THE QUARTERLY MARKET SECTORS TO WATCH

The Fourth Quarter of 1999 Commentary - by L.K.S.* July 15th. 1999

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. Secondly, while the graphs, charts, and other tools are wonderful forecasting tools, they look mostly to the past to predict the future. Under normal circumstances, the past is the best reflection of the future. However, the last Seven years have been everything but normal. New corporations like Amazon.Com, Ask Jeeves, ebay, excite, Yahoo, etc. have changed the landscape of the Business and Financial World in less than a decade! Almost all forecasts that existed before 1996 about the impact and the economic influence of the new technology, especially about the Internet, were awfully off mark! We will not try to "guess" the markets here. We will however, make informative economic commentaries based on Monthly ECONOMIC, POLITICAL, SOCIAL, and CULTURAL events around the world as they shape the world's economy. There will be no Graphs, Charts, or any form of quantitative analysis! This column is about the human factor in economics. Simply put: STRAIGHT FORWARD COMMENTARY TO BE UNDERSTOOD WITHOUT THE HYPE AND DOUBLE TALK.

UNITED STATES AND CANADA

THE INTERNET AND INFORMATION SERVICES SECTOR

The growth of the Internet and related information systems companies is now - to say the least - legendary. One doesn't expect the boom in Internet Company IPOs to end just yet. However, There is need to use caution as what types of net stocks to hold on to in a market downturn. There are really two types of Internet companies: Fixed companies with Internet presence (or their independent Internet subsidiary), and Internet based companies. Internet companies that are extensions of fixed firms (e.g. ZDNet.Com, Go.net, MSN.Com, etc.) are dealt with as part of their parent, even if the unit is independent. Why? Because the parent companies have vested interest in the success of these units, even if their stocks are traded as separate entities. Do you really believe a company like Disney can allow the GO Network, its most important Internet holding, to fail when it has the funds to infuse vigor into the unit when it needs it? In other words, these spin-offs of major fixed companies are inherently safer in nature. On another plane are the Internet based companies (the dot coms). Most Internet based companies provide services that can be in demand during an economic downturn (e.g. Jobs related sites, financial information and services sites, discount shopping sites and portals, and chat sites). These are Companies that have staying power and can prosper, even in a downturn. The vulnerable groups are those e-commerce sites that can be easily forgotten by web users (and by advertisers, investors, etc.) in lean times because they lack relevance in the stream of time and prevailing circumstances. These are sites that an average consumer and web user might view as a luxury than a necessity. In other words, sites that offer services a neighborhood strip mall can provide at a better rate, if you factor in the shipping and the sales tax. Yes, a sales tax will be here sooner than you think. Also in this group are those sites that are competing against Fixed industry leviathans that are decades old, with strong name and brand recognition, rich in revenues, and waiting for an economic downturn to use their status (did someone say fear and intimidation?) to lure back investors and customers. Consumers will rather use, for example, their Sears charge cards readily than an internet based retailer simply because of familiarity-a better understanding of the Sears credit system, etc. than to rely on a net retailer. It is not that the Internet store can't offer the same services. Rather, the comfort of a long established customer to business relationship prevails. We as humans generally retreat to known safety zones, irrespective of how unreasonable our decision, or how bright the future really looks for what ever we are worried about, simply because it is our nature. These are the Human factors that make economics a social science. These factors should be taken into consideration for longrun Internet stocks investing. The market first react out of fear, then calm's down. However, If your portfolio is full of investments that took years of gains can be cleaned up in just one major extended market adjustment or recession. If however, you don't have the time to wait forever for another boom might want to be very cautious. The Other major gainers will be companies whose products form the backbone of this new Technology economy. These are Networking and Network related Companies like Cisco Systems, Oracle, IBM, Microsoft, Sun Microsystems, etc., as the world catches the Internet craze. Do expect some surprises from network related firms, especially the upstarts. I am always weary of Companies that have a breakthrough technology, but lack control of the content their invention depends on. Innovations like MP3 and all these Television and Movies Replay technology are beautiful. However, Most of the companies that have made these innovations lack control of the content because they lack the licenses of the end product. Worst, These Industries they are competing against are awash in cash to invest in better technologies, and the power to spend limitless funds to advertise their way to the top.

TELECOMMUNICATIONS

The Telecommunications industry has had a stellar performance for a couple of years now, and I expect the realignments and alliances to continue. Major players like AT&T, MCI WorldComm, and their global partners will continue to enjoy the unprecedented growth in Voice and Data network services. The Sprint global alliance with the German and French Telecommunications giants is rumored to be on the ropes. Nevertheless, Sprint is always an attractive acquisition candidate. The proposed merger of Qwest and USwest will create a rich and diverse company that will be hard to ignore. The new Company will have a substantial market play worldwide in the areas of Internet, Wireless PCS, Data networks, etc. The regional Bells are also setting themselves up for the millennium. The exciting thing about this sector is the experience these companies have in the Internet revolution. Most of the U.S. and Canadian Telecommunications companies stand to reap great profits as the Internet evolves in Europe, Asia, Latin America and Africa. These Companies will increase their Internet Portal and ISP market share at the expense of AOL, excite, Lycos, Yahoo, etc. (who by the way won't do badly either). Let's not forget the dawning of the cell phone Internet, Internet phone services, etc. where giant Telecommunications companies can easily dominate.

THE CABLE WARS

This is one of the few markets that are hotter than Internet Companies. This is a battle that will literally go on for a couple of years. Why? Cable lines can deliver Voice and Data at faster speeds than the traditional phone lines. AT&T, Microsoft, Charter Communications, Time Warner Cable, TCI, @Home.Com, etc. are gulping up the smaller players so as to position themselves for the future. The only plausible high-speed network devices that can give cable companies serious competition are: ADSL and ISDN, and their ownership is dominated by the same Telephone companies. These are valuable acquisitions that will prove potent in the years to come. This is probably the future of the Internet. These could be the next buzzwords as Portals were in the mid 90's.

EUROPE

The Commentary on Europe will be very similar to their North American Counterparts. However, I expect the Telecommunications, Cable and Wireless sectors to overshadow Internet stocks, at least for now. Remember how companies like Yahoo, Excite, Lycos, and the other Large Portals developed in North America? How about the current Cable and Wireless wars in North America? The European Telecommunications giants like Deutsche Telekom, France Telecom, and British Telecom are going to make sure what happened in North America (like the unprecedented growth of companies like yahoo, excite, at the expense of the Telecommunications giants doesn't happen to them. Sure, some like Deutsche Telekom might be showing lower than expected performances. However, these companies are still viewed as parts of the national psyche. Europe may be united, but the French still leave in France and patronize (with pride) French companies and products. Germans still patronize their well-established home brands.... Well, you get the idea-that human factor again. These giant Telecommunications companies are hungry and in need of elbow room, and will use their name recognition and government support to position themselves as the dominant forces in Europe. They will snap up strategic cable and wireless, and Telephone companies in months to come. The Internet however, is going to evolve and develop differently in Europe. The European Internet companies that will end up having the huge market valuations like Yahoo!, AOL, Amazon.Com, etc. will be Internet Service Providers - ISPs. The extension of most North American internet based companies, especially the Portals, Financial and Shopping sites, into Europe almost all but guarantee's their continued dominance. Sure, a few European firms might pass through, but don't expect too many. Secondly, FREE Internet service is very popular in Europe and growing. These Companies (and their gateway pages) will control the traffic and revenues. The North American Internet based companies will claim the lion's share of the remaining market due to name recognition.

ASIA

Asia is recovering from a slowdown. As such, I will only mention sectors that will not be too interesting. I am not too excited about the banks in the region, except those in HongKong and Singapore. These two economies' banking system is closely modeled after their western counterparts in areas of loan, credit, and record keeping. No overvalued holdings, no hidden insolvency problems, NOTHING. I am also weary of the big trading houses in this region that are clearly in trouble but can't find an easy way out. Let me make this clear, there are many trading houses that have valuable assets applicable to this new technology based economy. However, there are also many that are carrying "ghost" companies along, simply because it makes the corporation look big and important. Nevertheless, there are signs that exist to signify if the big trading houses will post returns on investment in the future. Notably, if a big trading house is still holding on to subsidiaries that are losing money because the same products can be produced cheaper somewhere else. Be careful with these types of companies. Your investment will never improve, not even in the longrun. Secondly, a telecommunications or cable and wireless company in the region has to be doing about half of the following to be a viable company in the coming economy. These companies need to be upgrading their network systems, increasing their customer base, acquiring units that can give them advantages in the future (example: Phone companies buying into a cable outlets). These companies need to be seeking partnerships or mergers that can reap bountiful profits in the coming economy (example: cable companies teaming, or merging up with experienced ISP companies to deliver better services), and a strong internet presence, like a major Portal or ISP unit. This new "internet" economy is not forgiving, nor does it need political patronage. Any company in this region that is not laying the proper foundation for the new economy, especially if it is in telecommunications and cable business, will have an uphill battle to experience the stellar returns their counterparts around the world are experiencing.

LATIN AMERICA

Latin America, like Asia experienced an economic slowdown. The currency crisis in the region seems to have stabilized, but caution is still in order. Latin America has a lot going for it, especially the entertainment and telecommunications companies. The booming Hispanic population in the U.S.A. is hungry for entertainment and anything distinct to their culture. Established Latin American companies are feeling the void with relative ease. Hispanic Networks and Television shows are booming in the United States for two good reasons: The media houses in the U.S. are slow to take advantage and recognize the purchasing power these young Latinos have. This is not the case with Latin American companies that have ventured North of the border. Secondly, Hispanic music and Television has successfully crossed the U.S. ethnic bridge, thereby appealing to many non-Hispanics. There really is tremendous potential for Latin American companies in the United States, provided they are creative and responsive to customer needs. Companies that demonstrate these standards are doing rather well. Telecommunications upstarts in places like Mexico are challenging established outfits like Telmex, not because of telephone services in the local markets alone, but because of the potential the internet has in Mexico, Latin America, and the United States. The Established companies that react quickly, which most are doing, do have a good future. Another area with great potentials, at least in the coming two quarters are in the areas of Commodities and energy. The devastating drought in the Mid-Western United States will help major agricultural exporters out of Argentina and Brazil. The upswing in Oil prices will benefit Mexican and Venezuelan oil industry related companies, at least up to the first Quarter of next year. As always, these unexpected windfalls can go a long way to helping the local economies as a whole.

AFRICA AND MIDDLE EAST

Economic Data from Africa and the Middle East hasn't been very exciting for a while. The only Economies that haven't gone the regional trend have been those of Botswana, Israel, and South Africa. I expect Israel to tame its budgetary and inflationary problems by at least the first quarter of next year. I also expect Israeli and South African high tech companies to do well in this global economy. The mining sector, although fighting a depressed gold market, will do fairly well. Commodities based economies like Botswana, South Africa, Namibia, and Zimbabwe will perform comparatively better than the other sub-African economies (except the oil producing nations). The world oil prices are rising, as the oil producing nations hold on to their OPEC quarter and wait in anticipation of the Venezuelan conference next year. I expect energy-related industries to perform rather well up to the first quarter of next year. Western and Southwestern African producers like Nigeria, Cameroon, and Gabon have discovered more oil deposits that will no doubt help their local economies and their energy sectors in particular. The Middle East has consistently proved itself to the world in recent Months. Peaceful territorial negotiations and change of national leadership without crisis will prove to be an asset in the longrun. Besides Botswana, Israel, and South Africa, two other countries in this region have the opportunity to capitalize on their changing political climate: Nigeria and Palestine. I am optimistic about the Energy, Telecommunications, and Banking sectors in Nigeria. Provided, the economic reforms and investment liberalization of the new civilian government continues. The Palestinian State, without a doubt, has one the most potent source of direct foreign investment in the region, excluding Israel and the oil rich states. What makes Palestine so attractive is the unprecedented financial pledge expatriate Palestinians have committed to the new state (example: the Palestinian stock exchange is already up and running). As the Palestinian Authorities find common ground with the government of Israel's Barak, the once risky region is getting back to its business-friendly roots.

* 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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