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    Investment Views  (January 2nd 2000)
    Merry Christmas and a Happy New Year!

    Markets in General

    What a year it has been!  We closed the year with Dow and Nasdaq as well as the S&P
    all making higher highs.   The January effect will probably carry the market even higher.
    We feel that this market is becoming very frothy.  We expect the
    tech stocks to correct soon.  But we expect the Dow to hit new highs. The rally has
    been extrmely narrow in breadth.  It is necessary for the markets to broaden out
    in January.  It is almost certain that the Fed will hike the rates in February.  So it is
    a question of time that another correction will set in.  We expect another sector rotation
    correction.  The general market will probably remain weak, although the major indices
    will take minor hits.  What we have is indeed a new financial market.  Bonds used to
    be the main investment vehicle for institutions.  But the American institutions are the
    first to realize that the bonds are no longer safe in light of the globalization and
    free-floating exchange rates and interest rates.  The risk premium that bonds
    had enjoyed has evaporated.  Stocks have become the investors' choice.
    The expansion of multiples on growth stocks have been noticible.  At what multiple
    have stocks become lotto tickets?  No one knows for sure.  But the law of
    gravity cannot be defied forever.  Someday the whole bubble will burst.  Until
    then enjoy the party!

    The Dax continued its upward ascend.  The main reason continues to be the government's
    plan to introduce a new law eliminating capital gains for companies selling their holdings
    in other companies. This is good news indeed for financials like Deutsche Bank and
    Allianz Versicherung and Bayerische Hypovereinsbank.  The Social Democrats around
    Schroeder seems finally to be in control and starting to dictate a more centrist agenda.
    Indeed we see the Socialists across the world being more capital friendly than their more
    conservative counterparts!  People should realize at last that the European Socialists are no
    longer class warriors but actually cater to the upper middle class people with a social conscience.
    That's why they're having more success in restructuring the economy and cutting taxes as well
    as social benefits.

    Again the CAC made a series of historical higher highs  last week.  Generally
    the French economy is showing signs of real recovery, but the economy
    still has plenty of room to grow.  So, unless the ECB raised the interest
    rates too aggressively, the French economy will stay on track.  Almost all
    analysts are positive on the French market.  Some caution is warrented.

    The SMI is stuck in a tight trading range.  The market closed the year on a positive note.
    We should see somen more buying in the New Year.  The SMI stocks are very much
    out of favour at the moment, because it is composed of only  very diversified and defensive
    companies and there are hardly any high tech companies in it.  That is perhaps also the main
    problem for the Swiss economy.  The Swiss have missed out on the high tech revolutions.  But
    investors are not quite capable of assessing the values of companies like Roche.  Roche is a
    biotech incubator company.  This fact has not been acknowledged by the markets.

    Go to Index


    Stocks

    Our favorite stocks remains SAP, Nokia, Ericcson, Cable and Wireless, and Orange.
     
     
    High of the Year Low of the Year Price and year of recommend.  Performance*
    since recommend.    		 Stock Last Week's 
    Close    		 Daily high Daily low This Week's Close
    8489 5108.30 SMI 7299.70 7591.70 7501.10 7570.10
    SFr. 2300 1351 1351(1998) +88.75 Bachem 2320 2550 2550 2550
    Gbp  9.85 4.67 4.9(1998) +114.28% C&W 10.67 10.67 10.10 10.50
    E 174.90 126.60 140(1998) +80% Cap Gemini 232.50 257 245 252
    SFr.  79.90 25 40(1998) +164.37% Ericsson 91.80 106 103 105.75
    E.34.75 E.12.50 28 (1999) +25.89% Evotec  39 38.20 35.25 35.25
    E 336.90 169.70 189(1998) +135.3% LVMH 340 457.40 430.40 444.70
    Sfr.67 37 60(1999) +150.83% New Ventur 105.50 157 150.50 150.50
    E.134.80 52 30(1997) +500% Nokia 164.25 182.80 177.01 180
    Gbp19.50 2.40 4.5(1998) +366.44% Orange 20.30 21.20 20.85 20.99
    E.  11.80 4.06 2.6(1997) +51.15% Raisio Group 4.21 3.99 3.91 3.93
    SFr.  607 420 140(1997) +465.71% SAP 656 792 765 792
    E 39.40 12.40 17.7(1999) +301.13% Sonera 49.50 72 70 71
    SFr.  607 436 460(1998) +58.48% Syn-Stratec 655 729 715 729
    E 20.25 6.37 14.9(1999) +17.44% Zeltia 16.62 17.6 17.02 17.5
     
    *We decided to calculate the performance since recommendation, because we have recommended the different stocks
    to buy at different times.  Since we're convinced that one should be long term investors, we think the performance
    since recommendation is a better reflection of our goals.
    ** since the prices has changed all that much last week and we have caught a cold we decided not to update the
    stock quotes.

    Morgan Stanley Dean Witter has revised its target for Nokia to $180.  The
    market hurried to cover shorts and thus make the prognosis of MSDW
    likely to become true.  We think that Nokia is undervalued compared to
    Qualcomm.  Qualcomm will benefit from the next generation of CDMA
    wireless standard.  But Nokia will probably be equally profitable.  We therefore
    don't see why Qualcomm should be valued at a PE of more than 500 while
    Nokia has a PE of 78.  Since we don't believe Qualcomm will correct in a
    hurry, we expect the PE multiples of Nokia to expand.  Even if Nokia's
    stock prices were to double from the current level, it will still be cheaper than
    Qualcomm.  We therefore see no reason why Nokia shouldn't reach $300.
    The Samsung challange should, however, be taken seriously.  Therefore
    we would revise the target downwards to $240.   Also we would buy more
    Ericsson on weakness.  If CDMA were to become the next wireless communication
    standard, then Ericsson should profit for the same amount as Qualcomm.  As far as I
    can recall, Ericsson and Qualcomm's patent settlement calls for a 50-50 royalty split
    for the two companies.

    Raisio fell hard and fast last week after Warburg Dillon Reed took it off its
    recommended list.  Raisio admitted that they had some problems introducing
    its margarine in the US.  But sales in the UK and Europe is doing well.  We would
    therefore wait patiently for Raisio to sort out its problems in the US.  The ride could
    be very bumpy though.

    Cap Gemini is negotiating with Arthur Anderson on a merger with that company.
    Its shares jumped.  Evidently the market likes the combination of these
    two companies.

    Bachem made an acquisition in the States and its stock finally shook off its very
    tight range trading.  But it still can't seem to break above 2500.

    Go to Index


    Currencies and Bonds

    The dollar has stayed strong ever since the stock markets recovered a
    few weeks ago.  The SFr. 1.5950 level was broken briefly on Friday.
    Will we see SFr. 1.60?  I think we should see a brief correction, before
    the 1.60 level is challenged.
     

    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,
    Federal Express and UPS. 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, Cap Gemini,Broadvision and i2 technologies.
     
     
    *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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