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    Investment Views  (January 24th 2000)

    Markets in General

    Last week was a down week.  A down week during options expirations usually doesn't
    bode well for the market in general.  It means that nobody is nervous enough to
    cover their shorts.  Therefore the market is judged by professionals as not having
    much upside to it.  But the general public remains bullish.  There are no panic selling.
    Up until now, the general public has been right more often than the professionals.  Therefore
    we remain cautiously optimistic. The earnings reports have not been bad.  There are more
    earnings surprises to the upside than to the downside.  The US economy remains strong.
    But the Fed's meeting early February is on everybody's mind. So it's perhaps not surprising
    that people are cautious before the news.  We still expect the Dow to trend higher, after
    this minor correction.  Target: 12000!

    As I have pointed out long time ago, the e-retailers have shown themselves to be unable
    to make a profit.  The amazons of this world have no pricing power.   But there are still
    strong techs out there: the B2B internet stocks, the software and net infra-structure stocks.
    Although no one is making money on the internet, it is still paramount for all companies to
    present themselves on the net, if only to defend their brand image.  So we should see continued
    investment by companies of all sizes on e-commerce software, and internet infra-structures. And
    companies will have to get ready for the next wireless phone internet presence.  Therefore
    we wouldn't sell off all tech stocks indiscriminately.

    The Dax corrected along with Wall Street.  The correction is quite a bit more massive than
    New York.  But we remain bullish on Germany. The Dax will have to close decisively
    above 7300, for the market to break out of the current trading range 6950-7300.

    The CAC has been hit by profit taking.  Paris had a great run last year.  So profit taking
    is not surprising.  We expect the CAC to under perform the Dax this year.

    The SMI is still stuck in a tight trading range, 7200 to 7550.  The problem is the current
    rally theme involves high techs and biotechs, both of which are in rare supply in the
    SMI.  The Swiss companies are moderately valued.  But who cares, if everyone would
    rather have more fun betting on fantasy and ideas stocks than solid but stodgily profitable
    companies?

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    Stocks

    Our favorite stocks remains SAP, Nokia, Ericcson, Cable and Wireless, and Orange.
     
     
    High of the Year Low of the Year Price and year of recommend.  Performance
    since recommend.    		 Stock Last Week's 
    Close    		 Daily high Daily low This Week's Close
    7580 7110 SMI 7448 7304.50 7179.40 7236
    53.5 (2000) 48.60% AT&S 61.30 80 76.50 79.50
    SFr. 2910 2500 1351(1998) +110.21% Bachem 2539 2840 2790 2840
    Gbp  11.90 8.28 4.9(1998) +112.86% C&W 11.25 10.60 10.37 10.43
    E 274.80 210.10 140(1998) +70.71% Cap Gemini 251 243.90 228 239
    SFr.109 86 40(1998) +166.25% Ericsson 103 108 104.50 106.50
    E.58 E.32 28 (1999) +100% Evotec  49 58 54 56
    E 474 370.10 189(1998) +129.10% LVMH 470 439 413.70 433
    Sfr.185 133 60(1999) +183.33% New Ventur 180 173.25 168 170
    E.193 150 30(1997) +490% Nokia 179.20 178.10 174.30 177
    Gbp24 19.50 4.5(1998) +390% Orange 22.19 23.50 22.05 22.05
    SFr.979 655 140(1997) +540% SAP 961 908 887 896
    E 84 54 17.7(1999) +278.53% Sonera 69.30 69.50 66 67
    SFr.780 660 460(1998) +56.52% Syn-Stratec 735 746 720 720
    E 20.25 16 14.9(1999) +16.11% Zeltia 17.5 17.39 16.80 17.30
     
    *We decided to calculate the performance since recommendation, because we have recommended the different stocks
    to buy at different times.  Since we're convinced that one should be long term investors, we think the performance
    since recommendation is a better reflection of our goals.

    Cable and Wireless bought several IP servers and its stocks exploded to
    the upside.  Cable and Wireless is re-styling itself to be a major
    internet company.  But the valuation for Cable and Wireless is  still very
    reasonable.  We expect its  multiples  will expand to be more like an
    internet company.  Therefore we would hold on to Cable and Wireless.
    Indeed we recommend adding to this position during weakness.

    Morgan Stanley Dean Witter has revised its target for Nokia to $180.  The
    market hurried to cover shorts and thus make the prognosis of MSDW
    likely to become true.  We think that Nokia is undervalued compared to
    Qualcomm.  Qualcomm will benefit from the next generation of CDMA
    wireless standard.  But Nokia will probably be equally profitable.  We therefore
    don't see why Qualcomm should be valued at a PE of more than 500 while
    Nokia has a PE of 78.  Since we don't believe Qualcomm will correct in a
    hurry, we expect the PE multiples of Nokia to expand.  Even if Nokia's
    stock prices were to double from the current level, it will still be cheaper than
    Qualcomm.  We therefore see no reason why Nokia shouldn't reach $300.
    The Samsung challange should, however, be taken seriously.  Therefore
    we would revise the target downwards to $240.   Also we would buy more
    Ericsson on weakness.  If CDMA were to become the next wireless communication
    standard, then Ericsson should profit for the same amount as Qualcomm.  As far as I
    can recall, Ericsson and Qualcomm's patent settlement calls for cross licensing across
    the board for the two companies.

    Week before last, we add AT&S of Austria to our recommended list.  AT&S is a supplier
    of cell phone parts.  Its client list includes the likes of Nokia, Ericsson, etc.  Its business
    has grown very robustly along with the increase in sales of cell phones.  And the
    stock has already appreciated more than 48% in two weeks!

    We decided to take Raisio off of our recommended list.  We're quite disappointed
    that the margarine didn't seem to catch on in the US.

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    Currencies and Bonds

    The dollar has stayed strong ever since the stock markets recovered a
    few weeks ago.  The SFr. 1.5950 level was broken briefly on Friday.
    Will we see SFr. 1.60?  I think we should see a brief correction, before
    the 1.60 level is challenged.
     

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    International Financial Systems

    August last year the world financial systems almost collapsed because
    of a gigantic wrong bet placed by the Long Term Capital Management.
    Investors of the world panicked and refused to touch any kind of
    bonds except the "safest". (the US Treasuries)  Even with the treasuries,
    the investors were very picky and only stayed in the most liquid bonds
    ie.those when issued.  The spread between when issued and the older
    treasuries grew so huge that the Long Term Capital Management was almost
    bankrupted by the margin requirements they had to put up for shorting
    the spreads.  To prevent a gigantic financial collapse, the Fed eased
    interest rates aggressively.  The US and the world economy is still
    benefiting from those bold cuts in interest rates.  The US economy
    benefited the most, because of three main factors that multiplied the
    liquidity in the US financial systems.  First, whatever liquidity created by
    the Fed remained mostly in the US, because of the positive market psychology.
    Second, at the same time, foreigners and the US investors pulled their money
    out of the emerging markets and parked most their money in the US for safety reasons.
    Third, whatever the IMF and World Bank pumped into the crisis region, most of the
    funds came back to the US, again for safety reasons.  This
    enormous amount of  liquidity created a huge asset bubble in the US
    (vide the valuation of internet stocks).

    But as long as the aversion of risk remains, we think the US markets will
    remain "overvalued".  The US dollar will not slip into crisis.  Because the US
    remains a safe haven. But what happens when the Japanese and the emerging
    markets heat up again?    Then the safe haven will no longer look so safe
    anymore.  And international investors would want to repatriate their funds.
    Therefore we would watch out for signs of recovery and growth in Japan and
    other Asian economies intensively.   Because once this trend starts, the
    Fed will not be in a position to save the stock market.

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    Future Trends

    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 brand name 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,
    Federal Express and UPS. 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, Cap Gemini,Broadvision and i2 technologies.


     
     
    *The stock prices are provided for informational purposes only and  not intended  for trading purposes.  The opinions expressed in these pages are what they are: opinions!
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