Message To Mexico: Privatize Pemex

MEXICANS LIKE TO think of Petroleos Mexicanos as a national treasure to be guarded and never sold. In reality, Pemex is no more than a largish oil company -- the world's 11th-biggest -- that is unprofitable and inefficiently run. President Felipe Calderon should privatize it -- not for the revenue a sale would generate but for the powerful message it would send about Mexico's embrace of free markets.

Selling a chunk of Pemex wouldn't provide a windfall for the government. Even though Pemex has more reserves than most quoted oil majors, it also has more problems. And its big tax burden is one reason it is unprofitable. A Pemex sale would require a reasonable long-term tax deal with the Mexican government. With such an arrangement, and $85 billion in revenue, it is probably valued at upward of $80 billion. Subtract $42 billion in debt, and a complete privatization would bring the state less than $50 billion, equivalent to just a year of Pemex's tax payments.

So why should President Calderon sell it? If done right, a Pemex privatization might help break the grip of Mexican economic failure. Productivity has increased by less than 0.5% per annum since 1990. Every year, 500,000 productive workers cross the border to find jobs in the U.S. Pemex both symbolizes this failure and is part of it. In fact, Pemex provides a striking case of political featherbedding -- its revenue per employee in 2005 was just $610,000 compared with Exxon Mobil's $4.1 million. Conversely, while it has just a quarter of Exxon Mobil's revenue, it has 50% more proven reserves than the U.S. oil major.

As Vicente Fox showed in his recently ended six-year tenure as president, even a conservative who follows consensus Mexican economic policy while avoiding tough questions can achieve little. It would be much better to break with consensus and strike out for the free market. That is the revolution Margaret Thatcher inaugurated when she started flogging government-owned businesses in Britain more than two decades ago. Turning Pemex into a modern, efficient operation could bolster Mexico's oil exports and kick-start growth. Because President Calderon owes nothing to Pemex's politically powerful unions, there has never been a better time to act than the present.

Hedge-Fund Policing

A MILLION BUCKS isn't what it used to be. But that is all you need to be an eligible hedge-fund investor. The Securities and Exchange Commission is preparing to raise that to at least $1.5 million. Unfortunately, this won't protect small investors.

The blue-chip funds of the industry don't really want money from the little guy. And the SEC lacks the resources to enforce the higher threshold. The danger here is that raising the threshold leaves investors with a false sense of protection.

There is nothing wrong with trying to protect small investors or probing infractions like insider trading more aggressively. But the systemic risk posed by the rapid, leveraged growth of the hedge-fund industry deserves more attention and serious consideration by regulators. The hedge-fund industry's increased role in lending activities, without the kind of reserve requirements applied to banks, demands it.

Also, leveraged strategies employed by hedge funds in a bull market are unlikely to work the same way if credit tightens amid bearish forces. That could lead to cascaded selling by funds trying to dump slumping securities simultaneously. The SEC would better serve investors and financial markets by addressing these systemic threats instead of merely tinkering around the edges of hedge funds.

Biotech Bounces

THERE ARE TWO WAYS to invest successfully in biotech. One takes scientific knowledge and a lab coat. The other simply requires a calendar.

Over the past 18 years, biotech stocks have produced annual returns of 17%. However, the bulk of that has come between August and the year end. The American Stock Exchange Biotech index returned only 5% over the rest of the year.

Owning biotech over the last five months of the year looks even better on a risk-reward basis. It would have lost money only once over nearly two decades. Investing in biotech from January to July would have resulted in losses on 10 separate occasions.

So what explains this curious seasonal effect? Biotech stocks are driven by news. Demand for drugs isn't economically cyclical -- the most important facts for investors are how effective a new drug is in relation to its side effects, and whether it will be approved by regulators.

While negative data are likely to be presented at any time during the year, good news tends to arrive during the autumn. Biotech firms prefer to present findings at conferences heavily attended by doctors. The most important of these meetings, such as this weekend's American Society of Hematology conference in Orlando, Fla., take place toward the year end. Successful trials are given greater prominence at such powwows.

Furthermore, good news for biotech firms from regulators normally comes later in the year. Many companies rush to file with the Food and Drug Administration by the end of December or shortly after -- it looks better in the annual reports to say a drug is awaiting approval. The FDA gives itself more than six to 10 months to decide. So the majority of biotech approvals come toward the end of the year.

Source: American Attorney