| Investment Views (October 8th 1999) |
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.
Well, the Fed is on hold, although they had announced that their bias
will
be towards tightening. But we doubt they will do anything until
early next
year. In the mean time, the bond market vigilentes will be doing
the
Fed's job of tightening, even though there is still no inflation in
sight.
We expect the Dow to resume range trading. The levels to watch
on the
upside are: 10800, 11000. On the downside we still think the
10000
support will hold. Unless the bond market really tanks and the
yield
on the treasuries rise above 6.5%.
The Dax has again exhibited great relative strength despite of the
poor performance of the Bunds. With the ECB holding off an
interest rates hike, we think the Dax can probably test the 5600
level again.
The CAC is still in a correction mode. We expect the market to
be backing
and filling for a few weeks more. But the French economy is definitely
doing
better. So we don't expect the market to correct too much further
to the
downside.
The SMI is again exhibiting relative weakness. While other markets
celebrated the
nonevent of the Federal Open Market Committee meeting, the SMI manage
only relatively
small gains. But we don't see terrible downside either.
We're really stuck in a very
narrow range between 6800 and 7100. The problem is the
rising interest rates
at the market. All the banks are raising their rates. So
people are understandably
nervous.
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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.
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.
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.
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.
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