Index

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, the Dow and S&P both made new highs last week.
But the Dow had been consistently stronger than either S&P or Nasdaq.
The breath of the rise was poor.  Clearly the market was tired.
On Friday the consumer's inflation index was reported rising .7% in April.
And Dow started correcting, falling almost 200 points.  With bond yield
approaching 5.8%, we expect the market continues to correct some
more next week.  Still we're not convinced that the market will correct
more than 4-7%, unless the Fed raises the interest rates next Tuesday.
But since the world economic recovery is still quite fragile and the
inflation data in the US is still tentative, we doubt the Fed will pull
the trigger.  I think the Fed is just letting the market raise the rates
to about 6% and they will probably wait and see, if the market will
do their job for them.  Actually we have strong support on S&P 1320.
If the S&P doesn't break below 1320, the market should be fine.  But
we see a continued correction in the internet and other tech stocks.

Europe had another uninspiring week.  It was a lot of backing and filling.
None of the markets made new highs.  The two main markets we
follow: Frankfurt and Zürich continue their slide.  Frankfurt gave up
5300 without much of a fight.  The next level to watch is the 5000
level.  Breaking 5000 would be very negative indeed.

In Zürich the market behaved liked the weather.  It was gloom and doom.
On Friday the important level 7100 didn't hold.  We expect the market
to slide further next week, unless the 7000 level holds.  Otherwise the
market will re-text the 6950 level and maybe even slide down to the
6550 level which some analysts have long expected.  We are not that
gloomy though.  We expect the market to stay within the greater
trading band between 6950 and 7500.  Therefore if the Fed doesn't
act on Tuesday or Wednesday, we expect the market to bounce
back towards 7500.
 
 

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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.
 
 

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As we had expected, the dollar's support was strong around 1.4880.  Now the
dollar is above 1.50 again.  We expect further rise in dollar to test the 1.54
level before it will retreat in late sommer.

As we have repeatedly emphasized, we do not expect the Fed to raise the
interest rates.  The deflationary trend is still stronger in the world economy than
the inflationary one.  The American labor market is much less tight than
the statistics suggest.  Technical innovations make it possible for a lot of
companies to cut personnel.  We feel that the American service industries
are still overstaffed.  Therefore we do not see wage-pressures in sight.
Plus the world bond markets are overzealous in their inflation-watch.  There's
really no chance for inflation to get out of hand.
 

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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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