UP!!.com – July 1998

July 10, 1998

Dow Jones Average: 9090
S & P 500 Index: 1159



While the stock market gyrated nervously last quarter, and the average U.S. mutual fund lost .3 percent, one group of stocks soared to unimaginable heights. These glorified stocks have been dubbed the “new media companies” by analysts. A colorful corporate name is a prerequisite for inclusion in this group. The sector is led by Yahoo!Inc., and includes less well known companies such as Excite!, Inktomi, Doubleclick, Lycos, and Zap.

The hottest stocks in this nascent industry serve as portals or gateways to the internet. They connect individuals to content and services carried on the world wide web. There is a lot on the web, everything from news, weather, sports, and stocks, to auctions, chat rooms, and booksellers. Internet users access and search through all the information and services by going through one or more of the portal/search companies.

Most of the internet portal companies do not earn meaningful profits yet. They are attempting to earn money by placing little ads on the computer screens of people searching the web. And they receive access fees from content providers who want a particular link to the internet user community. Even if internet advertising dollars and access fees increase by quantum amounts, they will continue to be a fraction of the dollars earned by more traditional media companies. It is too early to say that the little, blinking ads on the web attract customers. Advertising on the web is strictly in the experimental phase.

In a bull market environment investors let their imaginations run wild. Stocks that combine mystery, the right concept, and a cool name are just more fun to own. So Yahoo! skyrockets to a market value of more than 10 billion dollars on minuscule financial results. According to investors Yahoo! is now worth 3 billion dollars more than the New York Times company. The New York Times owns the nationally distributed NY Times paper, the Boston Globe, dozens of regional newspapers, magazines, TV stations, and a top shelf web site visited by millions of viewers and supported by many advertisers. But in the stock market the unique franchise owned by the Times is worth less than a portal company such as Yahoo!. It must be the name.

We have a suggestion for the next for the next group of entrepreneurs looking to make it big in the internet/stock market. Name your new company UP!!.com and the rest should be easy. As with most of these new e-commerce companies this company would have more of a business plan than a real business. The plan would be to merge the good feeling sweeping the U.S. stock market with interest in the net. We are not sure what all these ! marks mean after internet stock names, but as they seem to attract investors we figure two !! are better than one. On second thought, perhaps we shouldn’t be airing these ideas before registering the name. It could be worth a billion or so by itself.

Current Strategy

Stepping back from the frenzied action in a few internet stocks, it is apparent that most stocks are struggling to maintain forward momentum. The bullish market tide is no longer lifting all boats. Many stocks are sinking, their popularity punctured by disappointing earnings announcements. Investors are clamoring to get on board the most reliable, predictable stocks, such as Coke, Microsoft, and Cisco. While the immediate impact is a price rise in those favored stocks, history shows that narrow stock rallies precede market declines. Eventually the weight of investor hopes and expectations becomes too great for a few stocks to carry.

We are concerned by the narrow market rally, economic collapse in Asia, weak profits for many companies, and the record valuation level of the market. An even greater concern is the complacent attitude held by most market participants. Many investors believe that the market is invincible, unsinkable. They see every dip in stock prices as a buying opportunity regardless of underlying fundamentals. Blind faith may be rewarded in a rising market, but it will be a costly position when the market changes direction.

Over the past few months we made very few new stock purchases as the risks simply outweigh potential rewards at current price levels. We have been active in the bond arena, filling out the fixed income portion of portfolios. We continue to closely monitor the earnings progress of companies in the portfolios, and are generally very pleased with the results.

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