Friday, November 21, 2008

Unwound

A recent headline caught my attention among the many declaring one type of doomsday, never-before-seen stock or bond market precedent. It read “Dot.com Era Unwound.” Having been through that frothy period, I would have to agree it needed some unwinding. However, I hesitate to conclude that the Internet has made no contribution to productivity such that stock prices should return to pre-Internet levels.

Indeed that is nearly what has happened - or has it?

In 1994 and 1995, the World Wide Web was first beginning to gain recognition and interest among consumers. Many including myself established their first Internet and e-mail accounts at that time. As the years went by it did not take the intellect of the rocket scientists who came up with the WWW concept to figure out what a time and expense saving tool it could be. Name the business or communication function - there would be an application.

Today we cannot fathom a world without Internet connectivity. We do our banking, make plane reservations, get movie tickets, buy clothes and books, find a doctor, and share our family photos - all on the Internet. Consider for a moment the costs you might incur if this platform was not available anymore! My budget would be decimated….not to mention that my quality of life would diminish considerably.

Yet here we are with the Dow Jones Industrial Average below 8,000. The Dow was at 4,000 in 1995, just before the Internet as a business platform took off. By June 1997, this stalwart measure of the U.S. economy and American wealth had soared to 8,000. Admittedly, the Dow was a bit ahead of itself in terms of what the Internet could provide as a communications medium and commercial platform. Nonetheless the promise of more to come was evident to those with a vision of new business, education and communications processes.

The 8,000 index level has been breached four times since that historic period in mid 1997 - August 1998, September 2002, February 2003 and November 2008. Each eliminating, as that headline suggested, some but not all the value gains since the mid-1990s.

It is illustrative to note the price of crude oil at each of these data points, particularly since petroleum is such a critical element of our economy. In June 1997, crude oil was commanding $17.20 per barrel. By August 1998, the price had declined to $10.20. The savings was short-lived as the price rose to $26.28 by September 2002. Crude oil prices gained speed in the next six years, reaching $32.13 the next time the Dow dipped below 8,000. Crude oil rests near $50.00 per barrel this month after that phenomenal spike to $147.00 in July 2008. The comparison helps to illustrate that the Dow index is not securely linked to commodities prices.

I was surprised to see the Dow breach the 8,000 level this month as I had viewed the index values below 8,000 as pre-Internet values. However, fear and uncertainty are powerful forces that can lead to conclusions on value that are as disconnected to fundamentals as the Dow is to the price of crude oil.

Americans use the Internet daily for the most personal and the most routine parts of their lives. It is a tough platform to unwind. Investors would do well to remember that the value the Internet technology has brought to our economy remains intact even if the imprudent and greedy management of some of our most important industries (read financial services and automotive) has led to a crisis of confidence.

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