This is from Gold Eagle

Nuts and Bolts

What determines reality? Technology has so quickened our affairs that it has become near impossible to accurately digest the flow of unfolding events. Are investors now mostly caught up in the moment, unknowing and unable to accurately make longer-term decisions? Is it reasonable to expect longer-term predictions to have validity? Have the markets now instead become a speculator's game where luck is as important a component as skill in picking a winning investment? Is success now more dependent upon being with the right trend at the right time? Does successful Buy-and-Hold investing now have to be done in segments? In what direction 'does' the future lie? Can we accurately predict tomorrow's reality?

Throughout the decade of the 90's we watched the former norms of prudent investing discarded. Price-to-earnings ratios fell to sub-historical levels and dividend yields ceased to be relevant measures of future success. Global deflation was an ever-present worry, yet markets continued to climb, and the longest running bull market in history unfolded. Then came the Internet and along with it new technology stocks. Who, even as recently as the mid-90's, would have accepted a prediction of what we now regard as current reality? Should we believe that the markets are telling us in what direction the future lies, or have they truly become uncoupled from the lives of ordinary people?

The current mantra is that we are evolving into an information society - that existing nuts-and-bolts industries are destined to become sunset businesses. Yahoo is now worth more than General Motors in terms of market capitalization, yet GM is far more prevalent in our daily lives than is Yahoo's information gateway to the Internet. Is the market to be believed when it appears to be telling us that GM is a business in decline and that demand for GM's products and services is destined to wane? Does this meet a basic test of common sense? Yet investors are voting with their dollars and abandoning companies with real assets, real cash flow and real profits, all for the opportunity to strike it rich in the "new territory". AOL's recent takeover of Time Warner illustrates this point where investor's holding real assets voted to merge with AOL and exchange their shares for a claim on the wishful promise of future earnings in the new economy.

It is easy to claim that we are entering into a new economy - an information economy - but the reality is that our daily lives are and will continue to be very dependent upon the continued supply and consumption of nuts-and-bolts items; oil, transportation, communication, food stuffs, health care, military hardware etc. So long as we have a stable or expanding population that demands a specific minimum standard of living there will be a threshold demand for nuts-and-bolts consumption. While information technology has greatly increased the efficiency with which we manufacture and distribute our 'nuts-and-bolts', the reality is you still cannot grow carrots in a patch of keyboards.

It is important to understand that information is but one necessary ingredient in the mix of economic activity, but by itself information has a greatly reduced value (Entertainment is an exception to this statement). Until information is applied to creating physical form it remains primarily an abstraction, analogous to ore still in the ground. And so long as people and our activities exist in physical form we will have predominantly physical needs. Because of this the companies that make the nuts-and-bolts will continue to flourish so long as we choose to have these needs met.

It is our opinion that short-term opportunity to make money does exist in the technology sector. This has already been explosively demonstrated. But is this real money or substantively speculative? And of the companies themselves, should they someday be able to generate net profits, from where do their current sales and profits arrive?

Of the sites selling products and services on the Internet, they can be divided into four categories: sites that sell information, sites that sell entertainment, sites that sell communication services and sites that sell conventional nuts-and-bolts. What we find though is that often the Internet is turning out to be just a new and novel way to sell the same old nuts-and-bolts.

If you consider the advertising that is currently funding the Internet you will see books, CD's, automobiles, computers, pharmaceuticals, clothing, etc, all being offered for purchase. But these are the same old nuts-and-bolts that are available through conventional distribution channels. And it is the profits from these conventional sales that are significantly funding Internet advertising and the Internet infrastructure itself. Sure, there is information for sale on the Internet but the cost of information is typically moving towards a zero price model. And an industry providing product with a zero profit margin is not likely to have a successful future. We therefore believe that information sales will not be the backbone of Internet revenues.

The fact is, the Internet is just a new marketing tool primarily attempting to sell the same old nuts-and-bolts that everyone else is already selling in the main-stream economy. There is no captive product that only the Internet can sell, the Internet just has the advantage in terms of being able to reach more people and at a reduced cost per customer. The end goal though remains to sell the customer a pre-existing package of nuts-and-bolts.

Until such time as a product or group of products emerges that the Internet can claim as an exclusive - items that have real pricing power and protection - the Internet will continue to exist as a flashy new toy fueled mostly by optimism and enthusiasm but still funded by old economy money. And at some point investors will be forced to assess the Internet on its own financial merits and a vote will be cast on were its real worth lies. We hope everyone who decided to trade nuts and bolts assets for a once-in-a-lifetime promise of opportunity was correct in their anticipation.

Irving F. Hubris

-- Zdude (zdude777@hotmail.com), February 26, 2000

Answers

You're right, the Market has lost touch with reality. Most of the .- coms are about hopes and dreams. They are like the lottery. Buy a couple tickets and "You too could be a winner!". You can't wear or eat them, they won't get you where you need to go. Get rich quick dreams have been around forever.

-- John (littmannj@aol.com), February 27, 2000.