| Investment Views (May 10th 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.
As we had expected, most markets in the world corrected last week. On
Wall Street
the strange pattern persisted: while S&P and Nasdaq corrected,
Dow barely made
a dent. Indeed we even saw new highs on the Dow on Monday.
The Dow and
the broader market have shown amazing strength, although intraday volatility
had
increased. But the Dow always managed to claw back its losses
by the end
of the day, even on the day when the Fed chairman Grennspan warned
on
Thursday that he'd increasingly worried about the danger of inflation
because of
the tight labor market and repeated his "irrational exurberance" warning
obliquely.
But as we had stated repeatedly on this page, the excess liquidity
that
central banks are pumping into the world financial system had nowhere
to go
but into the US stock, bond and real estates markets. The investors
of the world had
finally realized that the US is the last safe haven of the world.
Although we have
seen some funds returning to Asia, but most of the funds seem to have
been
pulled out of Europe but not US. The Superpower bonus is for
real! The S&P
corrected about 4% intraday. With the strong showing on Friday,
we expect
the market to make new highs next week. But we're not certain
whether
the Nasdaq correction is over already. We have the feeling the
next few weeks
are crucial. Some internet stocks have reached a level where
the technicals
could turn negative.
The German market corrected but has shown greater market strength than
the
Swiss market. The only major European bourse showing strength
is London.
The British economy is starting to turn up, although there is perhaps
another
cut in interest rates. So the conditions are pretty ideal, if
it weren't for
the already high valuation in some of the stocks.
It is boring to say, but the Swiss market just can't seem to muster
enough
strength to break above 7400. We did make a slight higher high
on
a closing basis. But almost immediately the market turned south.
Now
the question is whether the market will break below 7200 and then test
the 6900-7000 level again. The small caps on the Swiss market
still
look quite attractively valued. If we believe that the worst
is over
in Asia and Latin Americas, then we don't see why the Swiss economy
should be stuck in a rut. We would therefore buy the Swiss market
on further weakness.
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From our discussion concerning the internet we had concluded that the
internet providers
themselves will not likely to be extremely profitable, because of the
great competition on
the net, but that the content providers or service providers to the
internet providers will
profit greatly from the explosive growth of the internet. We
have named some of the
very well known US and Japanese companies that should profit in the
long term, but since
officially I want to confine my recommendations to European stocks
I have taken some
pains to study some of the telecommunication companies (both equipment
suppliers and
telecommunication service providers) in Europe. We decided to
add both Sonera and
Swisscom to our recommended list. Sonera because it is an extremely
well run and
the biggest Finnish mobile telephone company. For the first quarter
it has increased
its revenues by 15% and profits by 23%. It has shown a great
deal of creativity in
discovering new services for its clients. The Finnish mobile
telecom market is extremely
saturated. Yet Sonera has always been able to find new contents and
new ways of
serving its customers. We're very impressed with its combination
of internet service
and mobile telephony.
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.
It looks as if the Kosovo conflict is over. The Euro and Swiss
Francs both
recovered a bit against the dollar. The dollar was extremely
overbought
anyway. The dollar is around SFr. 1.48. It is important
that it doesn't fall
below 1.48. Otherwise we see further correction to 1.44 level.
But the basic
trend for a stronger dollar is still intact. We see the pullback
as a temporary
one.
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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