After 10 years in a rut, the Japanese and German economies are showing signs of life. David Smith columnist writes today...
Japan and Germany, the miracle economies of the post-World War II period, have been stuck in a rut for the last 10 years. The reasons for that are too complicated to rehearse right now, but we're always looking for evidence that they are moving into a higher gear.
Recent Japanese capital spending data showed a rise of almost one-third in spending on productive capacity. That kind of spending program is the kind of evidence we want. It is the act of a confident business community that sees better things ahead.
This capital spending will be reflected in Japan's January-March quarter GDP figures that are due to be reported tomorrow. GDP is expected to have grown 2.6% over the previous quarter. The renewed economic strength has boosted some chemical and basic material shares that are out of the Nikkei 225 mainstream.
The index itself somewhat unexpectedly fell overnight, instead of following the Nasdaq's lead higher. Also tomorrow we have Special Quotation, or SQ, which is the Japanese equivalent of Triple Witching in US stock and index futures and options. Position squaring, particularly in the new economy shares such as Kyocera (NYSE:KYO - news), DDI, Matsushita Communications, Advantest, and the like, which have recently gone into the Nikkei at an exaggerated weighting, pressured the index lower.
As for Germany'\200Ý
Germany has reported a lower jobless rate in May, the seventh time in the last eight months. Other employment-related studies I am doing also show evidence of a confident business community '\200'' hiring of executives and technical personnel is running at a higher rate in Germany than anywhere else in Europe, including red-hot France and Scandinavia.
Germany has also reported industrial production rising 1.5% on the month. This adds to the outline of a stronger picture for Europe's biggest economy. The market is taking on board the likelihood of a 25-basis-point rise in European interest rates later today without any particular concern. Stock indices are higher, led by telecom shares. The Euro remains close to 96 cents, its highest levels in several weeks.
I have been getting more bullish on Europe and the euro. European growth rates and other economic fundamentals are getting better, whereas the US has been growing too fast, creating the potential for either inflation or recession -- neither outcome desirable.
Momentum Builds in Europe
With the positive momentum of the US economy apparently broken, and the prospect of ever-higher dollar interest rates receding, there has been a sea change in the market's estimation of the former toilet currency. My macro hedge fund sources tell me that they are no longer structurally long the euro, but in fact rather short, which creates the possibility that its positive momentum starts to build on itself.
If you feel constructive toward European currencies and you think equity markets will be healthier for a while, the old continent has some of the best opportunities among world-class financial and technology shares.
In financials, I favor UBS (NYSE:UBS - news), ING Groep (NYSE:ING - news), and AXA (NYSE:AXA - news). In technology I like Philips Electronics (NYSE:PHG - news), Infineon (NYSE:IFX - news), and Epcos (NYSE:EPC - news), and of course the world-beating telco-tech companies Ericsson (Nasdaq:ERICY - news) and Nokia (NYSE:NOK - news). Pharmaceuticals are not helped by a rising euro but Aventis (NYSE:AVE - news) and Novartis (NYSE:NVS - news) offer a margin of safety and attractive valuations.
Microsoft: One More Thing
Having said yesterday how boring I think this whole Microsoft (Nasdaq:MSFT - news) antitrust nonsense is, I did not expect to revisit the case again for a while. But a reader asks an intriguing question:
``Has there ever been a breakup mandated by the Justice Department that resulted in hurting the shareholders financially? My guess is that the result of this Microsoft soap opera will be one that a) will benefit shareholders and b) benefit the users. Like you, I feel that the interim gyrations are a ho-hum but suspect that Microsoft is a buy at this time.''
The answer to that, in the famous cases of AT&T (NYSE:T - news) and Standard Oil, is no. They have worked out well for shareholders, with the successor companies, Telephone itself, a half dozen baby Bells and Lucent (NYSE:LU - news) in the one case, Exxon-Mobil (NYSE:XOM - news) and BP Amoco (NYSE:BPA - news) prominently in the other, growing far beyond their original limits.
However, people sometimes forget that IBM (NYSE:IBM - news) wasted ten years allowing the market to move away from it while contending against Justice in its case in the 70s and 80s, a case it won in point of law. IBM wandered in the wilderness for years until the accession of Louis Gerstner as Chairman and CEO brought a renewed focus and allowed the company to overcome its history.
Caution Ahead
So that is the cautionary tale for Microsoft. Never slow down, never relent, while the case grinds through months and years of appeals. There is no reason to admit to losing until the case is definitively lost, and in the meantime, the market will move far from the products and services that moved Justice to take up the case. Justice and the courts will do what they will; Microsoft needs to keep asking itself where it wants to go tomorrow.
Meanwhile, one thing that is not boring at all is the pre-market trading action in Microsoft shares. With Justice, the judge, and Microsoft management all sticking to the script, investors refuse to be frightened by the end of the movie. Shares are bid higher, looking likely to lead a rise in the markets later today.
David H. Smith is managing director of Grayling Management. Grayling manages hedge funds and private accounts, and performs customized research for institutional clients. Smith specializes in Asian and emerging market equities. His column analyzes global economic and corporate events that happened overnight, and tells investors how those events affect their portfolios. He has clients with positions in Kyocera, Aventis, UBS, ING and AXA. |
