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Strategies & Market Trends : VOLTAIRE'S PORCH-MODERATED -- Ignore unavailable to you. Want to Upgrade?

To: T L Comiskey who wrote (30235)	1/30/2001 12:32:06 PM
From: Jill	Read Replies (1) \| Respond to of 65232

Barron's: At last year's gathering many of you were worried about the market and the economy. We were tempted but it's a good thing we didn't take it as a contrary indicator. John, you even shorted the Nasdaq 100, which was an excellent call. What do you think about the economy now? Q: Felix, what do you think? Zulauf: It looks to me like we're already in a recession in the U.S. and that the 10-year expansion is about over. The basic problem is overconsumption and overinvestment, and undersaving. It's probably very similar to the situation we saw in the late 1980s in Japan and the mid-1990s in Southeast Asia. It will take a few years to work off the excesses that have built up over the past 10 years. It's been about 25 years since the last globally synchronized recession, and wherever I look outside the U.S., economies are decelerating. It doesn't look like an outright recession in Europe, certainly not yet, but that could come in the next year or so. Japan looks like it is rolling over again. For investors, then, this will be a year of economic disappointments and major reflationary attempts by the authorities, monetary as well as fiscal. We might have only one or two down quarters, and then bump up for a quarter or two before the economy decelerates again. I do not see a major meltdown right away, but a long, drawn-out working off of prior excesses. Zulauf: You can see already that we've gone from an inverse yield curve [denoting that short-term interest rates atypically are higher than long-term rates] to a slightly normalized yield curve. The yield curve throughout the U.S. and Europe will steepen, of course. There will be a major attempt at monetary reflation, and in some countries in Europe expectations for tax cuts already have been built in. We'll probably get a tax cut in the U.S., too. That's why the economy won't just fall apart. But it will be hard to rekindle the sort of growth we've seen, because the consumer is pretty extended. Another key problem is that we've overinvested in high-technology equipment, and that has been the driving force behind the expansion of the past few years. Zulauf: That's what I am saying. The current weakness will draw a response from the authorities on both the monetary and fiscal sides. Q: What you're saying is the economy will have five down quarters, but they won't be consecutive. That's the difference. Zulauf: Yes. Since the early 1990s the U.S. savings rate has declined to below zero from 8%. One percentage point in the savings rate equals about $100 billion. When you look at the formula, corporate profits equal investments minus savings. Total corporate profits are $600 billion. If the savings rate were to go up a few percentage points, that would really eat into corporate profits. So corporate profits are going to be a major casualty this year. Q: We believe you. Now, Felix, tell us about the rest of the world. Zulauf: The current market environment is more suitable for trading than investing. We are looking for rallies in stock markets around the world. I think all the markets are preparing for rallies soon, starting this month into the second quarter. We are looking for stocks to play that theme, that are sensitive to changes in the yield curve. So we'd buy British bank stocks such as Barclays and HSBC Holdings. We would buy construction stocks like Italcementi, an Italian cement manufacturer, which is very cheap. John would love it at one times book value and 6.5 times earnings. The stock was down about 30% over the past 12 months. In addition, we think the Nasdaq will finally start to rally, though it will be a bear-market rally. We'd use semiconductor stocks for that rally, and expect to gain 25%-30%, or more, within the next three to four months. Q: Which semiconductor stocks are you recommending? Zulauf: I'm talking about Philips Electronics or STMicroelectronics or Infineon Technologies. On the other hand, a lot of perceived defensive issues -- noncyclical growth stocks such as pharmaceuticals -- have benefited a lot from the bear market in technology. They've gone to unbelievable valuations. The European companies have benefited from a rising dollar for a long time. Now that's changing. One stock we're selling short is Aventis, created from the merger of France's Rhone-Poulene and Hoechst. The stock is now selling at 40 times earnings, with earnings growing at roughly 10%. Q: Do you have other short-sale recommendations? Zulauf: In foods it's the same story. Nestle is trading at 25 times earnings and has unit growth of maybe 2%-3%, at most. The company benefited from a restructuring program two years ago, but I do not believe that 10% earnings growth is sustainable. And with more than 50% of sales in U.S. dollars, the stock is vulnerable to currency swings. These are trading ideas for the next three to four months. We would certainly not hold these positions for the whole year. After the Nasdaq rallies, I believe it will come down and go to new lows -- probably much lower lows than most people believe."