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The King IS Naked
by Professor von Braun
May 22nd, 2000
The hi-tech internet boom that took the Nasdaq to record levels earlier this year (and helped the Nikkei to recover for a while) is now beginning to be seen for what it was - "much ado about nothing". Certainly it is unlikely that the 5000 level will be seen again for some time.
The rally contained all the elements of a speculative blow off top. Surging share prices, companies with no profits, business models that could be duplicated by anyone, dubious cash flows, ridiculous valuations and little chance of economic survival.
Now it is being seen for what it is. A market phenomenon that has no substance, in short the King is naked. That's naked as in no clothes whatsoever. Regardless of the CNBC spin, of "brain dead" analysts buy recommendations, of Wall Street hype, the often touted "new" economy substance is simply not there.
What is a tad amusing is the news out of the UK that an online e-tailer called Boo.com has closed shop and called in the receivers. Can you imagine any one calling a business "boo.com". I guess it got booed. Too many boo's, not enough customers. Perhaps it should have been called "booze.com" and if it could have figured out how to dispense liquor over the internet it may have had a chance of surviving.
How do you explain to your wife that the money you "invested" (one has to use that term loosely) in "boo.com" is gone? Booed out of existence by a lack other investors. Oh well!
Meanwhile back in the land of delusions, one has to ask what other online businesses are facing the same fate? Rest assured "boo.com" will not be the last failure in wonderland. More will follow as the growing awareness that the king is naked begins to spread, despite what Maria the Bartiroma and her highly paid associates have to say. Buy the dips? I think not. Sell the rallies might be a much safer strategy as the "who's next" game begins to gain momentum.
Also in the news this week was reports of lay-offs and redundancies in the internet world. How do you become redundant after six months on the job? What has changed? What about my stock options? One can imagine the hype that was used as new employees were no doubt promised that the dot coms were going to take over the world. "We are the fastest growing businesses in the world today, this is the place to be, stock options will make you rich, etc, etc". Then six months later you are redundant? No job, no options, in debt and maxed out on your credit cards. Boo!
Speculative blow offs, historically, do not end well. The participants tend to suffer from a shortage of shirts, a change in lifestyle and the new BMW suddenly becomes a 1989 Toyota.. The participants end up working in the service industry, waiting on tables, washing dishes and their cell phones no longer work. Often they change neighborhoods as well, having suddenly developed a preference for a less affluent area. Some even resort to residing at the family home, moving back in with Mom.
Meanwhile, back in the forgotten land of alternative investments, the precious metals market, not much happened there. No reported "boo.coms" there, even though the BOE sale is set for next week. The Swiss have been remarkably quiet, as has the gold market. So far the proposed sale of Swiss gold either has not actually happened, or if it has, it has been well absorbed by the market. That would be nice.
Is this market setting itself up for a rally? Trading in the $275 - $290 range can't continue forever. A break out appears possible here, with the odds favoring the upside as the volatility in both the currency and stock markets continues. However should gold rally one would need to keep an close eye on the mining companies. A rising gold price will cause problems for miners with large hedge books. Rising fuel prices will cause problems for those that are not hedged.
Now if Newmont had purchased it's diesel fuel from "boo.com", the e-tailer then perhaps could have survived. Or the Swiss could have done the decent thing and sold their gold at "boo.com's" website, along with a selection of perfumes, cheese and chocolates.
While the bulls and the bears continue to activate strategies that reflect their various positions, whether it's "buy the dips" or short the dot coms, the individual investor has, as an option, the ability to go neutral and buy physical gold. The advantage of doing this is that you remove yourself from the market volatility that is currently present. It is impossible not to place your accumulated wealth at risk. Risk is always present. However buying physical metal at these levels is about as close to becoming neutral as one can get. Gold has no other liability attached to it, its value is in what it is and it does not have to be watched every day to see if it's grown.
Neutrality and gold go together, a fact that the Swiss now seem to have forgotten. Playing the currency and stock markets requires you to use a liability to play. Whether it's the US $, the Euro, (how low can a Euro go?), the Japanese yen, the NZ $, (now at a 15 year low against the US $) or whatever. These funny pieces of paper do tend to lose their value on occasion and given the size of the derivatives market, believed to be in excess of 88 trillion $'s, who knows what impending disaster resides in some far away tax haven, waiting to appear. Such an appearance could occur faster than the latest computer virus.
Owning physical metal at these price levels, even though downside potential remains, certainly looks attractive. Continuing to hold liabilities that have untold paper contracts, that are not understood when it comes to assessing the risk, attached to them may be on a par to downloading the "Love Bug" virus.
The Prof can be contacted by email at email@example.com
Copyright by Professor von Braun. All Rights Reserved. Reprinted at USAGOLD by permission.
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