The Next Killer Ap

Last week, I was in the Bahamas. The temperature never dipped below 70 degrees. The ocean was crystal clear. The sun was shining. And the people were as friendly as could be. Life was great.

But I wasn’t there to tan, to sit on the beach or vacation. I was there to attend a gathering of the Supper Club: a collection of some of the hungriest, smartest and most creative businessmen and women in the world.

CEOs, CFOs and directors from five start-up companies came to the Bahamas to wow a group of accredited investors in hopes of receiving financial backing for their businesses. They came equipped with an arsenal of new products and technologies that could revolutionize everything from the way we access the Internet to the way we run our cars. It was an exciting couple of days.

Over the course of the conference, I got a rare glimpse into the future. I was introduced to technologies and ideas that could change the way we live in the next couple of years. I saw products that few people in the world have seen to date.

Koolspan: As Mainstream as the Internet

One of the most intriguing companies I saw has invented a product that could make Wi-Fi technology as mainstream as the Internet itself. In case you’re wondering, Wi-Fi technology is the hardware installed in thousands of computers that allows users to access the Net wirelessly. With Wi-Fi technology installed in your PC or laptop, you can access the Internet or your e-mail from anywhere – without having to physically plug in to a network. You just open your computer, log on and surf the Net.

It’s certainly a sexy idea. And with Wi-Fi capability, you would never have to worry about carrying all those pesky wires, plugs and adapters around. Who would miss that…except maybe the people who make the wires and adapters?

But there is a problem with Wi-Fi technology. There is a reason it isn’t mainstream already.

Wireless access to the Net isn’t secure. Any hacker with a high-powered antenna and amplifier could get into your local Wi-Fi network. That’s because there is no way to authenticate who is using a given Wi-Fi network. It’s like giving everyone in the world access to all the data on the Net and telling them not to look at anyone else’s information.

Let’s face it. There are quite a few bad apples out there…and it doesn’t pay to be too trusting. Because of this security problem, some government agencies and high- tech companies have banned the use of Wi-Fi in their offices. For instance, Lawrence Livermore National Laboratory (a nuclear weapons research company) in California has banned the use of Wi-Fi networks on its facilities.

The reason is simple. Any hacker with ties to a terrorist group could in theory sabotage the nuclear weapons research Lawrence Livermore is doing. And the last thing the United States needs is to give nuclear weapons secrets to our enemies.

Koolspan: Your Keys to the Net

Until recently, there hasn’t been a viable solution to fix the security problem. But one company I saw in the Bahamas could change all of that in the near term. Koolspan, an early stage, private company based in Bethesda, Maryland, has developed a highly secure, easy-to-use, scalable solution that could solve the security problem on all Wi-Fi networks.

This company has developed something called Subscriber Identification Modules. They are tamper-resistant, physical tokens registered to a Wi-Fi network that enable users to connect to the Web securely and safely.

The tokens are essentially your keys to the Net. One key is about the size of a small radio. It has two antennae and can dock in your home or office. This is the hub, if you will. The other “key” is a small chip that plugs right into your PC or laptop. Together, these keys create an unbreakable code that secures your specific Wi-Fi network. That means everything you look at online and any information you download is secure and hacker-proof.

Right now, Koolspan is getting ready to beta test its new Wi-Fi technology. If it is successful, the company could make a push to enter the public market. And there’s no telling how much interest it would generate among investors.

Of course, no one knows if Koolspan will be successful or not. Only time will tell. But as an investor, you can’t afford to ignore companies like Koolspan.

Koolspan: Small Companies and the Next Great Invention

It is the small companies on the market, private and public, that are forced to look outside the proverbial box to come up with the next great invention. It’s the only way they can create their own niche in a huge market. No small company in its right mind would try to come up with a new software program to rival Microsoft…or a computer chip to rival Intel’s. They will lose that battle every time.

Instead, start-up companies have to take risks. They have to develop products, technologies and ideas that no one else has thought of. They have to dream big and make those dreams a reality. Inevitably, a lot of companies will fail.

But it’s the handful of companies that do succeed that will lead us into the next bull market. Maybe Wi-Fi technology will be the killer app of the 21st century. Maybe it will be something else. But I can assure you of one thing. It won’t be the Microsofts, the Intels, the Sun Microsystems and the Cienas of the market that dominate once stocks start to rise again. They’ve had their run. They were the Koolspans of the 1980s and `90s. And most investors could kick themselves for missing out on those opportunities.

Now it’s time to move onto the next generation of innovative and hungry companies. It’s time to look at the new products and technologies in the pipeline. And it’s time to start investing in these companies while they are cheap and unknown.

Whether you are a public or private investor, there will be myriad lucrative opportunities around the corner. Don’t miss out.

Yours,

James Boric
For the Daily Reckoning
March 25, 2003

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Were investors right on Friday…or on Monday?

Last week, American troops advanced against the enemy…and stocks rose. People say they hate war, but last week, what was there not to like about it?

Then, all of a sudden, the people we were trying to kill began to defend themselves…and whoops…stocks fell more than 300 points before you know it.

That’s what happened on Monday. Investors panicked. Last week, they were panicking into stocks; they were afraid they might miss the post-war rally even before the war began. But yesterday, they began to wonder if the post-war rally hadn’t already ended.

According to tenured professors of finance, investors were right on Friday as well as Monday. They are always right, say the intelligentsia; the market is always right – it reflects the will of the majority…the votes of the vast lumpeninvestoriat.

As Alan Greenspan explained in June of ’99:

“Bubbles generally are perceptible only after the fact. To spot a bubble in advance requires a judgment that hundreds of thousands of informed investors have it all wrong.”

According to the Efficient Market Hypothesis, EMH, and the Theory of Democracy, TOD, the heaving masses can’t have it all wrong. In open markets as in democratic political systems, there is no higher authority than your nitwit neighbors. If the majority thinks mountain hooch is as good as Dom Perignan…it IS as good. If they think a war is honorable, it must be so. And if they believe that one dollar’s worth of earnings will be worth more when Saddam’s body reaches room temperature…well, they must be right about that too.

The trouble is that something inevitably goes wrong, and the poor schmucks change their minds!

What could be going wrong with the post-war rally? We have said it so often that the word is beginning to sound odd. Like a man who thinks too hard when he walks down a flight of stairs…we stumble over it. Dde..uh..bbbbb…dt. There!

What is this strange 4-letter word that threatens to stain the U.S. currency in its hour of glory? Debt. Debits. Obligations. Mortgages. Credit card bills. Deficits.

“My instincts, refined by fifty years of experience in finance,” explains Leon Levy in his marvelous memoir, The Mind of Wall Street, “tell me that we are in but the third act of a five-act Shakespearean drama that portends a bad ending. Stock prices may have plummeted from their dizzying heights, but neither consumers not investors have yet realized the perils of the suffocating pall of debt hanging over the financial world.”

Cannot the voters just cast their ballots and make the smoke go away? All $20 trillion of it? If they all join hands and buy an SUV, as Fed. governor McTeer suggested, couldn’t they stimulate sales and business investment despite it? If they buy stocks, wouldn’t that cause a new bull market, no matter how much ddddebt is in the system? And if they all reassure each other that what their troops are doing in Iraq will make the world a safer, better place – will it not be so?

Oh, dear reader, if only it were so! We were not present at the Creation…and no one asked our opinion. Perhaps we would have suggested an adjustment: a world in which the majority gets what it wants, rather than what it has coming.

Helas…that is not the way things usually work. And, while we still have not mastered the trick of being able to look into the future, we advise readers to exercise caution.

Over to you, Eric…

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Eric Fry, reporting from New York…

– The Dow followed up its best one-week performance in 20 years with its worst one-day sell-off in six months. The blue chips tumbled 307 points to 8,215, as all 30 of the Dow stocks fell by at least 1 percent. The Nasdaq composite fell 3.6% to 1,370.

– The rout in the stock market sent investors scurrying back to the perceived safety of U.S. Treasury bonds. The benchmark 10-year note jumped 1-4/32 points, pushing its yield down to 3.96%. Oil and gold also attracted safe-haven buying. Crude soared $1.69 to $28.60 a barrel, while the yellow metal gained $3.40 to $329.50 an ounce.

– “Volatile” does not adequately describe the trading action in the stock market these days. Eight straight winning sessions added nearly 1,000 points to the Dow Jones Industrial Average, which emboldened the bulls on Wall Street to emerge from their bunkers and sound the all- clear. Then, suddenly, a barrage of sell orders rained down from the sky to inflict heavy casualties on the major averages.

– Most investors have no idea whether to run and hide or keep on fighting the fight. Hiding out in cash and missing a major rally is no fun. On the other hand, jumping in to buy expensive stocks, simply because they have rallied for a few days, doesn’t seem terribly prudent. What’s an investor to do? Hiding out is not a bad choice. No less an investment luminary than Warren Buffet suggests exactly that course of inaction at the moment. He advises a sort of tactical sloth. “Occasionally, successful investing requires inactivity,” says the Oracle of Omaha.

– We would agree with Mr. Buffett. And yet, there may be one or two “chicken longs” in the stock market worth considering. A chicken long, loosely defined, is a stock that is likely to deliver some respectable gains if the general market continues to rally, but is unlikely to inflict sizeable losses if the general market drifts lower once again.

– Many U.S. oil and gas stocks seem like reasonable candidates for chicken longs…or at least that’s the informed opinion of Greg Weldon, editor of Resource Trader Alert. Most energy shares have not kept pace with either the general stock market trend or, more importantly, the strongly bullish oil and gas price trends. As a result, the stocks seem very cheap relative to their likely earnings prospects for 2003 and beyond. For this reason, Weldon currently recommends several selected energy stocks, and recently added Valero Energy to the list [Editor’s note: for details on Weldon’s strategy, see:Resource Trader Alert].

– It seems that Weldon has some expert company in the person of Tom Petrie, chief executive of Petrie Parkman, an investment bank specializing in energy. In this week’s issue of Barron’s, Petrie not only echoed Weldon’s bullish view of the energy sector, but also named Valero Energy, specifically, as a good stock to consider.

– “Over long periods, the shares of oil and gas producers tend to shadow trends in the underlying commodities,” the Barron’s story observes. “Yet since early last year, energy stocks and oil prices have gone their separate ways. Oil prices doubled to nearly $40 a barrel on expectations of war in the Middle East and disruptions to oil supplies. But the shares of U.S. integrated oil and gas concerns fell about 15% in 2002…”

– Therein may lie an opportunity. “Petrie expects oil prices to average $25 to $30 a barrel this year,” Barron’s notes, “with the high end of that range more likely. The war will disrupt oil fields and supply lines in the Middle East, he notes, even as the giant fields in Alaska and the North Sea mature. Moreover, global inventories of crude and refined products are low, while demand worldwide is growing.

– “Natural-gas prices, which tend to fluctuate with crude, also are likely to exceed current market expectations of $3 to $3.50 per million British thermal units. Petrie sees gas prices of $3.50 to $4.50 per MMBtu, rising to $4-$7 over the coming decade.” – Petrie’s predictions would be great news for exploration and production companies. But he also likes refiners like Valero, a stock that Petrie dubs the “gold standard” of refiners. “Gasoline fundamentals, in general, are stacking up in the refiners’ favor,” the Barron’s story notes. “U.S. gasoline inventories are approaching an eight-year low, while demand is nearing an eight-year high. That’s because summer vacation in the U.S. is apt to mean a road trip in this year of global unrest, and what’s on the road – a fleet of giant sport-utility vehicles – is guzzling more gas than ever.”

– Despite the bullish outlook for gasoline-refining margins, however, Petrie says that refining stocks are trading for only about seven times Petrie Parkman’s 2003 estimated earnings.

– Hmmm…that seems like a bet that even a chicken might take.

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Back in Old Europe…

*** What are the insiders up to? Barron’s reports the officers and directors of the 10 leading tech companies – firms such as Microsoft, Intel, Qualcomm, Dell and Oracle – are remarkably bearish. While the investoriat buys tech stocks, the people who know the industry best are unloading. “Since the start of this year,” continues the Barron’s report, “in the aggregate, there has been a single, solitary purchase of 3,600 shares by those insiders. However, over the same stretch, those worthies were responsible for 112 sales, in the process dumping 33.9 million shares of their own stock. Put another way, the ratio of shares sold to shares bought by the so-called smart money in the 10 biggest tech and growth companies works out to a staggering 9,407 to 1.”

*** While U.S. troops use force in the Middle East, fraud is the weapon of choice for the homeland front. Reporters are not supposed to call the war against Iraq a war against Iraq. Nor are they supposed to mention an ‘invasion’ of Iraq. It is not a war or an invasion, of course, because that would require a declaration of war from Congress! Instead of fighting a war against Iraq, U.S. troops are merely trying to ‘disarm’ the country and bring liberty to its people.

There is nothing so entertaining in politics as bald-faced lying. Clinton was a master. But this Bush bunch are not bad either.

*** ‘Shock and awe’ is a jolly little fraud. The Bush team did well to avoid the common term: blitzkrieg; the krauts gave it a bad name.

And here, we dip into military history, dear reader, with an ample warning: history does not repeat itself. That would be too easy. In an historical example, any resemblance to any person living or dead, is pure coincidence. And, as the SEC reminds us, past results may not equal future results. But here at the Daily Reckoning, we like history they way we like a good stripper. She teases us…even haunts us a bit…revealing just enough to be provocative.

The Wehrmacht’s first ‘shock and awe’ campaign against France went better than anyone expected – especially the French. Encouraged, Hitler turned to the East and launched his blitzkrieg against the Soviet Union. Attacking forces had a large technological superiority…and also believed that the enemy would give up. The Soviet Union, in 1939, was run by a monster worse than Saddam, who was responsible for the deaths of millions of his own countrymen. Surely, the Russians would not fight to protect him, said the Wehrmacht’s penseurs.

Hitler’s shock and awe campaign, led by Friedrich von Paulus, well at first. But in Stalingrad, the ‘awe’ went out of it. Blitzkrieg didn’t work in cities. Soviet troops had to be routed out of each and every building…at terrible cost. Finally, while the Germans were busy exterminating enemy soldiers block by block, Soviet troops surrounded the entire city. Von Paulus’ 300,000 troops found themselves cut off from supplies; they were forced to surrender and most were exterminated.

*** American forces cannot lose in Iraq. But they are expected to win so easily…that if they get bogged down in Baghdad, it will be a defeat of sorts. Trillions of dollars – held hostage by friends and foe alike – might be liquidated.