Sunday :: Apr 2, 2006

Ea$y Go

by pessimist

For many years now, the United States' economy has been greased with massive infusions of foreign invesetment capital. These funds have been the cover for the incredibly large deficits run up by the Republican presidents since 1980. [Yes, I know - there were deficits prior to 1980. They just weren't anywhere near as large as those begun under Ronald Reagan to build his faux-WWII fleets and continuing to be run up currently through George's faux-WWII.]

But conducting economic business in this manner is incredibly risky, as it opens up control of the economy to the actions of outsiders.

There is a real-time event which demonstrates this going on in the Gulf States. You will have to allow me to present a little background information in chronological order to set the stage. The real kicker is at the end.

Alwaleed to Invest $2.7 Billion in Saudi Stocks (Update1)

March 15 (Bloomberg) -- Prince Alwaleed bin Talal, the world's eighth-richest man, said he'll invest $2.7 billion in Saudi Arabian stocks after they slumped. Saudi stocks rebounded 4.74% Wednesday to close at 15,606.96 points.

The Saudi market slid to a five-month low yesterday [3/14/06] as indexes in the Middle East tumbled from all-time highs... Stocks in Dubai, Egypt, Jordan, Kuwait and Saudi Arabia, among the world's best performers since 2003, are sliding amid a record number of planned initial public offerings and concern that prices have outpaced the outlook for earnings growth.

Alwaleed's investment comes amid signs the three-year boom in Arab stocks is ending.
The Saudi Taudawil All-Share Index [TASI] has fallen by the maximum allowed limit of 5 percent each day for the last two weeks.

Alwaleed says, "What happened a few months ago on the Saudi market is that speculators dominated the market and created a bubble." According to the prince, "There are now special and great opportunities."

The prince will buy 10 billion Saudi riyals worth of stock over the next few weeks, his spokeswoman, Heba Fatani, said by telephone from Riyadh. "The prince is a patriot," Fatani said. She said she would provide more details later in a statement. "Alwaleed probably sees value in the market and he is willing to pull the trigger," said Ali Taqi, a senior manager at National Bank of Kuwait, which manages $4.5 billion.

Invest a little more time, and continue reading the fine print on the back side.

The private sector investor as represented by Alwaleed wasn't alone in riding to the rescue of the market. The Saudi government also took some - for then - radical steps to halt the market's decline:

Saudi Stock Market Bounces Back After King Intervenes
16/03/2006 [16 March 06]
Asharq Al-Awsat

Riyadh, Asharq Al-Awsat- Saudi Arabia’s ailing stock market recovered yesterday on news King Abdullah bin Abdulaziz recommended foreigners be allowed to invest. King Abdullah also advised Dr. Ibrahim al Assaf, the Minister of Finance, to study the possibility of reducing the nominal value of shares to boost the market and create further liquidity, the SPA reported.

By splitting their shares, the Saudis are offering them at bargain prices. This would reduce the overall value per share and make them more attractive to investors. Any time shares are offered in this manner, it reads like a sign of desperation - 'we need money - fast!' This would be reinforced by the economic happy talk which accompanied this report:

The Economic Council also agreed that the stock market freefall did not reflect the state of the Saudi economy, which was prospering across all sectors. For their part, the investors stressed that the economy was growing at a healthy rate and supported the government’s actions.

But it looks like the investors see more than what they are supposed to see:

Princely gift for a battered bourse
Billionaire joins Saudis in proposed bailout

The Saudi stock market breathed a sigh of relief yesterday as a multibillionaire prince vowed to pump equity into the battered bourse. That the intervention was necessary is another sign the region's profitable experiment with free markets may fail.
[T]he temporary reprise in a market that has lost 30 per cent of its capitalization in the past two weeks may do little to stop the long-term slide, or fortify the shaky underpinnings of the Gulf region's red-hot stock exchanges.
A drop in the Saudi market over the past three weeks was echoed in most of the region's markets, where retail investor panic caused massive losses across the board. Saudi regulators place a 5-per-cent limit on daily price movement. The market has hit or come close to the floor-end of that limit recently.

How The Gulf Markets Grew

The region has been in the eye of a perfect economic storm for the past few years, in part because of soaring oil and natural gas prices. Eight of the 10 best-performing major markets in the world last year are based in Arab countries. Led by the twin Cairo and Alexandria Stock Exchanges in Egypt, which rose more than 160 per cent in 2005. But retail investors, who make up the bulk of trading, seem to be coming out of a period during which they bid up some regional stock prices to unsustainable valuations. In the past couple of weeks, stocks have been sinking in many Arab countries, driven almost entirely by local retail investor selling.
Like other bourses in the region,
the Saudi stock market suffers from a lack of deep liquidity.
Because wealthy investors in Gulf states became less inclined to invest overseas after the attacks of Sept. 11, 2001, more money that would otherwise be sitting in London or New York now resides in Middle East bourses. These markets have become more attractive in recent years as governments in the region work to cut red tape and improve transparency. For many countries, the stock exchange represents a relatively novel way to move wealth to a larger portion of the population, rather than confine it to a powerful and well-connected minority. As the rise of radical Islam became more attractive in countries such as Saudi Arabia and Egypt -- where the Muslim Brotherhood did much better than expected in the last round of elections -- the ruling parties have begun to view this movement of wealth as vital to keeping citizens happy and maintaining the political status quo.

Most markets do not allow foreign investors into the market as easily as local investors, with the Cairo stock exchange being a rare exception. However, this correction has at least given regulators reason to reconsider trading rules and allow for easier foreign investment in order to balance the trading mix. Even in Cairo's market, local investment drives two-thirds of daily trading.

The party stopped in January, as investors panicked
and markets across the Middle East plunged.
This week has seen daily declines of double-digits on markets in Saudi Arabia and Dubai, which has posted a 41-per-cent drop this year.

There is speculation that Alwaleed's bailout of the Saudi TASI isn't necessarily what the market needs right now:

Is $2.7b a market parachute? - KSA
Bahrain Tribune
16/03/2006 [16 March 06]

Throwing cash at a market that has been artificially bulled by liquidity seems an odd way to convince investors about the fundamental value of stocks. [R]eality ruled as stockholders looked to get out of over-inflated markets and regional stock market indices continued their dramatic fall. Investors will be hoping that Alwaleed's intervention could turn the bears into bulls when the markets open this morning.

The prospects for that happening don't look good:

Emirates fighting an economic Gulf war
By Edmund Conway
(Filed: 17/03/2006) [17 March 06]

The market is down by 27pc since the start of the year and the mood is tense and anxious. The US reaction to the DP deal has threatened to create an economic fissure between the Middle East and the West, similar to that left by the 9/11 attacks. A potential trade deal between the US and United Arab Emirates has been put off, and the UAE has hit back with a move to diversify its foreign holdings away from US dollars.
If that weren't bad enough,
there are now serious concerns the entire area is enveloped in a huge economic bubble
which could burst at any moment.
Some of the locals say that they could stand to lose hundreds of thousands of dollars as stock markets in the region have plunged by as much as a third since the start of the year. Market indices everywhere from Saudi Arabia and Kuwait to Dubai and Abu Dhabi have plummeted by about a fifth since the start of the week, prompting the Saudi Prince Alwaleed bin Talal to pledge a cash injection of between $1.3bn and $2.7bn into the market to combat the correction.

[T]he world needs a financial centre in the Middle East, between London in the West and Singapore and in the East. [T]he area is generating billions of petrodollars. Much of this money would hitherto have been invested or spent in the US or Europe, but restrictions on spending by these parts of the world have been tightened since 9/11. Add to this the rise in popularity of Islamic finance, and it's clear the reasons for the boom have not been chimerical. Most of the $100bn total market capitalisation is money from the region...

Shariah law does not permit the charging or receiving of interest on cash, so strict muslims have previously been prevented from using conventional banks. There are ways around this, however. For instance, if someone wants to buy a car for £30,000, an Islamic bank might buy the car itself, and then ask its customer to repay it £35,000 over a period of time. That way, no interest is charged, but the bank still makes a profit.

So sophisticated have instruments for Islamic finance become that some bankers in Bahrain told me that they could be close to developing a Shariah-compliant hedge fund.

A single currency for the region is in the early planning stages, and could be in place as soon as 2010.

Others are more sceptical about such plans. Since the days - no more than a century ago - when Bedouin tribes ruled the area with primitive force, the Arabs have found it difficult to agree. Even today, there are many who would not mourn if the Dubai boom were to end in a spectacular bust.

As Sheikh Mohammed of the Bahrain government says:

"During the boom times people can forget about reality. But you have to come down eventually."

This is the first lesson of the Gulf investment crisis of which Bu$hCo supporters should take note.

Prince Alwaleed put up a big stake in the Saudi TASI. He got reinforcements:

Another Saudi tycoon, Al Rajehi, also announced he would use some $3bn riyals ($800 million) to buy stocks. [17 March 2006]

Few investors are as savvy about the markets as are Alwaleed and Al Rajehi, and because the markets are now open to those who have little investment experience, the Saudi government is training those new investors in what not to do. While this article focuses on Saudi women, think of it as a metaphor for the typical small investor - or Bu$hCo 'vote investor' - in America:

Lack of knowledge Main Cause for Stock Market Losses for Saudi Women
22/03/2006 [22 March 06]

Yousuf Qonstanteny, executive director of the center of experts of the stock exchange, took part in a seminar that was organized by the Chamber of Commerce and Industry in Jeddah, which was entitled All You Need To Know About The Local And International Stock Market. The seminar was held as part of a number of conferences organized by the chamber of commerce and the Sayyeda Khadija Bint Khowaylid Center to spread knowledge on the stock market and the nature of investment.

During the seminar that was attended by numerous Saudi women of various social spectrums, Dr Qonstanteny asserted, "there are ten major mistakes that are committed by investors of the stock market which in most cases lead to major losses."

He highlighted that other reasons for major losses include:

* the lack of a clear strategy for investment [or post-invasion occupation]
* the lack of diversity in stocks [or international participation in a war of conquest]
* the borrowing of huge amounts of money with insufficient knowledge of investment [or the effects on a nation's economy]


* the misconception of gaining large amounts of money within a short time span. [or through tax 'relief']

Other reasons include:

* intolerance when a loss has incurred [throwing more borrowed funds down an empty foreign bore hole]
* a lack of usage of developed facilities and programs [such as the UN]


* "many investors choose inadequate advisors or mediators and have too much confidence in the market, which leads to drastic consequences," Dr Qonstanteny said. [Listening to neo-confidence men and their wild plans for world domination does also.]

The conference tackled the most basic and most important information for any investor in the stock market. The seminar also referred to technical matters and responded to frequent questions concerning the future of the stock market, especially following the recent crash in Saudi Arabia.

Assuming you have been patient with my presentation of so much background (severely abridged from the originals, I might add!), you have made it to the second lesson, presented next, to be learned from the Gulf investment crisis - Repairs don't always work:

Saudi market continues to fall despite government measures
March 23, 2006

Stock markets in OPEC kingpin Saudi Arabia, the largest in the Arab world, and Dubai fell Wednesday despite government measures to boost sagging investor confidence.
The market appears to have ignored two key government measures to bolster the bourse:
allowing foreign residents to trade directly, and considering a proposal to split shares.
The Saudi Tadawul All-Shares Index (TASI) ended morning trading at 16,030.66 points, down 2.2 percent from Tuesday's close, after falling below the 16,000-points mark during the session. The TASI is now down 4.1 percent from its 2005 close of 16,712 points and 22.3 percent off its all-time high of 20,634.86 points on February 25.

The Dubai Financial Market Index, which has undergone a sharp correction since late last year, also dropped 0.8 percent to close at 652.15 points.

The index is now 36 percent below its 2005 close of 1,019.69 points
and 50 percent off an all-time high of 1,302.95 set last August.
The Abu Dhabi Securities Market rose for the second day running to finish at 4,389.00, up 0.8 percent from Tuesday. It is still 15.6 percent below the 2005 close of 5,202.95 points and 31.4 percent off its all-time high.

The Doha Securities Market finished at 9,248.48 points, up one percent from Tuesday. It is now 15.6 percent below its 2005 close of 11,053.06 points and down 25.4 percent from its all-time high.

Kuwait's Stock Exchange Index rose 1.6 percent to 10,310.10 points after two days of losses. It finished the week up 3.7 percent. But the index is still 9.9 percent down on last year's close of 1,445.10 points and 14.5 percent below its all-time high of 12,054.70, set on February 7.

Bahrain's stock market closed just 0.19 percent up at 2,104.66 points. It is now 4.15 percent below its year-end close of 2,195 points.

The Muscat Securities Market also closed 0.03 percent lower at 5,179.68 points, but up 6.2 percent on its 2005 close of 4,875.11 points.

It is the only market in the six-member Gulf Cooperation Council to remain ahead of last year's close.

A Promise Is A Promise

Even though things don't look good, Alwaleed demonstrates that he's a man of his word:

Meanwhile, billionaire Prince Alwaleed Bin Talal of Saudi Arabia said on Wednesday plans were underway to float 30 percent of his flagship Kingdom Holding company on the Saudi stock market by the end of the year. [He] was going ahead with the decision despite the collapse in Gulf stock markets in recent weeks.

Alwaleed's taking a huge risk:

Billionaire prince may float 30% of flagship company
MARCH 24, 2006

DAMASCUS: Billionaire Saudi prince Alwaleed Bin Talal said on Wednesday he plans to float 30% of his flagship Kingdom Holding company on the Saudi bourse. A report about the flotation first appeared in the Saudi newspaper Eqtisadiah on Thursday.
The flotation and financial disclosure required
could reveal the financial might of Kingdom Holding [Alwaleed],
which has stakes ranging from Citigroup to lesser known firms,
and allow ordinary investors direct access to its shares.

This is the third lesson to be learned from the Gulf investment crisis - go broke and need money, and you get 'partners' who aren't necessarily going to see things your way [think: US Federal Debt]. The following is the fourth lesson:

The region’s stock markets have fallen sharply
as investors pulled out of what Alwaleed called
'a bubble market'.

Just because someone invests in, say, your World Crusade For Crude, doesn't mean that they are going to stay in, especially if results don't meet the enthusiastic expectations presented to them at the beginning. Once reality sets in, the investor has to decide if there is a chance of things turning around, or if it's time to cut losses and seek better possibilities elsewhere.

Clearly, that is happening to the Gulf right now:

Foreign cash deserts Saudis
By Edmund Conway, Economics Editor
(Filed: 27/03/2006) [27 March 06]

A landmark move to open up the Saudi Arabian stock market to foreign investors has been followed by another lurch in the Middle East's biggest equity index, sparking fears that the area's slump is more deep-seated than previously feared. Saudi's key stock market index, the Tadawul, fell by 2pc to 14946 points yesterday, after a drop of 2.7pc on Saturday.
This means it has fallen by a quarter since hitting the 20000 mark only last month,
... the latest evidence that the Middle Eastern boom has hit the buffers,
with similar falls having been suffered in all the region's stock markets...
More worrying, the failure of foreign investors to inject capital into the Saudi market suggests that hopes for a rescue by the West may have been overplayed. Analysts believe the unorthodox behaviour of local financial authorities may have made western investors even more reluctant to invest in the Tadawul. [O]ver the weekend, foreigners living in Saudi were, for the first time, permitted to buy shares directly. The hope had been that expatriates, who earn a combined £20bn a year, would help shore up the index. But so far, analysts said, these new potential investors had shown little interest.

They know who to thank for this complication:

[G]rowing concern about potential conflict between the US and Iran
sparked a plunge in markets earlier this month.
Many now fear the falls could result in a full-scale financial crash in the region.
Yassine Al-Jafri, of the Economics department at Riyadh University, said: "The market is bleeding. A big chunk of liquidity that made the market before the correction has fled. This is a crash. We can't see the end of the tunnel."

This is the fifth lesson from the Gulf investment crisis: What will happen if invetors don't get their expectations met.

I've already reported on the Asian Central Banks making moves to shift some of their holdings into euros and out of dollars. They seem to have more of a clue as to where the US is headed than our leaders do, and they have direct experience with what happens to a nation when the US goes to war. Whether as a target or as an occupied land which was attacked matters not. They know what happened to their own economies after WWII, and they aren't about to risk everything they have gained since 1945 to exposure to the results of King George's Cockamamie Crude Crusade. They may also think it necessarity to rein in that Crusade by weakening (if not destroying) George's economic 'boom' through the dumping of the dollar. Sure, they are heavily inveeeted in us. But are we still a good investment?

Like all good and savvy investors, the cost-benefit ratio of remaining a backer of the US war machine is being examined - and if the benefit doesn't match the cost, cutting their losses and getting what they can out of us might well look like the better option.

What happens to us might well be the last lesson we as a nation might learn.

If the United States enters the sort of economic collapse that was visited upon Argentina (among so many other nations) by the IMF and the Wolfowitz World Bank, I seriously doubt that the United States will remain a single entity. States like California, which have large internal economies, just might decide to go it alone in order to remain vible societies. The rest will have to make it the best they can.

Maybe they could cross the Mexican border and find work there.

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