| Investment Views (June 28th 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 a few 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 had been correct. We have been range trading
on the Dow almost the whole month. Last Monday the market
retreated
before it even tested the 10900 level. We close the week at 10552.
We
have the feeling that the market will test the 10410 level on Monday
again. But then everything will depend on what the Fed will do,
when
they meet on Tuesday to decide whether they will raise the interest
rates.
Greenspan had dropped hints right and left that the interest rates
will be raised.
The question is: by how much? Will the Fed increase the rates as much
as 1/2%
instead of 1/4%? It's really difficult to tell. On the one hand
the American economy
is growing very strongly and there are some evidence of tight labour
market.
On the other hand the manufacturers have no pricing power whatever.
So there
is no real inflationary pressure. And the international recovery
is still quite
tentative. The main problem is whether the bond market will rally
after
the news. We have the feeling that with the market so oversold,
the
chances are good for a rebound after the Fed's decision. Then
we shoud
really watch the 10910 level. Maybe the long awaited summer rally will
begin.
But we do not see great potentials for the Dow on the upside.
The bond
market will not be satisfied with just 1/4% interest rate rise.
Alas, the summer rally fizzled in Europe last week, when New
York tanked. The only positivie is the fact that Europe just
followed Wall Street without double the downward speed. The
selling pressure is just not there. Volume is extremely thin.
Given a chance, we have the feeling that Europe should see
another rally this summer.
The Dax will start trading last week with adjustment. The individual
components of the index were re-weighted with the Deutsche Telecom
almost doubling its weighting. Thus the new Dax is not be quite
comparable with the old Dax. Still the week started out well for the
Dax. Monday the Dax rose above 5400. On Tuesday it made
a new intraday high hitting 5500. But the weakness of Wall Street
forced Dax to retreat too. But Dax has behaved quite well despite
of the weakness in the Bundes.
As we had expected it, the SMI did not manage to go above 7280.
Indeed, on Friday it fell below 7000 again which is a very bad sign.
Although we still do not believe that the SMI will go below 6800, we
can't say for sure. The volume is really really thin. There
is no
telling how far down the bears will drive the market. Luckily
the
SMI is becoming oversold again. So if we manage to close above
7020 again, then there is still a faint hope for a summer rally.
|
Stratec merged with an American company, Synthes. We still like
the company, even though
mergers can create problems. The combined company will become
the largest bone-
replacement manufacturer in the world. For the first quarter,
they have increased
sales by 15%.
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.
Our Thesis that the currency level is important for the recovery
of the Japanese and European economies have seen active support
from the Bank of Japan which had been actively intervening in the
currency markets to prevent a renewed strong Yen. Our feeling
is
the European Central Bank is not unhappy that the dollar is strengthening
against the Euro either. So we would remain long dollars.
The dollar hit SFr. 1.55 before retreating. Unless the dollar
falls below
1.48 the uptrend is intact.
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: