Internet Whiplash Jude Wanniski April 20, 1999

Just get used to the Internet whiplash. It will be with us for at least the next four or five years, before the markets can get a better handle on the long term. Think of a how a whip is snapped with the flick of the wrist, and how the whip end has the biggest swings and makes the loudest noise. The stocks closest to your hand are the most secure, so their swings are narrow. When the market must discount fresh news of long-term insecurity, it snaps, which we suggested last week was occurring because of the implications of the Balkan crisis on public finance, "Taxes and Bombs, 4-16-99." Because the "invention" of the Internet is equivalent to the invention of something as basic as the wheel, not the internal combustion engine, the market has an extremely tough assignment in putting values on the infant enterprises. The trick in playing the Internet stocks lies either in guessing at the tops and bottoms, or not worrying as much about the swings as understanding the potential of the new industry and the many initiatives within it.

Financial journalists continue to wonder how it can be possible that Price Earnings ratios on the Internet stocks can approach infinity when a search of the market going back a hundred years shows no parallel. Holman Jenkins, Jr., of the WSJ editorial board is among the savviest of commentators on the business scene. We posted his column last week in our client room "Recommended Reading" site, as he introduced the idea of market inefficiencies in the practice of telecosm companies issuing convertible bonds. He warned that investors need fear the monopoly money at play in the stupendous caps of many Internet stocks. If they never reach the price at which conversion to equity can be forced, the fledgling firms will be bled white with debt payments. Interesting stuff, but Donald Luskin, a West Coast Polyconomics client, answered in a letter to the editor Monday that the market is perfectly efficient in seeing such bonds as having an embedded call option which has a value that reduces the interest rate that must be paid on the bonds. Yes, there remain the risks associated with equity and debt in this whiplash world, but it can all be explained if we think it through.

In Monday's WSJ, Jeremy Siegel of the Wharton School made the case against the Internet stocks, and it probably had some effect in kicking NASDAQ down the stairs, with its second biggest point drop ever. The Journal promises the case for the Internet next week, but if you don't want to wait, check out Rich Karlgaard, publisher of Forbes, in his May 3 column, "Ten Laws of Infinity and Zero." "The technologies of chips and fiber are racing toward infinite capabilities at zero cost. Do they ever reach absolute infinity and zero? Obviously not. But if you round them off, they do. That's why smart entrepreneurs are even today launching enterprises and crafting business models around the new world of infinite and zero." Karlgaard's "Ten Laws" may not survive as long as the tablets from Mt. Sinai, but the entrepreneurial culture at Forbes is where we are more likely to find such commentaries. Try as they might, Fortune and BusinessWeek still represent the interests of the more secure companies and tend to be a step behind the race to infinity and zero.