region's 36 million people buy and sell nearly $20 billion worth of goods and services a year with the United States, even amid grinding poverty in corners of the isthmus.

"We buy half of what China buys from the United States," said El Salvador's economy minister, Miguel Lacayo, during a recent trip to Washington, referring to the region's purchasing power. "We buy more than what Chile, Colombia and Peru combined buy from the States. So we certainly are a significant trading partner."

Trade between Central America and the United States has nearly doubled in the past seven years, and any further increase would bring new jobs to South Florida, a conduit for a significant portion of exports and imports.

Washington's efforts toward hemispheric trade liberalization have stumbled in recent years. Economic collapse in Argentina and a leftward political tilt elsewhere in South America, most notably Brazil, have dimmed prospects further. A skeptic of free trade, Luiz Inacio Lula da Silva, took office Wednesday as leader of Brazil, the regional economic powerhouse.

The Bush administration - seeking to build on the 1994 agreement that united Canada, Mexico and the United States in a powerful North American trade bloc - hopes to invigorate the march toward a Free Trade Area of the Americas (FTAA), and it has had some recent successes.

On Dec. 11, the Bush administration wrapped up a free-trade agreement with Chile, the first with any South American nation. Congress is expected to approve the accord in coming months. Adopting a piecemeal approach, administration officials believe a less ambitious free-trade accord with Central America may give vigor to the FTAA talks.

"The administration is saying, 'Look, the FTAA is a lugubrious process, and we want to show some quick progress with Central America,' " said Jerry Haar, a trade expert at the North-South Center of the University of Miami.

Global terrorism has also stirred the Bush administration to push harder for free-trade agreements, believing they will bring greater prosperity and stability to a troubled region.

Whether a free-trade agreement would be an overall boon to Central America is still under debate. Some experts believe the value of free-trade agreements is oversold.

Huge disparities mark Central America. In prosperous Costa Rica, per capita production of citizens is $3,960 a year, while in neighboring Nicaragua, it is $420 per year, the World Bank says. The other countries in the free-trade talks are Honduras, El Salvador and Guatemala.

Leftist opponents say a Central America trade accord would weaken unions, lower wages, foster sweatshops and generally enrich those who already have money.

Others suggest that it will boost overall economic performance of the region, but that the five nations will benefit to different degrees and income disparities may grow.

"At the end of the day, the rich will get rich faster than the poor," said Gary C. Hufbauer, a senior fellow at the Institute for International Economics, a Washington think tank.

Several of the Central American nations lack mechanisms of modern economies, and cling to rigid labor laws, inefficient judiciaries or state ownership of key areas that may inhibit investment even with a free-trade accord, U.S. experts said. "Costa Rica and El Salvador are very entrepreneurial. They probably have a business community ready to exploit it," said Ricardo Hausmann, an economics professor at Harvard University. Disparities between the five nations should not block an accord, proponents say.

After the trade negotiations kick off on Thursday in Washington, they will resume in the last week of January in San Jose, Costa Rica. Nine meetings have been scheduled for the year.

"They are not incompatible. Costa Rica will move into the higher echelon or higher niches, while Nicaragua will be more linked to the lower end of manufacturing," said Alfredo Milian, executive coordinator of the Central American and Caribbean Textile and Apparel Council.

One of the obstacles to reaching an agreement is "great concern" within the Bush administration over corruption in Guatemala, the most populous nation in Central America.

At a congressional hearing Oct. 10, State Department officials said "high-level officials" in President Alfonso Portillo's government in Guatemala maintain close links with drug trafficking and organized crime syndicates.

Most of 2002 was so bad for stock funds that a strong finish couldn't save the year from being a downer. By KENNETH N. GILPIN The New York Times Sunday, January 5, 2003

The fourth quarter was a good one for stock mutual funds, but the market had declined so sharply in the nine previous months that 2002 ended as the third consecutive miserable year.

"It was nice to see something go up, but compared to where we were three years ago, it was a drop in the bucket," said Russ Kinnel, the director of funds research at Morningstar. "We are still looking at some pretty sizable losses in many areas."

Fueled by the rise in major market averages, which spent the first two months of the quarter rallying from lows set in early October, the average domestic equity fund gained just less than 6 percent in the quarter, according to Morningstar data. But that gain merely pared nine months' worth of sizable losses: For the year, the average domestic equity fund lost more than 20 percent of its value.

Last year was the worst for stock funds since 1974 and contrasted sharply with the 1990s, when the group rose in eight of the 10 years.

The 2002 declines were breathtakingly pervasive across the fund industry. Lipper Inc., which tracks fund performance, said 96 percent of equity funds finished the year in negative territory.

For the year, only three groups of funds had positive returns: gold funds, up more than 60 percent; specialty diversified equity funds, which include funds that short the market, up more than 8 percent; and real estate funds, up a bit more than 3 percent.

"Last year was about as bad as it can get," said Thomas M. McManus, chief investment strategist at Banc of America Securities. "But the good thing about the sharp fall in stocks is that it makes the market more resistant to further declines.

"I suppose you could come up with some scenario in which people would want to sell stocks below their October lows," McManus added. "But we think the market is making a gradual recovery."

Those who did well in 2002 did so by "avoiding mistakes" in the stock market, said Thomas F. Marsico, the president and chief investment officer of Marsico Funds. "If you avoided Tyco, WorldCom and Enron, you outperformed the market," he said.

At the end of 2001, he said, he was wary about what might happen over the next 12 months. "A year ago, our portfolios were pretty defensive," he said. "We are now somewhat more optimistic."

It was a good quarter for natural-resources funds, which rode the sharp rise in the price of oil. The end of Brazil's two-stage election process, and the decisive victory of Luiz Inacio Lula da Silva in the presidential race, was a tonic to Latin American stocks. Emerging-markets funds in general did well, as did most funds that focus on foreign stock markets.

Tom Soviero, who manages the $2.2 billion Fidelity Advisor High Income Advantage fund, said that if one event helped the high-yield market, it was the Fed's rate cut in early November. "That was a statement that liquidity was going to be provided," he said. "Also, the equity market helped quite a bit, led by technology and telecommunications stocks."

Although High Income Advantage was up more than 13 percent for the quarter, it fell by more than 5 percent for all of 2002.

"It's been a tough year," Soviero said. "I'm not bragging. But I hope the recent trend continues."

It seemed to be a good quarter for technology and telecommunications stocks, which bounced sharply off what some analysts said were oversold levels. Still, many said fundamental indicators suggested weak demand for products from personal computers to fiber-optic cable.

Nevertheless, technology funds posted a gain of just under 20 percent in the quarter. And telecommunications funds rose nearly 16 percent, according to Morningstar.

But those gains did little to transform a horrific year for the sector.

In 2002, science and technology funds lost more than 40 percent of their value, according to Lipper. So did telecommunications funds – their worst performance on record. Over the past three years, both groups have lost more than 70 percent of their value.

Steven F. Crowley, co-manager of one of the quarter's best performers, Kopp Emerging Growth fund, has about 90 percent of its assets in health care, medical technology and technology stocks.

"In our opinion, these stocks went down to a valuation extreme," he said. "If the economy doesn't grow next year, you will be hard-pressed to make the case that technology spending is going to grow."

REUTERS[ SUNDAY, JANUARY 05, 2003 05:57:02 PM ]

DOHA: Opec president Abdullah al-Attiyah said on Sunday he expected the cartel to increase crude oil supplies by up to one million barrels per day (bpd) in a bid to quell soaring prices.

"An increase could be anywhere between 500,000 bpd to one million bpd... It will depend on consultations," Attiyah, the oil minister of Qatar, told Reuters.

Unless there is a sharp drop in prices, the cartel is on course to lift supplies in mid-January via its mechanism that stipulates supplies be raised by 500,000 bpd if prices for a basket of OPEC crudes stay over $28 a barrel for 20 days.

The group is not bound by the 500,000 bpd volume. Opec's crude basket was last valued at $30.05 on Thursday, the 13th day the reference price was above $28.

It is still not clear whether Opec ministers will have to meet to raise output or decide by telephone to lift supplies.

"We should decide before January 14 whether the mechanism should be triggered automatically or if there should be an extraordinary meeting," said Attiyah, who from January 1 took over the Opec presidency from Nigeria's Rilwanu Lukman.

"We are still in the consultation process."

Oil prices have rallied sharply on fears that political turmoil in Venezuela will spur a supply crunch in the United States and that a war on Iraq will deepen shortages.

Opec agreed in December to raise output limits by 1.3 million bpd to 23 million bpd from January 1 in a bid to legitimise quota-busting that had left actual output running at 24.5 million bpd prior to a strike in exporter Venezuela.

Their pact to curb output was based on the assumption that Venezuelan supplies would resume imminently, but the strike which has crippled the Opec member's oil operations is now in its fifth week.

Of the 10 countries bound by quotas, only Opec's leading producer Saudi Arabia and its Gulf ally the United Arab Emirates have any significant spare capacity.

Their combined excess volume would be sufficient to replace either Venezuelan or Iraqi exports. But analysts said the unlikely scenario of a simultaneous halt in both countries would test the cartel's supply limits.

Sun January 5, 2003 09:03 AM ET By Philip Klein

NEW YORK (Reuters) - Stocks could get a boost from positive economic signals this week as the trading year begins in earnest, but fears over international trouble spots Iraq, North Korea and Venezuela will likely temper gains.

Investors are optimistic that 2003 will break the three-year losing streak of major market indexes, and stocks got a head start on Thursday after an upbeat report on December manufacturing sparked one of the strongest opening days ever.

When traders return for the first full week of the year they will be closely watching data on the service sector due on Monday and unemployment figures due on Friday, hoping they will show that last week's positive economic news was no fluke.

"Investor psychology is hoping for a positive '03," said Tim Heekin, director of trading at Thomas Weisel Partners. "I think early on in the year people are going to look to put a little money to work, and I'd like to think we'll have a nice 2 percent to 5 percent move up next week."

For the holiday-shortened week, the Dow Jones industrials .DJI were up 3.6 percent, the S&P 500 .SPX was up 3.8 percent and the NASDAQ .IXIC ended 2.9 percent higher.

President Bush is expected to unveil an economic stimulus package on Tuesday that could include tax cuts on stock dividends.

But uncertainty about expected U.S.-led military action in Iraq, confrontation between the United States and North Korea over nuclear arms and political upheaval in Venezuela will be hanging over the market.

"Based on the landscape globally, even though we do have an improving economy, we're going to see sideways movement and that's all," said Jack Francis, senior trader at UBS Warburg.

WEEK ONE

Next week, investors are expecting volume to improve with institutions returning to full staffing levels after the last two trading weeks were split in half by the Christmas and New Year's holidays.

With signs that the economy is improving and sentiment that the flood of corporate scandals is over, market watchers are optimistic that this will be the first up year for stocks since 1999.

ECONOMIC SIGNALS

The Institute for Supply Management's manufacturing index was well above expectations and spurred a rally on Thursday.

But the report left many analysts questioning whether the numbers reflected real strength in the economy or an aberration.

They may get answers next week when the ISM's report on the service sector is released Monday. If it mirrors the strong manufacturing data, markets could get off to a good start, but a negative report would likely be a major drag on stocks.

"If that number comes out disappointing, you'll probably see indexes test their December lows," said Tom Schrader, head of listed trading at Legg Mason Wood Walker.

As for Friday's release of December unemployment figures, the jobless rate is expected to remain at an 8-year high of 6 percent.

MAJOR CONFLICTS

Schrader said the biggest factor keeping the market down now is that three international crises are happening at the same time -- in Iraq, North Korea and Venezuela.

"It's a general dark cloud, and as much as the Bush administration is trying to play it down, what worries people most is North Korea," Schrader said. "I think most people think we can go in and take care of Saddam Hussein pretty quickly."

The situation in Venezuela is particularly troubling because labor strikes by opposition groups have choked oil shipments from the world's No. 5 oil exporter, driving up the price of crude.

NYMEX crude oil futures ended 4 percent higher Friday at $33.08 a barrel, the highest in more than two years.

"If oil prices remain high, there is clearly a threat to economic recovery in the United States," said Alan Ackerman, senior vice president and strategist at Fahnestock & Co.

Ackerman also said markets will be eagerly awaiting the details of the Bush economic plan and the strength of opposition to it.

Corporate quarterly earnings reports will begin to trickle in next week as well, including Dow component Alcoa Inc. AA.N . But investors will be especially sensitive to any profit warnings and outlooks for the year.

On Thursday, retailers will report their sales at stores open at least a year for a December holiday shopping season that is seen to have the lowest gains in decades.

But, after warnings by Wal-Mart Stores Inc. WMT.N and Home Depot Inc. HD.N , investors believe that much of the bad news is already reflected in the market.

"It was a so-so Christmas. Everybody knows it and all negative news is probably placed in," Francis said