Markets: Q1 / Q2 2001 - Selective Trading?

David Cobbe

Junior member
34 1
Telecom stocks have been one of my main themes this year: VOD in particular. Since around the end of May I felt that overall, the stock would trade lower. Specifically, many analysts were driving their stock price targets to £5 and beyond. My main concern at the time was that the 3GL bidding war would place a massive financial burden on the companies. Moreover, the companies cannot prove the technology until after the event: the downside risk is too great in my opinion. Overall, I still think 3GL technology is a “bad thing” because the content and functionality captures a gimmicky market. Generally, gimmicks do not command a large cash flow, the initial attraction wears thin, and boredom seeps in. In addition, the Helsinki University of Technology has designed some software compression techniques (11Mbps) that can transmit at the 2.4GHz frequency. This frequency does not require licence agreements and so even if 3GL would transpire to be successful; it would be very easy to emulate a 3GL handset without undergoing the financial burden.

I am not against technology. Actually, I tried to push an idea onto Alliance & Leicester. I think combining credit card technology with mobile handsets is a low cost and more flexible alternative. You enter a shop, scan an infrared tag with your handset and the handset submits the transaction details to the various bank accounts. From my own IT experience; such a system is very easy to implement (over half of the technology is there anyway) and will lend itself to a more proactive form of shopping. For example, your handset will know your shopping habits and can advise you in advance, if there are bargains in the area, which you may find interesting. The handset can act as a navigation system too, directing you to the location if you are not familiar with the area. In addition, it is interesting to see the Bank of England echo similar concerns. Sadly, the concerns come rather late in the day: Sir Eddie should have agreed with me in my Money World post, May 2000.

Going forward, I think next year is going to look ugly, worse than now in fact. Interest rates take about six months before they start making an impact on to the economy. Slashing interest rates now is not going to have an immediate impact until about June 2001. During that time, the earning season reports will show greater evidence of an economic slow-down and panic of a “hard landing” will increase. It will be difficult for the market to comprehend: we are cutting interest rates and yet the indicators will show that the economy is increasingly cooling down.

As an investment strategy, you may be tempted thinking banks will do well if the central banks cut interest rates. However, many of the banks and special finance companies have heavily exposed themselves to the technology bubble. The bubble has burst and consequently this will affect the banks. It is unlikely that the bank stocks will break out of their three year trading range.

I think retail is a misguided perception of a defensive sector. Sure, people still need to eat: bread is nice. However, if the economy does slowdown, people will spend less and therefore the retail spending will decrease. Consequently, the retail profits will be very flat and the danger is that the sector could look over-valued in relative terms. The same applies to housing too: if people are going to spend less then housing prices are likely to flatten, which in turn will affect the retail (home improvement) and construction sectors.

If you are going to trade a difficult market, you will need to be very selective. Companies are earning less; therefore, they will spend less. If they spend less, the service sectors in turn will earn less. Just because Psion, Kingston, and others are cheap, there is no law saying they cannot get cheaper. If retail have no money to spend and corporations have no money to spend; who is going to buy their products?

Finally, keep in mind that “fear” is about 1.6 times more influential than “greed” insofar as stocks will only trace about half their losses.

All the best for the New Year!

David
 

traderx

Active member
146 2
Tremendous stuff David and a timely warning. Commentators are forecasting 2000 or less for NAZDAQ and the bears are firmly in control for the next 6 months until interest rate cuts begin to take effect. If you saw Bloomberg this weekend the editor of 'The Banker' is saying that banks have bet their shirt on the telecoms sector, to the extent that 50% of bank assets is now risked on the telecoms sector. If the bet goes pear shaped its effects could be significant for business in general and global markets in particular. I cannot comment further except to agree with your analysis going forward. We must all take even greater care.

Tx
 
David,

A very good outline a highly probable scenario going forward. This corresponds with my base case view. However, there is always the possibility that things could be much worse. The fundamentals underlying the US economy are not good. If the US economy goes belly-up then everybody will take a hit. However, if this happens the UK and Euro markets are likely to recover quicker. My vote is for a quick (3-6 months?)recession (shakeout) which would then provide the foundations for steady economic growth going forward. This will engender new positive enthusiasm for company profitability and for stock prices. It is out of adversity that good things come. First the pain, then the gain. Apologies for the philosophical musings.


<BLOCKQUOTE><font size="1" face="Verdana, Arial">quote:</font><HR>Originally posted by traderx:
Tremendous stuff David and a timely warning. Commentators are forecasting 2000 or less for NAZDAQ and the bears are firmly in control for the next 6 months until interest rate cuts begin to take effect. If you saw Bloomberg this weekend the editor of 'The Banker' is saying that banks have bet their shirt on the telecoms sector, to the extent that 50% of bank assets is now risked on the telecoms sector. If the bet goes pear shaped its effects could be significant for business in general and global markets in particular. I cannot comment further except to agree with your analysis going forward. We must all take even greater care.

Tx
<HR></BLOCKQUOTE>
 

Cigar

Well-known member
292 13
A timely reminder to look at the longer term trends of what we consider buying. As the books say, buy the dips in the major trends.
That probably stands true whatever timescale we are on.
Its amazing how difficult I find that. We are always looking for major turning points in shares that have fallen for the last 9 months. As has been said before, the 1st 10% and the last 10% are the most dangerous parts of a trend.
I'm in total agreement with what has been said above, I think the time is here to be ever more careful.

rgds
 

titus-uk

1
291 5
Lets face it. Every rally since the beginning of Sept has been sold into. There is no quick fix here. There will be trading ranges en route, and if you feel brave, may be worth short term trading (2 weeks ago a case in point). However, the general trend is bleak, and confidence low.

I have read that 2nd half 2001 may be a good time. Prob tying in with the fact that as David puts it, it takes time for interest rate cuts to work through.
Panic is stronger than greed.
Mark

------------------
 

David Cobbe

Junior member
34 1
Glimmers of hope!

What about the electricity generators? These stocks look cheap and safe. IPR anyone? Duke Energy?
 

Similar threads


AdBlock Detected

We get it, advertisements are annoying!

But it's thanks to our sponsors that access to Trade2Win remains free for all. By viewing our ads you help us pay our bills, so please support the site and disable your AdBlocker.

I've Disabled AdBlock