THE QUARTERLY MARKET SECTORS TO WATCH

The First and Second Quarters of 2001 Commentary - by L.K.S.* February 23rd. 2001

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.

INTRODUCTION

Due to the poor state of the US economy, we are combining the First and Second quarters forecasts for very obvious reasons - the first quarter will end with very little changes in corporate activities besides trying to stay afloat. Only brave souls have the funds and the stamina to invest in new development activities, or to acquire other companies (see below). We are going to keep this forecast short and to the point.

UNITED STATES AND CANADA

INTERNET MEDIA COMPANIES ARE VULNERABLE!

.  Internet companies have gone through the outrageous valuation stage, funds burn rate reduction stage, and then the profitability stage. But guess what? there is still a very tough stage to go through and we can see only about six (yes, 6) of the 50 major online giants surviving this next stage - vulnerability for a takeover. After almost a year of the stock market meltdown, most major Internet players spent (some squandered) their hard earned money on branding, efficiency and profitability, but how does the market reward them? low stock valuation. A low stock valuation means a sitting duck for cash rich traditional media, which can't compete with their online counterparts, but can easily buy them outright. How bad is the situation? Almost every pure Internet player now finds itself valued at least 50% less than what it was last year by this time. Only AOL Time Warner and eBay seem insulated from this. Who is the most attractive to acquisition? Yahoo! For the fact that these companies are not initiating stock repurchase plans seems to us how dire their financial state might be.  We appreciate your feedback on this subject at our Discussion Forum.

ONLINE BROKERAGES AT THE BAT!

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.

ONLINE RETAILERS AGAIN!

Well the Christmas shopping season came and went and guess what? most of the online retailers folded up like crazy. The suck puppet is gone, so is eToys.Com, etc. (ever notice that most of the Internet businesses failing are almost all online retailers - a group that should be making money). What is so amazing is that these businesses are failing not because there are too many of them, but because their brick and mortar counterparts are beginning to do things right: build web sites that are easier to use; merchandize can be returned to the nearest store; and recently, you can use store cards online (if you have been a fan of this column for at least a year, we have already discussed these issues in this column). Now then what is next in this sector? I don't think Walmart.com, Kmart.Com, and the other brick and mortar dot coms will rest until their are no Amazon.Com, Gifts.Com, and the other pure internet players. Amazon especially vulnerable after an analyst made known this month that Amazon has only about $300+ million of working capital, but not the $1 billion it claimed to have. With the continued downturn in the economy and the stock market's unwillingness to enrich these companies let alone venture capitalists, it is going to be ugly. Before we forget, the Department of Commerce's survey saw growth in online retail sales, but mostly from brick and mortar appendices.

BUSINESS TO BUSINESS (B2B) REVISITED

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 

BIOTECHNOLOGY AGAIN!

Now that the human genome sequence has being mapped, people are beginning to wonder when the information could start turning into cash. One has to give to gene related companies though, the idea to publish the human gene sequence in respected scientific magazines will not only put the human genome project on the front burner, but could actually help their sagging stocks at least for the next few quarters.

EUROPE

EUROPEAN TELECOMMUNICATIONS PROBLEMS

Business and Finance is an interesting thing. A couple of months ago, European telecommunications companies took on heavy debts as they went around taking over the smaller players so as to protect themselves from their US counterparts who were hungry for expansion too. Then, it made perfect since to acquire these companies and promise investors a partial floatation (tracking stocks) of certain units. Now however, things are different. A good example is the demise of France Telecom's partial floatation of its Orange mobile phone unit, which has being struggling since launching this February. British Telecom is now considering a full floatation of its BT Wireless unit as pressure continues to mount for it to reduce its massive debts. With markets all over the world struggling, we don't expect relieve to come in very soon.

EUROPEAN (POSSIBLE) CURRENCY WOES AGAIN!

In this new regime of global financial alignment, most countries that use to matter very little to the major economies can now cause some serious problems due to the efficiency of information and the financial markets. The memories of the near catastrophic global financial woes precipitated by Thailand's devaluation are still fresh in our minds. We are afraid to say that we see similar and potentially dangerous beginnings in Turkey's currency crisis. We advise our readers to pay close attention to the developments over there.  

ASIA

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.  

LATIN AMERICA

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.

AFRICA AND MIDDLE EAST

The outlook for Africa and the Middle East just got fuzzy as violence in the Middle East stands the chance of spreading to other parts of the world with sizable Islamic and to some degree Jewish populations. How is this bad? Oil prices above $30 a barrel is bad for both producers and consumers. High prices causes the consumers to find alternate sources of oil and energy. When you include uncertainty - like the violence in the Middle East, the search for alternate sources actually speeds up, and that is bad for OPEC producers in the long-run.

The .

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.

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* 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.

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