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To: Glenn D. Rudolph who wrote (32069)	1/1/1999 1:13:00 PM
From: H James Morris	Read Replies (2) \| Respond to of 164684

Glenn>> I believe these will be the last fools.<< Its been an investors proverb for centuries. "When the last of the little guys looking for gold come in. Its time for the pro's to leave".

To: Glenn D. Rudolph who wrote (32069)	1/1/1999 3:02:00 PM
From: Rob S.	Respond to of 164684

Many investors and analysts have expected the "January effect" to lift the tech sector even higher. But if you look back on the charts of the sector for the past 10-20 years, (or as long as techs have been market leaders), you will find that in the years when NOV-DEC were up the January effect either didn't materialize altogether or was muted. In almost every case the techs were down considerably by the following summer. As I see it, there are a few factors that most affect these Internet stocks: 1] New investors coming into the market and doing on-line trading. 2] The incredibly rapid growth of the Internet and on-line sales. 3] Because of the growth of the e-commerce having reached "critical mass" it has captured the minds of the media and the public which has added greatly to the awareness of anything tagged .com. 4] The fact that the Internet commerce market is in the very early initiation and growth phase. Despite the fact that the market is maturing in "Internet time", it is still at the phase in which competition is hardly focused on as a primary investment criteria. Investors either don't know or don't care much about normal measures of risk v. reward potential because they are focused almost entirely on the impressive sales growth figures and overall market potential of on-line sales. 5] Announcements of new market relationships, product ventures, acquisitions, stock splits, new issues, etc. Have added to the flurry of activity in the sector. 6] The brokerage and investment banking industry has made hundreds of millions from the enormous sums traded in these stocks. There is an inherent bias to favor the prospects of these stocks beyond prudent speculation. 7] Overall market liquidity. 8] The actual operating results of the companies and how that compares to market expectations. This is important but it is a relative measure - expectations are stretched so far into the future for most stocks in the sector that it has largely become guess work as to how the companies will end up. So how do you figure when the momentum will change? My guess is that when the majority of these influences have started to lose momentum then the stocks will "correct": 1-2} New investors will continue to come into the market in 1999 but the big Christmas PC buying season has about run it's course. The influence of the saturation of Internet connection to the aprox. 400 million existing computers is ready to become a factor this year, IMO. In 1999 fewer new Internet users will also be new PC users rather than existing PC users who have gotten connected. Out of the aprox. 120 million new PCs sold each year about 55%-65% are sold as replacements to existing PCs. As the base of existing PC users has quickly become saturated, the "total available market" for new Internet connections is reduced and the robust market growth we have experienced goes down. 1998 was also the year of acceptance of e-commerce. People overcame their security fears and something like 60% of users bought something on-line. Those users will go on-line to buy even more stuff in 1999 and will be a major factor for growth. I don't have a graphical analysis of the trends and can't predict exactly when the growth of new users and increased buying by existing users will decelerate enough to impact market expectations. A thorough analysis of these factors would also include the dillutive effects of new competition. IMO the trend toward lower growth rates will become apparent in 1999. This is expected by most analysts but not appreciated by the average investor. The explosive growth of on-line sales will continue during 1999 - I don't know the growth trend well enough to judge when it will become less of a factor. Likely it will continue to add "irrational exuberance" to the Inet market. 3} The awareness of the Internet stock craze has reached almost epic proportions. This has ridden on the strong growth of the gift-giving season in which arms length purchases are very appropriate. "Let me get that 'click' for Aunt Sue, that 'click' for my brother . . . and have these things wrapped up and delivered. That saves me a few trips to the malls and the post office. Great!" IMO, as that factor is largely taken out of the equation, the market for e-tail stocks has less to hold it up. 4} When will investors attention shift from the Internet's incredible growth to a more realistic understanding of competitive factors and valuations? I think we will see the market come down to some measure of reality by this summer but don't expect the darlings to stay down. By next fall we should se the stocks up again. Guessing that far ahead is more risky. 7} The overall market liquidity has been affected by the robust US economy and a rise in real wages v. inflation. It has also been affected greatly by the FED policies that have pumped money into the economy in order to help out failing foreign economies. The FED has been able to keep the pump primed because of falling commodity prices. Signs now appear that the FED is likely to keep interest rates the same or might be forced to raise them by the end of next year. IMO, the increase in liquidity that has helped to move up the stock market will be a much lesser factor, if not a negative one, in 1999. 8} IMO, the operating results of the Internet darlings will need to strongly beat current expectations in order for these stocks to continue to move up. Just meeting expectations probably will lead to a downturn of another 15%-40% by this summer. Any analysis of the Internet sector must take in more than the performance of the companies themselves. Just how these factors play out is still a lot of guesswork, but at some point the momentum will turn.