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| Prices as of: February 5, 1999 |
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Gold: $290 |
30-yr Bond: 5.28% |
This Month
Again, belated apologies for a very belated January issue. One of these days, perhaps even in February, I'll get on a schedule, and you'll be greeted by this missive on the same day each month, like more conventional letters. In my dreams.
I contemplated another article on the Congo, or African stock markets, but scotched them because, although I promise it would be interesting, it would also be irrelevant to most readers. Instead, I came to the conclusion it was "now or never" to discuss the Internet at some length, including recommending a stock. I trust I'm not giving you more than you want to know about one company here. But as bearish as I am on the market, an explanation is in order.
As you read this, I'll probably be back in Cuba, a forbidden investment fruit to Americans, but a tasty morsel for everyone else. I'm still of the opinion that beachfront property, which can be had for a few hundred dollars an acre, is an overnight ten-bagger once Castro sheds his mortal coil. I believe I'll have some serious how-to information for you shortly.
An Internet Stock
The current mania for Internet stocks is not, of course, anything new. In the late '60s any stock that ended in "-onics" or that had "systems" in its name was guaranteed to go to the moon. Later it was any stock that had "bio" in its name. And from 1993 to 1996 anything with "resources" or "mining" in its monicker went 10 for one. In each of these instances, the late objects of the market's affections subsequently lost 90-95% of their peak values. It happens every time, typically coincident with a hot market in new issues from start-up companies. The resource sector will cyclically recover and boom again, just like the high-tech and biotech sectors. But most of the individual start-up companies within these sectors simply disappear.
Interestingly, the resource and high-tech sectors are, and have always been the most volatile in the entire market. The reason is that, since most companies in them don't have earnings, or even revenues, they're not readily valued by conventional measures, but lend themselves to "blue sky." So, literally, the sky is the limit when some catalyst cyclically gets them going. But their lack of earnings makes them even more volatile on the downside because, when their initial capital is gone, they simply disappear if they can't raise more. Startup companies, resource explorers, and high-tech outfits rarely have earnings; what they have is a "burn rate." The burn rate gives you the number of months before bankruptcy occurs, unless magic happens.
That's financial reality. But the inevitable can be postponed in a hot market that allows companies to sell more stock, or even borrow, to postpone what is, for the majority, the inevitable; bankruptcy. That doesn't have much to do with how high share prices can go in the short run. But it makes the eventual, and usually cataclysmic, end of the boom a cosmic certainty.
The current mania focusing on Internet issues is probably the wildest of all time, bar none. MarketWatch.com was under-written at 17 and ran to 130 in mid-January (now $77); theglobe.com came out in November at 9 and ran to 97. Amazon.com trading at $118 has a market cap of $18.7 billion, which is pretty hefty for what amounts to a FedEx service for a highly discounted commodity. eBay has a market cap of $9.4 billion; Broadcast.com has a market cap of $2.2 billion. Multibillion dollar market caps for companies that barely have revenues are a dime-a dozen.