Morgan Stanley rooting for lousy near-term earnings.
World Economy/Currencies
Our view remains that the currency debacle that first began to plague the world im mid-97 is waning & the various
emerging economies are, on average, getting better. Despite a 30% decline in the Brazilian currency, world mkts
have held up very well, indicating that the massive liquidity measures undertaken by the world's western
economies are starting to pay dividends. Indeed, during the height of this devalution, Mexico priced one-year
paper & Hungry raised ten-year money. Both issues were six times over-subscribed.
Morgan Stanley continues to believe that Japan favors a firm to strong yen. Many have fretted about the linkage
btwn Brazil & China - i.e., if Brazil goes, China goes - we disagree. We believe that China will not significantly
devaule its currency & the Hong Kong peg will hold. At the margin, the trade-weighted value of the U.S. dollar
will likely continue to weaken.
In summary, emerging economies are getting better & the trade-weighted value of the dollar is declining. Very
importantly, that is the reverse of the dynamic that destropyed this group & most commodity cyclicals beginning
about 18 months ago. The next worry point will be the U.S. economy. We would highlight that the
manufacturing side of the economy (the part that consumes the most energy) is already in the tank. We believe
1999 will go down as a year of healing.
More on Earnings
A couple of weeks age we wrote a piece titled "Lousy Earnings are Necessary Evil". Recall that our overall view
is non-OPEC crude oil production & U.S. gas production will disappoint, leading to a second half 1999 recovery
in commidity prices. For this to happen, earnings will necessarily disappoint. To be candid, we are rooting for
warm weather. If this happens, spending will overcorrect more than it already has, creating a high potential for a
V-shaped recovery in oil services activity sometime in the next four or so quarter.
Investment Strategy
As a result of lousy earnings & conflicting signals from the commidty mkt, the stocks will remain volatile. Our
overall advice reamins to be disclipined buyers of the group, focussing for now on three names HAL ($26-$28,
tgt $53), SLB ($40-$45, tgt $67) & DO (low $20's, tgt $40). By mid-year & perhaps sooner, we suspect that our
focus list will become a little wider. |
