Business & Money News

Earlier this week, the Forex Blog speculated that the tide was turning on the Euro, which had retreated from the $1.60 threshold. Sure enough, the month of April saw the best monthly performance by the Dollar in over two years. The sudden about-face by the Dollar stems from changes in interest rate expectations. Only a couple weeks ago, the consensus among investors was that the Fed would cut rates further at its next meeting; the only point of uncertainty was whether rates would be cut by 25 or 50 basis points.

As of today, however, there is only a 25% chance that the Fed will cut rates at all, if you go by futures prices. Regarding the Euro, investors are no longer so sure that the ECB will hike rates in response to surging inflation. In short, the new consensus is that the US/EU interest rate differential has stabilized. Then there is the economic picture; investors have “chosen” to be pleasantly surprised by the most recent economic data. While the economic downturn still seems inevitable, it may not be as severe as investors had previously feared. Reuters reports:

In contrast to slightly stronger U.S. data, the Ifo German business sentiment index this week showed the biggest monthly fall since September 2001.

Read More: «www.reuters.com»

Tom O’Halloran’s goal is to buy stocks that will bust right out of his category.

O’Halloran, portfolio manager of Lord Abbett Developing Growth Fund, buys small-cap growth stocks. But he doesn’t want them to stay that way.

“We want the small-cap stars that can become mid- or large-cap stars within one to seven years,” O’Halloran said.

He has had a few of those lately. The fund sold solar power company First Solar () last year when it was near $20 billion in market cap. The stock rocketed nearly 800% last year. Another solar company, SunPower, () reached $10 billion in market cap when the fund started cutting it back.

O’Halloran starts small. His universe typically ranges from $500 million in market cap to $2 billion when he first buys.

He wants companies that are growing sales at least twice as fast as the economy. In a normal environment of 3% growth in the economy and 3% inflation, he’s seeking at least 12% sales growth.

Financial strength is another key. Developing Growth seeks a strong balance sheet and it prefers profitable companies.

He and his team of five small-stock analysts dig into the company’s fundamentals. A good business model is vital, and favorable industry forces help, O’Halloran says. They look for competitive advantages and strong, credible management, too.

“If a company is good on all four of those, we consider it a very fine business,” O’Halloran said.

That narrows the 3,000 or so stocks that fit his size criteria to about 250. He trims that to about 120 holdings at any one time by focusing on growth characteristics.

He’s not only hunting for powerful growth, but also a trend in the right direction. He sold former highflier Crocs () last year when it said profit growth would slow from about 200% to 40% this year.

Stick To The Process

O’Halloran won’t stray from the fund’s process. “We view the process like the U.S. Constitution. It’s unchangeable,” he said.

The fund will sell a stock when the reasons it bought it have changed. The business model or management might have weakened, or the company could be losing share. Earnings or sales growth might have peaked. He’ll also sell if valuation reaches an extreme.

The fund has beaten its small-cap growth peers tracked by Morningstar Inc. for three straight years. That includes the fund’s whopping 35.9% gain last year that trounced its peers’ 7.6% gain and the S&P 500’s 5.5% return.

Developing Growth has beaten its peers and the S&P 500 over the past three-, five- and 10-year time periods, too. The fund’s 16.53% five-year average annual return tops peers’ 12.50% gain.

Last year’s outsized gains, he says, came mostly from “unusually good stock picking.” The bear market that started last year hasn’t been kind to many of these highfliers. Going into Wednesday Developing Growth was down 16.13% vs. 13.52% for its peers and 10.67% for the S&P.

New Oriental Education, () which teaches English to students in China, was an example. The stock soared 140% last year. Now a smaller holding, it plunged through its 10- and 40-week moving averages the past two weeks and is about 45% off its November high.

Sectors played a big part, too. The fund was heavy in consumer and tech stocks last year. It was light in health care and industrials. And the fund hasn’t owned banks for nine months, he says.

This year, that has changed. The fund is now overweight in health care, whose stable growth looks good in a slowing economy. Tech is about equal weight vs. the market, while O’Halloran is steering away from consumer stocks due to economic concerns.

Illumina () recently became the fund’s largest holding. The maker of genetic testing gear fits O’Halloran’s health care theme. Its sales have been growing in triple and high-double digits, it posts strong profit margins and it just settled a rival’s lawsuit. “That’s a major overhang that’s been lifted,” O’Halloran said.

MOSCOW: A plan to privatize the worlds largest electricity company is entering the home stretch, successfully it seems, in spite of its Rube Goldberg-like complexity and the general hostility toward privatization in Russia today.

The plans architects say they have raised $33.9 billion by creating a simple and obvious investment opportunity - the chance to sell heat and light to one of the worlds coldest and darkest countries. The Russians say they have learned how to privatize their electricity market by watching the best example of failure: the Americans and Enron.

The Russian state electricity monopoly, Unified Energy Systems, will be disbanded June 30 after spinning off dozens of subsidiaries and floating a portion of shares in those companies on the Russian stock market, then selling the balance at auctions.

To attract buyers and investors, Russian officials promise they will also liberalize electricity tariffs for industrial consumers by next January.

“From a market point of view, its very sexy,” said James Fenkner, chairman of Red Star Management, a hedge fund based in Russia. “You are going, all of a sudden, from a system of government controlled inputs and outputs to a market based system with more potential for profit.”

Red Star Management has invested in hydroelectric plants in Russia.

By Tuesday, Unified Energy had raised 797 billion rubles, or more than $33.9 billion, in spite of glum market conditions, according to the company spokesman, Stas Degtyarev. Though the company sells mainly to other utilities rather than portfolio investors, shares in newly privatized Russian electricity companies are now popping up in portfolios and on the books of hedge funds around the world.

To be sure, enthusiasm has been dampened not only by the complexity of the securities, but by memories of President Vladimir Putins reversal of some oil industry privatizations, and concerns the same fate could await electricity investors. Also, many Russian power plants co-generate heat for residential buildings - a market whose rates will not be liberalized.

Generally, electricity privatization is fiendishly complex, and it has failed spectacularly before. But the Russians say they have learned from others misfortune, especially the case of Enron.

“What happened in California, though it was unfortunate, helped us design restructuring,” said Sergei Dubinin, the chief financial officer of Unified Energy Systems and a former Russian central banker. “We said, We cant do it that way. ”

The case for investing rests on a scarcity of electricity as Russias economy grows and the belief that prices will explode after liberalization. Russia is the fourth-largest electricity market in the world, behind the United States, China and Japan.

The deals are low profile, but high-priced. OGK-1, for example, which owns power plants in western Russia and the Ural Mountain region, is expected to fetch about $7 billion at auction on April 17. On Monday, the Russian billionaire Mikhail Prokhorov bought 32 percent of TGK-4, with plants in smaller cities near Moscow, for $500 million at auction.

The gas-powered electricity plants have become acquisition targets for the European utilities like Enel of Italy and E.On of Germany; both have bought plants with intentions to invest money and expertise in energy savings in order to balance a projected rise in the price of natural gas in Russia.

For their part, portfolio investors have tended to bid up the price of power plants before large sales, then exit the stocks, making these shares more volatile than the average equity in the Russian stock market. Shares in the power and heat company TGK-5, for example, dropped 40 percent since its spin-off from Unified Energy.

Some investors have bought Russian hydroelectric capacity that taps the currents of the wide northern rivers. The cost of production, of course, will not rise with the price of gas. This was the approach taken by Red Star, Fenkners hedge fund. But the government may increase a water tax for these plants .

Controversially, one outcome of Russian electricity privatization is likely to be a shift from natural gas to the relatively cheaper, but less clean-burning coal as plants seek savings - indeed, a Citigroup investor note has even recommended investors buy coal-fired plants.

One looming risk, however, is that Gazprom, the gas monopoly, will raise domestic prices for natural gas before the electricity market is fully liberalized, squeezing the profits of the electricity companies and their new owners.

And, as one investor who did not want to be identified because his company deals with Gazprom, noted, “Gazprom is far more powerful than Enron ever was.”

2007 was a banner year for the Turkish Lira, which appreciated 21% against the US Dollar. However, in the year-to-date, the currency has returned nearly 10% of this gain, making it the third worst performing currency in the world. Turkey generally, and the Lira specifically, are considered by investors as proxies for emerging markets. The global trend towards risk aversion, as well as skyrocketing inflation, are hurting many such currencies. In Turkey, inflation is so problematic (9.4% at last count) that the Central Bank has raised its benchmark interest rate to 15.25%. Ironically, the more the Lira depreciates, the harder it becomes for the Central Bank to control inflation, causing the Lira to slide further as part of a self-perpetuating free-fall. In addition, the country is beset by political uncertainty, as the courts determine whether the nation’s current government can stay in office. Bloomberg News reports:

“The recent political developments are likely to complicate policy-making and the investment climate. The deteriorating political backdrop will in turn undermine the prospects for restoring fiscal discipline and reviving the reform agenda.”

Read More: «www.bloomberg.com»

A British primary school teacher was charged yesterday in Sudan with “insulting religion and inciting hatred” after allowing children in her class to name a teddy bear Muhammad.

Sudan’s ambassador to London was summoned to the Foreign Office last night as the state prosecutor said Gillian Gibbons, 54, from Liverpool, would appear before judges in Khartoum today. She has been held by police since Sunday, accused of insulting the prophet Muhammad. Despite her colleagues insisting it was an innocent mistake, Sudan’s deputy justice minister confirmed yesterday that a charge had been laid. “The investigation has been completed and the Briton Gillian was charged under article 125 of the penal code,” said Abdel Daim Zamrawi, speaking to the official Sudan news agency in Khartoum. “The punishment for this is jail, a fine and lashes. It is up to the judge to determine the sentence.”

Gibbons arrived in Sudan in August to take up a post at the exclusive Unity high school, which follows a British-style curriculum. In September, during a class on animals and their habitats, she asked her seven-year-old pupils to give a teddy bear a name. They chose Muhammad, the name of one of the boys in the class and a popular name in Sudan.

Last week the education ministry informed the school that a few Muslim parents had complained about the name, and police arrested Gibbons at her home in the school grounds.

Sudan’s top clerics, known as the Assembly of the Ulemas, said in a statement on Wednesday that parents had handed them a book the teacher was assembling about the bear. “She, in a very abusive manner, used the name of Prophet Muhammad, may Allah shame her,” the statement said.

Unity’s directors have shut the school to avoid the type of protests that greeted the publication of the notorious cartoons in a Danish newspaper last year.

The Foreign Office confirmed Gibbons had been charged, prompting a statement from Gordon Brown’s official spokesman. “We are surprised and disappointed by this development,” he said. “The first step is to summon the Sudanese ambassador so we can get a clear explanation for the rationale behind these charges.”

The foreign secretary, David Miliband, is expected to see the ambassador this morning. The Foreign Office minister Lord Malloch-Brown is understood to have been in close contact with Sudanese officials. Diplomats in Khartoum, who were denied access to Gibbons on Tuesday but were allowed to see her for 90 minutes yesterday, were shocked by the decision to press charges. They had hoped that a policy of quiet diplomacy would persuade the authorities to free the teacher.

Muhammad Abdul Bari, secretary general of the Muslim Council of Britain, said he was appalled by the news. “This is a disgraceful decision and defies common sense. There was clearly no intention on the part of the teacher to deliberately insult the Islamic faith.”

Ghazi Suleiman, a human rights lawyer and Sudanese MP, said: “This should not be politicised. People must stay calm. There was a complaint made against her by certain parents. There is now a case to answer. In my opinion as a lawyer, the lady is innocent. I am sure that if she is seen by a competent court, she will be acquitted.”

Some analysts saw ulterior motives. There are tensions between Britain and Sudan over the conflict in Darfur. In a Guardian interview this month, President Omar al-Bashir expressed anger at the threat of UK sanctions against Sudan if peace talks failed.

Mudawi Ibrahim Adam, a prominent peace activist in Khartoum, said: “This was an opportunity for the government to distract people from the main issues in Sudan: the problems between the authorities in the north and south of the country, the conflict in Darfur and the question of letting in United Nations peacekeepers.”

There were reports yesterday of pamphlets being circulated in Khartoum calling on people to protest against the teacher after Friday prayers. But many people seemed to take her side. Muhammad Kamal Aldeen Muhammad, a 20-year-old student, said it was clear that she had not intended to insult the prophet. “All she was doing was trying to help her students. The government is looking at this purely from an Islamic perspective.”