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" The Nasdaq Phenomenon"

By Suhail Abbas
Apr 24 - 30, 2000

After an absence of almost two years since I last wrote for PAGE, I look forward to this opportunity to author a series of columns on International Finance & Markets. As always, your feedback and comments are appreciated.

In the last three years, no development has captured the imagination of investors and savers all around the world more than the spectacular run-up in the stock prices of technology shares, especially those listed on the Nasdaq market in the U.S. The proliferation of the Internet and the ease with which anyone from any corner of the globe with even the smallest amount of investable assets can open an account with a broker and trade has not only fuelled the rally, but has made the daily gyrations of the market a truly global topic of discussion. Indeed, it has been virtually impossible to go to a social gathering in most cities of the world (including Karachi) where the dominant topic has not been about the latest 'hot' stock to buy, or people bragging about their latest 'killing' in the market. Stories about overnight millionaires were almost commonplace at one point. ( To give just one example, a company called Xcelera went from $2 a share to $225 from July to this January, turning a hypothetical $10,000 into over US$ 1 million in just 6 months.)It has been noted that CNBC (the 24 hour business news channel that can be seen around the world) has become the 'MTV' of the new generation.

In the U.S, the level of individual interest in the stock market has become so high that it is abundantly clear that the overall fortunes of the entire economy now are inextricably linked to how the market performs. Consider that this giant economy is growing at a sizzling rate of more than 6% so far this year, spurred on by consumer spending due to what is called the 'wealth effect' (i.e people feel richer because their investments are in such good shape, so they spend more). The giant budget deficit of the 1980's has become a giant surplus due to the extraordinary amount of capital gains tax (taxes paid by investors on stock market profits) that have arisen due to this prosperity. The pick-up in garment exports from Pakistan to the U.S can also be directly tied to these developments.

As many of you will no doubt be aware, this euphoria was rather violently interrupted several weeks ago when the market started to top out, culminating in a massive sell off the week before last when the Nasdaq Index fell to a low of 3100 from its high of over 5000 set in early March. Even this almost 40% decline in such a short period of time masked the brutality with which individual 'high-flying' stocks were brought down to earth, some stocks falling as much as 90% in a matter of days. The cause: a slow realization that prices had become unrealistic, a huge new supply of stock coming onto the markets, a Central Bank that is very keen to take liquidity out of the system due to worries over the inflation threat that this massive and sudden wealth creation would bring, and the inevitable 'herd' instinct of investors who all decided to try and sell what they could at the same time.

To give you some current perspective on the current investment environment and the outlook for the "Internet Revolution", consider the following:

Firstly, the last major economic 'paradigm shift' came with the creation of the airline industry, when all of a sudden the world became a much smaller place and which opened up all sorts of international business and commercial opportunities. In its infancy, there were in excess of 100 different airlines just in the U.S. Today, there are a mere handful, and the cumulative profit of the ENTIRE airline industry over its ENTIRE history is exactly zero.

Secondly, one often quoted analogy says that during the California Gold Rush of the 1800's, when people flocked from all over to dig up the earth in search of instant wealth, the only people who ended up making any money were the people who sold the picks and shovels to the starry-eyed prospectors.

The implications, if anything is to be learnt from history, is that:

a) most of the "dot.com" companies which have risen to enormous market valuations will eventually be worth zero and

b) the real money from the internet revolution will be made by those companies providing the key pieces of the Internet's 'Infrastructure' i.e the basic technologies that make it faster and simpler and more efficient.

The secular case for technology investing remains unchanged, and as with all markets throughout history, the very best companies and the very best ideas will rise to the top again.

The author is the Managing Director of GNP GLOBAL ADVISORS, an international investment management company. Anyone interested in further information should contact information@pak-economist.com