Table On-Topic Summary - 19-Aug-2002
A compilation of this board's financial/economic posts From 40643 to 40687

Post  40643  by  Decomposed       OT: Table ON TOPIC SUMMARY Aug
Post  40644  by  lkorrow       "Let there be peace here
Post  40645  by  Culmus       OT: Test, eom.

Post  40646  by  uponroof       Reply
'show and tell' money...
An interesting market newsletter which mentions the Brazil/Citi/JPMC dilemma.


3076 Sir Francis Drakeís Highway
Road Town, Tortola, BVI

Website: E-mail:

August 15, 2002
Volume 16



I think if I hear the word ďcapitulationĒ one more time, I may become violently ill. For the last three weeks every guru on Wall Street has been on CNN or CNBC trying to determine if weíve had capitulation in the equities markets and, as a result, made a bottom. Most have come to the conclusion that we have made a Ďtemporary bottom and some more intrepid souls have even gone so far as to call an end to the Bear Market. The use of the word capitulation in and off itself doesnít bother me; rather itís the misuse of the word that gets my goat. I was always taught that capitulation in the market place refers to a day or sequence of days where you have 90% of all volume and points gained/lost in the red. That has happened twice in the last twenty years: once in October 1987 and then again in April 2001. It did not happen in September 2001 nor did it just happen in July of 2002. And until it does you will not see a bottom of any significance in the equities markets. Whatís more we did see one day in July where 90% of all volume and points gained/lost finished in the black, one of our sudden 447 point rallies that squeeze the short players and lead to premature graying. Whenever you see upside days like this that precede real capitulation, itís usually a bad omen.

If Iím right and we canít apply the dreaded ďCĒ word yet, then whatís in store for the coming days and weeks? For the last several months every prominent politician and Sir Allen Greenspan have been telling everybody who would listen that the economy has turned the corner and thereís no need to worry. In fact we werenít even in a recession because we never had two consecutive quarters of negative growth. Oops! It was announced last week that weíve actually had three consecutive quarters of negative growth but who keeps track of such trivial things? Oops again! Mr. Greenspan just announced that they might have to lower interest rates again because the economy hasnít turned around quite the way he anticipated. Some poor souls actually have the gall to question if we are headed into double-dip recession. How dare they! Obviously Allen knows what heís doing. After all, the twelfth rate decline in just over one year should make all the difference in the world.

Sarcasm aside, in order for the market to turn around things have to improve. If youíre honest and ask yourself what is better now than a month or two ago, the true answer has to be ďnothing.Ē The equities markets are still grossly overvalued. Thatís right! As of July 31, 2002 the U.S. equities markets are still excessively overvalued in spite of the fact that the NASDAQ has lost 75% of its value and the S & P has lost 40% of its value. The PER (price-earnings ratio) for the NASDAQ is still in excess of 40 while the S & P remains above 27 times earning. The historical average for the U.S. equities markets is 13.5 times earnings (this would be somewhat higher for the NASDAQ do to itís speculative nature). Whatís even more interesting is that during times of major Bear Market declines, the equities markets fall from their lofty perches and almost always go down through 13.5 to make lows at 6 or 7 times earnings. Then they recover to their 13.5 average. As far as we are concerned, we still have a long, long way to fall! Additionally, the U.S. dollar current account deficit now exceeds $400 billion dollars annually, and the continuation of this chronic deficit has turned the U.S. into the worldís largest debtor nation as most of these deficits are being recycled into U.S. government debt instruments. As a result, the U.S. Dollar Index is now below 107.00 and has fallen as low as 104.12. In my opinion, the absence of any significant rally back above 110.00 over the last several weeks has all but sealed the fate of the U.S. dollar.

The question continues to be: how good are U.S. investments? Investments in the equities markets are not going to attract attention because of high P/E ratios and a lack of transparency. The same can be said for bonds. This is further complicated by the fact that numerous US banks are having liquidity problems. In particular J. P. Morgan/Chase and Citibank. These banks have tremendous problems with their respective derivatives portfolio, have billions of dollars in bad loans out to domestic corporations and Latin America, and are being investigated for making fraudulent loans to numerous energy companies. The same goes for Merrill Lynch and several other large brokerage houses. Eventually the weight of all this debt, scandal, and lawsuits will close these institutions. Finally, the Japanese and European markets all made new lows recently and there really isnít any port in the storm.

With respect to the major indexes, I want to focus our attention on the Sept S & P futures. Sooner or later the DJIA will follow the Sept S & P(SPU2) while the NASDAQ is still a disaster and doesnít warrant any discussion. We bottomed out at 775 in the CASH S & P in July and since then we have tried to rally. We closed at 918 on August 14th and are close to reasonable resistance at 940.65 in the SPU2. I view this as our best-case scenario. In the off chance that we can exceed this barrier, our next best alternative is that we have 1,011.51 offering further resistance. I seriously doubt that we can make it this far but it is possible and does merit some consideration. More than likely though, we will loose our upward momentum before the end of next week and move down to test 828 and maybe even 771.30 in the SPU2. Ideally, I was looking for the market to bottom out in July at 715 in the SPU2 and then stage a reasonable Bear Market Rally (characterized by a lot of sideways movement) that could take us back up to the 1,000 area and maybe even offer a short-term buying opportunity. This rally should have carried us into late September. Then we would have begun a significant decline into the 600ís. Unfortunately that didnít materialize and I canít help but have this nagging feeling that we didnít finish this last leg down of the Bear Market and the experts on TV are in for some more surprises to the down side. These surprises could come sooner than later. Do to uncertainty, I liquidated my short positions at 785 in the SPU2 but I never went long. I shorted our first small rally that carried us to the 900 level and was stopped out at 855 after going as low as 828. I am currently out of the market and wonít attempt to go short until we reach 932.50 in the SPU2. I donít think Iíll have to wait very long. In any event I will put a stop/loss in at 949.50 as I have no intention of giving back our hard earned profits. Under no circumstances, will I attempt to buy this market.

Finally, there is a small chance that we trade in a range (828 to 947) for several weeks. The SEPT S & P took out the September 21, 2001 low of 944.75 on July 3, 2002 and then dipped as low as 771.30 on July 24th before we began a rally that has carried us back up to our current level of 918. This is our second trip up here. This break of last yearís low is important because the Bulls have been saying all year long that it would hold. This break in the SEPT S & P (SPU2) futures was even more dramatic as we broke below the old lows by more than one hundred and seventy points. Thatís significant! I now expect the SEPT S & P to end their rally soon and then head down to test our recent lows. I really doubt these lows will hold and I fully expect to see 715 in the SPU2 within two months. My question is: will this hold and produce the expected Bear Market Rally? I expect the market to find considerable support at this level and we should set up for a Bear Market Rally that lasts anywhere from one to four weeks. Although I think that the rally will be high-lighted by sideways trading for the most part, it is possible that we could rally back up to 1,011.51 in the SEPT S & P. Any reasonable break (< than 15 points) of the 715 support level will probably lead to a complete collapse of the market and a quick trip down into the low 600ís before we can catch our breath.

Itís important to understand that we arenít making any bottoms in the Bear Market and we wonít be doing so anytime soon. These occasional rallies at best offer a chance to day trade longs and really are nothing more than longer term selling opportunities and they shouldnít fool you. The worst is not over. The worst is yet to come.

With respect to the precious metals markets, there is absolutely no doubt in my mind that we have entered into a long-term Bull Market for both gold and silver. But as Iím sure youíve noticed by now, it wonít be with out some discomfort. In simple terms, gold has done some things over the past three weeks that have no precedent as far as I can tell. For instance, I can find no similar period over the last eighty years where youíve had sharply declining equities markets, inflation, the US dollar in a free fall and declining gold prices. Not one time. Yet this has been the case for the better part of the last six weeks. And when gold prices do rise, gold stocks decline, sometimes sharply, at the same time. The only logical explanation is intervention by major banks with short positions (Citibank and J.P. Morgan), the Fed (afraid that rising metals prices will confirm inflation), and the US Treasury. The good news is most of this has been offset by Asian demand thatís willing to buy whatever quantity of gold at US $305.00/ounce. Too, itís worth remembering that intervention canít last forever and is almost always counter-productive over the long run.

The recent pullback in the gold and silver market is also a good example of seasonal weakness. During the last two Bull Marketsí in gold, we also experienced summer declines during the second year only to make new highs in the fall. Specifically, OCTOBER GOLD (GCV2) fell from our June 4th high of US $331.10/ounce to a low of US $299.5/ounce on August 1st and it would appear that we are building a base for the next run up. We were stopped out of gold several weeks ago at US $317.50 and only repurchased 25% of our portfolio at US $302.50. Why? We are still looking for GCV2 to bottom at US $296.52 and this should happen over the next two weeks. If it doesnít happen, we will add on to our positions on any weakness. Likewise we were stopped out of our SEPT SILVER (SIU2) positions at US $5.05 in the middle of July. We have now repurchased 50% of our former contracts at prices ranging from US $4.45 on up to US $4.59 and have our stop/loss at US $437.65 The SIU2 closed at US $4.458 on August 14th. These declines have prompted a series of articles from analysts stating gold was extremely overvalued and would fall to US $292.50/ounce before stabilizing. They recommended buying at this latter price. Well, gold prices were ahead of themselves and a correction was inevitable but I seriously doubt that the market will allow this to happen and as of August 14th the OCT GOLD has worked its way back up at US $312.30/ounce. Volume is increasing as people are being forced to buy at higher levels than they previously anticipated. Those of you had the foresight to purchase OCT GOLD at these lower levels will be able to look back in a month and say they got into the market at a cheap price. Then again, thatís the major characteristic of a bull market!

With respect to metals stocks, you may recall that we liquidated our entire portfolio toward the end of May in order to realize all of our profits. Subsequently, in early June we reinvested half of the proceeds in Bema Gold, Cambior, Echo Bay, Gold Corp., Glamis Gold, Golden Star, Gold Fields, and Kinross Gold. Later in July, we added Afrikander Lease to the portfolio. All of these companies were purchased in Canada, South Africa, or Switzerland in that countryís respective currency. In terms of share price, the portfolio has suffered a 25% decrease since the initial investment but weíve recovered some of that (+/- 5%) do to exchange rate profits. The question now becomes: when do we invest another 25%? The answer is when GCV2 reaches US $297/ounce. If this doesnít happen by September 7th, then we will purchase small amounts (5% at a time) on weakness. Right now there is nothing to do but wait until the metals market defines itself. Please understand that I chose these companies because they engage in little or no forward selling of gold. This means that they will receive the full benefit of any rise in metals prices.

As far as the currencies are concerned, we continue to be long the DEC SWISS FRANC (SFZ2) and have no intention of taking profits. We have taken our profits in the SEPT US$ INDEX (DXU2) short positions at 105.50 as well as longs in the Canadian and Australian currencies. With respect to the DXU2, we will look to short again at the 108.00 level and we will put our stop/loss in at 109.25. Also, we have readjusted our stop/losses to in the SFZ2 to 0.6650. Whatís more, if we can break below the old lows of 104.11 in the DEC US$ INDEX, I would add onto my positions. Although we will have rallies in the dollar do to intervention from Japanese and European banks, this is only a band-aid and wonít be able to turn the tide. There are very few times in history where intervention really made a difference.

The grain markets finally gave us the profits we were looking for. As a result, I decided to exit all of my DEC WHEAT (WZ2), DEC CORN (CZ2), and NOV SOYBEAN (SX2) as well as DEC OATS (OZ2) on August 13th. This represents a minimum gain of 30% with respect to last month and although I believe we are still only scratching the surface, I prefer to take my profits and concentrate on the CRB Index. Patience will be the order of the day, as I believe that we are in for some real volatility going into the fall.

The CRB Index has continued its relentless move up and the NOVEMBER CRB (CRX2) has traded as high 222.50 on August 12th. This is very important because it flies in the face of the US government figures that claim that we have no inflation. This index consists of energy products, grains, meats, softs (juice, lumber, sugar, etc.,), metals (industrial and precious) and other similar products that we use in our everyday life. The CRX2 has made a steady, relentless climb from lows of 182.00 made more than nine months ago to its current level. Also, there has been very little in the way of sharp retracement along the way and really is still a very good play if you are looking thirty to ninety days down the road. I donít know how the government keeps their books but I do know that these prices are more than 20% higher than they were a year ago and they are real, tangible items that I consume everyday. As usual, Iíll remind you that these contracts arenít that heavily traded so I wouldnít want to own more than ten at any one time, but they are and will continue to be a great play on inflation.


Remember last month when I told you that one of the interesting facets with respect to all of the market declines, government defaults, and bankruptcies and that is Iíve yet to here any major bank or lending institution come right out and say that they were stuck for a loss. Well, that all changed a couple of weeks ago. George Bush and Paul OíNeil refused to give aid to the Brazilian government because the ďmoney would just end up in private Swiss bank accounts. Then all of the sudden the US government asked the IMF to loan US $30 billion to Brazil. Why the sudden turn around? Simple! Brazil owes US $28.9 billion to Citibank and J.P. Morgan over the next year and canít pay. These banks would close if that occurred. OíNeil went to New York where he had a private emergency meeting with several distressed US banks and the Fed and the liquidity crisis was the topic of discussion. What do we do they asked? They opted to buy some time. In order for the IMF to loan out that much money, the US would have to contribute almost all of it and that would be a difficult sale at best. So the IMF made a loan of ďmuseum fundsĒ (this should really read Ďshow and tellí money). These funds will be reflected in Brazilís reserves on paper but they will not be allowed to spend this money. More smoke and mirrors! For all the world, it looks like a financial meltdown has been averted but the truth is they just bought a couple of months and brought a little domestic peace to Brazil. Unfortunately, it wonít last. Brazil is going socialist in the next election and wonít be able to pay their US $280 billion debt and Mexico is the next shoe to fall. The Peso has already started to devaluate.

For more than a year now, I have been trying to determine if the US economy is headed toward a severe recession with inflation or a depression with massive devaluation. Originally, I thought we would enter into a Depression but modified my views to favor the Recession scenario early this year. Honestly I am more confused than ever but I am now drifting back into the Depression camp. I simply donít see any effort on the part of the government to deal with the real problems or end the tremendous increases in M2 and M3. I really fear a 1920ís German style collapse. As a result of all the excesses of the past, the United States is heading for a Depression. Itís unavoidable and whatís more, itís necessary! . The Depression will be deep and long and it will be characterized by the following:

A meltdown in the equities markets Ė this process is now under way but there is still twenty-one more months to come. The CASH S & P will bottom somewhere between 525 and 660.

A commodities inflation Ė now clearly beyond the initial stages with rising gold, silver, oil, sugar, corn, wheat, soy bean and copper prices. Also the CRB is well off of its lows and the best is yet to come.

A meltdown of the US dollar Ė now well underway, and

A sharp decline in real estate prices Ė just in the beginning stages but it will be obvious by the end of the year.

We have had Depressions before; most notably the 1908 and 1929 Depressionsí are the oneís that we remember most in the United States. Also, many Europeans are familiar with the Depression several centuries ago as a result of the crash of Tulip prices. Unfortunately, this depression will be worse than the previous two serious Depressions that affected the U.S. and the average American will end up losing his life savings and his house.

In conclusion, George Bush canít do anything to help. In fact, the best thing he can do is keep his mouth shut because every time he gets in front of the cameras to tell the American people that the markets are fine, the market tanks. A perfect example was his town meeting in Waco, Texas on August 13th. He began to talk and the markets dropped 200 points after he finished. Alan Greenspan is also loosing credibility and is avoiding the public eye for the most part. Whoís left? The Chairman of the SEC or the Vice-President? I donít think so! There isnít one public figure with any credibility left with the American public. Theyíre all in a box with no way out. Inflation has already begun and under normal circumstances Greenspan should have raised interest rates. The last time we had a preemptive rate hike was in 1994 and the result was disaster. Mexico almost collapsed and Orange County went bankrupt. A preemptive rate hike this time will surely lead to deflation and a Depression. Alan will do the only thing he can do under these circumstances; heís going to resign for health reasons. During the Great Bull Market we always had something to hang our hat on and propel us upward and onward, but not any more. The partyís over and itís time to pay the check.



S & P FUTURES = 10%(short) YES 949.50

DJ FUTURES = 0%(short) YES n/a

NASDAQ FUTURES = 0% (short) YES n/a

METALS FUTURES = 10%(long) YES AU = 309; SI = 437


CRUDE OIL = 0% n/a n/a



CASH = 60%

Please be aware that this Newsletter was actually written on August 14th and was not loaded into the website until August 15th. As usual, I will post any significant changes in my opinions in the Chat Room for all to see, so pay attention.


The Management


Good Luck


Post  40647  by  Culmus       Reply
Sources about GAAP:

This is the #+*+ßŖ' third time I post this #+*+ßŖ list, one post got swallowed by cyberspace when redoing another the #+*+ßŖ computer would crash and if that one doesn't work I give up:

Comparison among 53 countries:{0AD1201B-0CE1-4713-9048-C9D139B43F25}&sd=452433413


Post  40648  by  Culmus       Reply

Post  40649  by  Tampathom       OT: More aid for Israel coming
Post  40650  by  StockmanI7       OT: Aid to Egypt
Post  40651  by  Arkural       Notebook overhaul on the horiz
Post  40652  by  Tampathom       OT: You're going off the deep

Post  40653  by  Arkural       Reply
Someone asked about fuel cells here a while ago:


Post  40654  by  united_division       OT: NEA delivers history lesso

Post  40655  by  danking_70       Reply
Tampa re: Aid to Egypt

"The decision does not affect the $2 billion in annual military and economic aid that Egypt already receives from the United States, but it does limit any new funding."

Egypt is still getting their $2 Billion. They just won't get anything on top of that.

This policy change came after Egypt jailed the human rights activist, who happens to be a US citizen. I also feel that since Egypt (along with many other ME countries) has not been as cooperative with the US on its current ME policy (Iraq), withholding the extra money for Egypt is a way for the US to show its displeasure with them.

"Where Middle East foreign policy is concerned--like it or not--Israel is our 51st state."

I like it.

Post  40656  by  StockmanI7       OT: Aid to Egypt

Post  40657  by  lkorrow       Reply
roof, interesting -- "Later in July, we added Afrikander Lease to the portfolio."

Post  40658  by  uponroof       Reply
Asian CB's increasing gold reserves?...
I posted some quotes from The pres. of NEM a few weeks back. One of his statements included Asian CB's increasing gold reserves to perhaps as much as 15%, a far cry from their tiny fractional reserves of today. For example, the USA holds 55%, Europe 35-40% while China a paltry 2%. Should the Asians start to increase gold reserves we will have one more very bullish fundamental in the gold market.

Post  40659  by  uponroof       Reply
Linda, thanks, I saw that also.

AFKDY is going to do very well this Fall IMHO. Today it opened at .57 up from the high 30s of a few weeks ago. Today with POG under pressure down some at .53. Kinross (KGC), a much more established Canadian producer, is also getting some wide based interest these days. Good Luck.

Post  40660  by  lkorrow       Reply
Ark, A good story. I like the concept of an integrated cellular and WiFi capability. There are two cellular standards in the U. S. Verizon and Sprint use one, AT&T and Cingular, the other and there is no roaming between the two. So the integrated cellular/WiFi discussed would need to have a tri-mode capability!

Post  40661  by  danking_70       OT: Europe's indirect/direct f
Post  40662  by  danking_70       OT: Part 2 - Europe's indirect

Post  40663  by  lkorrow       Reply
Competitive information on the cellular data services of the top carriers:

Data Price War Just a Shot Away

By Kenneth Li
Senior Writer
08/19/2002 07:09 AM EDT

Just as the big six wireless carriers have promised to stabilize prices for voice minutes in a historically volatile market, momentum is building for another fight in the emerging market for high-speed data.

Obscured by the hubbub last week when Sprint PCS (PCS:NYSE) launched high-speed wireless data was a disturbing trend. Among the big six operators offering varying degrees of so-called 2.5G or 3G data services, research showed Sprint already was undercutting the market. . . .

Full story:

Post  40664  by  lkorrow       OT Aid to Egypt

Post  40665  by  SkippyWalker       Reply
Deregulation with Chinese characteristics

Dear Table: I have taken up many old habits during August while all my bosses are on vacation. (DC is like Paris in one sense, a ghost town this time of year; but its like Hong Kong in another sense, hotter than Hades). Including lurking on RB. I'll post sporadically, and keep it On Topic cuz the web already has enough pundits-without-portfolio. Below is a long read but informative on how business is done in China; not only in t'coms but in any sector where ministry/state-owned firms are involved. Best to all familiar names here, and hello to the new names. Regards, Skippy
Lines Crossed in China
State-Owned Firms Bully Customers, One Another in Fight for Telecom Turf

By John Pomfret
Washington Post Foreign Service
Saturday, August 17, 2002; Page A01

TANGSHAN, China -- An Jianye's desk does not look like a war zone. An, who manages a seedy six-floor walk-up hotel in this northern Chinese city, keeps the place neat and his In-Out baskets clean. But the two phones sitting there tell a different story.

Over the past few weeks, workers from one of China's state-owned telecommunications behemoths, China Netcom, have twice severed the phone lines of China Railcom, a plucky rival that is also state-owned, to keep it out of An's hotel. Government regulators, allegedly in cahoots with Netcom, clipped little Railcom's wires a third time.

Other government departments also pressured An to keep China Netcom over Railcom, threatening to cut off his water and electricity. The local press has not touched the story because China Netcom is a major advertiser, according to local sources. Railcom, for its part, offered to pay for mobile phones for hotel staffers for a month if they signed up.

So An settled on a compromise -- two phones on his desk, one black, one red, and a line from each phone company leading into his hotel.

"One is an old friend and one is a new one," he said somewhat sheepishly. "Competition is good, but not like this."

Battles such as the one over An Jianye's desk have erupted across China as it grapples with the question of who will control communications in, from and to the most populous country in the world. Fortunes are at stake. Revenue in China's telecom sector reached $43.5 billion last year, much of it going to the government and the Communist Party.

Deregulating telecommunications has tended to be messy everywhere, including the United States. In China, with its huge market and unsettled rules, the deregulation battle is being fought block by block, wire by wire, by workers often willing to sabotage competitors' equipment and even attack their staffs -- even though ultimately they all work for the Chinese government.

The account of China's telecom wars, one of a series of stories on the way power is wielded in the new China, shows how after two decades of economic reforms most key power struggles here are over turf and cash, not ideology. Where politics has a role, it is increasingly as an excuse to exclude competitors, including foreign firms. Ideological forces -- such as those dividing people who want the information revolution to set China free and those who want controls to maintain Communist Party rule -- take a back seat to profit.

In the rush to reform the Chinese economy, state-run and private firms alike have embraced rough-and-tumble competition that mocks the power once wielded by socialist central planners. Special interests, backed by ministries or local governments, have so fragmented a once monolithic system that the economy has turned into a grab-fest where the strongest or wiliest survive.

"Collusion in America is easier than in China," quipped Zhang Weiying, associate dean of Beijing University's Guanghua Business School. "It's crazy but it's true. Our phone companies are all owned by the state, but they behave like enemies, not brothers."

The telecom wars also dramatize the corporatization of power in China, shifting political gravity away from government bureaus and toward companies, which pay better, provide good housing and become sources of a potentially endless river of bribes.

In the past, power resided in ministries and Communist Party committees. The party committees -- for the telecom sector, the State Information Leading Group -- still wield a big stick. But the ministries, which are supposed to carry out the reforms, do not. Only 800 people supervise telecom deregulation for the Ministry of Information Industries, compared to more than 3,000 in the United States. Hundreds of government officials have abandoned the ministry in recent years for telecom companies.

"The current philosophy is this: Don't worry about the government because it can't do anything," said Shi Wei, an expert on telecommunications at the State Council, China's cabinet. "The companies think: Can I make money with this in the future? I don't know. Can I grab it now? I must. This whole reform is turning out to be a lot more difficult than we thought it would be."

Unprecedented Growth
China's telecommunications revolution has been unprecedented. No other country has wired up and bridged the digital divide so fast.

A decade ago, there were only 10 million phones in China. Because of official paranoia about controlling information, it was even difficult to get authorization to own a fax machine. By September, the government estimates, there will be 400 million phones. The growth rate of Internet users, currently at 39.8 million, is the highest in the world. More Chinese use mobile phones, 176.2 million, than anywhere else. And China's fixed-line use, 198.9 million, has grown faster than that of any country in the world for the past decade.

From the beginning, the government has spent countless hours and millions of dollars blocking foreign political, religious and pornographic Web sites and tapping into Chinese phones and personal computers to ferret out and even jail freethinkers. In late June, China sentenced one man to 11 years in prison for downloading what it called "counter-revolutionary" material.

But the broader battle lies elsewhere. The first front is the fight for bureaucratic influence in Beijing, and then over the ability to stall or speed implementation of regulations. The second front is in the provinces, where Beijing's influence waxes and wanes depending on the willingness of local governments to listen.

For decades, there was basically one phone company in China. Ministries such as forestry, railways, coal, power resources and the People's Liberation Army ran private networks, but the majority of Chinese used phones from the Ministry of Post and Telecommunications, which called its phone operations China Telecom.

In 1994, the government created China United Telecommunications Co., or China Unicom, with investment from the ministries of electronics, railways and electric power. Competition had come to China's telecommunications industry. But the going was rough for China Unicom because the Ministry of Post and Telecommunications was at once the telecom regulator, the owner of China Telecom and in no mood to be nice to a competitor.

Sitting at the ministry's helm was perhaps one of the greatest power brokers in contemporary China, Wu Jichuan. China's telecom revolution had exploded under Wu's leadership; he was not about to let go of his telecom monopoly without a fight.

Backed by Wu, China Telecom regularly refused to allow China Unicom to link its tiny phone system to China Telecom's. And in 1998, Wu persuaded the government to force Unicom to divest itself of $1.4 billion in investment from 40 foreign telecommunications companies, a move that hurt the start-up.

Wu's argument was political. Foreigners should not be allowed to invest in China's phone system, he said, even though at the time China, as part of its accession to the World Trade Organization, was in the process of finalizing regulations allowing foreigners to do just that. But the real reason Wu stopped Unicom's foreign investment, Chinese industry sources said, was that China Telecom was worried about the boost foreign capital and management expertise would give to its minuscule challenger.

Since then, other state-owned shareholders bought into Unicom, bolstering the company's political heft, including China International Trust and Investment Corp. (CITIC) and Huaneng Power International Inc. China Huaneng, as it is called, is run by Li Xiaopeng, the son of Li Peng, the architect of the Tiananmen Square crackdown in 1989 and No. 2 in the Communist Party hierarchy. CITIC is linked to the family of Rong Yiren, China's former vice president.

Unicom has used this political pull to protect itself from China Telecom and to gain a more equal hearing before government agencies. It now has 30 percent of China's mobile phone market.

Disastrous Experiment
Last year the government awarded Unicom exclusive rights to use code-division multiple access, or CDMA -- a mobile phone technology from the United States -- as a way to help it compete in the mobile phone market. So far, Unicom's experiment with CDMA has been a disaster, with the number of customers a fraction of what Unicom had predicted and losses on the service mounting. But the government, to protect Unicom, has forbidden China's press to report about the troubles, Chinese journalists say.

Restructuring did not end with Unicom. In the late 1990s, other firms were split off from the China Telecom empire. Among them were China Mobile, now China's biggest telecommunications company in revenue, and ChinaSat, a satellite communications firm. During a government reform in 1998, the Ministry of Post and Telecommunications was amalgamated with other ministries to become the Ministry of Information Industries, but Wu kept his position at the top.

Once China's leaders let the genie of competition out of the bottle, it proved impossible to put it back. Guerrilla companies run by local governments or private entrepreneurs, using the Internet to carry phone calls, ate into long-distance phone revenue. Wu's ministry, seeking to protect China Telecom, masterminded the arrest of a pair of brothers in 1999 in Fujian province for running a long-distance Internet phone service, according to Chinese newspapers.

That case further illustrated how politics has become a convenient screen for what is basically an economic war. The brothers, Chen Zhui and Chen Yan, were accused of "endangering state security." What they did was run a tiny telephone operation out of an electronics store in a rural hamlet. But China Telecom was trying to scare competitors. Eventually, Wu's opponents organized a defense of the pair in China's press, and the case was dropped.

Cable television stations, desperate for revenue, began experimenting with pay TV that allowed customers to surf the Web in dozens of cities around China, violating government regulations saying China Telecom would monopolize Internet access. Local bureaus of Wu's ministry, backing China Telecom, dispatched teams to smash up cable TV stations and rough up cable TV workers in several provinces. But the programs continued under the protection of government departments that benefited from the sale of the services.

"In China, to do business you have to be everybody's friend," said Terry Lui, the chief executive officer of DVN, a Hong Kong-based firm that has set up interactive TV in several cities. "Sometimes the technology runs faster than the rules."

Internet content providers routinely send video down China's phone lines, even though one government bureau, the State Administration for Radio, Film and Television, said it would allow the practice only if it got a piece of the action. So far, it has not.

"China is a big country," said one executive at a private Internet firm that has been selling video downloads for almost two years. "There is a lot that the government can't control."

Wu has had some victories. His ministry winked while China Telecom established a local mobile phone service, called Little Smart, without a license to do so. Operating in 250 cities, this business in some regions is killing China Mobile and China Unicom, the only two firms in China with licenses to sell mobile phone service.

Largely because of the competition, phone prices and revenue have plummeted. Mobile phone revenue per user has dropped 50 percent in three years. China Telecom used to charge as much as $3 per minute for an international call. Now, competition has forced the price down to about $1. In the first five months of this year, revenue from domestic long-distance telephone service rose by only 0.27 percent while international call revenue dropped 15.32 percent.

"This is the warring states period of Chinese telecoms," said Duncan Clark, managing director of BDA China, a leading telecom consultant.

China Telecom was broken up last May into two firms as part of the government's efforts to encourage more competition. One, which operates in 21 provinces and cities in southern China, kept the name China Telecom. The other, which operates in the 11 provinces in the north, took the name China Netcom.

In theory, the two are owned by the Large Enterprise Department of the Communist Party and managed by the Ministry of Finance. In reality, Wu has retained enormous influence; of the 11 top executives in both firms, 10 were his proteges.

A smaller firm, China Railcom, backed by the Ministry of Railways, also was given a license to operate. As part of the government's policy to encourage competition, Railcom was allowed to charge less than its bigger rivals.

The original Netcom, once a tiny firm in Shanghai, was backed by Jiang Mianheng, the son of China's president, Jiang Zemin. It floundered for several years and, according to industry sources, was on the verge of bankruptcy before the merger with China Telecom's northern assets. That Netcom's name continues to be used and that the firm continues to exist at all, industry sources said, is a testimony to the influence of Jiang's son.

"It is the perfect compromise," said a Western telecommunications executive, who spoke on condition of anonymity for fear of hurting his company's business. "Jiang Mianheng's company was effectively eaten by China Telecom's northern businesses. But the firm took the Netcom name. So Jiang's son got some face, but in the end not much power."

Tangle of Phone Lines
China Telecom's reorganization marked the declaration of open season on phone lines. To break into the market, Railcom and Unicom began offering deals below government-set prices, laying phone lines and not always paying attention to the law.

Behind An's hotel in Tangshan, the results of the reforms are on full display. A cat's cradle of phone wires, both Railcom's and Netcom's, connects several run-down apartment blocks.

"It's a little chaotic here," said Rui Xinhe, a 50-year-old Railcom executive from Tangshan as he walked beneath the mess. "But this is competition."

The battle for An's hotel happened in the wires above Rui's head. In early July, Railcom laid its wires, running them alongside Netcom's wires. In some cases, workers hung the wires on hooks belonging to Netcom.

"We're the little guy," explained Rui. "Maybe we cut a few corners."

Railcom has 10,000 customers in Tangshan, Netcom 1.4 million. "Their goal is monopoly," Rui said of Netcom.

"Sometimes I think we just should let one company do it," Rui continued, strolling under a maze of phone lines, power lines and clotheslines. "You know, just let one business do it and regulate them. You know, a real socialist company serving the people. But we don't have those in China anymore."

Across town, Li Liqiang, a Netcom official, is unrepentant.

"Our people cut the cable," he said, "but they shouldn't have hung their cable there. If you want to hang your clothes out to dry, do you put it on your neighbor's clothesline?"

Tangshan is not the only battleground. In the town of Liaocheng in Shandong province, China Netcom workers, repairing an underground cable, discovered Unicom phone wires running through a system that belonged to their firm. "Unicom sneaked underground and laid their cables there," said Li Tao, an executive with China Netcom in Beijing. "They laid the cable on our property. Of course, we're going to rip it out."

And in Suining county, in Sichuan province, China Telecom workers flexed their muscles. In June, they stormed into the operations center of China Unicom, smashed equipment and beat up employees in an attack that led to an eight-hour halt in service for Unicom's customers.

So far, the Ministry of Information Industries, which supervises the telecommunications industry, has not issued a ruling on any of the cases because, an industry official said, most of its investigators have moved over to the phone companies.

© 2002 The Washington Post Company

Post  40666  by  lkorrow       Reply
Thanks roof, good luck too! Yes, I see gold taking a bath as the dollar heads up. Guess we'll see if that holds. . .

Post  40667  by  lkorrow       Reply
Bank discussion

US investment banks take more risks
By Ellen Kelleher in New York
Published: August 18 2002 20:19
Last Updated: August 18 2002 20:19

Many of the largest US investment banks are taking bigger trading risks to boost their profits, according to the latest round of quarterly filings to US regulators.

Value at risk (VAR), which estimates the maximum amount a bank would stand to lose in a particular period under certain assumptions, increased last quarter at Merrill Lynch, Morgan Stanley, Goldman Sachs and Citigroup, the companies told the Securities and Exchange Commission in their 10-Q filings.

Analysts said such trading strategies were predictable, given the relatively low levels of short-term interest rates, which often trigger more fixed-income activity.

"In a fixed-income environment, you're going to see trading houses grow their balance sheets and take a little bit more market risk," said Brad Hintz of Sanford Bernstein. "The general position [among investors] is long corporate bonds and short treasuries. They were positioned for the spreads."

The upturn in risk exposure marks a reversal from recent quarters, when many banks made an effort to avoid risk and lower their VAR ratios.

Last quarter, Goldman Sachs' VAR rose to $51m from $49m in the first quarter while Morgan Stanley's climbed from $41m to $66m. Merrill's rose to $62m from $56m at the end of last year and Citigroup's increased by $10m to $64m in the same period.

A few banks bucked the trend. JP Morgan Chase's VAR plunged to $110.9m from $148.1m in the first quarter. The VAR ratios of two leading players in the mortgage-backed and municipal bond markets - Lehman Brothers and Bear Stearns - also fell.

In the wake of stock market weakness, investment banks have suffered from a drought in lucrative equity underwriting and mergers and aquisitions activity, forcing them to rely on lower-margin businesses.

Investigations into conflicts of interest in their stock research and their dealings with companies such as Enron have also shaken investors' confidence. Shares in Citigroup and JP Mo rgan Chase have declined sharply since congressional investigators showed how the two biggest US banks helped Enron disguise its debts.

Last week, ratings agency Standard & Poor's warned that it may lower the AA- ratings of JP Morgan, Merrill Lynch and Morgan Stanley. The warning could lead to higher borrowing costs for the banks as investors become concerned about their prospects. It also suggests that the downturn in the investment banking business will continue.

Post  40668  by  Decomposed       ot: Polls on Table

Post  40669  by  Decomposed       Reply
re: Unix


I have a hacker friend who is very knowledgeable with BSD unix. I've got a copy or two, in fact, since he plugs that OS at every opportunity. Consequently, the next time I install unix, I'll probably go the BSD route.

You suggested that I check out NetBSD now -- but you didn't say whether it has corrected the font problem that has me so beleagured. You say they look "sharper" and they look "great" -- but do they look "as good"? Since I now spend a LOT of my time on the web, I want my browsing experience to rival what I'd get with Windows or Mac OS.

You don't need to answer. I know I'm being a little unreasonable. The mere fact that I'd be running Netscape or Opera automatically means that things won't look the same. My subjective opinion is that they'll look inferior, since the vast majority of top web pages have been optimized for the Internet Explorer browser.

Unix's day is coming. For the home user, though, I'm still inclined to think that it's not here yet.

Post  40670  by  Decomposed       ot: Poll Questions,
Post  40671  by  maniati       OT: Actually, the lawsuit bein

Post  40672  by  Arkural       Reply
Decomp-what did you do w/ Sanm and Nem?eom

Post  40673  by  Arkural       Reply
Sanm, bailed out. eom

Post  40674  by  pmcw       OT: maniati, I have few points

Post  40675  by  pmcw       Reply
A company in the CM space that appears to be overlooked today is SUNN. I feel they are doing better than their price implies. Regards, pmcw

Post  40676  by  Decomposed       Reply

SANM: I sold SANM the day after I bought it, with an 18% gain. Of course, I'd have been better off holding since it is now up more like 40% -- but bear in mind that for the next year, at least, I'm bearish overall. I'll buy traditional growth stocks when my frame of mind changes or when, as with SANM, I see something that looks ridiculously cheap.

NEM: I bought high ($31+) and held through its awful fall. In the $22 range, I more than doubled up. When that was up a buck or two, I became discouraged by the news that Newmont was, in fact, hedged much more than it had let on, so I moved that money to a much smaller but less-hedged company, KGC. My initial $31 investment is still in Newmont, untouched.

Right now, KGC is about where I bought it -- $1.68. NEM is at $25.27.

Post  40677  by  Arkural       Reply
Sunn-Ahem, is this under radar or what, hmmmm.

Post  40678  by  Arkural       OT-maniati-Oh boy, this is goi
Post  40679  by  clo       OT: Decomposed, polls to have

Post  40680  by  Arkural       Reply
Decomposed-ok, I see. I wasn't sure if you went back in Sanm. I still feel 03 will be a better yr for gold.....My guess is it will bottom out soon and then again in the Fall.

Imo, mkt outlook. Rally, now or in 4Q, then the slide re-invents itself. Rally duration 3-5 months. Think it could be fools gold version.

Post  40681  by  jeffbas       Reply
pmcw, your point #4 reminds me of the asbestos litigation, well into its second generation of lawyers (sons of lawyers). I can't wait until folks start suing over pink fiberglass insulation for homes (which I installed a bunch of over the years). With the way the market has been going, that may end up being my retirement fund :-)

Post  40682  by  tinljhtkh       OT: On polls!

Post  40683  by  maniati       Reply
StockRyder: First, about your comments on buying back stock to cover the options....

That's a perfectly reasonable idea. It has been done in the past, you know. Companies have been known to buy back shares which they later use for stock-based compensation, bonuses, or options. It's easy to forget that, given the recent practice of many companies of issuing new stock to cover incentive options.

What's novel about your proposal is the suggestion that companies rely exclusively on stock buybacks.

It's important to note that treasury stock (the stock that the company has bought back) is not counted towards the number of outstanding shares for EPS purposes. Therefore, the buyback, itself, will affect EPS, by raising it.

So, if you really want that EPS denominator to be constant, you would have to do something creative. One possibility is that we change the rules so that the EPS denominator includes treasury stock. That keeps the total shares number constant, but it doesn't really reflect the economic reality properly. For example, what if the company hasn't granted any options at all, or what if the options have expired worthless? In those cases, there are no claims on that treasury stock. But, that would mean that the value of the company is fully-owned by the remaining shareholders, since the company cannot own itself. (As I said in a previous post, the company is distinct from the ownership of the company.) Therefore, to properly reflect who owns the economic stake in the company, the EPS denominator should not include the treasury stock.

Another possibility is that we require the company to buy back its stock within some specific window of time relative to the exercise of the options. The buyback would still affect EPS, but the idea would be that it would be affected for a fairly brief period of time, and then it would return to its previous value, once the options were exercised. If you go this route, it has to be a mandatory and clear-cut rule, otherwise it won't work. For example, if a company is allowed to buy back the stock at any time, then the company might load up during times when the stock price has dropped, and it could be years before those shares are released from treasury due to the exercise of options. But, EPS has been affected during that whole time.

Obviously, one of the drawbacks of the above approach is that a company would no longer have the ability to time its buybacks to take advantage of dips in price. The buybacks would have to coincide with the exercise of options, regardless of the prevailing price at the time. Needless to say, corporate America might not like that.

Well, we could remove the time constraint, and simply require that incentive options be covered by treasury stock, as opposed to issuing new stock. That gives the company the flexibility to time its buybacks, but, obviously, that means the total shares number would not be constant; it would fluctuate. However, in the long run, it would not be increasing the way it does now; it would never be greater than the total number of all outstanding shares, including treasury stock.

Depending on the number of shares a company starts with and the rate at which it issues options, one has to wonder how the company's demand for treasury stock (to cover the options) might affect the share price. Over time, the company becomes owned more and more by its own employees. That could be a relatively small change over time, depending on how one works the numbers. However, the underlying assumption behind this entire exercise is that dilution is a real issue; if it is, then presumably the company's demand for treasury stock would be a real issue as well. One would have to give some thought to the dynamics of all of this in the long run.

You also said that your proposal did not require projecting the future effects of dilution, whereas a discounted cash flow (DCF) analysis required one to take future dilution into account. First, I would point out that, as we saw above, even your proposal is likely to cause fluctuations in the EPS denominator. But, more importantly, I don't really see any problem with doing a DCF. I think DCF is the best way to value a company, regardless of whether there is future dilution or not. I think the use of DCF as a method of valuation is an entirely separate issue. Even under your proposal, I would still do a DCF to value the business. In so doing, maybe I wouldn't have to take dilution into account, while, under the current regime, we know I would have to take future dilution into account. But, either way, I still would want to do a DCF. The only difference is that, in one scenario, the total shares number I divide by is constant over time, while, in the other scenario, it is not. But DCF works either way, and the problem of the total number of shares not being constant isn't a problem with DCF; it's simply a result of the dilution.

And, if, as under the current regime, we expect dilution to increase in the future, then we could make some simple assumptions to simplify the analysis. For example, we could assume that the number of outstanding shares increases by a constant number of shares each year; or we could assume that it increases by a constant percentage each year - whatever more closely resembles the reality.

Maybe some shareholders missed the boat by failing to take dilution into account in the past, but I don't think it's that hard to do. And even when dealing with future projections, one can make simplifying assumptions about future dilution that might not be exact, but that should be close enough.

Post  40684  by  smokesignals       Reply
lkorrow..sorry about the delay in my reply to you. I was out of town on business all last week. I now have a lot to catch up on.

The bear that I am finds something to nibble on from time to time. The bear that I am doesn't do much in the way of hibernating but naps have been found to be a pleasant respite from the all those screaming on lookers.

When I posted to briguy in regard to TABLE's nature having changed to one I didn't find as rewarding for myself, I was not singling you out. As a matter of fact, you weren't a poster here during the formation of the change.

Full disclosure: I was not nor have I ever at any time thought that any one poster was to be given credit for the change of TABLE. Neither I nor any member of my family.

Post  40685  by  pmcw       Reply
maniati - Options

In my original exchange with Culmus I provided the following ideas (numbers four and five out of the original five):

4) Since the rational behind options is to reward those who deserve reward when the stock price increases, I wouldn't mind seeing a pseudo option law to where stock can't actually be awarded, but that a bonus can be accrued based on stock performance. This could clearly be an expense item since it avoids the double whammy of expense and dilution." I particularly like this idea or a hybrid of this where the maximum annual dilution would be lowered to say 0.25% from the current level of 5%. However, this would remove the implied long term ownership of company stock by employees some might feel is a part of the benefit derived by using stock as a form of compensation.

5) Require that the company buy stock on the open market within 30 days of awarding an option and retire the shares (shares would be issued when the option is exercised). This would create a system whereby an option could be expensed, but only for the amount of difference between the purchase cost and the option price. The balance of the "cost" would be reflected in dilution when the shares were awarded.

On another note, I had about a 15 minute conversation with my local Congressman Saturday evening. We spoke mostly about why the economy needs cap/ex stimulus. He then asked my opinion about options and was surprised to find I was against "expensing" options. However, after just a few minutes he saw where our take was correct and is now in our camp (so he says).

Regards, pmcw

Post  40686  by  lkorrow       Reply
smokesignals, I hope you were some place cool (in more ways than one). :-) Thanks, I didn't think you were zeroing in on me, but was glad to hear your post, it made me realize I should slow down a little and how I got side tracked from my other work.

What was Table like before?

Post  40687  by  Decomposed       ot: Ginger