BusinessJeeves.Com: Quarterly Forecast of World Economy

Investing and other branches of Economics are much an Art as Science. After the Charts, graphs and other quantitative methods, the social half of Economics - The Human Behavior factor - generally has the final say! This bull market, although long and exciting, will not last forever. As such, an informed investor will be positioned better to withstand the coming economic downturn with the least exposure to losses. If you are a first time visitor to this column, we advice you to visit our archives section (link is below) to get a proper understanding of our methods.

Our forecast for Q3 will generally mirror the Q1 to Q2 forecasts. This is because most of our Q1 to Q2 forecasts are still blooming due to the recent stock markets and Federal Reserve FOMC policy uncertainty. Most economies and companies delayed their activities as stock market devaluations and increasing borrowing costs made it almost impossible to survive, let alone expand. Nevertheless, our Q3 will still have changes in the areas of Telecommunications and the Internet sector. We are also introducing sections for Contract Electronics Manufacturers (CEMs), and Online Brokerage Houses. Please Visit our archives below too to read our Q2 forecast so as to be more current.

It use to be that everyone who had something to do with electronics manufacturing was an Original Equipment Manufacturer (OEM), or an Asian outpost. Not anymore! North American and European Contract Equipment Manufacturers (CEMs) like Flextronics International, Jabil Circuits, Celestica, Solectron, Celestica, Plexus, Manufacturer's Services, and Benchmark Electronics are increasingly becoming the players to contend with. Recent multi-billion dollar outsourcing contract deals, offshore facilities acquisitions and expansions, and the unprecedented large market capitalization are all boosting this once ignored sector. As more OEMs dispose of their manufacturing units and turn more to outsourcing with CEMs, the more valuable CEMs are becoming, especially those with offshore satellite operations. The only notable concerns have been that the CEMs have a narrow customer base and the market can get quickly crowded. The CEMs are countering these fears with long-term and very broad contract agreements with their customers (just like Lexmark International did when they acquired IBM's printer business). Secondly, as CEMs lock in deals with their customers and aggressively acquire former OEMs, an artificial barrier to entry develops in the sector, thus allowing these few players the chance to dominate the market. We appreciate your feedback on this subject at our Discussion Forum.

North American online brokerage stocks have taken a beating lately, and who hasn't. However, beyond that general market torture, this is a sector ripe for good rewards and do have a very bright future ahead of it. Companies like E*Trade Group, Charles Schwab, National Discount Brokers (NDB), etc. were closely watched to see if they can pull it off, and they have! The crash and burn of the Dot Coms haven't affected them, nor has long-term revenue fears. What is now left is to carry this North American experiment globally and allow even villagers in say, Africa or Latin America armed with a cell Phone to play the global financial markets. That, is the grand vision and reward, which most in the sector are already close to.

We STILL see a very bright future for the major portals like Yahoo!, AOL, Alta Vista, Go Network, MSN, EuroWeb, Excite@Home, Lycos, Looksmart, and Snap. Worries about the ability of say, Yahoo! to maintain their profitability due to Dot Com scale back in advertisement budgets will squeeze out online portals is an over-reaction. Granted, Television has been very successful in challenging Online portals with their own online portal business (examples include Go Network, Snap, and CBS' properties). However, it is a different story with print media. We feel the above mentioned internet portals will actually prosper in the future! Here is our reasoning: First, it is a known fact that the internet continues to grow leaps and bounds, and an unprecedented amount of companies are vying for position to be seen and herd online, from Mom and Pops stores to the Wal-Marts. When you want to be seen on the web and you have the money to spend to get your point across, you go to the most popular destination sites - the above mentioned portals. For every Dot Com that scales back about $25 million in advertisement, we estimate about One old style economy company will spend that much to market just 2 product lines online, out of thousands of products. When it comes to traffic, Online portals still dominate and will continue to be the biggest beneficiaries of online advertisement as the web grows. For example: Procter and Gamble, which just announced a sweeping internet advertisement blitz, and spends over One billion dollars a year in advertisement to market hundreds of products, will logically be heading to the portals. Secondly, Mom and Pops stores are not just standing by, they are wanting to be herd and are spending to achieve that too. Most major portals now have an ever-increasing shops mini-portal that allows small retail players to set up shop. While the portals, through agreements, handle their financial transactions and advertisements for them. Financial transactions handling and online marketing were some of the major draw backs for most of these stores. Now, Mom and Pops are heading to the web in droves, and spending serious money on advertisement and services. Lastly, even the major media outlets count on these above mentioned portals to advertise their web presence!

Despite a Prudential Securities' downgrading of the major Business to Business (B2B) companies, and the seismic shockwave that went through the sector, we are still bullish on the sector. B2B retailing is really the natural progression step for the web and major corporations, especially since a good track record can be found in Electronic Data Interchange (EDI). B2B powerhouses like Ariba, CommerceOne, and i2 Technologies have signed and gone into co-development agreements with major industrial concerns like Ford Motor Co., General Motors, DaimlerChrysler, Toyota, etc. who spend literally tens of billions of Dollars a year on supplies, procurement, and are major EDI users. These industrial giants are quickly becoming the partners to these B2B ventures. Secondly, the eMarketplaces B2B companies provide will save billions of dollars to companies who take advantage of it. To ignore these B2B leviathans in the short run will be rather expensive in the long run. As always, your views are welcomed at BusinessJeeves.Com Discussion Forum

Once again, telecommunications is ready for another readjustment. Now that Worldcom and Sprint's merger is in pieces, these two highly valuable US companies are up for grabs. European and Asian telecommunications companies can really do well with these two. However, most telecommunications companies outside the US are over 25% owned by their respective foreign governments, and as such, US laws stand in their way in acquiring such strategic companies. So, here is our advise to one particular European Telecom that has the money and can benefit tremendously from a US acquisition (we all know who they are): Loose the government and come get your prize. Do you hear DaimlerChrysler, or should we say Daimler Benz, complaining about their US prize?

Online phone companies are going to be the major niche players in this sector. The major telephone companies are going to reply aggressively to the growing web based telephone companies like Net2phone.com by either buying these "smaller" players, or offer competitive services.

Cable companies will not do badly either. We expect charter communications to acquire more units, and go into content alliances with online networks (could be MSN). We expect some strong performance from this sector.

This is something its time has come, and the major players are going to do very well in at least the next two years. The companies positioned to gain tremendously are software manufacturers like Microsoft (Windows CE), technology licensers like Qualcomm, units manufacturers like Motorola and Nokia. The hand held device market is also mushrooming and expected to be very profitable too. Longtime players like Psion Plc. and Palm Computing have seen a steady influx of new players seeking a piece of this fast growing market. A note of caution: only devices with web capabilities (latest) are recommended. The unique the device is in helping someone keep in touch and do their work without a trail of cables, bags, and accessories, the better.

We are going to round up the usual suspects for this sector. Before we forget, Intel is going to do very well. Semiconductor and High speed Networking infrastructure manufacturers are going to be tough to beat this quarter. As the web evolves and need for higher speed increases, these companies stand to be in for quite a long haul. 3Com, Asante, Bay Networks, Cisco Systems, Texas Instruments, National Semiconductor, Lucent Technologies, Madge Networks, Novell Networks, Terra Networks, and Nortel Networks are just a few of those we feel have what it takes.

Now that Y2K is behind us and online shopping for the 1999 Christmas season ending well better-than-anticipated, we expect the brick and mortar companies to expand their web presence and buy new equipments. Companies like Exabyte, EMC Corp, Iomega, IBM, Compaq, Sun Microsystems, Seagate Technologies, and Hewlett Packard stand to benefit the most.

We have been recommending Microsoft since the company came under scrutiny. True, the Anti-Trust ruling might be rough on Bill Gates and Microsoft, but we need to start looking at Microsoft the way we look at other companies: a company, not Bill Gate's company. When, and if we do that, we can see the tremendous opportunities these lawsuits have created for those who own a piece of this company. Worst case scenario, suppose Microsoft is broken up. We know that MSN, Microsoft's Internet portal that is increasingly becoming a potent player, will end up getting even better management and strategy, instead of playing second fiddle to other Microsoft holdings. Notice no mention was made of Internet Explorer, Microsoft's highly successful browser, or the other Internet holdings; these other holdings actually increase the potential for even higher stock valuation if they are lumped with MSN. How about the Operating Systems and other Software units, you might ask. Well, those units can hold their own against anyone (yes, including Linux), because there really is no challenge out there, especially the recent release of Windows 2000 which has the potential to become a dominant server side player. Linux is good, but it is not easy to install, the Linux field is too crowded, and corporate heads are much comfortable with products they are familiar with. In this case, Microsoft products. We dismiss the Open Source Code because it will be a drawn out court battle that Microsoft has the funds to wage, if it comes to that. If the company is left intact, investors who own a piece of the company can count on a run for the stock. What do you think? submit your views on our message boards at Discussion Forum..

Recent comments from US President Bill Clinton and British Prime Minister Tony Blair about open access to biotechnology research work caused a free fall in the sector, and it hasn't recovered fully since. We actually see some good in this pronouncements. This will give the sector the opportunity to tap more gifted minds out there so as to increase the level of discovery. Sharing research work doesn't mean you will loose your patent, or some scientist will set up his own genome lab and wipe all biotechnology companies out. We see the contrary. BioScience requires extensive (and costly) research, then the tedious efforts to get published for peer review. The Biotechnology companies have the funds, the facilities, and the experienced staff to attract new talent, as opposed to loosing it. Recent discoveries and new treatment advances also make this sector hard to ignore simply because two politicians voiced their opinions on something that they seem to have little control of. Even if they do have the control, it might takes years to implement. We see industry leaders like Amgen, Ariad Pharmaceuticals, Genome Therapy, Ocular Biosciences, Trega Biosciences, ISIS Pharmaceuticals, etc. having a stellar year.

Our forecast for Europe will be more or less the same as last quarter's. European economies will perform strongly up to 2001. We are most especially optimistic about the Telecommunications, cable and wireless and financial services sectors. The key players in telecommunications will be the German, French, British, Italian and Spanish "National" telecommunications companies. We expect the Northern European players like Ericsson and Nokia to lead the way in new exciting hand-held internet access technologies. This is the year that Europe will be like 1998 Internet industry in the U.S.A. We are expecting a reasonable amount of web use increase, and the public offering of such companies. Perhaps, the surprising underdogs will be Spanish Internet ventures, as they move aggressively to meet the growing demand for Spanish web portals and content around the world.

Major European Telecommunications companies in Germany, France, and Spain are looking for acquisitions around the world. Expect Deutsche Telecom and Spain's Telefonica to score big wins in the Americas.

The European financial services industry is growing and changing. The number of Europeans getting into the investment market continues to grow at a very rapid rate, as few count less on the old established welfare state. We expect financial institutions to continue acquiring and merging across borders, offer more investment opportunities as their North American counterparts (and increase their global influence).

Despite a glowing economic future for Europe, the persistent labor problems and the willingness of most governments to give in to union demands is troubling. Recent union successes in Germany, France, and Italy, though they seem politically savvy in the short run, are clouding the bright future these economies and Europe in general have in the long run. We feel the recent problems of the Euro and the high unemployment rate (twice the rate of the USA) are signs to, and of the markets rejecting the region's lack of a clear focus for economic and labor reforms. This dynamic new economy is very unforgiving, and European leaders need to always be aware of that fact.

Asia, (including Japan) is actually going to do quite well. Regional powerhouses like Japan, South Korea, Singapore, Hong Kong, Taiwan, and Malaysia will lead the pack Telecommunications, Banking, Technology (especially Software & manufacturers) will do quite well.

Nippon Telephone & Telegraph will do very well as the world moves into handheld devices to access the web. Over the years, this company's cellular & wireless unit have been hard at work building a sophisticated network in Japan that is the model for the world. We expect this wireless unit to be spun off, and to expand its operations to other parts of Asia. Singaporean, Malaysian, and Hong Kong telecommunications companies are not sitting by and watching "DoCoMo" have all the fun either. Recent hostile moves between Singapore and Hong Kong telecoms are just the signs of things to come-acquisitions and mergers across boundaries.

India's software industry has had a spectacular run in the past few years, and we expect more to come. Companies like Amdahl, Infosys Technologies, and Satyam have opened the door for many Indian software companies to tap the rich North American capital markets.

Technology components manufacturers in the region are going to enjoy a very strong year. Cellular and wireless handheld device manufacturers, memory chip manufacturers are just a few in this category that will enjoy a boom as the Internet and flexible access demand around the world continue to increase.

South American Deposit Receipts (ADRs) have been gaining on U.S. exchanges lately. We expect tremendous growth in the Telecommunications sector. South American telecommunications companies stand to dominate in the "New Economy" as the Internet evolves in South America. Unlike in the U.S. where the Internet and e-commerce developed independent of major telecommunications companies, these South American companies stand to use both the North American and European models (and they have) to position themselves as the major and most potent players in the region. These companies will become some of the most prized companies in months to come. Argentina, Brazil, Chile, and Mexico will be the stars for the region. Mexico's energy sector will also enjoy a robust growth.

Venezuela has what it takes, but the recent natural disasters will take up resources that would have otherwise been used to improve its infrastructures. Nevertheless, Venezuelan energy and telecommunications companies will perform better than any other sectors of the economy.

As commodities prices continue to be depressed, most Latin American countries will not do well. The only exception to the rule here will be the oil producing countries of Mexico and Venezuela. Argentina and Brazil will be least affected because they produce multiple commodities, and least dependent on commodities exports as the only source of foreign exchange.

The outlook for Africa and the Middle East looks brighter than the last quarter. African and Middle Eastern Oil producing states have had an unprecedented windfall in oil revenues lately. Our forecast indicates oil prices will generally move within the price band of $22 to $27 Dollars per barrel based on the recent OPEC production increases. Although lower than the $30+ we have seen lately, it is still a huge financial windfall that most oil producing countries need to repair and improve production in the long run. This financial windfall will also be used by these economies to revamp their dormant economies, after a decade of low Oil prices. We expect these countries to: Use the money to improve infrastructures, and update ailing public companies for privatization. The best deals in these countries will be in Telecommunications, Oil related and Banking sectors.

The commodities market has been hard hit lately. Unfortunately, the US Midwest drought will not benefit Sub-Saharan African producers, due to the difference in commodities affected. Apart from the Oil producing economies like Nigeria, Gabon, and Cameroon, the only other economies that stand to do well are South Africa, Botswana, Namibia, and Zimbabwe. South African software firms are making a good stride on the global scene. However, mining will continue to dominate the South African economy for a while. A note of Caution about South Africa: The high unemployment rate is something of a grave concern, especially in a country that is politically very unstable, and South Africa has the makings of a pressure cooker.

Israel has what it takes to do very well in the next few years. Expect technology, telecommunications, Software and Internet companies from Israel to become major players in the world.

* Mr. L.K.S. (he requested anonymity) has a graduate degree in Economics from a highly respected Public University in Virginia, U.S.A. For the past Five years, he has held many posts. Notably: State Economist, Economic Consultant, and Research Economist for a Large Mid-western University. He now lives in California.

THE QUARTERLY MARKET SECTORS TO WATCH

The Third Quarter of 2000 Commentary - by L.K.S.* July 10th. 2000

THE QUARTERLY MARKET SECTORS TO WATCH

The Third Quarter of 2000 Commentary - by L.K.S.* July 10th. 2000