885 John Wright David T. Nicholson's Wednesday-Night.com

david.nicholson's

with John Wright

Wednesday-Night.com Salon Magazine vol 18 #885
February 17, 1999

WEDNESDAY NIGHT February 17, 1999 #885

John Wright

Fund Manager: John G. L. Wright
[Effective August 31, 2000, John G.L. Wright retired as co-manager to the Babson-Stewart Ivory International Fund, Inc. (the "Fund")].
John Wright has been the portfolio manager of Babson-Stewart Ivory International Fund since its inception in 1987. Mr. Wright is a member of Stewart Ivory International & Co Ltd. of Edinburgh, Scotland, a firm with over a century of international investment experience.
Because he lives and works outside the United States for an international investment firm, he feels he has a different perspective on international investing. "I typically avoid even foreign stocks that I believe are significantly influenced by what is going on in the U.S. market" says Wright. "I try to ensure that the Fund reflects its objective."
Mr. Wright was educated at Oxford University and joined Stewart Ivory & Co. Ltd. in 1971. He brings over 26 years of international investment management experience to the Fund.

Wednesday Night February 17 #885
As seems to happen more and more frequently, the agenda strayed from the one suggested in the invitation in favour of a new and most interesting guest, John Wright.
John, a Senior Partner and Director of Stewart, Ivory of Edinburgh, was introduced by Chilian Heward who referred to his own long-standing relationship with and affectionate admiration for the firm. John is one of McGill's advisors on investments and is particularly knowledgeable on the Japanese economy.

The Federal Budget
"it is a good budget for someone who wants to be Prime Minister --- and probably will be by September 2000"
David treated us to a morphed presentation of the proposed Alternative Budget, comments from assorted experts on it and on Paul Martin's version. As the figures have been widely published, there is no need to repeat them other than to reiterate that from revenues of $157 Billion there is a $45B surplus, based on 2% growth for the economy. The Bank of Canada is looking for 2½-3% growth.
The conclusions were that overall the budget was as expected - a bandaid approach; the Budget Speech was not one of the best given by Paul Martin and the complaints by the Caisse and Québec politicians are unfounded as Québec will receive the lion's share of transfer payments.
Wednesday 17 February 1999 Martin shifts billions to health care, tax cuts a middle course and $1.4-billion bonus for Quebec but transfer change will hurt. 'We've been robbed': Landry 18 February 1999 Budget's promise: a falling standard of living by JAY BRYAN

Other comments included:

the Finance Minister did not revise the unemployment rate;
Debt/GDP ratio is coming down but Canada is still second only to Italy at the bottom of G-7 countries;
The debt will be at $580 Billion next year (this figure includes Government pension);
Tax cuts over the next three years will total $16.5 Billion; the good news is that the 3% surtax is gone - the bad news is that for those earning over 60K, the 5% surtax remains in effect;
The Canadian dollar was unchanged after the speech;
The Canadian stock market was down (reflection of New York markets) while the bond market was up.

How is Canada perceived in Great Britain

John Wright

John Wright stated that British (Scottish!) and European investors are "bench-mark conscious". Canada represents 2% of the world market, therefore 2% of their investments. Interest in Canada is low, probably because of the poor performance of the resource market and possibly because of view that when Canadian companies grow big enough, they are swallowed by U.S. companies.
The image of Canada as a resource-based economy persists because of the small population in a huge resource-rich area.
Several people pointed out that Canada has an increasing percentage of exports other than resources (commodities now represent 40% of total, down from 60%). John Wright agreed and noted that Canada is particularly well known for press and communications (including press barons!)
He also mentioned that Canada is perceived as less friendly to private enterprise than the U.S., however others mentioned that some European investors are moving away from the U.S. to Canada in order to avoid the wide-spread litigation in the U.S.
Real estate

Dr Hans Black

Hans Black mentioned that real estate prices have firmed, recently bringing several major U.S. investments including Goldman Sachs and a large Boston-based investor.
Japan
Citing views heard at Davos, Hans Black solicits John Wright's views on Japan. John made the point that the Ministry of Finance is not as powerful as formerly and that there is no longer the close-knit alliance between the governing party, the Bank of Japan and the Ministry of Finance.
A double-dip recession is a real danger.
The direct intervention by the Bank of Japan in the bond market is significant. Their objective is to sustain a controlled weakening of the yen. The comfort zone is 110-120. The Japanese government does not need economic growth because there is no population growth; companies provide the social security that Western governments underwrite. An older population (which has a high savings rate) accepts a lower standard of living "for the good of Japan", however, the younger generation is less accepting, less disciplined and less dedicated to the work ethic.
How advanced is the banking restructuring? They have been addressing the problems since '97, bringing in tougher regulations. But, the problems are enormous and extend to insurance companies. It would probably have been best to have nationalized, cleaned up and "spat out" these entities three years later!
The recent easing of the yen did not help. The Japanese are terrified of hyper inflation. There will probably be a decline this year followed by positive figues next year (0.5-0.8%).
Where does this leave China?

Mayer Lawee

The trouble with analysis of China is that the figures are unreliable. Growth is NOT 8-9%, it is more likely 2-3%. GNP figures are suspect; it is likely that the heartland is not included. Example: the figures for electricity production at 2.8% is not a sign of great activity. Bureaucrats will tell you what their bosses would like to hear; it is the old Soviet-style reporting system.
Long-term problems include over-production of steel and limited infrastructures for shipping it to markets - if there are any.
China has a comfortable surplus, devaluation will not turn around their economy. It is an economy of enormous contrasts between the thriving market economies of Hong Kong, Shanghai and the 3rd world existence throughout the interior.
What is the impact of the lower yen on Far East industrial markets?
Korea, Taiwan may be concerned by the competitivity of Japanese steel, but the Japanese have always been more productive than the Koreans. Some multinationals may close foreign operations (e.g. Thailand).
It was practically impossible for Japanese companies to lay off workers unless the company was bankrupt. This has been changing during the past year, as long as companies are treating workers "fairly and reasonably", and rather than layoff, companies have shifted workers to subsidiaries. The unemployment rate is only 4.4%.
Another guest suggests that companies have been quietly laying off for 5-10 years but because of the culture and the question of "face", these layoffs have not shown up in unemployment statistics. CC dollar It is down to 66 cents from the recent high of 69 cents because of low commodity prices and also the perception that the Bank of Canada may ease rates.
The Debt/GDP ratio of 67% is major concern. So far we have pad back $20 Billion and the debt now stands at $570 B, but by year-end it will be $580 B.
   ROARING 90S Thursday, February 25, 1999

  + With Consumer Confidence in America shooting up, Alan Greenspan,
    chairman of the Federal Reserve, predicted that the economy was heading
    for another year of growth -- its ninth -- and that, at 2.5-3%, it
    would be stronger than expected. Although one-off factors like cheaper
    oil had helped, technological advances, said Mr Greenspan, had also
    boosted the economy: companies had increased profits not by raising
    prices but through increased efficiency.


  + The London Stock Exchange jumped to a record high after the British
    government announced its first cautious preparations for joining
    Europe's single currency, the EURO, early in the next century. But the
    euro itself fell again against the dollar: it is now 7% down since its
    launch in January.
Technical views on the market
Ron Meisels, commenting on the perception of the Canadian economy as commodity-based, points out that the Banking and Industrials sectors are each 20% of the TSE Index and the Resource sector is about the same. With the cycle, resource stocks are low, but should bottom out soon.
John Wright, noting a certain defensiveness about Canadian commodities, interjects that there is no conflict between a commodity-based economy and having brains, cites Sweden as an example!
The Dow Jones sold off heavily from April to October. Since then it has been over bought. The current correction should end by the end of this month which may coincide with Alan Greenspan's forthcoming testimony. [on the menu for Wed#886]
Bombardier, [T-BBD_B] Canadian Tire, Weston [T-WN] , Loblaw's among others.

Dr Hans Black Chilian Heward

Our host notes that both Hans Black and Chilian Heward have been known for their quite conservative approach to investing in the past, this has proven to be a successful strategy long-term.
Chil Heward mentions that the firm had been discussing adding to their Japanese holdings and that John Wright has counseled them that some of the smaller and mid-cap companies are very reasonable buys, especially as these companies are not obligated to maintain the same social safety nets as the multinationals. These are generally niche companies.

Roslyn Takeishi

Y2K
Following a quick clip of Chicago traders who are banking on problems created by a run on ATMs , David pointed out that Y2K is a blessing as it will force many people to make the new equipment purchases they should make anyway.
Hans Black referred to Davos and the panel in which Ed Yardeni participated with the head of the Swedish Post, the head of the World Bank Y2K team and someone from the Economist. Yardeni is still predicting a severe recession. Based on numerous discussions, Hans feels that the level of preparedness in the 2nd and 3rd world is nil. While Japan is in reasonable shape, other Far East countries like Malaysia and Korea are not. John Wright pointed out that a number of the Asian countries are more recently computerized and therefore do not have to deal with the same problems as those countries with older technology.
The U.S. is about 60% prepared. No country will be 100% compliant. Expect problems in aviation and utilities sectors.
Imbedded chips will pose the greatest problem, as Hans illustrated with the example of the university heating system.
The Central Banks of the G-7 are consulting on how to cope with the expected short-term run on money.
In contrast, John Wright stated that there does not seem to be an advanced state of preparedness in the U.K. As an investor, he simply adds Y2K to the check list Hospitals and utilities are a major worry. The Government does not appear to be doing much.

Robert Stewart

David Mitchell, who organised the previous evening's public meeting on "Y2K and You , Westmount resident" gave a brief summary of what transpired. Roslyn Takeishi reiterated her reassuring words regarding the fact that nobody in Westmount lost money in any of the banks during the ice storm last year and said that she felt quite confident that the City of Westmount now has things well in hand.
She does feel that there will be some problems and people would be wise to remember the lessons learned last year. Have a 72-hour supply of bottled water, matches, candles, generator. Make sure that chimneys and fireplaces are in good repair, stock up on wood. Have at least $200 cash on hand. Banks may be ready, but power failures affect ATMs. Fill the tank(s) of car(s) for the same reason.
Ron Meisels mentioned that here we can get accelerated depreciation for new computers purchased.
Hydro-Québec has stated that it is 80% compliant - but does anybody trust them?
SEE our Y2k site

Robert Ackerman

Test your VCR by setting the date/time to Dec 31 1999 11:55p.m.; go have a drink and if it does not blow up and the date/time is ok ...fine. If the date is wrong, at the end of 1999, set the date to 1970, the year which is the same as 2000 including Feb 29th.
"if it's not broke, why fix it" has been the rule for many 'main frames' for 31 years. So the Y2k bug is a blessing... as many will now 'fix it' thus improving their systems.

Jacques Clément

Thank You and Goodnight
At David's request, Jacques Clément thanked John Wright for sharing his views with such openness and wit and urged him to return to Wednesday Night whenever possible - a thought that was echoed by all.

David Nicholson

Ron Meisels

Ron Meisels, one of the longest tenured Wednesday Nighters, then took the opportunity to remind everyone that Wednesday-Night has now started on its 18th year. He underlined the tremendous amount of work and creativity involved in preparing the subjects and in making sure that pertinent topics stimulated the conversation throughout each evening. In conclusion, he thanked David and Diana for their remarkable tenacity in maintaining the tradition uninterrupted for all these years.

Andrea Lavergne

Diana Nicholson

From notes by Andrea Lavergne and Diana Thébaud Nicholson
Edited by Diana Thébaud Nicholson

Date: Thu, 25 Feb 1999 16:42:50
From: John Wright

Many thanks for allowing me to attend your meeting last Wednesday-Night in Montreal, at Chil Heward's invitation. I greatly enjoyed the occasion. When asked what we think about Canada, I had to resist the temptation (partly because I did not know my audience too well, and partly because it no longer seems quite so true) to pass on a comment in "Over Here" by Raymond Seitz (1st career diplomat to be appointed US ambassador in London). "Canada," he said, "should have had the best of all worlds: British politics, American economics, and French culture. Instead they seem to have ended up with the worst: French politics, British economics, and American culture." Best wishes.

John Wright

The debate over adoption of a North American currency continues both here and at Davos - and we started earlier than they did! (see comments at:Davos also One NA Dollar

Do see our One NA Dollar debate

884 MarkRoper 889 Dovas

David Nicholson

our Medical Web ..Super Hospital

Friday, February 12, 1999
Quantitative Analysis - Peter Gibson
Our analysis states in no uncertain terms, that when speculative manias produce accelerated growth rates and greater than 100% year-over-year gains then the short-term risk is enormous. We believe the possibility of an imminent collapse in the NASDAQ is very significant. We also believe that this will cause considerable collateral damage to the major stock market indices, lead to a decline in U.S. bond yields which will then be followed by another round of Federal Reserve cuts. We recommend reducing exposure to equities in the near term. We do not believe the cycle is over. There will be a buying opportunity for the high ROE growth stocks we have been stressing for the last four months. Use a pullback to buy: ATI Technologies, Geac Computer, Biovail, BCE Inc., Nortel Networks, Maritime Tel & Tel and CGI Group. We like these stocks on a fundamental basis. For those not interested in playing the waiting game, Nortel, BCE, Maritime Tel & Tel and CGI are stocks we would buy today.
Apple Computer - Kevin McCarthy

AAPL chart
AAPL $37.19 BUY Target: $62.50
Apple announced that it will move much of its iMac assembly to outside contractors in an effort to improve the flexibility and efficiency. APPL will take a charge to reflect the closing of assembly facilities. Kevin feels this initiative will result in higher gross margins going forward
Kevin reiterates his BUY rating based on AAPL's cheap valuation both on an absolute basis and compared to the hardware group.
EPS EST: 1999E $2.75; 2000E $2.50

Date: Wed, 10 Feb 1999 15:57:59 -0500
From: Andrew de Courcy-Ireland

Subject: Philip Morris buying opportunity
[ + A San Francisco jury hit PHILIP MORRIS, America's biggest tobacco firm, with $50m in punitive damages after a suit by an ex-smoker suffering from lung cancer. Philip Morris's shares fell by 9%. Date: Thu, 11 Feb 1999 19:28:39 +0000 From: The Economist]
Philip Morris Down: Analyst Says Decline An 'Overreaction' Philip Morris Cos. (MO) chart
NEW YORK (Dow Jones)--Philip Morris Cos. (MO) shares were down 7.7% Wednesday, which a tobacco industry analyst called an overreaction to a $1.5 million judgement handed down against the company in California.
"These are ongoing risks for the company," said Tim Swanson, an analyst with A.G. Edwards & Sons Inc. "Anytime an individual case is lost, it tends to have an overreaction in the market place. Stocks should have already been discounted for that risk."
Tobacco companies have lost just four suits such as the one filed by Pat Henley, a 52-year-old California woman who said she got cancer after smoking cigarettes, Swanson said. Three of those have been overturned on appeal.
Also, the amount of money lost on paper in the market movement Wednesday exceeds the $1.5 million judgement against Philip Morris, Swanson said.
The judgement against Philip Morris represents compensatory damages.
According to a source at Philip Morris, the case's judge placed limits on how much information each litigant may relay to the media.
In a statement read by a Philip Morris spokesman, the company said it will have no further comments on the case or Tuesday's verdict until after the case's punitive deliberations are complete.
The San Francisco County Superior Court is scheduled to resume proceedings Wednesday, the company spokesman said.
MYSE-listed Philip Morris shares recently were down 3 1/2 to 41 7/8 on volume of 15.2 million, compared with average daily volume of 6.6 million.
(END) DOW JONES NEWS 02-10-99 01:07 PM- - 01 07 PM EST
The shares closed at $41.125, down from the high of $59.50 reached Nov 25.
I believe this represents a very good opportunity to invest in one of America's great companies at a relatively cheap valuation. Dividend yield is now 4.25%

================ 30 =====================

Recent evenings
876 Desert Fox 16 Dec, 1998
874 with Marcus Hope of Great Britan 2 Dec, 1998
873 pre vote with John Ciaccia 25 Nov, 1998

872 with John Ciaccia 18 Nov, 1998 by Michael Judson
Edited Diana Thébaud Nicholson

Robert Ackerman

871 with Martin Barnes 11 Nov, 1998 by Herbert Bercovitz
Edited Diana Thébaud Nicholson

869 with J. Grey Oct 28, 1998 by Herbert Bercovitz and Andrea Lavergne
Edited Diana Thébaud Nicholson

Who speaks
for Canada?

Please call Diana Nicholson Please phone (514) 934-0023
e-mail your thoughts. or e-mail us your thoughts.

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