| Investment Views (June 21st 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.
We wrote a few weeks ago:
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.
And indeed we had been correct. We have been range trading
on the Dow the last few weeks. A second testing of the lows
on the Dow around 10410 has indeed held. And last week we
turned right around and are again at the 10800 level. The resistence
level at 10950 has not been broken. So Monday will be interesting.
If we manage to take out the 10950 level, then maybe the long
awaited summer rally has begun. But we do not see great potentials
for the Dow on the upside. A third testing of the lows made
in June could still be in the cards.
For Asia and maybe Europe, the summer rally has begun. Asian
markets have all managed to make new highs last week. So we
see the direction of the flow of funds has again turned eastward.
European markets have been in doldrums since the beginning of
this year. But recently we heard more and more analysts
recommending buying Europe. Finally we are seeing some
portfolio adjustment and the American investors seem to be
buying Europe ever so carefully. But the European institutional
investors have not got into action yet. Until they also start
buying
we shall still see European stock markets in trading range mode.
The Dax will start trading next week with adjustment. The individual
components of the index will be re-weighted with the Deutsche Telecom
almost doubling its weighting. Thus the new Dax will not be quite
comparable with the old Dax. We'll have to wait for a few weeks
to
see which direction the index adjustments will take.
The Swiss market has seen some astonishing recovery from 6650 all
the way up to 7230 in two weeks. Therefore we do not see much
more upside potentials in short term. Unless the SMI closes above
7280
with large volume, we do not see the SMI breaking out of its tight
trading
range. Even if SMI breakout above 7280, the upside is still limited
to about
7600. Until we really close above 7600 we are stuck in the larger
trading range between 6500-7600
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We do not officially recommend non-European stocks. But we had
written about a month
ago that we would buy stocks of Sony, Time-Warner, Dow Jones and Federal
Express,
because these stocks would profit in the long term from the developement
in Internet.
These stocks have outperformed the general market. But our European
recommendations
have fared very well too. LVMH has gained more than 15% since
our recommendation
a month ago. Sonera also gained more than twenty percent.
We must admit that we have difficulties understanding
the analysts on CNBC.
They seem to think that a weak Euro is such a tragedy.
But did the Americans
ever worry about a weak dollar? They're happy
that a weak dollar makes
American exporters more competitive. Now the
Europeans should be happy that
the Euro is not trading at a stratespheric level.
After the Plaza agreements,
the Americans and the markets have forced the Japanese
and the Europeans
to upvalue their currencies at an breakneck pace.
No wonder the Japanese
and Europeans have problems adjusting to the new levels
of their currencies.
Why is the American economy doing so well? Part
of it is because of the weak
dollar, stupid. The real economic adjustments
take time. Re-structuring, moving
manufacturing abroad, firing and hiring take time.
In the very long term, we still
think that Euro will be strong. But the momentary
adjustments will take some
time to work out.
Our Thesis that the currency level is important for the recovery
of the Japanese and European economies have seen active support
from the Bank of Japan which had been actively intervening in the
currency markets to prevent a renewed strong Yen. Our feeling
is
the European Central Bank is not unhappy that the dollar is strengthening
against the Euro either. So we would remain long dollars.
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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