| Investment Views (May 31st 1999) |
Instead of writing my clients
individually I thought I might as well
do a weekly summary of my views
on the markets, the currencies,
the economy, the world, and
life in general.
The US markets finanlly got their 4-7% correction that we had been looking
for. The Dow corrected more than 6% intraday and the S&P
slightly more
than 7% while the Nasdaq had seen a correction of more than 10%.
In our
opinion the market has become oversold, we should see some rebound.
But we see a second and maybe even a third testing of the lows made
in
this correction until the end of June. The most likely scenerio
is range trading
until the interest rates situation has become clearer.
The saying that "when Wall Street coughs, Europe catches a cold" is
truer
than ever. Last week the Dax tested the 5000 level again.
The market
looks weaker than ever. We wouldn't be surprised if the Dax 5000
level
won't hold in the next few weeks.
The SMI has shown the worst relative strength of all European markets.
The 6800 level is broken. We even saw the 6665 level intraday.
The
market is deeply oversold. With the positive closing on Wall
Street
on Friday, we should see a bit of a rebound on Monday. We'll
have
to see how strong the recovery will be. If the volume remains
thin
and the market still has problems recovering, then we could see
SMI test the 6500 level and maybe even 6000. Technically, the
SMI
is a sorry sight. A very clear long term head and shoulders pattern
has been developed. Thus we might even see a retest of the 5200
level again later this year.
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Swisscom has regained some strength, ever since it became clear that
it is
closer to selling its engagement in Malaysia. The market seems
to think that
Swisscom should expand closer to home rather than going into adventurous
markets that it doesn't know well.
As we had expected, the dollar's support was strong around 1.4880.
Now the
dollar is above 1.50 again. We expect further rise in dollar
to test the 1.54
level before it will retreat in late sommer.
As we have repeatedly emphasized, we do not expect the Fed to raise
the
interest rates. The deflationary trend is still stronger in the
world economy than
the inflationary one. The American labor market is much less
tight than
the statistics suggest. Technical innovations make it possible
for a lot of
companies to cut personnel. We feel that the American service
industries
are still overstaffed. Therefore we do not see wage-pressures
in sight.
Plus the world bond markets are overzealous in their inflation-watch.
There's
really no chance for inflation to get out of hand. We expect
therefore
Fed to sit tight, albeit with a slightly tighter bias.
The internet will transform our world in a massive way. I think
it is time to
begin and do some thinking on what kind of change it will bring and
see if
we can draw some conclusions that are relevant to our investment decisions.
First, as we have opined in this column we do not believe many of the
today
sky high internet stocks will eventually make a lot of money.
The internet
is such a competitive forum. The pricing pressure is so great
so that only
providers with Brandname recognition and meaningful contents will be
able
to have some pricing power. We must remember what the internet
eventually
will bring is absolute international competition. Price competition
will be fierce.
Middle men will be eliminated. Therefore we see many service
sector jobs
will be eliminated. For example, we see this trend in the financial
sector already.
More and more people are trading stocks on line. With internet
brokerage
charging less than $10 per trade, we should see brokers and financial
advisors
being eliminated at major brokerages in a big way soon. The same
should
happen in other tradable items. For example, there will be less
need for
retail stores for items that one can buy easily on the internet.
Of course
there will be branches of the economy that will profit. For example:
the telecoms, the Federal Expresses, and the computer software industries.
But the question is: Will the general economy really profit or will
the general
deflationary trend continue and become worse and worse? Without
pricing
power and with lots of jobs being eliminated and salaries on hold,
we see
the world economies trending toward deflation, even if it continues
to grow.
That means real estates and gold will become even less appealing.
If we
believe our argumentation, we would not invest in the "internet" stocks
themselves but in the companies that do have contents and pricing power
as well as companies that will offer services to the internet providers
and users: ie. companies such as Sony, Time Warner, Dow Jones,
and
Federal Express. We would also recommend the stocks of Corsair (CAIR),
Qualcomm, Ericsson, Nokia, the equipment and software provider for
the CDMA,
the next wireless telephony standard as well as stocks of telephone
companies
like Sonera, ATT, Worldcom-MCI, Colt Communications, and Swisscom.
We also
see internet companies needing ever more sophisticated software.
Therefore
we're quite optimistic about the long term future of the likes of IBM,
Oracle,
SAP and Cap Gemini.
| *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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