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Investment Views (October 12th 1998)

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.

Markets in General

The recovery in the European markets is short-lived. Dax is extremely weak.
We saw the markets recovering a bit on Tuesday. But by Wednesday the markets
pulled back again. The German markets have two basic problems: the political
uncertainty because of the red-green alliance and the weak dollar. These two
factors will not go away next week either. Although the dollar and the Dow
recovered quite a bit on Friday. Next week will also be options expiration
week. Thus we should see further recovery in European markets. But
the volatility will remain high.

The Swiss market has finally displayed some strength. We had two days
of rising markets vs. three days of falling markets. Yet we managed to close
the week at about even. That is a positive sign. It seems to us that
the 5250 level has held. Thus we expect the Swiss market to recover
somewhat next week. The volume is still very thin. Therefore any
buy or sell orders have magnified effects. Until we see more volume
on the up days, we will not see the market recovering strongly. The level
to watch is 5600-5700. Then the 6000 level is important. If we can
manage a close above 6000 with strong volume, then we might
be tempted to say that the bear market is over.

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Stocks

Our favorite stocks remains SAP, Nokia, Raisio Group, Ericcson, Cable and Wireless, Orange
and Bachem.

High of the Year	Low of the Year	Stock	Last Week's Close	Daily high	Daily low	This Week's Close
SFr. 1495	1351	Bachem	1740	1690	1630	1630
Gbp 8.13	4.67	C&W	5.25	5.87	5.42	5.83
SFr. 51	25	Ericsson	23.25	22.50	21.50	21.50
FIM 509	182	Nokia	363	318	302	311
Gbp 8	2.40	Orange	4.64	4.43	4.12	4.22
FIM 1080	640	Raisio Group	76.50	80	76	76
SFr. 1029	419	SAP	480	510	475	500
SFr. 2350	1820	Stratec	1500	1530	1530	1530

Because of downgrades by American brokerage houses, Ericsson and Nokia continue to lose grounds.
But we think that long term investors should add to their positions on these two. Both are excellant
companies. Nokia seems to us the more promising company.

SAP reported 3rd quarter sales and earnings increased more than 40%. They're still confident that
they will meet their yearly earnings target. We have no doubt they will also have a good year 1999.
Therefore we also recommend long term investors to add to their positions in SAP.
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Currencies

The IMF, World Bank, G7, G22 all met in Washington D.C. last week. Unfortunately our
prediction that nothing fundamental will come out of these meeting turned out to be true.
We did get some stop-gap measures. There is a general agreement that the individual
countries in the West need to lower interest rates and help to reflate the world
economy and that transparency in the financial systems is important. We also get
a aid package for Brazil and vaguely worded trading band for currencies. But we did
not see any international accord on the regulation of hedge funds, margin requirements
for currency trading, an international up-tick rule on shorting, maybe even the introduction
of circuit breakers around the world on currency trading and other financial markets and
standardized reporting requirements for off-the-balance sheet exposures to derivatives
for banks. The Chile-model for regulating and restricting short term capital inflows
has gained more acceptance among the international participants. Although Clinton signalled
that he might swallow such short-term capital restrictions, Rubin and Greenspan are still
consistantly free markets advocates. Thus nothing explicit is agreed upon.

What the IMF and other world leaders do not seem to realize is that currency bands
do not work, as long as the hedge funds and banks can short any currency in amounts
far exceeding the capacity of central banks or IMF to intervene. The markets
will remain unstable, as long as these windows of opportunity remains open.
Lowering the interest rates will only make these transactions cheaper. Banks and hedge funds
can make bigger bets against any currencies and stock markets they fancy. Fundamentals
do play a role. But once started, fundamentals no longer matter. When the mechanism
of the whole system start to gyrate, no one is in control.

As far as I can tell, I don't think the Brazilian package will work, as long as the IMF again
insist on austerity measures. The Real will continue to fall just as the Bovespa. The 30 Billion
Dollar package will disappear in no time, as the Brazilians try to defend the real in vain. The
hedge funds have lost a bundle in Russia and Yen trades, I doubt they will let the 30
billion dollars to really get into Brazil, just as the IMF funds for Russia never really
got into Russia.

On a more basic economic structural level, we need a re-examination of the policies
up until now. The European and Japanese have increased the consumption taxes
to a very high level at a time when the corporations are downsizing and moving
production to low wage areas. The American workers had been laid off and taken
pay cuts. In the mean time because of the low wages in the emerging markets, the
consumers in those countries cannot make up the shortfall in demand. During all these
years, the Bank of Japan, the Fed and other central banks had printed money
like mad. For a time, the additional liquidity had been invested in the emerging
markets. But in time, people realize that enormous mismatch between the capacity
to produce and to consume exists. If the emerging markets cannot sell what they
produce, then they cannot repay the debts they took on to gear up on production.
Thus we have the emerging market currency crisis. The stampede to get out of the
emerging markets pushed the emerging economies into deeper crisis. Thus we
have a de facto default of debts worldwide.

During the last decades, the US economy had not sinned in the sense that the
corporate heads added producation capacities without regards for the demand
situation. Instead the additional liquidity had been invested in stock buy-backs
and led to a financial bubble in the stock markets.   Already last year Alan Greenspan
warned about the "irrational exuberance". But nobody seemed to listen. Now
when the bubble threatens to burst, everybody demands that the Fed
lowers the interest rates in a hurry. I'm not sure the whole-sale financial crisis can be
averted just by lowering the interest rates.   After all there are still plenty of hedge
fund positions that are going the wrong way.   Therefore we see further stock market gyrations and
dollar weakness.

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*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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