Japanese PM, devastating hurricane make waves in the financial world this month

------By Justin Lowes

After tremendous gains over the last few months, August saw most major markets slip back slightly, with only the UK among west-ern markets showing positive returns. The strongest performance came from Japan, which rose by more than 4.5 percent. Prime Minister Koizumi was defeated in his flagship plan to privatize the Japanese post-office. As promised, he called an election in an attempt to force through reform in the face of op-position from the conservative wing of his own party. He used the campaign to not only focus on post-office reform, but also to promote alternative candidates to the LDP conservatives that had voted down his policy. On September 11, he won a comprehensive victory, securing a large majority for his coalition and removing more than half of his opponents from office. Popular support for much needed reform, plus positive economic data has energized Japanese bulls, who argue that at long last the fundamentals are in place to end deflation and rein-vigorate the second-largest economy in the world. While Japan has disappointed many times in the past and the LDP is still filled with many hostile to real reform, the mandate secured by Koizu-mi and the election agenda does offer a genuine ray of hope that this time, optimism will be justified.

In the wake of Hurricane Katrina, oil prices rose above $70 per bar-rel, before falling back to the mid-sixties. Most ana-lysts forecast that prices will aver-age around $50 per barrel for the next five years. Some doomsayers are predicting peaks at $100 per bar-rel or even higher. Although prices in real terms, on some estimates, are near or at levels that have previously precipitated recessions, such dramatic effects are yet to be seen. However, the world.s biggest retailer, Wal-Mart, recently forecast poorer earnings on expectations that the spending of their customer base (which tends to be at the lower income end of the spectrum) was likely to be negatively effected by higher petrol prices. As discussed previously in this column, consumer spending (largely supported by rising house prices) has sus-tained the global economy for the last 5 years. Slowing real estate markets, com-bined with households feeling the pinch from in.ation, may well put the brakes on consumer spending. Gold, which has been strangely divorced from the price of oil for some years (normally the two rise in tandem but gold has languished compared to oil) has also started to rise in value. Are the clouds gathering for the global economy?

Stock pick of the month

Weyerhaeuser Co (NYSE: WY) is a major lumber and wood products concern based in the United States. Although an initial look at their sector might tempt one to overlook this company because of its nexus with the precariously situated housing market, a closer inspection reveals that a signi.cant portion of Weyerhaeuser's revenue is derived from the manufacture and sale of paper and related products and materials. Such diversi.ca-tion offers a nice hedge against any possible bursting of the U.S. real estate bubble. Of further comfort is the fact that the stock pays a fairly decent 2.7 percent annual dividend. Coming from a value perspective however, the fundamentals are what really sell this stock. Despite the fact that Weyerhaeuser's market capitalization is nearly twice as big as its closest competitor, it still has some extremely impressive value ratios (Price/Book = 1.65; Price/Cash Flow = 5.6; Price/Sales = 0.71). Not only are these numbers great (the lower the number, the better the value) with respect to the market as a whole, they also are on the low end for Weyerhaeuser's industry. Accordingly, the company's share price may be able to sustain a further increase of 10 percent or more before it ceases to be a good value.

Since we added Weyerhaeuser to our portfolio in early August, the value of its stock has risen a little over 4.5 percent. Moreover, the share price should continue to increase steadily. The outlook for the company is encouraging, since competition appears to be easing. Major players have recently retreated from less pro.table areas to concentrate on their core businesses, leaving opportunities for Weyerhaeuser to expand operations and increase market share. Justin Lowes is Chairman of Tenbridge

Consulting www.tenbridge.com, an independent financial advisory firm based in Beijing.