| Investment Views (July 12th 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.
The German market followed Wall Street quite closely, although it is
still
far from its highs made last year. The cyclicals are rallying
again. So
the market judged the upturn in the German economy as sustainable,
although
some negative news on the unemployment front were out last week.
The question remains whether the German recovery will gather enough
steam to make a dent in the unemployment situation without basic
labor laws reform in the country. But a weak Euro will undoubtedly
help the exporters.
The Swiss market again exhibits weakness inspite of the rallying markets
all over the world. There are nasty rumors about Novartis.
A cloud still
hang over Roche, because of the price-fixing scandal in vitamins.
The
banks and insurances recovered a bit last week. But all in all
it was a
poor performance. We will have to be patient and wait until the
market
test the 7280 level again. But we're doubtful whether the market
will
be able to overcome that resistence.
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Swisscom announced on Friday that it bought a 58% majority in debitel,
the third largest
mobile telephone company in Germany. Debitel, however does not
have its own
network. It is only a reseller of telephone services. So
it is quite a gamble for
Swisscom, because not only it paid a very high price for the company,
it will also
have to invest a lot to build its own mobile network. So this
acquisition might
not pay off for a long time and the good will will dilute its earnings
for years. It's
no wonder that the market sold off its shares with a vengence after
the details
came out. But we're convinced that for the long term, it is a
good strategic move.
Swisscom needs to breakout of the confines of Switzerland to remain
a player.
Doubling the number of its clients is a good way to start.
This week we make two new recommendations: Reed International
and New
Venturetec AG. Reed, because it's a very reasonably valued content
company.
As we have argued in our opinion concerning the developement in the
internet,
the content companies will be the long term winners on the net.
New Venturetec is a very interesting company. It is a venture
capital mutual
fund. It is a cheap way for small investors to get involved in
venture
capital investment with risk diversification. Venturetec is especially
interesting
because it is not only specialised in internet companies but also biotech.
So far
the stock has risen almost 70% this year. There is a 28.1% premium
over
the net asset value of the portfolio. But venture capital investments
are
typically difficult to evaluate. So we do not think a 25% premium
over
a conservative evaluation of the investments is too rich.
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 finally broke the SFr. 1.55 level. Now it is a question
of time
before we shall see 1.5850 level and maybe even 1.60.
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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