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    Investment Views  (October 4th 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.
     


    Markets in General

    The Dow has been weak all week.  We had expected the market to hit 10500
    before going down again.  But the market did not recover until Thursday.
    The Dow recovered to about 10450 intraday, before retreating again on Friday;
    making it clear that all the fireworks on Thursday was mostly window dressing
    at month's end.  Technically the market is really getting very oversold here.
    But next Tuesday the Fed will meet again.  We doubt, if they will raise the
    interest rates at this point.  The economy is still quite strong.  Export is picking
    up, because of the global economic recovery.  So the Fed really is really in a dilemma.  If it raises the rates too fast, the fragile global recovery might be
    stopped right at its track and another global financial crisis might be in the
    making.  Also the y2000 effect on the economy is wearing off.  The economy
    might experience a natural investment pause after the start of next year.
    No one really knows for sure, how much the economies are stockpiling
    in anticipation of y2000 problems and how much is real demand.  So a cautious
    man like Greenspan would usually wait until early next year for more
    economic indicators.  The main question is:  what will the Bank of Japan
    do?  Will it ease again?  If it does, then the Fed might not have to raise
    interest rates again to defend the dollar.

    The Dax followed the Dow down.  The key 5300 level was broken and the
    market seems on its way to test the 5000 support level on the Dax.  Everything
    really depends on Wall Street.  If the Dow rebounds this week, Dax will probably
    be doing better too.  The level to watch is 5300.

    Paris followed the US in this correction confirming the saying that when Wall
    Street sneezes, the rest of the world catches cold.  The CAC is still
    relatively strong.  But individual stocks got hammered.

    The SMI also retreated last week.  But for the first time in a long time, the SMI
    did not retreat more than Wall Street.  Indeed it has held up relatively well.
    The relative strength can be a sign that the worst is over for the Swiss
    market.  The downside is perhaps 6800 maximum 6500.  The level to watch
    is 6800, 7000, 7280.

    Go to Index


    Stocks

    Our favorite stocks remains SAP, Nokia, Raisio Group, Ericcson, Cable and Wireless, and Orange.
     
     
    High of the Year Low of the Year Stock Last Week's 
    Close    		 Daily high Daily low This Week's Close
    8489 5108.30 SMI 6965.70 6920.10 6827.50 6907.40
    SFr. 2300 1351 Bachem 2250 2240 2110 2190
    Gbp  9.85 4.67 C&W 6.69 6.80 6.59 6.70
    E 174.80 126.60 Cap Gemini 166.40 169.50 147.30 148
    SFr.  51 25 Ericsson 48.50 47.25 46.20 46.75
    E 253.90 169.70 LVMH 287 282.50 276.80 281.50
    Sfr.67 37 New Ventur 71 72 70 71
    E.79.50 52 Nokia 83.78 84.74 83.35 84.10
    Gbp10.75 2.40 Orange 11.17 12.01 11.41 11.97
    E.  11.80 5.30 Raisio Group 6.89 6.45 6.32 6.33
    SFr.  607 420 SAP 567 579 564 572
    E 19.22 12.40 Sonera 26.10 27.60 26.90 27.13
    SFr.  513 436 Syn-Stratec 560 568 545 558
    E 20.25 6.37 Zeltia 14.94 15.63 15.37 15.60
     

    Sonera has developed a standard for safe wireless data transfer.  The market
    is quite positive about this new technology.  Therefore Sonera shares remain
    high, while all the other tech stocks corrected.  We recommend adding to
    Sonera positions during weakness.

    It is rumored that Nokia is thinking about taking over Ericsson.  That would
    be very positive for both companies.  We recommend adding to the positions
    during weakness.

    Go to Index


    Currencies and Bonds

    The dollar has been stronger against the Yen and weaker against the
    Euro and Swiss Francs.  People are still waiting for the Bank of Japan
    to intervene. Nobody wants to go long yen too aggressively at this point.
    But the fundamentals do point to a stronger recovery in Japan and Asia
    than everyone had expected.  Therefore any easing the Bank of Japan
    do will only be temporary.  In the longer term, the US will have to raise
    the rates as people repatriate their money to Asia.

    The US Treasury bonds have been trading in a narrow range slightly above
    the 6% level.  It is rumored that the Bank of Japan will indeed bow to
    American pressure and will perhaps do unsterialized interventions in the
    currency market to support the dollar.  That will be a short term positive
    for the world bond and stock markets.  But as I have pointed out above,
    they haven't really stepped up to the plate yet.
     

    Go to Index


    International Financial Systems

    August last year the world financial systems almost collapsed because
    of a gigantic wrong bet placed by the Long Term Capital Management.
    Investors of the world panicked and refused to touch any kind of
    bonds except the "safest". (the US Treasuries)  Even with the treasuries,
    the investors were very picky and only stayed in the most liquid bonds
    ie.those when issued.  The spread between when issued and the older
    treasuries grew so huge that the Long Term Capital Management was almost
    bankrupted by the margin requirements they had to put up for shorting
    the spreads.  To prevent a gigantic financial collapse, the Fed eased
    interest rates aggressively.  The US and the world economy is still
    benefitting from those bold cuts in interest rates.  The US economy
    benefitted the most, because of three main factors that multiplied the
    liquidity in the US financial systems.  First, whatever liquidity created by
    the Fed remained mostly in the US, because of the positive market psychology. Second, at the same time, foreigners and the US investors pulled their money
    out of the emerging markets and parked most their money in the US for safety reasons.  Third, whatever the IMF and World Bank pumped into the crisis region, most of the funds came back to the US, again for safety reasons.  This
    enormous amount of  liquidity created a huge asset bubble in the US (vide the valuation of internet stocks).

    But as long as the aversion of risk remains, we think the US markets will
    remain "overvalued".  The US dollar will not slip into crisis.  Because the US
    remains a safe haven. But what happens when the Japanese and the emerging markets heat up again?    Then the safe haven will no longer look so safe
    anymore.  And international investors would want to repatriate their funds.  Therefore we would watch out for signs of recovery and growth in Japan and
    other Asian econemies intensively.   Because once this trend starts, the
    Fed will not be in a position to save the stock market.

    Go to Index

    Future Trends

    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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