| Investment Views (June 14th 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.
We wrote two weeks ago:
The US markets finanlly got their 4-7% correction that
we had been looking
for. The Dow corrected more than 6% intraday
and the S&P slightly more
than 7% while the Nasdaq had seen a correction of
more than 10%. In our
opinion the market has become oversold, we should
see some rebound.
But we see a second and maybe even a third testing
of the lows made in
this correction until the end of June. The most
likely scenerio is range trading
until the interest rates situation has become clearer.
And indeed we have been correct. Last week, the market
recovered up to about 10920 on the Dow intraday and then
broke down again. Friday, the long awaited PPI figures did not
bring
any relief. The main problem is the surprising strength of 1st
quarter
GDP in Japan. If Japan's and the tigers' economies have indeed
hit the bottom, then analysts are concerned that the price-restraining
factors will disappear for the US. First, the commodities will
become more expensive. As the currencies of the Asian
tigers recover, prices of the imports will go up a bit. With
a tight
labor market and euphoric consumers, even the Fed is getting
worried about inflation again. The bond market sold off on Friday.
With yield up to 6.15% on the thirty years treasury bonds, the
extreme high valuation of the stock market doesn't seem very
attractive. Stocks therefore followed bonds lower Friday.
We have
again reached support level 10420 on the Dow. The question is:
are we going to see lower lows? We'll have to wait until Monday to
find out. But the chances are quite good for lower lows.
We see
support at the 10300 level and then definitely at the 10000 level.
The Dax has recovered a bit, despite of the weakness on the Dow.
We some quite positive economic data out of Germany last week.
The first quarter GDP was stronger than expected. Unemployment
fell in West Germany. In the last few month people were much
too pessimistic about the German economy. So last week's data
took quite a lot of market participants by surprise. We do not
see
Dax making new highs though, if the Dow continues to be weak.
The SMI tested the 7250 level and turned right around downwards.
On Friday we close the SMI barely above the 7000 level. Because
of Dow's weakness on Friday, we see further weakness in the SMI
next week, although some analysts are starting to advocate buying
Europe and selling US. We saw the Dax and the FTSE profiting
more
from that recommendation than the SMI. If the SMI manages to
hold
above 6950, maybe we should see a short term upwards move.
Longer term we're still quite bearish.
|
Ericsson is finally breaking out of its very narrow trading range.
It is strange how
much stronger Qualcom is trading, even though Ericsson will be splitting
the licencing
fees of the next generation wireless telephony with Qualcom.
Since Ericsson has
also bought Qualcom's manufacturing facilities, it seems to me that
Ericsson would
earn more than Qualcom. But the market still prefers Qualcom.
We must admit that we have difficulties understanding
the analysts on CNBC.
They seem to think that a weak Euro is such a tragedy.
But did the Americans
ever worry about a weak dollar? They're happy
that a weak dollar makes
American exporters more competitive. Now the
Europeans should be happy that
the Euro is not trading at a stratespheric level.
After the Plaza agreements,
the Americans and the markets have forced the Japanese
and the Europeans
to upvalue their currencies at an breakneck pace.
No wonder the Japanese
and Europeans have problems adjusting to the new levels
of their currencies.
Why is the American economy doing so well? Part
of it is because of the weak
dollar, stupid. The real economic adjustments
take time. Re-structuring, moving
manufacturing abroad, firing and hiring take time.
In the very long term, we still
think that Euro will be strong. But the momentary
adjustments will take some
time to work out.
Indeed we saw a recovery of the Euro last week. The Swiss Franc
also gained on the dollar. The Japanese Yen was especially strong
on
that strong 1st quarter Japanese GDP data. But the trend is still up
for
the dollar. With the interest differentials widening, this slight
strengthening
of Euro and Swiss Francs will be over soon. We see stronger dollar
until the European economy starts to strengthen more rapidly.
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! |
LINKS: