| Investment Views (May 3rd 1999) |
The German market is exibiting a bit more strength than the Swiss one.
But Europe is nowadays a dismal place. The markets generally
are still 10-15%
below the highs made last year. They are so range bound that
it is frightening. Frightening, because if markets are inherently
unstable,
then such stable patterns cannot persist. And we have no idea
whether the markets will explode to the upside or to the downside.
But with the year 2000 approaching, we should see a global slow-down.
So we're not so sanguine about the prospects to the upside. The
level
to watch for in Germany: 5000 on the Dax. If the Dax breaks 5000 to
the downside, we should see further weakness. Even worse would
be
a break below 4700.
In Switzerland the SMI just can't seem to get above 7400. We expect
further weakness on Monday. The weakness of the Swiss market
have
many facets. First, the Swiss Francs have traditionally been
a safe
haven currency. The huge global currency and financial crisis
last year
had led to an extra-ordinary inflow of foreign capital. These
are now
slowly returning home, as the Asian and Latin American markets recover.
Second, the majority of Swiss stocks are defensive in nature: pharma,
food, insurance, and banks. These are all out of favor.
And there are no
high tech firms of great stature. Third, the banks have traditionally
played a big role in all kinds of derivative instruments and arbitrarge
trades.
But since the calamity of Long Term Capital Management, banks everywhere
have tightened their risk management and are no longer putting on so
many positions. Therefore the market has become far less liquid
and
less hyped, which in itself should make the market a bit healthier
and stabler. We doubt we shall see a correction of more than
40% intraday
like last year again this year. We do not see great potentials
higher but
we also do not see a re-test of the 5000 level. But the current
range has
got so narrow: 7100-7400 that it is a question of time that we
should
extend this range. With the Wallstreet correcting, we would not
be
surprised if the range should be extended to the downside: to
maybe 6500.
But first the market must take out the strong support around 6850-6950.
To the upside, the market will have to close markedly above 7420.
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The Swisscom has been less imaginative. But the Swisscom's monopoly
is more
solid than people realize. As new entrants of the mobile telephony
have
discovered, Switzerland with its stringent building and zoning laws
is extremely
hostile towards anyone who wants to put up new mobile telephone receiving
towers. The chief competitor of Swisscom, Diax, for example,
has experienced
great difficulty to get their net together. Therefore I think
the Swisscom will
have much more time to restructure and face the competition than the
market
had assumed.
We also added LVMH back to our recommended list. If the Asian
recovery is
for real, then we see happier days for LVMH.
The IMF met last week in Washington. Their new proposal of giving
deserving
countries a standing credit line is encouraging. At least the
international
officialdom is working to improve the world financial system.
But I'm afraid,
unless the private sector is forced to share the burden of the last
financial
fallout, we shall have only weak and deeply indebted emerging economies
who
will have a hard time to qualify for the standing line of credit that
they will
need. Also with so much money winking the speculators will be
stupid not to
attack and see what happens.
The dollar becomes even stronger, although the trade deficit is piling
up.
But why worry about trade deficit, when the whole world is anxious
to
export to the US? when the US is really the last global power
and
guarantor of world financial stability? As I have always argued,
one should
always factor in the power-bonus in calculating the "real" value of
the
dollar.
The US dollar broke above 1.52 against the Swiss Francs. We expect
it
to strengthen further towards 1.54.
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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