| Investment Views (April 12th 1999) |
The ECB finally cut interest rates by a half percent rather than the
expected
quarter percent. Interesting is the fact that Wall Street reacted
more positively
than Europe to the rate cut. The problem is the sky high level
of the Dow.
European markets are really nervous when the Dow stays above 10000.
People
are convinced that the US market will have a serious correction soon.
The
problem is, the market never act the way the majority expect it to.
So we're
quite sceptical that the "great correction" will happen anytime soon.
We have
no doubt that after this last rise, the US market is overbought.
Problem is, markets
can stay overbought for quite some time. What we have is still
lots of liquidity
been pumped into the world economic system. The real economy
remains quite
weak. Asia and Latin America are still limping along. Japan
and Europe are barely
growing. So the world does not have a lot of demand for capital.
Money have
nowhere to go except into the stock markets. The US being the
only robust
economy in the world, money just piles into this last bastian of growth.
Although
Asian economy is finally showing some signs of recovery, but one must
not forget
the bleeding it had just suffered. The people are still being
laid off. The buying
power has partly evaporated. In fact the consumers of the world
are tapped out.
The financial crisis of last year has set the consumers in the whole
world back
a few years with the exception of the American consumers. But Americans
alone
cannot pull the world out of the deflationary spiral. Thus it
is right that the
ECB cuts the interest rates aggressively. So with some luck we
shall not see
a "great" stock market crash in New York. And the world economy
should
recover slowly.
The German stock market still doesn't display a lot of strength.
Despite of the
rate cut, the market has remained quite tame to the upside. It
was positive
that the Dax managed to close above 5100. But it did not managed
to defend
the day's high. So the signals are mixed. I think the European
markets are
still waiting for the US to correct. So everything depends on
Wall Street. If
the Dow corrects a bit, I think it is quite likely, than the Dax will
go down
in a hurry to test the 4750 level again. We're stuck in a trading
range.
The SMI closed above the all important 7350 level. But it did
not manage to
close above the 7400 level. So we still feel that the upside
is rather limited,
especially if the Dow should start a correction next week as we expected.
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Ever since Qualcom and Ericsson settled their lawsuit, Qualcom's stock
has almost
doubled. Ericsson's stock has barely budged. We find it
strange that people are
willing to buy Qualcom at a PE around 85 while Ericsson slumbers at
around
PE 30. After all the patent dispute had only occured in the US.
For the rest
of the world Ericssons patent was not in dispute and Ericsson's marketing
savvy should not be overlooked. The future of the new mobile
telecommunication
standard should be just as bright for Ericsson as for Qualcom. Therefore
we recommend
investors adding to their Ericsson holding at any weakness.
The dollar has strengthend since mid-January. There are some arguments
in favor
of a strong dollar. The Japanese economy doesn't seem to be able
to recover on its
own. It needs to export out of its mess. Second:
the US is the only major economy
with a government budget surplus. The virtuous cycle has some
time to run. Third:
the European economy is weakening. The ECB will have to cut the
interest rates
after they have demonstrated their political independence for a few
more months.
Otherwise they risk helping the global deflationary spiral to
accelerate. The monetary
policy of the ECB is too tight for Germany and France. Both countries
are slowing
down rapidly. A decisive push to reflate is necessary.
The US treasury bonds have been quite volatile. Yields have risen
to 5.75 before
falling back on the employment data on Friday. There were more
jobs created
than the consensus expectation. But wages have been very tame.
We see the
situation as a confirmation for our long held view that the US unemployment
had
been consistently under reported. The labor market is not as
tight as the official
numbers suggest. Positive as the job creation figures were.
The consumers
in the US are piling on debts faster than their salaries increases.
We must hope
and pray that the ECB will lower the interest rates soon, so that the
US
will no longer be the only consumers sustaining the world trade.
The dollar did not manage to go decisively above SFr. 1.49. We
're back at around
SFr. 1.47-1.48 level. We do not see this pull back as fatal yet.
But we should
be leary about going long dollar at this level.
| *The stock prices are provided for informational puruposes only and not intended for trading purposes. The opinions expressed in these pages are what they are: opinions! |
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