BALTIMORE, MARYLAND

TUESDAY, NOVEMBER 9, 1999

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In Today's Daily Reckoning:

*** Amazon just keeps rolling

*** Gold is dead in the water

*** And the Socialists are alive and well in Paris

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*** Wow…Amazon, my favorite heart of darkness stock, rose
20% yesterday. The cause? Did the company announce that it
was finally making money? Did it come up with a business
plan to explain how it would make money next year? Did Jeff
Bezos resign? Nope. It just put out a one-paragraph press
release saying it would tell investors [today] about a new
line of business it was getting into. It couldn't make money
in the old lines…so what the heck, try something new…

*** "The Internet average," says my favorite Dow theorist,
Richard Russell, "has gone parabolic. Parabolic is when an
item rises at a steeper and steeper angle until it almost
hits the vertical. A dangerous pattern, but a barrel of fun
while it's going on." My guess: this is the final spike
upwards in the Great Internet Mania. Or…I just don't get
it…more below…

*** The Dow itself, meanwhile, barely budged. Up a little.
As usual, there were more stocks declining than
advancing…1,697 vs. 1,350. The Nasdaq, on the other hand,
had a good day.

*** Even Microsoft, recently added to the Dow, didn't do
badly. It was down…but not much, considering it has been
named a monopolist by a federal judge of apparent sanity.
And a group of jackal lawyers are trying to figure out a
course of action that might pry some big money out of
MSFT…like they are doing with the tobacco companies.

*** Gold is going nowhere…still at 291…waiting for
something to happen…

*** Adrian Day is recommending a company with hotel
developments in Cuba. I asked an old friend, who just
returned from Cuba, what he thought of the place. He's been
going for years and has close friends on the island. "It's
not getting better," he said, "it's getting worse. People
are afraid to have anything to do with foreigners. Castro is
not loosening his grip…he's tightening it."
Still…Castro's death grip will come to an end some day.
This might be a good time for a contrarian to buy…

For information on Adrian Day, write Investment Consultants
International, Ltd., P.O. Box 6644, Annapolis, MD 21401 or
call (410) 224-8885.

*** Today is another anniversary… the Berlin Wall came
down 10 years ago today. Eastern Europeans consider the fall
of the wall "the most successful revolution since the
American Revolution."

*** The Hong Kong government bought shares on the open
market last year to head off a collapse. The move
worked…and the shares rose more than 100%. But now it's
got more than HK$200 billion worth of shares. What to do
with them? It's set up an index fund to offload them back to
investors. So far…it seems to be working…

*** Festivus is catching on even among the earnest,
humorless do-gooders of the Hillarium Clintonicus phylum.
Direct Action Network is calling for a "Festival of
Resistance" in Seattle. The object of their resistance is
the World Trade Organization…which they don't like for
some reason…

*** The park outside my window looks awful. Police closed
the crack house down the street, so the bums seem to be
hanging out in the park. They've made the grass look like a
worn-out carpet.

*** A small item from "Le Monde"…an English journalist was
kidnapped by animal rights activists, then stripped and
branded with "A L F" [Animal Liberation Front?] on his back.
The ALF denies responsibility.

*** And the 21st International Socialist Congress is under
way in Paris. "The progressive left," said Tony Blair,
addressing the assembly of fools and knaves, must reaffirm
"its faith in the market."

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PARSING THE NEW PARADIGM

"The Internet revolution is spawning whole new industries in
software, broadband, narrowband, etc. etc. That is why the
market continues to rise and will continue to rise for years
to come. Sure, there will be corrections, but the major
direction will be way up.

"Before the Internet revolution took hold, there were slow
advancements in the fields of electronics, fiber optics,
communications, integrated circuits and so forth. Now, with
the excitement of the Internet, huge advancements are
happening every day.

Hundreds of new companies with new ideas are forming every
day. Intelligent people from all over the world…now have a
great challenge, and some are getting rich. People are
coming out of the woodwork because they know they are at the
cusp of a revolution. It's about time that erudite people
pull their minds out of the past and see what's really going
on…"

This is a part of a message I received last week from one DR
reader who goes on to suggest that I need to catch up with
my chief competitor, Tom Phillips, whose company now
publishes Michael Murphy's tech stock recommendations. He
ends with, "you do not realize the magnitude of this
technological revolution."

Actually, I'm struggling to understand it. I occasionally
surf the Net. I even look at porno sites…to try to
understand how they work, of course. I labor through those
tedious articles in "Forbes ASAP"…where the writers throw
in every piece of Internet jargon and celebrate every
business fad they can think of. I even toss out a bit of
jargon myself from time to time, just to let people know
that I'm not yet completely petrified in some pre-Internet
rock strata.

But it is no use. I just don't get it. I don't see why
Amazon…whose losses are nearly equal to its revenues…
suddenly became worth $6 billion more yesterday, simply
because the managers, who've failed to make a profit for so
long, say they're going to try something new. Nor do I see
why the Internet is assumed to be a completely positive
thing. Henry Louis Gates, writing in the "Herald Tribune,"
bewails the fact that blacks are not using the Internet as
much as whites. He should be delighted. The Internet, like
TV…which blacks now use more than whites…can be a
terrible time waster. Economically, TV is probably a net
loss to society. The Internet holds more promise. But it is
no panacea.

The New Paradigm actually has two components. The first is
that the Internet will change the world. That, I believe, is
true. The Internet is probably a little like the invention
of the printing press…and a little like TV. People who
want to waste time will find the Internet a useful
accomplice. So will people who want to do something
productive.

The world is, in fact, changing. I've been reading several
books that try to make sense of the changes from a geo-
political perspective. A Russian writer, mentioned
yesterday, named Alexander Zinoviev, believes that Western
civilization is doomed. It is being replaced, he says, with
a Supersociety in which economics is the critical, unifying
component.

Meanwhile, Samuel Huntington has described the development
of what he calls "Civilizations" which are characterized by
religious divisions. He says the world is divided into
Islamic, Christian, Confucian, Jewish and Hindu
civilizations.

My friend Jim Bennett thinks what he calls "Network
Commonwealths" lie ahead…organized along linguistic and
culture lines.

All of them have a shared ingredient -- the Internet. The
Internet makes possible larger, more complex forms of
organization. I can go on the Internet and reserve a room at
a New Zealand hotel. I can talk to people -- when we speak
the same language. I can do business…when we share the
same business culture. I can root around in the Great
Digital Dumpster and find things that are useful or
entertaining.

All of a sudden there is a world of possibilities that
didn't exist a few years ago. No doubt that entrepreneurs,
businessmen, investors and accidental innovators will
stumble upon some big winners. Just as the printing press
enabled Sears and Roebuck to sell its merchandise in prairie
towns and fishing villages…the Internet makes it possible
for Jeff Bezos to sell books to me in Paris…or wherever I
am. Conceding that I don't realize the magnitude of this
technological revolution…I humbly suggest that no one else
does, either. Yet I am perfectly willing to believe that it
is at least a big as the known universe.

But that leads us to the second part of the New Paradigm
concept. The Internet will indeed change the world…but
will it also change the rules by which the world works? From
an investment standpoint, are all the old rules, measures,
precautions, old wives' tales and wisdom of generations of
broken, bankrupted and busted investors all worthless now?
The abiding idea of our reader's comment…as well as the
Nasdaq itself…is that an investment made today in the New
Paradigm businesses is worth more than an equivalent
investment in any other industry at any other time. A tide
of historic proportions is rushing in. You just have to make
sure your boat is on it, they might say.

But why? The only reason I can find to think this might be
the case is the argument, made above, that the speed of
innovation…faster than ever before…makes the old rules
obsolete. P/Es…dividend return…book values…just can't
keep up with the growth rates of the cyber-economy. This is
the argument that Jim Davidson makes, and the source of the
well-known concept that a stock's P/E rate should be roughly
equal to its growth rate.

And yet…as I ponder the implications of this…I can only
think of reasons why an investment in these businesses today
may be worth less than in the past…not more.

The rate of innovation may be a plus for society…but not
for investors. Look at Amazon, for example. Assuming the
company could ever become profitable, the capital value of
the profit depends on how long it keeps coming. Things
happen seven times faster in the Internet world than in the
rest of the world, they say. But this should also mean that
a company's life expectancy is one-seventh as long. Amazon's
current price, based on current projections, only makes
sense if the company earns a profit and keeps earning it for
the next 100 years. Don't make me laugh…What is likely is
that the Internet companies will grow very rapidly. They may
achieve high rates of profitability for a year or two.
Then…they will be replaced by another, superior model.
Investors stand little chance of ever getting their money
back.

Also, Internet companies are the first post-capitalist
businesses. We have already seen what this means to a
company such as Microsoft. MSFT is supposed to be
profitable. But it pays no dividends. Who gets the profits?
Actually, when you take out the value of the stock options
that MSFT has given its employees, the company is operating
at a loss. In the post-capitalist era, labor is more
valuable to a company than capital is. Investors lose
again…

Finally, the whole nature of the Internet economy is one
that devalues capital. Capital is the central feature of the
Industrial Era…when huge amounts of it were needed to
construct factories…and pull raw materials from the
ground…and build railroads and ships. The Internet economy
is different. It emphasizes brainpower, imagination and
entrepreneurial hustle. Yes, it will produce unexpected,
even revolutionary, changes, but, the poor capitalist, the
investor, will find it tough to make money on them.

Until tomorrow,

Bill Bonner

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