March 1997

Is it time for a correction?

After nearly two years of continued growth on the major markets of the world the questions arises: “can this go on forever. shouldn’t there be a major correction? Ofcourse no market can grow forever, every bull market has to turn sour at some time. But in the long run all stock markets are in comparison with other investment opportunities the best performers over time and consequently the best way to secure a major part of your portfolio.

All major markets are identical in that the stocks get, through the impressive growth, overvalued in price-earning ratios and yield ratios. As most price-earning ratios are moving into the twentieth range and the yield ratios into the two to two point five percent. The earnings are therefore largely dependent on the growth of the stockprice.

These high ratios could become a limit on the growth of the stockprice but this is also highly dependent on the development of the economy. The underlying fundamentals of the stocks are still in very good shape, the inflation is low, state expenditures largely under control, the value of the leading currencies in balance, the demand after products is showing a steady growth with an inclination to faster growth, the overhead costs are limited because of the heavy restructuring of the last decade and finally the large financial reserves promise a lot of opportunities to commit research and development to secure the future.

A fundamental and technological analysis of a number of stocks from the leading stock markets like NYSE, Nikkei, FTSE and Dax are showing a positive indication towards further growth of the stockmarket. Most of the companies possess still growth potential which means a rising stockprice. The only disadvantage is the psychology of the markets because of the incredible growth and the fear for a rise in intrest rates makes the traders get nervous.

In the United States the following stocks are very promising J.P. Morgan, American Express and Citicorp in the financial sector, Sprint, GTE and Southwestern Bell in the telecommunications sector, Intel, Compaq and Dell in the IT branche, Sears and Kroger in the retail business and pharmaceutical companies like Merck & Co, Pfizer and Eli Lily.

Nikkei is also listing some companies which will show a good performance. These companies are largely aimed at the export market and take advantage from the rising value of the US dollar. Electronic gigants like Sony and NEC, conglomerates like Mitsubishi and the car producer Toyota.

The companies which will show a good performance in the UK are British Aerospace, Britsh Airways, SmithKline-Beecham and BP. But hte British market is volatile because of the possible rise of the intrest rate.

The German markets are also in a winning mood. Even when the growth of the economy is disappointing a number companies still see a chance to make some money. Especially the international oriënted companies like BMW, Daimler Benz, MAN, Siemens, Hoechst Marion Roussel, Bayer, Allianz and the Dresdner Bank and a number of smaller socalled Ländesbanken.

There is in general a positive trend visible in the stock markets of the world, especially if the whole year is taken into consideration. The positive economic development, the low inflation and the abundance of available capital are a nearly garantee for growth.

Israel versus Syria.

After the Israeli elections from last year the peace process nearly collapsed because the Likud party with their right wing coalition were opposed towards the land for peace agreements of the former government. It took time, pressure and a new conference and following treaty start up the process again. But the newly elected government got a more favourable deal from the Palestinians.

The negotiations with Syria came to a virtual standstill, the land for peace deal was unacceptable for Netanyahu government. The Syrians should according Netanyahu first sign a peace treaty or at least disarm the Hezbollah in Lebanon as a sign of good will before there could be any further negotiations over the withdrawal from the Golan heights.

This kind of diplomacy worked well with the Palestinians who had no other option than to find some sort of agreement with Israel. The Palestinians had to save their new established area of control and to do this they need the help of Israel. The Syrians on the contrary want the Golan back but they are not in the same need as the Palestinians to get what they want. They have time on their side.

The recent rumours of a possible war between the two is according our analysis unlikely, even when the Syrians have moved troops, formerly stationed around Beirouth, more to the south closer to Israel. These troops are hardly capable, according their structure and training history, to launch an assault on Israel. They are only there, in cooperation with the Hezbollah in Lebanon, to put pressure on Israel to force them back to the conference table.

The Israeli defence forces are far superior to the Syrian forces, all military forces of all Israeli neighbours combined are not enough to break the Israeli hegemony, the Syrian military forces have lost the support of Russia and all aquisitions new and spare parts have to be financed by hard currency and against market prices.

The inventory of the Syrian armed forces is largely outdated, the training of the forces is lagging behind in mobile warfare, to much time is spend on internal security, and in case of any conflict the Syrian forces are not able to support themselves, they are in need of foreign supplies of spare parts, ammunition etc. they simply can not afford a war with Israel which takes longer than a couple of weeks.

The Israeli forces are also not able to wage a long war but considerably longer than their opponents can. The military hardware is in very good condition and regularly supplied with new high tech equipment. And most of the used hardware, can be supplied and taken care of by their own industry. And finally the training of the Israeli forces is superbe, it is even better now the military is less involved in policing and guarding the West bank and the Gaza strip.

The Syrians in cooperation with the Hezbollah can try to pull the Israelis into actions which force the Israelis to expose themselves without a chance to clearly beat one of the two parties. On the battlefield the Syrians do not stand a chance but they can “easily” gain a political victory. In the end, this can be more beneficiary to get what you want.

The Israelis on the other side maybe want to frustrate the peace process to a certain extent, they want to gain as much as possible without giving up to much territory. A lot of the actions undertaken by the government is giving prove to this hypothesis.

A lot of promises have been made by the Israeli government but most of them are ignored or delayed. Any start to new negotiations are frustrated by one of the two sides before they get a chance to take off. The Israeli forces and the Mossad, the intelligence service, continue with their operations in Lebanon and abroad, and not only terrorists are the target of those operations. Especially the timing of the publication of those operations reveals a process of destabilising the negotiations.

This policy of brinkmanship have been very profitable for the Netanyahu government but it certainly has its limits. The international community get fed up with the delaying strategies, they want a firm commitment that the peace process is implemented as agreed to into the several contracts.

The margins to act get lesser for Israel, their best chance is to avoid any open conflict with the Syrians or the Hezbollah, military they can win but politically they can only loose. The Hezbollah has to be countered with defensive means, intelligence and covert strikes with the garantee that no civilians get hurt. They even could consider withdrawing from the security zone and force Lebanon to an agreement. The Israeli forces can easily protect and control the border of Israel with UAV’s, radar and infra red/optronic sensors. The security zone is a nice to have but not a necessity to garantee the security of Israel.

At the same time this would give Israel some time to handle Syria on their terms instead of being forced to negotiations in which you only have to give in.