Monday, June 27, 2005

UP AND DOWN WALL STREET   Friendly Dragon?

REMEMBER JAPAN!

By ALAN ABELSON

If that seems a bit like "Remember Pearl Harbor," we confess the similarity was designed with malice aforethought, a rhetorical device intended to catch your attention. Truth is, we bear no grudge against the Japanese; for gosh sakes, sushi is one of our all-time favorite dishes.

No, what we urge you to remember is back in the waning decade or two of the last century all the fuss and furor when Japan was seized by a seemingly insatiable yen for buying up our golf courses, our majestic hotels, our soaring office buildings, our irreplaceable Impressionist paintings and lots of other great stuff in this fair land -- and price was no object. As it turned out, of course, the Japanese got stiffed big time, and when their stock market and their economy went poof, they wound up selling virtually every trophy piece of real estate and assorted gaudy bauble and showy trinket at a monster loss.

That's what you should remember about Japan when you're tempted to join in the growing clamor, not a little of it emanating from Washington, about China's increasing appetite for bits and pieces of Corporate America. What got the nativistic juices flowing is that, in the past six months alone, one Chinese company bought IBM's PC business, another is making goo-goo eyes at Maytag and, just last week, China National Offshore Oil Corp. -- Cnooc Ltd., for short -- offered $18.5 billion for Unocal.

That last move was extremely provocative, by jingo, on several counts. For one thing, Unocal already had agreed to tie the knot with Chevron for $16.4 billion (Cnooc's offer does not include a $500 million consolation fee Chevron is due if its deal falls through). For another, we're talking energy here, and the Chinese hostile bid immediately conjured up the notion that China's gain in oil and gas would be our loss in those precious commodities. And, finally, Cnooc, which is the third-biggest oil company in China and whose stock is publicly traded (including American depositary shares on the Big Board) is 70% owned by the government.

Why do we suspect that what's really turning the Chinese on is that something over a quarter of Unocal's proven crude reserves, and more than 70% of its proven gas reserves, are in Asia (there's a rumor, strictly unconfirmed, that's where China lives)? Cnooc's $67-a-share cash offer is some $6 more than Chevron's combination of stock and cash. Talk is that both suitors are willing to up the ante, but, then, talk is cheap.

Chances of getting a bargain buying an oil company after a rise of over 60% in crude prices over the past year doesn't strike us as quite as good as the average sucker's chances of hitting the lottery, whether the buyer is Chevron or Cnooc. Which merely enhances the likelihood that a Chinese acquisition binge in the U.S. will end on the same sobering note for the big Sino spenders as the Japanese buying binge did for the feckless acquisitors from the Land of the Rising Sun. Nowhere is it written that the Chinese have a better eye for value than the Japanese.

We do sympathize with the Chinese. They're sitting on close to $691 billion in foreign-exchange reserves, not a little of it resting in U.S. Treasuries. Buying something, anything, American with that mountain of money is a heck of lot better than building another steel mill or pouring yuan down a rat hole in an effort to prop up a sinking stock market. Instead of being downright rude when the Chinese come a-courtin', then, let's keep that $691 billion and the memory of Japan's mad pursuit of our assets firmly in mind, and joyously echo President Bush's famous cry, uttered in a slightly different context: "Bring 'em on."

Just as an afterword, we'd like to give Mr. Fu, the head man at Cnooc, a tip. (If he can make an unsolicited bid, we're entitled to offer unsolicited advice.) To better negotiate the treacherous political terrain he must tread in his pursuit of Unocal -- to get the delay of the land, so to speak -- we suggest that he sign up one of those high-powered Washington lobbyists who's really plugged in. Jack Abramoff would be the ideal man, but our understanding is that he's otherwise engaged. Not to worry, Mr. Fu. If there's one thing that Washington has in abundance, it's influence peddlers boasting quite peccable credentials and the right connections.

THE ADMINISTRATION, in the person of John Snow, the hapless Treasury secretary, and no less a deliberative body than the House of Representatives -- and we can't think of any less a deliberative body than the House of Representatives -- have told the Chinese to revalue their currency or they'll be sorry. A pricier yuan, so the reasoning goes, would help our exports, particularly in manufacturing, and create jobs.

Mr. Snow likely is looking for a scapegoat to explain why this expansion is so conspicuously ragged compared with other recoveries, most notably on the employment front, where at this point, to judge by past cycles, it should have produced eight to 10 million more new jobs than it has. Let's, for once, be generous and assume that the sentiment inspiring the push for China to revalue is as noble as the pushers contend. There's still a problem: It won't work.

For even if Beijing were to up the value of the yuan by as much a 15% (they won't, because they're worried about losing ground not with us, but with their similarly low-cost Asian competitors), it wouldn't get our somnolent factories up and smoking again. The reason is simply that what our manufacturing workers earn in an hour, their counterparts in China earn in a week. Currency, shmurrency, no matter how hard and how smart our folks work, that gap is as ugly and daunting as it is yawning.

If nothing else, the distress and consternation in high places occasioned by the Cnooc's bid for Unocal will doubtless nudge the Chinese to take some modest action to mollify its currency critics. The commanders of China's command economy do prefer timid to bold steps, as witness their less than resolute attempts to rein in their runaway economy.

As Steve Roach of Morgan Stanley points out, "more than a year into the tightening campaign, interest rates have been raised by only 27 basis points." That 0.27 percentage-point rise in rates compares with the Fed's two-percentage-point increase during roughly the same time span. If the Fed by its own description favors a "measured" approach, China obviously is a monetary minimalist.

So far, in any case, the Chinese economy appears quite reluctant to cooperate with even the mildest efforts to cool it off. Industrial production was up a sizzling 16.6% in May over the same month last year, fixed investment has been running upwards of 25% ahead of last year, oil demand continues to spurt and China has its very own, swiftly growing and very large real-estate bubble. A tendency to operate at least part of its industrial plant so that social stability tops profits as the bottom line obviously serves to camouflage weaknesses, but only for so long.

Our own feeling is that the regime's ambivalence and equivocation about stepping on the brakes in earnest make China's mother-of-all-booms almost a sure thing to became a big, fat bust, possibly some time next year. We won't even hazard a guess as to the size and severity of the fallout, except it'll be huge and it'll be global.

THE STOCK MARKET TOOK a skid last week. If those worthy professional market watchers are to be believed (no comment on that here), investors stopped chewing on lotus leaves long enough to discover that oil futures were flirting with $60 a barrel. It was kind of a coy flirtation: More than once during the trading session, just as they had back in April, crude prices edged past the magic $60 level, only to close a few tantalizing notches below.

While the petro movers and sheikers who make up OPEC quietly (they hate to get the people they're squeezing dry agitated) celebrated the rise, it was greeted less than enthusiastically by the rest of the planet, especially that little slice of it known as Wall Street. As we say, the conventional wisdom was quick to finger the move in oil as the culprit for the market's swoon and, we certainly agree, it was as good an excuse as any for stocks to backtrack rather hurriedly. But it was by no means the sole cause of their abrupt decline.

Sentiment was getting, to use a new favorite of Mr. Greenspan's, "frothy." Market Vane registered a 70% bullish reading among the trading set it surveys, typically a sign of heavy breathing. The American Association of Individual Investors' sounding of its membership showed that well over twice as many were upbeat as negative. And the latest Investors Intelligence study of advisers revealed 53.9% were bullish, a mere 20.2% bearish, a spread that betokens trouble ahead for the stock market.

And even though it didn't get much mention from the usual-suspect market know-it-alls, Iraq and the eruption of fresh violence there, Dick Cheney to the contrary notwithstanding, surely dampened investor spirits.

But since oil is the designated villain de jour, we felt obliged to check in with Tom Petrie and get his read on the petro picture. Tom is a founder of Petrie Parkman, which does everything in energy except drill for the stuff and, as you might expect, he's as clued in as anyone extant on oil and natural gas.

Tom says we pretty much have to learn to live with at least $50-a-barrel crude for the next three to five years. During that stretch, he can foresee some wide swings, with oil getting up to $70 to $80 a barrel and dropping as low as $40. But he most assuredly doesn't hold with the forecast -- popular among desperate contrarians and suffering short sellers -- that look out a bit and you can see a shortage turning into surplus.

China, he feels, is one big reason that's not apt to happen. As it is, he reports, the distillates (read: gasoline) market is really tight, courtesy of the Chinese. And he notes that, thanks to its incredible construction boom, China now is No. 2 in the world in what we call interstate highways. Imagine when they fill those highways with cars, he adds, which is certain to happen, how much gas will be soaked up.

Tom, we should observe, is a calm and cheerful type -- just in case you were wondering whether or not to be perturbed. Go right ahead and be perturbed.

A LEGION OF KINDLY READERS, knowing our abiding interest in real estate, has alerted us to the existence of a Website fittingly called CondoFlip.com¹. Although too numerous, alas, to cite by name, we thank you heartily one and all.

As its moniker strongly suggests, Condo Flip is designed to enable folks to sell their condos. Or, more precisely, as the company dubs it "A marketplace" for condo flips.

What a terrific idea! Even better is that, as the site makes clear in its promotional blurb, you can use it to flip your condo even if it happens to be a "preconstruction condo" -- in other words, even if you've bought the darn thing before it has been built. That's apparently a growing trend, and it figures: From a nation of hamburger flippers, we metamorphosed into a nation of stock flippers and now into a nation of house flippers. You can't stop progress.

Condo Flip is "debuting," the company reports, in Miami, but if you happen to own a condo somewhere else, especially one that hasn't yet been built, don't despair -- Condo Flip is coming to a city near you.

The headline on the site chortles: "Bubbles are for Bathtubs." Bathtubs, in turn, are for baths: which is what we reckon condo-flippers will wind up taking.