| Investment Views (May 15th 2000) |
The market participants had been almost hysterical in their fear of
inflation before
last week's retail sales and PPI data. But the data turned out
to be tamer than expected.
People started to think that the Fed has been successful in bringing
about a soft landing.
We think the fear of inflation has been exaggerated. There has
never been hyperinflation
in modern history without a major war. And thank god, we haven't
had one
since the Vietnam War. Also the labor market is less tight than the
statistics
would suggest, because of the changes and flexibilities introduced
in the
labor market in the recent years. Now there are more seniors
willing to
work and are not penalized for working beyond 65. And lots of
the "self-employed"
were working less than full-time. Another major reason is the
new parsimony of the US
government. i.e. The government is not draining precious resources
from the
private economy. Therefore we do not think there is any lack
of liquidity
yet in the US. On the other hand the global economy is still
in the recovery
phase. Japan is actually still quite weak. Thus the world
economy is
in no danger of overheating. The US stock market is overheating, because
of the excess
liquidity the Fed had injected into the system during the financial
crisis of 1998. Now
Fed is trying to drain the excess liquidity while the treasury department
is adding liquidity to the
system by buying back treasuries and issuing a lot less new debts.
Thus we had a very slow
and gentle tightening process and the world economy has not been squeezed
too badly.
Another reason why we're optimistic that the Fed will succeed
in inducing a soft landing for
the US economy.
Last week the Dax and CAC have mostly followed the movements of Wall
Street.
But both markets have continued to outperform Wall Street. The
Euro economies
have again reported very good growth data. The weakness of the
currencies will
help the exports. And the Euro Central Bank has been very careful
in
raising interest rates so as not to kill the recovery in Germany and
France.
We're still the opinion that this year the European markets should
outperform
Wall Street.
The SMI is finally exhibiting amazing strength. The SMI finally
has broken above
the 7600 level. Indeed it closed the week above the 7700 level.
This is really
positive indeed. The next levels to watch are 7800 and then 8000.
Given the
fact that the market has become pretty overbought, we wouldn't be surprised,
if there should be a correction soon.
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The telecom and telephone equipment sectors corrected last week.
But Nokia
and Ericsson have held up well.
SAP and Cap Gemini have both corrected to levels that have become very
attractive again. We suggest adding to these positions on weakness.
Last week the Euro fell below the .90 level but managed to recover
to close
above the 90cents level. .90 still have to hold. The danger
that the Euro
will fall below 85 cents level cannot be denied. But my gut feeling
is that the
.90 level will hold.
The Swiss Francs remain stronger than the Euro after the National Bank
raised the interest
rates by a surprising 3/4% last February. But the dollar remains
positive against the Swiss Francs.
The downside level to watch is SFr. 1.50. Until then we should
see further gains in the dollar.
Target: SFr. 1.80
When talking about the asset bubble, analysts and jounalists tend to
forget about
the volatility of the bond, currency and real estates markets in the
last decades which cause
investors to be less than enthusiastic about those instruments.
Stocks have shown themselves
to be a better investment for the long term. As this insight
begin to sink in the psyche of the
world baby boomers, we should see greater allocation to equities than
ever in history by the
European and Japanese investors. That trend will cushion the blow of
the rising interest rates
in the US.
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 brand name 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 UPS. We would also recommend the stocks of Corsair (CAIR),Qualcomm,
Ericsson, Nokia, Epcos 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 purposes only and not intended for trading purposes. The opinions expressed in these pages are what they are: opinions! |