Profit 31-October-2011 by Profit Epaper

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Sino-Pak relations – an exhaustive symbiosis Page 4-5 KSE witnesses bearish trend over the week Page 6 Have a blast till you last! Page 3

Pages: 8

profit.com.pk

Monday, 31 October, 2011

POWER CRISIS

PEPCO dissolution no answer CPPA expected to take over duties g Inconsistent polices hindering investment in power sector g Line losses reached 19.6pc instead of NEPRA’s prescribed 16.5pc

KARACHI

STAFF REPORT

issolving PEPCo without eliminating root causes of its inefficiencies and forming CPPA to work with similar infrastructure and processes would be a complete failure on the part of government which will continue to hurt the country in the years to come.

PEPCO DISSOLUTION LIKELY According to sources, Ministry of Power and Water is likely to announce dissolution of PEPCo next week and set up Central Power Purchasing Agency (CPPA) under its power sector reforms which will take over the duties of PEPCo. The government last year announced to dissolve PEPCo after eliminating the demand and supply gap but the gap is widening even at the start of winter and some cities are experiencing 8-10 hours power cuts daily. The government deadlines, plans and different committees formed to resolve power crisis could not propose any roadmap to eliminate the power crisis in the country, sources added.

PEPCO, A SCAPEGOAT? sources said that it seems that PEPCo is being used as a scapegoat to put the onus of power crisis over it. “Though PEPCo has played a part in this power crisis but its share may be only 25 per cent but other inefficient bodies like nEPRA, WAPDA and its distribution companies and even the ministry itself are hiding their inefficiencies and lack of planning abilities behind it,” they added. The political masters as well as nEPRA, the regulator, continue to play the game of make-believe as nEPRA prescribed a target of 16.5 per cent as cumulative line losses of all its distribution companies (DisCos) in

FY2010-11; but the actual losses were 19.6 per cent, with a “healthy” growth of 7.2 per cent in PEsCo, 5.8 per cent in HEsCo and 3.35 per cent in MEPCo. sources said that after having lost one fifth of this very valuable resource to theft, the remainder is billed and the DisCos fail to collect 11.5 per cent of that billed amount also, leaking more than 30 per cent of their revenue in total. Moreover, government owned power plants are highly inefficient as their average thermal efficiency is about 25 per cent to 30 per cent with some plants having efficiencies as low as 15.64 per cent and it would be a daunting task for any management to bring their efficiency level to acceptable limits, they added.

IPPS TO OPERATE IN PEAK HOURS According to sources, in private sector, average efficiency of a gas based iPP is 51 per cent while the average efficiency of furnace oil based iPP is 45 per cent which is more than twice of the government owned power plants. They said that these iPPs were asked to operate in the peak hours only to supplement the public power plants but now they are operating round the clock to help the government meet the electricity demand but even then the demand and supply gap is widening. Even though these iPPs are a major contributor to power production in the country, they are constantly suffering at the hands of government as mounting circular-debt issue is stressing them out, sources added. They said that the amount payable by PEPCo to independent Power Producers (iPPs) in operation has reached almost Rs300 billion and approximately Rs24 is billion being added to it every month due to inefficiencies of power high-ups.

INEFFICIENCIES GALORE When PEPCo fails to make payments to independent Power Producers, they find themselves unable to pay for furnace oil, having already exhausted their borrowing limits with banks. “if the operating companies backed by private investors have been in the financial quagmire then how will new investors come to invest money in different private and public sector power generation projects?” they questioned. The inefficiencies of PEPCo and the two associated ministries have failed to attract foreign and local investors in the power sector and even existing investors are looking to offload their stakes in the power producing units. They said that investors are hesitating due to this ballooning circular-debt as well as inconsistent policies regarding fuel supply and recovery inefficiencies and line losses of PEPCo and DisCos which in turn hurt iPPs as they are not getting their overdue amount in time.

PTCL may buy mobile carrier to boost pricing LAHoRe MOniTORing dESk

ECEnTlY talking to Bloomberg, PTCl CEo Walid irshaid stated that he did not rule out an acquisition by the company, further adding that PTCl is not selling but rather buying. it was highlighted that Ufone aims to acquire targets as the company is now focusing on fixed line, high-speed internet along with television services which has helped expand the customer base to approximately one million, and has contributed 20 per cent to total sales. Mobile phone subscriptions according to him have surged to more than 100 million in the country, explaining that the cellular rates in Pakistan were cheapest in the world. “This can’t continue. This market has to consolidate, otherwise this will be a losing proposition for every operator,” irshaid said. PTCl, he indicated may buy another service provider as falling rates have dampened industry earnings prior to a planned third generation bandwidth auction this year. The government has not indicated how many licenses would be at stake for the five mobile service providers of the country. “There can’t be five 3g operators when the revenue per user is too low,” irshaid said. Profit Decline: The company’s profit dropped 33 per cent in the first quarter from a year earlier to 1.4 billion rupees ($16 million), according to a statement. net income fell 28 percent from a year earlier to 8.4 billion rupees in the 12 months ended June 30, down from 30 billion rupees in 2004, the year the government deregulated the telecom market, ending the company’s monopoly. Cash and equivalents rose to 23 billion rupees as of the three months ended March 31, from 19 billion in the previous quarter, according to data. Telecommunications Corp., has built up its infrastructure to handle as many as 2 million broadband customers, irshaid said. The capacity may help the company compete with rivals Pakistan Mobile Communications ltd., Warid Telecom ltd., Telenor AsA and China Mobile Communications ltd. Annual net income will probably increase this year, irshaid said, without giving a more specific forecast.

Atlas Honda foresees export to Central Asia g

Motorcycle industry opposes import from India g Zero import duty for Yamaha dangerous g Motorcycle industry should be in negative trade list KARACHI

gHULAM ABBAS

TlAs Honda ltd (AHl), which is exporting thousands of motorcycles to Bangladesh and Afghanistan, foresees Central Asian markets for exports during the next few years. The Japan based Pakistani company has exported over 12000 motorcycles during the last five months, exceeding the same exports made during the financial year 2010-2011. The company is currently looking to iranian markets for exporting the products. The plans to reassemble the motorcycles in Bangladesh, where the company is already exporting its motorcycles, are also under consideration; AHl

general Manager HR, Admin and Corporate Affairs Razi ur Rahman said this during a recently held media briefing at the company’s sheikhupura plant. Besides the export and trade of localised motorcycles, the company has also contributed over Rs7 billion in duties and taxes on a sale of 544331 units during the last financial year. According to Razi, together with other Atlas group companies, the company contributes almost Rs19.38 billion towards national exchequer which is around 2 per cent of the country’s total revenue collection. Moreover these manufacturing plants in Pakistan are providing jobs to thousand of skilled and semi-skilled labour of the country. Atlas also expects to produce almost 0.7 million motorcycle during the

current financial year. Besides, the AHl is also committed to the development of local motorcycle industry and move towards 100 per cent localisation. Talking about the new entrants, Razi said that though his company has no objection over the introduction of new companies in this sector but the proposed policy for the new entrants specially ‘Yamaha Motors’ of Japan was unjustified. government was trying to accept the demands of zero import duty rates for five years, made by Yamaha. The policy, if approved for the new company, would be disastrous for the existing companies. The government, instead of this, can offer land and other facilities to the new companies but the lifting the whole import duty would definitely affect the existing companies of the auto sector. in reply to a query, he said that

the company has already recommended Ministry of Commerce to include the motorcycle industry in the negative list of trade with india, as the import from huge markets of the neighbouring country would damage the local industry. AHl general Manager R&D and Projects Afaq Ahmed said on the occasion that the motorcycle industry is likely to become the second largest industry of exports after textile. While talking about the increased prices of motorcycles despite the localisation of the industry, he said, “The Company did not compromise on quality and standard of its products, therefore the existing prices of various kind of motorcycles is reasonable against their costs”. The company’s products which include CD70, CD100, gC 125 and Cg 125.

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Monday, 31 October, 2011

news

Euro zone debt deal tackles symptoms not cause

LoNDoN

REUTERS

URo zone leaders are as far as ever from finding a lasting solution to the bloc's underlying problem of economic divergence, despite their latest progress in managing the symptoms of its debt crisis. The complex agreement reached in Brussels in the early hours of Thursday lends credence to the view that the euro zone will somehow muddle through. But it is not the grand Plan that optimists had hoped for: what was the 14th summit in less than two years to tackle the crisis will not be the last. "This is another step in the right direction, but it is not enough to get us to the end game," said stephane Deo, chief European economist at UBs. "it buys time but it does not address the fundamental problem of the sovereign debt crisis." European equities and the euro rallied after the summit exceeded markets' modest expectations. Banks agreed in principle to a 50 percent reduction in the face value of their greek bonds and leaders said they intended to increase the firepower of their financial rescue fund to 1 trillion euros (876 billion pounds). But nearly 35 percent of greek

bonds is in the hands of public institutions such as the European Central Bank (ECB) and is not subject to the mooted writedown. As a result, greece's debt would still be an eyewatering 120 percent of gross domestic product in 2020 -- exactly the level of late 2009. And even that assumes decent economic growth and ambitious structural reforms including large-scale privatisation of state assets. "From the macroeconomic point of view, if it's purely a 50 percent 'haircut' on the nominal bonds, without an extension of the maturity and a reduction of the coupon, i'd still be reasonably suspicious about the sustainability of greek debt," Deo said.

REASONS FOR SCEPTICISM

greece, however, has become something of a sideshow. investors long ago judged that it was not just illiquid, but insolvent. Much more critical is what the euro zone could do to prevent the debt rot from spreading to bigger, systemically important but stagnant economies, notably italy. Markets will have to wait for details as to how the European Financial stability Facility will be scaled up; whether the likes of China will top up the bailout fund; and how operationally it will enhance the credit of member states' new bonds. But some analysts are sceptical. Economists at

Royal Bank of scotland said they expected markets to reprice sovereign debt across the euro area given the size of the losses imposed on greece. Expressed as the "net present value" of the bonds, the proposed loss will be close to 70 percent, much more than the 40 percent hit that banks had volunteered to take, RBs said. What's more, the EFsF will be too small to offer help to any country that might need it for any length of time. And a promise by governments to help banks regain access to long-term bond market funding implies they will have to assume extra contingent liabilities, thus adding to their debt burdens. "We find no convincing arguments in the new policy response to suggest that sovereign bond spreads in the euro area will tighten meaningfully vis-a-vis-germany," RBs said in a note. italian 10-year bond yields did in fact fall 11 basis points on Thursday to 5.81 percent. But they were still around 30 basis points higher than in early october when the leaders of germany and France promised a far-reaching solution to the debt crisis.

ECB ROLE

Yet another source of doubt involves the European Central Bank. Economists interpreted comments made on Wednesday by Mario Draghi, who takes over the helm of the ECB on november 1, as indicating that the bank will continue to buy spanish and italian government bonds in the secondary market if need be. But investors, as ever, are demanding greater certainty. if the ECB hands over its bondbuying responsibilities to the EFsF, there will be concerns that the rescue fund is not big enough for the job, said Karen Ward with HsBC. "Ultimately there are only two options for creating a firewall: the ECB's balance sheet, or the german balance sheet. if the ECB is not the backstop, it is unlikely the firewall can be big enough to be credible," Ward said in a note to clients. Having the ECB act as a fully fledged

lender of last resort, just as the U.s. Federal Reserve did during the 2008 financial meltdown, is anathema to germany, which fears it would reward feckless debtors and sow the seeds of inflation. But in dodging the question, euro zone leaders had squandered the chance to get ahead of the market, said nicholas spiro, managing director of spiro sovereign strategy, a london consultancy. "They have not fixed the issue that investors care the most about: can you put in place a credible and durable and effective backstop for euro zone public debt?" spiro said. "We're not talking about working monetary union work. That's for the medium term. We're talking about containing the contagion. And they haven't been able to do that yet," he added. "Credibility and confidence in Europe are all, and this has yet to be restored as far as i can see."

ALL EYES ON ITALY

The country most at risk of contagion is italy, where anaemic economic growth and faltering confidence in Prime Minister silvio Berlusconi are compounding the difficulty of servicing a debt-to-gDP ratio of nearly 120 percent. Under pressure from his euro zone partners, Berlusconi gave a raft of reform commitments at the summit, including raising the retirement age by two years, to 67, by 2026. not only do such deep-seated policy shifts take years to have an economic impact, they are highly contentious politically. Postponing the retirement age is so fiercely opposed by Berlusconi's ally the northern league that it could topple his coalition government, Royal Bank of scotland said. And, as with greece, the euro zone is proposing that the European Commission, the European Union's executive arm, take a more active role in monitoring the implementation of italy's reforms. italy's biggest trade union, Cgil, wasted no time in pledging to fight the reforms and urged smaller unions to unite against "targeted attacks" on italian workers.

CORPORATE CORNER First Pakistan, Germany workshop on Field Robotics

lAHore: The first Pak-german workshop on Field Robotics is being held at the lUMs school of science and Engineering (ssE) over the course of two days october 28-29, 2011. This event has been organised by lUMs ssE in collaboration with University of Kaiserslautern, germany. The theme of the workshop is to introduce new and exciting areas of research in field and off-road robotics. PRESS RELEASE

TCP awards tender for import of 215,000MT urea lAHoRE: Trading Corporation of Pakistan (TCP), in response to its international gallop tender notice published on 21st october, 2011, issued award letters for a total of 215,000 metric tons (MTs) of Urea at price of $538 per metric ton (PMT), on the lowest bid basis, to four different bidders. in all, ten responsive bidders participated in the tender and quoted prices ranged from $538 to $559. PRESS RELEASE

Muslim Aid Pakistan committed to provide education to all iSlAMABAD: DFiD Head of basic services group Mr Martin Dawson said, ‘though the development sector is far beyond the achievement of MDgs by 2015 but we cannot stop the struggle. in fact we need to increase our efforts to attain this goal”. He was addressing the participants of an event organised to mark Muslim Aid Day. He strongly emphasised on quality education. PRESS RELEASE

BISP seeks CCHF’s partnership to launch technical training programme iSlAMABAD: Pakistan and brother neighboring country China have tremendous scope to work together for improving the lives of the poor segment of their population and to enhance mutual cooperation in the social sector. Both the countries can benefit from each other’s experiences, especially in the area of vocational and technical training programme. This consensus emerged on the occasion of a meeting of a delegation of CCHF with federal minister and chairperson Benazir income support Progarmme (BisP), Madam Farzana Raja. PRESS RELEASE

Samsung GALAXY S and GALAXY SII reach 30 million global sales lAHore: samsung Electronics Co., a leading mobile handset provider, has announced that its samsung gAlAXY s and gAlAXY sii smartphones have achieved a combined total of 30 million global sales. gAlAXY sii has set a new record for samsung, generating more than 10 million sales - quicker than any device in samsung’s history. PRESS RELEASE

LAHORE: Evacuee Trust Property Board (ETPB) Chairman Syed Asif Hashmi handing over a check of Rs500,000 to the medical superintendent (MS). PRESS RELEASE

FAiSALABAd: Mr Haseeb Adrees, Mr Faiq Javed, Mr Azhar paracha and Mian Anees on the launching ceremony of ‘Accessorize’ at Sitara Mall. PRESS RELEASE

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Monday, 31 Oc tober, 2011

EDITORIAL

The liquidity trap nAlYsTs rightly worry when the financial press laments over government borrowinginduced liquidity trap, while quoting sBP officials regarding another impending rate cut on the same day. Though credit easing was urgently needed to trigger private sector investment, the manner of the sudden, and ambitious, 150 bp cut raised eyebrows because of already double digit inflation, a rupee nosedive and erratic oil prices in the international market. Criticism coming the new governor’s way, of the cut benefiting the government even as the economy flirted with runaway inflation, seems to hold weight now that the government’s addiction to debt has been confirmed. Despite the risk of compromising the risky monetary easing, islamabad could not overcome its dependence on easy money. And now we have the classic liquidity trap. The official argument is selfdefeating. While shifting from central bank borrowing to advances from commercial banks is the lesser evil, it is

not so in this particular case. Catering to official demands again crowds out private sector participation, defeating the very purpose of the cut. What another reduction will achieve is not clear, other than further reducing the government’s burden. Also, whatever little percentage points the exercise shaves off the inflation number, oil fluctuation in the international market can easily trigger agflation by upsetting input prices across the board. it is yet more unnerving that while inflation trends and liquidity traps have economic remedies, they cannot be effective till the central bank has complete autonomy. Machinations at play so far reveal a disturbing erosion of that independence. going by the trend so far, we can expect a generally loose monetary stance, with private investment continuously ruled out, and the government adding to the debt burden, at least till continuous rupee weakening and rising inflation necessitate yet another embarrassing, and painful, u-turn.

Retail Term Finance Certificates in vogue?

Aahyan Mumtaz s much as the recent announcement of a retail TFC offering coming to the market is heartening for investors, it is that much of a point which financial institutions should be pondering upon. interest rates remain high despite the last 150bps cut, which makes bank borrowing unattractive either because it is an expensive proposition or to put it mildly ‘restrictive’. Banks are averse to lending anyway; a lot has already been said about how private sector credit has been crowded out by public borrowing. But when investment opportunities exist and companies want to borrow, one wonders what avenues do they have left? The high cost of bank borrowing and the covenants that accompany makes them think twice and sometimes thrice about that recourse. Equity markets are depressed owing to liquidity issues and general investor pessimism. Foreign investment is scarce on the back of the negative perception tag regarding security in the country. The answer: tap the retail market. KEsC’s intended offering of a Rs2.0 billion retail bond follows in similar fashion to Engro’s Rupiya Certificate which was able to raise Rs8.0 billion for the company at a 14.5 per cent rate under two separate issues. it has to be kept in mind that this rate was offered at a time when interest rates were hovering around a similar mark themselves. As per market expectations at that time, this rate was also lower than what other instruments issued to institutional investors were yielding. The Rupiya Certificate issues, which were fully subscribed both times, were able to reduce the company’s borrowing costs: on a debt quantum of above Rs100 billion, even a slight reduction in rate of return implies significant benefits for the issuing entity. Even now when the interest rate has been cut, the instrument still costs lower than what banks would offer after adding spread on

Is financial cost saving the only reason for issuing retail TFCs? Worth of QR codes

A new financial model

The advertising and marketing gurus should take note of this. i have noticed QR codes from supermarket grocery items to articles in the Harvard Business Review. it seems more and more information is being pictorially represented using -if i may borrow your words those "black and white squares". That simple phrase shows the beauty of these - holding massive information yet so tiny and fragile in its truest sense. i bet the phenomena would pick up in Pakistan it's just that no body has noticed them yet here for some reason. The age old maxim that a picture is worth a thousands words has just been redefined.

“The development of alternative islamic financial institutions with a focus on societal improvement”, this is the bedrock of an islamic financial system that should seek to enhance economic welfare through equitable human development. i like the idea of having unique islamic Foundations. great care should be taken in defining the investment parameters and objectives of these foundations and establishing an appropriate regulatory framework to govern their operations. And all of this requires the full commitment and will of sBP officials, sitting in AC rooms for policy making.

RAfAy bIN ALI

MobAsHeR ZeIN KAZMI

LAHORE

kARACHi

Have a blast till you last!

Sakina Husain vEn the most patriotic amongst us, especially those who have never been shipped across the border, would in the heart of hearts admit that incredible india has managed to imprint itself as a glamorous destination with values and culture acquired from the rajas and maharajas of yester centuries. And much to the dismay of those who value prosperity in material terms, the ‘Hindu growth Rate’ is now the epito-

mical way to go although skeptics would gladly point out that the fruits of indian growth are distributed among many and that too unevenly! Coming back to the mess on board, if Pakistan were to follow the indian example, it wouldn’t need much tutoring. growth in the services sector has already proven to be the economy’s talisman in the previous bout of ‘high’ growth years while currently, in 2011, contributing more than 50 per cent to the gDP. And much to economists’ glee, correlations could be drawn between high growth rate and FDi in the services sector trickling down on the manufacturing sector, which grew by rates as high as nine per cent in the midst of the decade ending in 2010. The paradox, however, arises when the economy registers a mere $5.5 billion of exports in services, and an overall deficit of more than $2 bilSHAHAB JAFRY Business Editor ALI RIZVI News Editor

lion. Why has Pakistan not been able to positively brand itself, one may ask. Did it wish to? And did Pakistanis internationally ever possess faith enough to deploy resources and invest back home? Dissecting numbers and highlighting positives first, exports from the computer and information services (iCT) industry have grown by more than an impressive 200 per cent over since FY06, registering an average annual growth rate of 25 per cent. The total value of exports from this segment stood at $217 million in 2011. While this may be considered laudable, the $50 billion indian counterpart does little to soothe one’s little heart. And this excludes BPo exports! Moving onto other less mainstream components, the economy earned about $350 million through travel and tourism in FY11. globally, the tourism industry generated about

KUNWAR KHULDUNE SHAHID Sub-Editor

The writer is a financial analyst with Pakistan Credit Rating Agency (PACRA)

Why has Pakistan not been able to positively brand itself?

$500 billion during the same period with an average annual growth rate of nine per cent. of this, about $70-90 billion is attributed to mountain tourism. only if the land of the pure had been projected as the land of scenic purity, there would have been lots of beneficiaries, some of them who live today without a chance to persist beyond subsistence. on the services import front, as opposed to what we earn through tourism, Pakistanis spend thrice the amount or $971 million traveling abroad. Moreover, once iCT imports ($177m in FY11) are taken in to account, the net amount indicates an almost zero net benefit to the economy, further reinstating its lows in comparison to the neighbour. At this point, there just might be very little for the economy to fall

BABUR SAGHIR Creative Head HAMMAD RAZA Layout Designer

top of KiBoR. The offering by KEsC also seems to reflect the same reasoning, although this depends greatly on what rate the instrument is issued at. so is financial cost saving the only reason for issuing retail TFCs? Certainly not as they also provide a much sought after characteristic in the form of investor base diversification. The subscribers of retail TFCs are mostly the general public. These commonly comprise those who are seeking a good return on their savings and are usually not highly rate sensitive. Peak returns offered by Term Deposit Certificates these days are around the 11-12 per cent mark or 12.68 per cent to be exact by Defense saving Certificates and these too for a holding period of five years or more. it is likely that retail TFCs would be offering a higher rate for there to exist an incentive to invest for the common man. Effectively companies are saving the spreads paid to banks by bypassing the financing medium altogether and investors are getting a better return than what they would have if they had put their money in more traditional avenues. This makes for a win-win situation for both. However, retail investors more than the institutional creed, are sensitive to reputation and brand recognition. This perhaps is the major impediment that restricts the management of corporations from taking such an initiative, apart from thinking out-of-the-box naturally. logic dictates that although the public would want a higher return, at the same time would be concerned with the soundness and safety investment, comfort on which is dictated by their familiarity with the company’s name. negative perceptions about the company would certainly be a factor, which is where the credit quality of the instrument on offer comes into play; high credit quality would act to placate concerns. Moreover, the reputational consequences of failing to meet commitments as promised is another aspect entities should be concerned about. Having said this, retail TFCs certainly open up avenues which were previously left unexplored by Pakistani corporations. given the liberal capital flow environment, they make reasonable economic sense as far as feasibility is concerned provided proceeds are utilised for funding appropriate investment opportunities. is this new fashion going to gain popularity with others is a question that only time will tell. But from the perspective of the investor and a proponent of developing the paltry bond market, this is certainly a positive development.

back on and it is definitely too late to start over. There is little hope of jumping on the industrialisation bandwagon with China boasting of economies of scale and scope, and a labour force that is at a 96 per cent discount to the cost of labour in the Us; it may not possible to go lower. it is hopeless to blame policy makers for not thinking about trade in services, when they could not care about ensuring consistent availability of power! one can only imagine that if provinces other than Punjab were given a chance to endorse themselves and their culture to the world at large, may be this war of egos would never have started! The writer is an economic researcher and freelance financial journalist. She can be reached at sakina.husain@gmail.com

For comments, queries and contributions, write to: MUNEEB EJAZ Layout Designer

Email: profit@pakistantoday.com.pk Ph: 042-36298305-10 Fax: 042-36298302 Website: www.pakistantoday.com.pk

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Monday, 31 October, 2011

I have a great dream that Chinese can travel to Pakistan without a passport and Pakistanis can travel to China without passports

debate

President Asif Ali Zardari

1950

1951-63

Pakistan becomes the third non-communist country, and first Muslim one, to recognize the People’s Republic of China.

1970-78

Beijing and Karachi establish diplomatic relations. 1963 - Pakistan cedes the Trans-Karakoram Tract to China, ending border disputes.

Pakistan helps the US arrange the 1972 Nixon visit to China. 1978 -The Karakoram Highway linking the mountainous Northern Pakistan with Western China oﬃcially opens.

1980s China and the U.S. provide support through Pakistan to the Afghan guerrillas fighting Soviet occupational forces.

1986-96 China and Pakistan reach a comprehensive nuclear co-operation agreement. 1996 - Chinese President Jiang Zemin pays a state visit to Pakistan.

1999 A 300-megawatt nuclear power plant, built with Chinese help in Punjab province, is completed.

2001 A joint-ventured Chinese-Pakistani tank, the MBT-2000 (Al-Khalid) MBT is completed.

2002 The building of the Gwadar deep sea port begins, with China as the primary investor.

Sino-Pak relations – an stratEgic alliancE

Pakistan-China Friendship is higher than mountains, deeper than oceans, stronger than steel and sweeter than honey

KuNwAR KHuLDuNe sHAHID

RAvERsing any turmoil is made all the more arduous, sans the presence of a helping hand. And since we, as a nation, have been profoundly reliant on external assistance for just about anything every man and his dog can put a finger upon, affixing ourselves to a foreign power has become our national ethos. Hence, an ally that has a brawny stature around the globe and can influence matters pertaining to economy, trade and security is of paramount significance. However what makes the helping hand a necessity, in our neck of the woods, is the paranoia that we attach with every maneuver from the eastern vicinity. And if the aforementioned global powerhouse has a geo-strategically picture perfect site on the map to boot, an unyielding bond becomes indispensable – China fits the bill seamlessly.

YUSUF RAzA giLLAni Prime Minister

Diplomatic options

They (the Pakistanis) are trying to use their diplomatic options as much as possible to defuse pressure on them. They hope China will help them in this crisis HASAn ASkARi Rizvi

With China, unlike most other nations, we get the nearest thing to a symbiosis – economic or otherwise – that we can conjure up on the international stage. Both nations tout themselves as “all weather partners” and the need for companionship is felt in both countries simultaneously – justifiably so. While the indian presence, historically, has been a cause of apprehension for both the countries, the burgeoning Us influence in the region is one that alarms China in particular. And hence having islamabad on their back is pivotal for Beijing. During the entire osama Bin laden soap opera, China defended the Pakistani government though the U.s continued to haul over coals, and blamed our hierarchy – left, right and center – for the exacerbated situation of terrorism. standing firm in the support of its ally, in what in all honesty was a prodigiously tricky scenario – it was a major statement of support from Beijing. After Pakistan enunciated its desire to have a seat on the Un security Council at the 66th general Assembly session in september, the bid was backed by China extrovertly. since China visualises Pakistan’s importance in the maintenance of global peace and security, it did not withdraw any decibels in echoing Pakistan’s voice.

CHINESE ASSISTANCE

Pakistan is very keen to expand its links with China in the field of education and to increase the exchange of students and teachers between the two countries MASOOd kHAn Pakistan’s ambassador to China

last year’s bilateral trade numbers depict a trade volume worth $8.7 billion, which substantiated a 27.7 per cent rise from the statistics in 2009. However the trade flow is still skewed in favour of China, with the Chinese exporting good worth $6.9 billion to Pakistan and Chinese imports were valued at $1.7 billion – 25.5 per cent and 37.2 per cent rise from 2009, respectively. nevertheless there is a buoyant optimism on our side of the border that these numbers would amplify precipitously in the near future, with bilateral trade numbers as far as $15 billion being prognosticated. To further bolster the trade correlation between the two countries, China has frequently assisted a lot of our major projects. Two of the most momentous project are; gwadar Port in Baluchistan – lucrative sea route and the Karakoram Highway – linking western China with the northern parts of Pakistan, and if upgraded would provide a channel for energy imports in China from various other markets.

SINO-PAK FRIENDSHIP

Security Analyst

Exploring opportunitiEs

SANGUINITY IN TRADE

China’s help in the construction of gwadar Port has been well documented, and while it aids Chinese aspiration of opening up an energy and trade corridor from the gulf, it goes without saying, that the potential boost to our economy is massive. China has also helped us in building our principal nuclear power generation facility at Chashma, another 330 MW unit has commenced last month as well, and a couple more projects are in the pipeline at the same opulent spot. China national nuclear Corp has said that it was also in talks over the construction of another 1-gigawatt atomic plant in Pakistan. China is also the key supplier of conventional arms and has also supported our nuclear weapons programme in the past – also providing us with military gear that includes fighter jets and frigates. Amidst the nuclear proliferation and safety clamour, this, undoubtedly, is a strapping move from Beijing. Chinese aid for flood relief purposes was another feather in the cap of sino-Pak friendship. China has donated $4.7 million, with another $5 million promised by liu Jian – Chinese Ambassador to Pakistan, in addition to the $18 million donated last year. China has also supplied 7,000 tents for the flood victims, another laudable contribution in easing out the pain of the multitude of people that suffer.

BOLSTERING ECONOMY Even though the two nations signed a free trade agreement and five-year development programme on trade and economic cooperation in 2006, followed by the approval of the economic proposals of 36 projects worth more than $13 billion last year, the bilateral trade still doesn’t post up groundbreaking numbers. The sino-Pak bilateral trade volume of $8.7 billion last year doesn’t come out on par, when compared with most other countries. sino-Us trade volume posts gargantuan numbers – with a towering $380 billion last year. sino-india trade in 2010 amounted to $61.7 billion and the number escalated further, crossing $35 billion mark in the first half of the current year – a 16 per cent rise from the same time in 2010. Even China-vietnam the bilateral trade volume was worth more than $10 billion in 2010! Considering our ties with China, and the universally flaunted companionship, the diminutive trade numbers – under situational juxtaposition – are absolutely unfathomable. if we are to bring to fruition the forecasted tally of $15 billion bilateral trade volume annually, and benefit from our intimate political relationship in tangible returns we have to streamline our approach. instead of merely focusing on enhancing the trade volume, we should look to ameliorate our industrial base. China can lend a hand in this cause by producing goods for export in Pakistan and employing local labour force. This would indeed be un-sailed waters, as far as approaches towards enhancing bilateral economic ties are concerned. However a customary encumbrance is the security threat and the cultural differences. Chinese companies haven’t expanded their bases, from tip to toe, in terms of their presence in the Pakistani market, and a reassessment on the part of our Chinese counterparts would not only bump up their market exposure, but also fortify our industrial foundation.

EDUCATIONAL EXCHANGE Another tool that has not been appositely utilised is the educational exchange programmes, especially at the university level. By allowing the cream of both the nations to blend, and acquire the positives from each other’s repertoire would have been rewarding for both the sides. Dr Muhammad Akram sheikh, former deputy chairman of the Planning Commission of Pakistan raised this point at the China-Pakistan Cooperation Conference on Monday in Beijing. He was of the opinion that a joint think tank be-

tween Tsinghua University of China and the national University of science and Technology (nUsT) of Pakistan should be established, hence setting off the hobnobbing amongst the top two universities of the respective countries. “sino-Pakistani cooperation must be underpinned by a focus on knowledge, economics and technologydriven development. That’s why cooperation between Tsinghua and nUsT is of paramount importance.” His thoughts were staunchly backed by Mr Muhammad Asghar, President nUsT, who agreed upon “leveraging education to deepen the PakistanChina strategic partnership”, and futher stated; “We have to look east, to reorient our academic approach. Tsinghua and nUsT can form a platform to carry on related studies.”

READRESSING SECURITY CONCERNS China has vehemently asked Pakistan to take notice of Uighur militants and undertake a robust action against them. The Uighur militants originate from the western Chinese region of Xinjiang, but have penetrated inside the Pakistani territory, doling out their menacing in-

tent. on 5th July 2009, the Uighur antagonism boiled over and violence broke out between the Uighurs – essentially Muslims – and the Han Chinese in Xinjiang, resulting in 197 casualties. A lot of them were Han inhabitants who were executed in stonehearted assaults on the part of the Uighur militants. Pakistan categorically condemned the riots, receiving acknowledgement from China. Another ghastly issue marring the sino-Pakistan bond is the safety concerns regarding the wellbeing of the Chinese nationals working in Pakistan. numerous Chinese workers have succumbed to militant attacks in the recent past hence resulting in the plunge of the number of employees from China willing to toil here. Most of them aren’t willing to risk their lives and rightly so. Therefore, the security factor has got to be given paramount importance to perk up our ties and ensure that we get the assistance of the Chinese expertise in enhancing our economical dynamics. Especially, considering the fact that our particular area has unfortunately become a hub of terrorism, we need to counter this disparaging hazard to move ourselves – in all facades of national prosperity – forward.

COUNTERING DRUG TRAFFICKING Cross-border smuggling of drugs has been a cause of uneasiness for both the neighbouring countries. Chairman standing Committee on interior senator Talha Mehmood recently expounded the increasing trend of smuggling that has rung alarm bells in both

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02-Profit 31-10-2011_Layout 1 11/2/2011 11:21 PM Page 5

Monday, 31 October, 2011

debate

all wEatHEr partnErs

China and Pakistan are all-weather cooperation partners. Under the complex and fluid international and regional circumstances, it is a firm policy of the Chinese government to further cement and deepen the strategic partnership of cooperation with Pakistan WEn JiABAO CHinESE Prime Minister

Financial quagmirE

As a long friend of Pakistan, China understands it is facing some financial difficulties Qin gAng Chinese Foreign Ministry spokesman

upHolDing intEgritY

China categorically supports Pakistanâ&#x20AC;&#x2DC;s efforts to uphold its sovereignty, independence and territorial integrity MEng JiAnzHU CHinESE viCE PRiME MiniSTER

02-Profit 31-10-2011_Layout 1 11/2/2011 11:21 PM Page 6

Monday, 31 October, 2011

We have found a durable solution to the Greece crisis

Markets

French President Nicolas Sarkozy

weekly review

KSE down on institutional profit-taking Pakistan petroleum announces strong corporate results Traded volume decreases by 16pc Investors remain concerned over uncertainty in Pak-US relations

Bulls storm KSE with 238 point gain Triple digit rate cut allowed the benchmark to gain 3.3 per cent PTC led the turnover with HUB CO being the runners up Safer stocks attracted investors after denial by IMF on issuing LOC

KARACHI

STAFF REPORT

oving towards the economy and stock market situation iMF has provided us a note of caution with their expectation of inflation at 14 per cent (With base effect 13 per cent to 13.3 per cent), fiscal deficit at 5.3 per cent along with gDP growth of around 3.8 per cent. During the outgoing week the benchmark was in a bearish mood for the majority of the days except Friday. The KsE-100 index moved in a fast and furious mood on Friday turning the weekly returns to-

wards the positive zone. The continual bearish trend which persisted over the past few days finally toned down. The results of top tier stocks were more or less in line with market expectation except ogDC, FFBl, and UBl beat analyst expectations. Among the 100 benevolent stocks, 65 per cent of the companies remain in red zone while 27 per cent ended the week in the green zone. ogDC with its 163 points contribution can be considered as the major trend setter for the index. second tier banks including sCB and snBl outdid the index performance after better results. Fatima with its exceptional result breached the Rs25 per share mark while FFC re-

LAHoRe oliTiCAl strains and global economic uncertainty kept investor sentiments down as the KsE-100 index ended virtually flat, gaining only 36 points (+0.3% WoW). This is despite healthy corporate returns which failed to stir investors at the start of the week. However, attractive valuations finally lured investors during the last trading session of the week. As a result, average daily volume declined 12.6% WoW to stand at 75 million shares. Foreigners remained net sellers of ~UsD 8million as the global debt crisis takes its toll on European countries. This was largely the key driver of lackluster market performance during the start of the week as profit taking activity was generally observed. However, with growing consensus and agreement over the $1.4 trillion bailout package, investor confidence seemed revitalised as seen by the sharp uptick in regional markets as well. This, coupled with strong news flows regarding sectoral performance and better than expected corporate results, strengthened investor confidence as the index saw a substantial 278 point jump (+2.47%) during the final trading session. This was also reflected in increased activity in the futures market.

g g

KSE gains 278 points Oversold local equities stage strong comeback Fauji group stocks allows the index to register intra-day gains of 2.8pc High temperature on political front questions sustainability of the current run-up

Bears return to market with 139 points dip KSE witnesses a sustainable selling pressure Dumping by offshore participants is observed g

AAHYAn MUMTAz

KSE witnesses bearish trend over the week

MCB drops by 4.8pc at its lower circuit Fatima becomes the volume leader with trading of 9.17m shares Investors remain pessimistic due to gloomy economic forecasts

mained in a rock and roll mood. We believe the current jubilation following by global market performance may fade away, said Bilal Asif at HMFs, adding that but bearish trend over the past few days may provide investors with potential fundamental upside. Money MArket: Despite continual compression in nFA, money supply contraction has decelerated due to substantial rise in nDA. government borrowing for budgetary support has swelled by Rs242 billion to Rs2.9 trillion for the week ending on october 15, 2011. government borrowing from schedule bank has risen to Rs288 billion whilst net outflow from the banking channel ahead of Eid is likely to keep the liq-

uidity under strain. inflation for the month of october expected at 10.5 per cent-11.0 per cent is likely stir sentiments on further monetary easing. Primary yields despite tight liquidity as 6months KiBoR has fallen by 6bps to 11.91 per cent. Despite widening rate differentials and looming debt payment, targeted intervention by central bank has also arrested depreciation of PKR against the green back to 0.96 per cent since the beginning of fiscal year from 1.8 per cent at the end of 1QFY11. lower inflation expectation and stable market yields going forward are likely to persuade investor for participation in longer tenor in the next week’s treasury auction.

STOCK SPECIFIC ACTIVITY

FORWARD LOOKING EXPECTATIONS

Corporate results seemed healthier than anticipated for most companies. on the back of higher retention prices and higher dispatches during 1QFY12, lUCK posted earnings growth of 107% QoQ, slightly above analyst expectations. Banking sector heavyweights MCB and UBl posted strong profitability growth of 24% and 36% on a YoY basis respectively for 9M2011. However, nBP – impacted by rising npl’s – reported a flat bottom line. The results of FFBl were announced which exceeded expectations considerably as earning growth came out to be 145% higher YoY. This is primarily owing to the exponential rise in DAP prices seen during the period, supported somewhat by marginally higher volumes despite gas shortages. As a result of gas loadshedding, fertiliser stocks continued to be in the limelight, however, performed relatively better than other sectors.

The final trading session of the day indicated the presence of strong support levels which entice investors to buy securities offering attractive valuations. This trend is expected to be seen in the coming week as well driven by the continuity of corporate results as popular script entities such as FFC, EngRo, nCl, KEsC, and Anl are scheduled to announce their results in the coming week. Assessment of flood damage to cotton crop is also likely to be released shortly. Again fertiliser stocks are expected to be in the main fray. The results of FFC and EngRo are considered important in this regard as they may carry indications about the severity of gas load shedding experienced by the sector during the period. Furthermore, with seemingly positive sentiments arising in global equity markets, the trend of net foreign selling – which has continued for several weeks – may be expected to seize, at least in the upcoming sessions.

02-Profit 31-10-2011_Layout 1 11/2/2011 11:21 PM Page 7

CMYK Monday, 31 October, 2011

“larry, do you remember where we buried our hidden agenda?”

closing bell

gARFiELd

taurus

gEmini

Have faith in yourself -- it's all you need in order to get things done today. Your energy is just right for making big leaps and getting others to do the same. You can do this, no matter how it seems.

Now is the time to start talking up your pet project -- whatever it may be! People are definitely ready to hear your words of wisdom, and you may find that you can get the wind at your back.

You need to try new things today in order to make a difference. You aren't able to figure out how it will all work out until you try it yourself, and a few failures just make you stronger in the end.

cancEr

lEo

virgo

Your sense of balance is slightly disturbed today, which could mean that you need to deal with someone who's off-putting, or that you need to ease up on a new favorite activity for a little while.

Forget your own needs today -- you've got to deal with someone who's going through something really big. It may be a friend or a work acquaintance, but your help means the world to them.

Your love life could use a boost, and this is the perfect night to make it happen! Say something sly or make a move -- your energy is just right for moving closer to someone you like.

libra

scorpio

sagittarius

Your ability to manage authority figures is waning today, so see if you can deal with those who are able to listen to reason and put off the rest for another day or two while your energy recharges.

Someone is in a really good mood today -- so much so that they might help you get your way on a project or plan that you had nearly abandoned as hopeless. Show your gratitude soon!

Your financial savvy isn't exactly off the charts right now but you do know enough to try to save. Set aside some for later in life, or even just for a rainy day. You definitely won't regret it!

capricorn

aquarius

piscEs

Your energy levels never seem to lag today, and you should find that you are able to get as much done in 24 hours as a normal person could do in a week. Make sure you rest up tomorrow!

Your energy is a bit dissipated today -- but you can feel it ready to flood back with a vengeance! Make sure that you are finding new ways to amuse yourself, as morale is paramount now.

An unexpected assist from someone you hardly know comes as a pleasant surprise -- and it could be one with long-lasting consequences! You may have just unlocked a new ally in your struggle.

SUdOkU

ACROSS

WORd SEARCH

BRidgE

HOW TO PLAY Fill in all the squares in the grid so that each row, column and each of the squares contains all the digits. the object is to insert the numbers in the boxes to satisfy only one condition: each row, column and 3x3 box must contain the digits 1 through 9 exactly once.

knowlEDgE

antElopE

manDatorY

aromatic

marmalaDE

carDinal

objEctivE

cHarcoal

pacHYDErm

cigar

rivErboat

cuDgEl

sHipsHapE

Dogma

sHrub

EccEntric

situation

EpisoDE

snakE

FramE

socializE

guarantEE

sounDlEss

HockEY

spHErical

inFEction

valEntinE

intEntion

vElocitY

invisiblE

watErFall

Today’s soluTions

MAd BRidgE PARTY

CHESS White to play: play and mate in 3 moves 8

DOWN

7 6 5 4 3

CMYK

chess solution

1.Qxh6+ gxh6 2.Be5+ Rf6 3.Bxf6# *

sudoku solution

1 Adviser's first to finish plan (4) 2 Oddly blue nettle chewed as narcotic (5,3) 3 get Free French art, 23 (6) 4 golden match during interval (8) 5 Prefer grace's rent-free companion? (6) 6 i'd say trickle is current (4) 11 Time to brew tea for inspiring new cricket side (9) 12 Expedition leader that is lacking restraint (5) 14 Electrify a former prison (5) 16 Musical symbols in fashion turned into a novel (8) 17 Managed to keep one divine church relief (8) 19 Releases small blocks choking back street (4,2) 20 Harass capital, having changed sides (6) 21 Maybe marinate it in alcohol? (4) 23 Second half of porter's Scottish water (4)

abrasivE

crossword solution

7 Unfavourable qualifying terms omit B and E (7) 8 Tailor aspires mostly to drink posh port (7) 9 Half of Andersen's translated or all of him? (4) 10 With a little clothing, run well all of a sudden (2,1,6) 12 One of 5 seen swimming across sea (5) 13 impressive group here that includes short bird (3,5) 15 guy from dubrovnik hasn't got the right paint (4) 16 governor that entertained PM once (5) 17 Leader of Alaska's in power in Anchorage (4) 18 Weapon landed the wrong way during fight (8) 20 Forces cleric to shave round end of sideboard (5) 21 State of stupor in Spanish region banning Left for a short time (9) 22 Her letters are primarily about usual nuptial troubles (4) 24 virtuous group here start to eat hot dog, free (3,4) 25 Winning girl entertains hundreds on ship (7)

diLBERT

CMYK

ariEs

CROSSWORd

02-Profit 31-10-2011_Layout 1 11/2/2011 11:21 PM Page 8

Monday, 31 October, 2011

Sino-Pakistan cooperation must be underpinned by a focus on knowledge, economics and technology driven developments

actionable intelligence

Dr Muhammad Akram Sheikh

Market Watch

UBL – Measuring real performance T

AAHyAN MuMtAZ

HE recently announced results of United Bank limited (UBl) came above analyst expectations, with a growth in profit after tax (PAT) of 36 per cent YoY and 24 per cent on a QoQ basis. This bodes well for the bank, which is shaping itself to strengthen its position in the industry, however, some concerns still remain. We present the key highlights of the analyst briefing held in Abu Dhabi on october 25, 2011.

Key takeaways from the analyst briefing net interest income for the bank registered an increase of 18 per cent YoY to stand at Rs29.6 billion for the 9MCY11. given that net performing advances for the bank declined slightly to stand at Rs326 billion at the end of the quarter, the increase in interest earned comes primarily on two accounts: (i) higher average 3month KiBoR which helped earning yield to increase by 60bps, and (ii) higher yields on investments led by government securities (+150bps) and corporate bonds (+110bps) on a YoY basis. Enhanced yields on advances are driven by corporate advances, which naturally constitute the majority of the advances portfolio (59 per cent). Adding to this, significant improvement was seen with respect to consumer yields, reflecting positively in terms of customer response to the banks efforts to enhance its product range under this segment. The other cause of increased markup income comes from fattening of the investment book mainly sovereign securities – a trend that has continued to grow during this risk averse environ-

ment. However, with expectations of declining interest rates in the future as given by an inverted yield curve, the sustainability of this avenue before banks are forced to look towards lending again still remains to be seen. The jump in interest yields of 70bps YoY was muted somewhat by an increase in cost of funds by 40bps YoY. However, on closer inspection, this seems to be a deliberate strategy followed by the bank to grow the balance sheet through acquisition of profitable, albeit higher cost of deposits. Average deposits increased by 18 per cent YoY over the corresponding period last year and three per cent over the previous quarter, led by growth in funds attracted from international avenues as the domestic mix remained largely the same. in this growth, the key point lies in the maintenance of CAsA ratio at 79 per cent. if the management philosophy is to be believed, the bank is positioning itself to capitalise on growth opportunities in terms of future lending avenues as and when they arise. The degree of success that the bank envisions versus the realised quantum is a matter which only time will tell. nevertheless, for the time being net interest margin realised an increase of 30bps YoY. The bottom line of the bank was also supplemented by decent growth in non-markup income, up 24 per cent YoY. Frontrunners in this regard were commissions earned, gains on foreign exchange dealing, and derivative income. However, apart from fees charged, other sources of income can hardly be considered to be recurring avenues casting significant doubt once again on the sustainability of this stream. nevertheless, one positive to stand out was the result of cost control measures adopted by the bank with operating costs remaining flat QoQ.

Another point of concern for the bank lies in asset quality. gross infection ratio for the bank has seen a rise of 100bps to 14.9 per cent since Jun11 only. it is claimed that this is the result of aging of nPls rather than fresh infection. As the breakup of classified loans was not provided in the analyst briefing, it is difficult to certify this claim. Regardless, concerns over the bank’s quality still remain which would lead to higher provisioning expectations in the coming quarters.

Anlayst opinion The scrip price of the bank stands at Rs55.27 as per the last trading session, trading at near lowest levels seen during the past 52 weeks. This translates to a P/Bv of 0.95x which is comparatively lower than other peer banks apart from nBP. However, the P/E ratio of the bank stands largely at par with competitors except MCB, despite the sharp fall in share price seen for the latter. Does this relative valuation indicate that the bank is undervalued? Maybe not, as the fundamental analysis of the bank may suggest that concerns over future earning still remain. investors seem privy to this and have not been attracted to the stock despite valuation. Another reason is a steady decline in cash dividend over the years as the bank has preferred stock payouts to the former, along with declining overall dividend yields. The one-month performance of the scrip has been similar to the general decline seen in banking sector stocks and little supports reason for a reversal of sentiments, at least in the short run.

stANCe: HoLD

currency Market focus

Devil is in the detail? sHAHAb JAfRy

nE didn’t have to wait too long for a small dose of rationality after last week’s landmark euro-summit sweet-talked a two per cent uptick in the single currency, sparking risk appetite and bidding up commodity currencies. Yet the next day’s headlines sobered traders posturing towards strategic longs as italy’s debt problems resurfaced, vindicating my take that the tea leaves clearly signal a medium-term short on the euro. Even oil pared earlier gains going into the weekend as European confusion combined with a decline in Japanese industrial output to renew fears of weakening international growth. The euro may still have some topside elbow room left, but hardly any intrinsic strength beyond strong resistance at 1.4250. last week’s suggestion to leverage the brief post-summit rally for a strategic short still holds as scrutiny into the euro’s biggest one-day rise in a year reveals loopholes in the bailout mechanism. The EsFs expansion, the 50 per cent bondholder haircut, bank capitalisation requirements, though impressive as an exhibition of continental solidarity, hardly amount to a fundamental departure from what 13 other summits achieved in 21 months. greece is in default, italy’s borrowing costs are rising and nobody has the slightest idea how banks will raise $120 billion in present market conditions, except handing out stakes to BRiC and emerging market sovereign wealth funds at heavily discounted prices. Even if possible, how it will help Europe, its banks, or the euro is still not clear. Despite a serious aversion to conspiracy theories, i cannot ignore rumours of germany printing deutsche marks when they come from Dr Pippa Malmgren, an enigmatic former White House and Deutsche Bank economist whose deep understand-

PAIRs

outlook going forward outLooK

MARKet PosItIoN

CuRReNt PRICe

suPPoRt

ResIstANCe

euR/usD

bearish

oversold

1.4146

GbP/usD

bearish

oversold

1.6120

usD/CHf

bearish

oversold

0.8631

usD/JPy

bullish

Neutral

75.79

1.4148 1.4113 1.6108 1.6068 0.8619 0.8597 75.72 75.54

1.4191 1.4227 1.6158 1.6199 0.8648 0.8669 75.98 76.17

ing of financial markets fascinated me some years ago in Dubai, as my first baby steps in the complicated world of financial markets coincided with the crash of ’08. This, combined with the german constitutional court ordering a halt on a parliamentary panel’s efforts to green-light bailout disbursement, strengthens my conviction that the euro might not survive in its present form. For now, look for the trend reversal to short with abandon. if meeting after executive-level meeting cannot prevent another great slide, the market will have already priced in the death rattle of the euro, ending an enchanting era of the euro area’s romance with the free market. Even as euro remains the central figure, yen uncertainty is still on the rise despite the BoJ’s best efforts to discourage safe haven inflows. But with the yen at 75.78, finance minister Jun Azume has no more rabbits to pull out of the hat, and intervention must come soon. Currency appreciation has seriously hurt exporters, and Tokyo will not be able to hold off big companies from breaking down its door for long. nintendo, for example, expects to record its

first loss in 30 years, a bad omen for an economy struggling with years of recession. strangely, bets are still open for interest rate decisions from both Europe and America. Analysts are pretty much split on a possible QE3 as Bernanke & Co juggle improved quarterly growth and a stagnant job market. Most European commentators expecting Mario Draghi to cut, on the other hand, fail to notice that Trichet was not the ECB’s chief hawk, but Bundesbank executives still paranoid from the hyper-inflation hangover of the Weimer Republic’s collapse. interestingly, Europe’s existential uncertainty is proving beneficial for sterling-longs as Wednesday’s euphoria subsides and risk makes its way out of the market again. But discretion should be the better part of valour for serious traders, as volatility abounds and the risk pendulum swings at the euro’s cue. in the immediate term, dollar, yen, sterling, oil and commodity currencies will all move with the eurozone’s heartbeat, especially if the union goes into cardiac arrest. The devil, as always, is in the detail.

Misgivings about the gold rally g

Last week’s surge just didn’t feel right, particularly because Main Street and Wall Street are both nervous. A guns-and-gold strategy?

oNLINe bARRoNs

oMETHing is amiss when a 375-point stock market advance seems suspect. But that’s the feeling after Thursday’s massive stock rally. such pessimism often presages another rally simply because investor sentiment has gotten too negative. But the recent surge higher seems unsustainable when compared with the whirlwinds of concern surrounding the market. it is difficult to be anything but cautious. Buying bearish puts on the ishares Russell 2000 (ticker: iWM) that expire early next year seems more prudent than just trading off the back of hedge-fund managers desperately trying to catch up with benchmark indexes, favorable seasonal trends, corporate earnings and the news that Europe’s financial crisis is apparently now under control. Main street and Wall street usually disagree, but their worries currently sound eerily similar. That in itself is cause for concern. on Main street, stories have begun to reappear about doctors declaring bankruptcy, or unable to access bank financing. Dentists claim patients are opting to have teeth pulled for a few hundred dollars because they can’t afford crowns that cost several times that. And stock brokers have noted an uptick in client complaints about fees, more account closing and a general reduction in risk-taking. sounds more like the beginning of 2008’s financial crisis than the start of a major rally. on Wall street, the fourth year of a global financial crisis has many of the well-heeled nervous. A hedge-fund manager recently told me his neighbors in summit, n.J., an affluent Manhattan bedroom community, are teetering on the edge of insolvency. Their $20,000 to $30,000 in monthly expenses consumes all their income. Another money manager carries around a picture of gold bars he stores in UBs’s vaults in Zurich. There’s even talk again of bankers buying guns. Preparing for civil unrest would be easy to dismiss, if buying guns and gold were not increasingly mentioned by serious people. By some accounts gold would be $2,000 an ounce if not for John Paulson, the hedge-fund manager. He is believed to be selling gold to cover investor redemptions because his funds have stumbled. At a recent gathering of the World Federation of Exchanges in Johannesburg, major stock and derivatives exchange leaders privately expressed concern about the inability of regulators to address the global financial crisis’ fallout. of course, they mostly excused themselves from responsibility. Consider credit-default swaps that are used to insure corporate debt. They adversely influence stock and options trading because the slightest trading activity or price changes are viewed as a sign that bad things might happen to a corporation. The swaps influence bearish put volatility and invariably pressure stock prices, but the swaps, which have no position limits, are effectively ignored because exchanges do not want to anger banks that make big money in unregulated oTC derivatives like a CDs. The public suffers because banks are increasingly business partners, customers and shareholders of for-profit exchanges. Politicians are similarly encumbered. one exchange leader said the bourses are only required to regulate their own markets — not the overall market. That’s the job of the securities and Exchange Commission and the senators and representatives who oversee the agency and the banks. Yet, exchange leaders admit the financial markets are too complex to be understood by the sEC and politicians. These grim views should make you uneasy. if you want comfort, buy gold bars and coins, a 12-gauge pump shotgun, and slightly out-of-the-money puts on the ishares Russell 2000 index that expire in February or April. Two to four months into the new year should be about when the current bullish mood wears off and the sclerotic global economy again slows the financial markets. Hopefully, this skepticism is misplaced and you are left with a fine story about how, in the fourth year of a global financial crisis, the world’s problems seemed intractable just before the hardships ended.