Alternative Investments (page 1 of 4)

This is the medicine we recommend for these turbulent times. We currently suggest an allocation of 10% of assets in alternative investments.

US Stocks

There were only 4 occasions when the Fed cut the discount rate 5 consecutive times since 1960. Taking the 19 Feb 1971 as an example, the gains at the 10th day after the rate cut were 2.29%, and the best gains for the first 10 days were 2.29%. The best close occurred on the 10th day, and the worst close was on the 1st day. The percentage change between day 1 and the lowest close during the first 10 days was -1.05%. From the subsequent market observations, the S&P500 were higher in a year out in each occasion, the retracement range from -1% to -10%. Historically, odds remain titled toward higher prices over the next 12-month, particularly with improving liquidity.

For the short term (3-6 mos.), the concerns are as follows:

• note that valuations of the S&P500 Index at each of the 4 dates were lower than what we have now

• Though the inventory glut is being worked out, capacity utilization is at an 8-yr low, there are still plenty of excess capacity out there

• The ratio of corporate debt to GDP remained at the lofty level of 150% compares to a 10-yr average of 141%

• Capex will depend on the profit outlook and the debt level of corporate America, right now it does not look promising on both counts

US Technology Stocks

From a fundamental point of view, there isn't much positive news ahead to encourage further price appreciation from current levels as end-user demand for technology products remain weak and expectations on corporate IT spending continues to be cloudy.

However, from a speculative point of view, long-term investors may be adopting a "why not" stance and thus, promoting an "accumulation" phase from a previous "underweight" position.

In terms of valuations, technology stocks may not be at their cheapest levels but investors have already begun to place bets for an improved 2H01 performance. The NASDAQ Composite index is presently trading at relatively distressed levels of 2.47x price-to-sales and 3.52x price-to-book.

In terms of price movements, the index is again testing the upper range of its near-term consolidation zone and is positioned for a potential upside breakout in price.

Nevertheless, if price does succeed in breaking out on the upside and rallies further, we would still maintain a cautious view and would recommend to take the opportunity to start trimming technology holdings on subsequent price strengths.

To capitalise on the expected near-term up-move in technology stock prices, we have added another preferred eBusiness infrastructure software candidate, BEA Systems (BEAS US, $38.74, CSFB rating: Strong Buy), to our US Recommended Buy list. BEAS reported favourable April-1Q01 results with total revenues that grew 44% sequentially and 67.3% year-on-year to $257.2 million (meeting expectations). EPS of $0.08 beat consensus estimates of $0.07 a share. We like BEAS as we believe the company is well positioned to maintain its track record of healthy revenue growth. With 1Q01 day-sales-outstanding (turnover rate) improving to 72 days from the previous January-4Q00 of 75 days, and cash from operations increasing 6% to $88 million, we highlight BEAS as a well managed company, and an attractive Buy candidate.


Europe

Despite initial concerns after the strong retail sales figures the FED did what markets were expecting and lowered interest rates by 50bp.