Rising Mideast Tensions Could Send Investors to the Sidelines

When the social unrest sweeping the Arab world initially jumped from Tunisia to Egypt, it elicited plenty of undue pessimism. While many commentators feared that radical elements were taking over, the end of Hosni Mubarak's dictatorship in Egypt is instead likely to set the stage for more moderation and progress in the country.

But the region's turmoil may now be reaching a tipping point. Deadly violence is engulfing Libya, where Muammar Gaddafi's regime is using extreme force against protesters, and major pressures are being felt in Iran, Bahrain, Yemen and even China. In the long run, the hope is that the changes being ushered in may prove to be a cornerstone of further global economic growth and political stability.

More immediately, though, the uprisings are likely to create exactly the type of uncertainty that investors dread. And a U.S. stock market that has been moving steadily higher could finally see its momentum broken as a result.

Chaos Before Resolutions

Doomsayers are out in full force when it comes to analyzing the unfolding event across the Mideast. But the driving forces -- a younger generation seeking more freedom and opportunity -- offer plenty of reason for optimism over the long haul. About 60% of the Mideast's population is under 30, and a recent survey of youth in nine Mideast countries found their top wish is a desire to live in a free country.

The long-standing tensions in the region -- clearly one of the thorniest problems in geopolitics -- may eventually be resolved constructively, thanks to a new generation. But the process will be packed with plenty of chaos first. And while the immediate consequences for financial markets were relatively subdued with Egypt, the battles now engulfing Libya will have far more impact.

Unlike Egypt, Libya is a sizable player in world oil markets. The country produces 1.8 million barrels of crude oil per day, 90% of which is exported, analysts at global intelligence firm Stratfor wrote in a note to clients. That amounts to more than 20% of the 8.4 million barrels per day for Saudi Arabia, the world's biggest oil producer.

Rising oil prices act like a growth-dampening tax on the global economy. And crude rose sharply on global markets Monday amid prospects of less supply coming out of Libya. The March futures contract spiked up more than 6%, closing above $91a barrel.

Adding to Uncertainty

But tensions are mounting in unexpected ways that go beyond mere supply and demand. Iranian warships are poised to enter the Suez Canal in a move that would be seen as a provocation by Israel. As the hard-line Iranian regime sees protests swelling at home, its motivations are fairly easy to understand: Brinkmanship could help deflect attention away from domestic repression and stoke nationalist sentiment, particularly in the more conservative countryside.

That will only add to the uncertainty even if the move isn't as belligerent as it seems on the surface.

The stress is being felt as far away as China, where authorities are rushing to quell demonstrations in the Communist-led nation before they spiral out of control. Protesters inspired by events in the Middle East are clamoring for more openness and progress at home. But Beijing's authoritarian regime is clamping down on Internet access and mobile devices to try to maintain order.

Warm sentiments aside, investors should keep in mind just how precarious a situation China is in. The country walks a tightrope that attempts to use red-hot growth to deal with massive urbanization as people migrate from China's rural areas in search of employment.

Wildcards Raise the Risks

Close economic coordination that ranges from an export sector with razor-thin margins to a managed currency is required to keep that economic engine going. While Chinese officials have managed an impressive juggling act so far, wildcards like a sudden domestic push for openness add to the risks.

The social turmoil unfolding around the globe may eventually create a safer and more prosperous world. With that day a long way off, however, investors can't be blamed for heading to the sidelines as things shake out.

View all Articles » Vishesh Kumar, previously a staff reporter at The Wall Street Journal, has joined DailyFinance, where he will be focusing on investing, particularly in tech and telecom. Vishesh has also been on the staff of TheStreet.com, where he produced hundred of videos and also served as a writer; his work has appeared widely in many other major publications. His TV appearances include CNBC and ABC's "Good Morning America," and he has been a radio guest on National Public Radio and "The Brian Lehrer Show."

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Bucking a Trend: Why the Dollar Could Rally in 2011

Despite a likely third straight year of $1 trillion U.S. budget deficits, and the U.S. Federal Reserve's controversial quantitative easing program, the U.S. dollar has basically remained flat against the world's other major currencies. Compared to the British pound, it has barely budged over the past year, going from $1.6153 to $1.6093. At the same time, it fell a relatively small 4% against the Canadian dollar and went up 5% against the euro.

Admittedly, the dollar lost a substantial 10% of its value against Japan's yen, but unless you're willing to "park" your money in Japan's famously low-interest banks for almost no return, the yen is not a worthwhile option. By extension, that same drive for yield/return will probably discourage many institutional investors from trading in their dollars for yen.

If the dollar's resiliency in 2010 didn't surprise you enough, try this on for size: There's a decent chance the dollar may rally in 2011, rising in value against other major currencies. Here's why:

U.S. budget deficit reduction progress. First, it seems likely that there will be progress in reducing the budget deficit in 2011. That may be hard to believe, given that the Democrats and Republicans in the past week courageously said "you go first" regarding entitlement reform, but the important point is that the structure of the debate has changed. The debate is no longer focused on spending increases; instead, it's looking at how much will be cut and where the slashing will occur.
Analysis: Dollar bullish.

Euro-zone debt concerns. The European Union has made strides addressing its sovereign debt woes; for example, it's poised to increase the size of its bailout fund. Still, at least two large-debt nations, Spain and Portugal, remain under "24-hour observation." While the pair will probably will avoid a bailout, the chance that they might need one -- and the negative impact that such a bailout would have on the euro -- is likely to keep investors nervous about the euro for the next year.
Analysis: Slightly dollar bullish.

Dollar as global reserve currency. Eventually, globalization may lead to the adoption of several reserve currencies. In fact, the euro, yen, British pound and Swiss franc already play supporting roles. For the time being, however, institutional investors are not yet ready to abandon the dollar-dominated reserve currency system -- a status that continues to boosts the dollar's value.
Analysis: Dollar bullish.

U.S. economic expansion. Finally, there's the U.S. economy. After the longest and most painful recession since the Great Depression, the world's largest economy appears to be headed for a better-than-adequate performance in 2011. U.S.-based companies, including many multinationals, are lean, cash-flush (they've amassed about $2 trillion in cash), and are well-positioned to take advantage of the global growth cycle. That bodes well for earnings growth. And because these are largely dollar-denominated investments, it will increase demand for dollars.
Analysis: Dollar bullish.

So whether you're talking about the deficit reduction, Europe's debt woes, currency reserves or the multinational-led U.S. economic recovery, the stars appear to be lining up for a decent year for the dollar. Of course, the outbreak of another war involving the U.S., an unforeseen natural or man-made calamity (such as terrorism) or a major and sustained disruption in the flow of imported oil could all result in a bad year for the buck. But minus those, look for the dollar to hold its own in 2011.

View all Articles » Joseph Lazzaro is the former managing editor of financial news web sites WallStreetEurope.com/WallStreetItalia.com, based in New York. Prior to graduate training in U.S. public policy and international economics, Lazzaro also served as a copy editor and staff writer for The Hartford (Connecticut) Courant.

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The Alibaba Fraud Case Could Be a Weight on Yahoo

When trading resumes in the U.S. on Tuesday, Yahoo (YHOO) investors may want to brace for a potential Alibaba (ALBCF) affect. That's because the road to an initial public offering for Chinese e-commerce giant Alibaba's sister company, Taobao, may have just gotten even longer.

Yahoo, which holds roughly a 40% stake in the Chinese companies' parent, Alibaba Group Holdings, has been pining for a Taobao IPO to make its lucrative investment stake in Alibaba Group even more valuable. But on Monday, Alibaba announced that CEO David Wei and Chief Operating Officer Elvis Lee had resigned following preliminary results of a fraud investigation at the company.

Taobao CEO Jonathan Lu was named CEO of Alibaba and is now tasked with overseeing both Internet sites, a move that could potentially push back any plans for a Taobao IPO even further down the line. On Monday, John Spelich, an Alibaba spokesman reiterated: "We have no intention for Taobao to become a publicly traded company."

Up to Half of Yahoo's Value

On Jan. 26, press reports surfaced that Alibaba Group was planning to postpone IPOs of its eBay-like consumer-auction site Taobao and PayPal-like online payment site Alipay, according to a Bloomberg report. That day, Yahoo's stock fell 2.8% to $15.57 a share, while the broader markets advanced. Alibaba Group, combined with Yahoo's other Asian investments, like Yahoo Japan, account for upwards of 50% of the U.S. portal's value, say some Wall Street analysts.

Alibaba's board asked Lu to serve the dual CEO roles and has not initiated a CEO search. Lu's exposure to running publicly traded Alibaba could be a good thing if Taobao goes public one day.

Meanwhile, concerns that Lu may be stretched too thin to be effective in either role should be offset because both companies have strong leaders and a deep bench of talent, Spelich says. "Jonathan will have all the resources he needs available to him," Spelich says. Alibaba's board will monitor Lu's progress in managing both companies.

Fraudulent Storefronts

For Internet darling Alibaba, the revelations of fraud present a black mark, which it's quickly addressing. While neither Wei, Lee or other senior executives were found to be directly involved in the fraud, Alibaba says the top two executives resigned to show that they nonetheless take responsibility and that such acts won't be tolerated.

The internal investigation revealed approximately 100 sales representatives, managers and supervisors were either intentionally or negligently allowing fraudulent storefronts to appear on its international marketplace, rather than submitting them to its authentication and verification system. Those employees accounted for roughly 2% of Alibaba's overall workforce.

Between late 2009 through 2010, a total of 2,326 Alibaba China Gold Suppliers were found to have committed fraud when selling goods to users. That represented 1.9% of the company's total Gold Suppliers over the course of two years.

Alibaba says the average claim per buyer came out to less than $1,200 and that the fraudulent actions won't have a material effect on its financial results. As for any future fallout, like loss of business, Spelich says the company hopes its actions to address the fraud will underscore its values and ethics.

View all Articles » Dawn Kawamoto is an award-winning business and technology reporter for DailyFinance. She previously covered the business angle of technology companies at CBS Interactive's CNET News and has also worked as a business reporter for the Los Angeles Daily News, Orange County Register and Santa Barbara News-Press.

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Smartphones Could Give a Boost to Verizon's Shares

Verizon Communications, Inc. (VZ) primarily competes with AT&T, Inc. (T) and Sprint Nextel Corporation (S) in the mobile business. Our price estimate for Verizon stands at $36.62, in line with market price. However, given Verizon's aggressive smartphone penetration expectations, this price estimate could potentially see further upside.

Smartphones encourage high data usage, and require better service provider networks, but also offer large profit opportunities for companies like Verizon. The recent addition of new tablet devices to service providers' arsenal extends these opportunities.

The penetration rates of smartphones are higher than ever before, as noted by Verizon during its recent earnings release. The company stated that it expects its smartphone penetration to increase from 26% in 2010 to 50% in 2011. That is a very aggressive target and leads us to investigate what such momentum holds for Verizon's future.

What Does Rising Smartphone Penetration Mean for Verizon?

Although Verizon's smartphone penetration is low, the company stated during its recent earnings release that about 75% of the postpaid net adds in Q4 2010 were smartphones. It is clear that new customers are leaning towards smartphones, but older customers are upgrading as well, as evidenced by Verizon's aggressive smartphone penetration targets for the coming year. The iPhone is one reason why Verizon thinks it can achieve these targets.

See our full analysis and $36.62 price estimate for Verizon

The rising smartphone penetration of Verizon's postpaid subscriber base, coupled with 4G unlimited plans at $30 and the possibility of higher pricing as data usage increases, could leave our data ARPU projections on the conservative end.

In fact, if average data revenue per subscriber crosses $32 per month by the end of our forecast period, data revenues will actually overtake voice revenues, which would mark a fundamental shift in an industry that began as a means to connect people via voice. The modifiable chart above illustrates that, should this pricing scenario materialize, it would imply 5% upside to our $36.62 price estimate for Verizon (all else held constant).

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Could You Work for Yourself?

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It's a question a lot of people have been asking themselves of late. The recession has seen many people lose their jobs and one of the main ways they have got back into earning again is to start a business of their own.

But could you actually do it? It might seem to be the perfect solution if you are having trouble finding another position, or you simply don't like the work you are doing now. But working in your own business requires a whole set of skills and abilities not everyone has. How do you find out whether you have what it takes to set up and run a successful business of some kind?

First of all you have to be honest with yourself. It is easy to sit in an office, working for a horrible boss, thinking that you would be so much better on your own. But if you did take the plunge you would have to take responsibility for a lot of things you currently leave to other people to do.

For example, you would have to start doing your own accounts for the business. You would need to know how to find clients on a regular basis. You would have to find either a range of products to sell or a service to offer, depending on what field you decided to go into. As you can see, it isn't always as easy as you might think to successfully work on your own.

There is also the question of losing the camaraderie you get with your work colleagues every day. Of course you won't have to deal with those people you don't like any more either! But even if you end up employing other people it won't be the same as being on level pegging with your work mates. Could you really handle the perks and the downsides of being your own boss?

Discipline is another big problem for some people who take the plunge without thinking it through first. Some people are highly self motivated and find it easy to get started every morning – even when they don't have someone looking over their shoulder or checking their watch to ensure they turn up to work on time. If you aren't able to get started easily you need to think about whether you are going to be able to make your own business work. It won't work unless you have the motivation to work as well.

You also have to get everything set up properly – find office space or work from home, get a business phone line installed and make sure you have all the equipment you need. Could you do this easily enough?

Hopefully you will now have some idea of whether you are the ideal person to work for yourself. If you are, enjoy the journey ahead.

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