THE QUARTERLY MARKET SECTORS TO WATCH

This column will resume in late June 2003 - by L.K.S.* April 29th. 2003

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 extending our previous forecasts to the First and Second quarters of 2002. We are also hoping to capitalize on the coming recovery, as such we have written this forecast with the view to current activities that might affect the economic recovery, or be affected by it. 

UNITED STATES AND CANADA

ENRON, FUZZY CORPORATE ACCOUNTING AND ALL OTHER THINGS THAT ARE SHORT OF GAAP!

.Now that Enron's problems have brought the spotlight on how corporate America do their accounting, we are all very hopeful that some meaningful changes will finally be implemented. The downside to the accounting fears is the emergence of a witch hunt for large corporations, and the possibility that this economic recovery might be delayed as investors hold back on getting into the capital markets, thus causing many corporations to delay capital investments due to uncertainty. On the upside, investors will find bargains in other energy related shares like Dynegy and El Paso Energy - companies that have strong fundamentals, but have suffered because they are in the same sector with Enron, Calpine, and AES. Investors need to do their due diligence, since we expect these accounting problems to continue for a little while. Now that the telecommunications sector has caught the "Eronitis" virus, we think banks might be next - especially serious hedge players like Bank of America.  We appreciate your feedback on this subject at our Discussion Forum.

TELECOMMUNICATIONS AND NETWORKING COMPANIES

Times have changed a lot in about 16 months. Gone are the days when massive debts from telecommunications companies, and the aggressive expansion of networking companies were viewed as standard behavior. These days, many telecommunications companies are granting their wireless units full autonomy so as to cut debts. Networking giants who taught the never ending expansion of next generation, or even next next generations networks now find themselves with obsolete inventory. The bad news is, we do not see much improvement in this sector for the whole of 2002 - Most telecommunications companies can barely stay above the water, let alone order new equipments. North American telecommunications have been having their trials since the bankruptcy of Global Crossing, and mounting problems for Qwest Communications International, Sprint FON Group, and Worldcom Group. On the upside, North American telecommunications companies seem to be doing better than their European counterparts (BT Group and MmO2, the companies created when the UK's British Telecom broke up, still can't find their way around on the London Stock Exchange - Vodafone Group and Cable & Wireless are also in the same dilemma). We appreciate your feedback on this subject at our Discussion Forum.

HIGH YIELD (JUNK) BONDS, SMALL CAPITALIZATION COMPANIES AND THE COMING RECOVERY

Print media, the internet and the airwaves are abuzz with how good High Yield (Junk) Bonds are about now. It is true that high yield bonds do very well when we are heading into a recovery - the question is, are we going to get that recovery this year? now that corporate accounting fears are trying to sniff out the chances of a recovery. We do have high hopes on small cap. shares, as funds flee big corporations for smaller companies with less "fuzzy" accounting practices. As always, your views are welcomed at BusinessJeeves.Com Discussion Forum 

HIGH ENERGY PRICES AND AN ECONOMIC RECOVERY DON'T MIX

We decided to add this section on March 13th. as tensions between the US vs Iran, and Israel vs Palestinians continue to mount. The US and global economic recovery can easily be tripped if these Middle Eastern problems continue and end up causing some supply shocks. These conflicts will only benefit oil producing countries and US states, while the rest of the US and global economy can easily be pushed by to a recession due to supply shocks. 

EUROPE

EUROPEAN TELECOMMUNICATIONS PROBLEMS REVISITED

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.

COULD THIS BE THE CENTURY OF THE EURO?

The Euro was launched at the beginning of this year without a hitch. The question then becomes, will the Euro replace the US greenback as the currency of choice in the world? The answer is NO. The Euro still has 2 strikes against it: It is such a young currency that hasn't been proven in the roughest of times. It generally takes at least 80 years for a currency to to prove itself and make consumers feel comfortable enough to trust it. Our second worry is the division of Europe. The European Central Bank (ECB) is still a political institution that still pits France, Germany, and Italy with their allies trying to exert influence that is beneficial to their individual countries. One thing is certain though, that the Euro will expand its sphere of influence in Europe to such a level that, non-Euro Zone countries will have no choice but to accept the Euro as much as their local currencies, if not more. We also think that the way Japan is going, the Euro might just end up being the only second "serious" global currency after the US Dollar. 

ASIA

JAPAN (AND THE WORLD'S) UNDERESTIMATED ECONOMIC PROBLEM!

We were all hoping that the Japanese government might be bold enough to do something about its ailing banks and their bad loans. It is understandable that no country will want to tell its people that their lifetime savings are gone, but delaying further will only see the Japanese economy continue its deflationary slide to say, third world status (It has happened before - Argentina after World War II). It is unfortunate that most of the business leaders in Japan who are against banking and economic reform are now using the Enron and the "fuzzy" corporate accounting problems in the US to convince their people that the US shouldn't be telling them about reforms when the US have its own problems too. Granted, the US have its own problems. However, the US is dealing with it so as to solve the problems and put its corporate accounting on the right track. Wouldn't that be nice if Japan can do the same while their is still time, before this second largest economy in the world surprises the global financial markets with a Ka Boom! anytime from now. 

LATIN AMERICA

THE ARGENTINA THE WORLD NEEDS TO CRY FOR!

Argentina! Argentina!! Argentina!!! Let me make this a very short and straight forward paragraph: Economic Restructuring - GOOD. Economic Non-restructuring due to political pressure - BAD. Fiscal Discipline - GOOD. Lack of fiscal discipline - BAD. That should do it! 

AFRICA AND MIDDLE EAST

SOUTH AFRICAN RESOURCES, ECONOMY, FINANCIAL MARKETS AND THE RAND

The recent weakness in the Rand has been a boom for resource companies who have Rand hedges by trading their shares outside South Africa, domestically based companies have a different story. We are encouraged by the government's recent moves to stabilize the economy and encourage further investments in the country. We also see an upside in the long run for South African companies that have been moving aggressively to invest and acquire businesses in other noteworthy African countries like Nigeria. We are also very optimistic about the future of Gold and Platinum, since these metals seem to be the "safe haven" of choice for investors in North America and Europe, as their equity markets continue to suffer from "fuzzy" corporate accounting, bankruptcies, and huge debt burdens. We are cautious about the banking sector due to the recent implosion of Saambou.

OPEC OIL: THE RUSSIANS ARE COMING!! THE RUSSIANS ARE COMING!!!

It used to be that when OPEC spoke, everyone listened. Now Russia is turning out to be the spoiler for OPEC. What makes it so intriguing is the vast access Russian oil giants like Lukoil have to big time OPEC producers like Iraq. The recent OPEC and Non-OPEC production quota problems seem to be just a small taste of serious wranglings to come in the near future. Does that mean this is the end of OPEC as we know it? We will all find out in the next 4 months..

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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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