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Harry Newton's In Search of The Perfect Investment Newton's In Search Of The Perfect Investment. Technology Investor.

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8:30 AM Tuesday, June 14, 2005: The Euro has dropped to a nine-month low against the dollar. It's down to $1.22 from $1.35 at the start of this year. This reflects less on the U.S.'s brilliant economic management and more on the rigidity of rules affecting business in Europe and resulting poor economic performance. Unemployment is over 10% of the workforce in Germany and France. Italy is in recession. The European Central Bank may cut interest rates -- for the first time since 2003.

Europe will be a little cheaper this summer. The bad news is that cheap fares (especially in and around the U.S.) are filling planes and will create massive delays. Take books, food, water and pillows.

An echo of a boom? The Economist has a neat piece. It confirms my increasing belief that Google (GOOG) is way overpriced.
Dotcom shares are booming again, with Google leading the way. Is this stellar performance justified? Or should investors worry that another correction is on the way?

REMEMBER What about Do or ring any bells?, perhaps? The casualties of the dotcom bust have long closed or changed hands since the heady days of the late 1990s turned to the crash of the new millennium. But of the internet firms that survived the demise of the “new business paradigm”, many are now enjoying soaring market values as investors regard online enterprises with renewed confidence. And new firms are coming to market too, amid no small amount of excitement: for instance, PartyGaming, a gambling website, is working on an initial public offering (IPO) that values the firm at about $10 billion. Is this a new fit of over-exuberance?

This week Google’s share price rose to take the firm’s imputed market capitalisation to just above $80 billion, pushing the internet search engine past Time Warner to become the world’s most valuable media company. Its shares are now worth $285 apiece, three times more than at its IPO last August. That Time Warner has been overtaken by an online upstart is symbolic for the growing band of sceptics who detect a return to the overvaluation and hype of the tech-bubble days.

Time Warner was involved in the most disastrous merger of the period, when in 2000 it joined forces with America Online. Fans of the deal said that the brash AOL would drag the staid but solid media giant into the new business age. But the deal failed to live up to expectations. The renamed AOL Time Warner’s colossal valuation melted away as the bubble burst. A couple of weeks ago, Time Warner (tellingly, the AOL has gone from the name) was said to be considering a spin-off of its underperforming web-based partner, so bringing the ill-fated venture to a close.

But those who would draw parallels between then and now should note that much has changed since the tech revolution faltered five years ago. Investors, battered by the stockmarket crash that accompanied the demise of the dotcoms, are now a little wiser. Certainly they are unlikely to hand over considerable sums of cash to any online “entrepreneur” with a half-baked business plan. The hype and hysteria that accompanied every new scheme to build market share through first-mover advantage is over.

These days, the online giants such as Google, Amazon, MSN, Yahoo! and eBay operate in a different business climate. Since the bursting of the dotcom bubble consumers have logged on to the internet in increasing numbers and have become more comfortable conducting business online. In 1999, some 150m people worldwide used the internet; today, over 1 billion use it regularly. And those who venture into cyberspace are increasingly willing to spend money there.

Overall, Americans, the most enthusiastic adopters of e-commerce, spent just over $69 billion buying things online in 2004. According to emarketer, a research firm, that figure is set to double to $139 billion by 2008. Similarly, those firms that depend on advertising have enjoyed growing revenues. Last year, internet-advertising revenues in America hit $9.6 billion, up from $7.3 billion the year before. However, despite early predictions that the web would be a free-for-all, the lion’s share of this market is now in the hands of a few giants, with the top ten commanding 71%.

So in many ways the hopes for the internet of the dotcom boom years are now coming to fruition. Yahoo!, which peaked at a market value of $125 billion in early 2000, had slumped to $4 billion by late 2001. Now it is worth $52 billion. And like numerous other internet firms that were once worth a fortune despite making no money, it is now actually turning a tidy profit: $840m after tax, on revenues of $3.6 billion, in 2004. Google itself enjoyed revenues of $3.2 billion last year and made a profit of $400m. But they are still far behind the biggest “old media” companies. Time Warner’s revenues for the year were $42.1 billion, for instance, and its operating profits $6.2 billion.

Despite the obvious dissimilarity between the performance of today’s online leaders and older, more mature firms, the rapidly improving financial performance of the dotcom survivors has persuaded investors to open their wallets. This has pushed the Dow Jones internet index up by 10% in the past two months (see chart). Google’s worth could top $100 billion sometime this year if the trend continues.

But investors with stakes in big internet companies, and Google in particular, might pause for thought. Although revenues and profits are rising steeply, valuations are rising disproportionately quickly—suggesting that another correction is likely at some point. Also, advertising revenues on the web—on which firms like Google rely heavily—are not growing as rapidly as online sales of goods and services. And although Google commands over half the worldwide market for online searches, its share is falling.

In response to such threats, the online giants are encroaching on each other’s territory. The leading auction site, eBay, recently bought, a shopping comparison site, a service already offered by Yahoo! and Amazon. Google, Amazon and Yahoo! also host auctions, though they have some way to go before posing a serious challenge to eBay in this business (see article). And while profits are growing fast, other new competitors may be tempted to join the fray—the barriers to entry in most online businesses remain low.

Undoubtedly, today’s big online ventures are on a surer footing than those that fell in the last dotcom crash. They are, unlike most of their erstwhile but now defunct peers, being run like proper companies. And there is a bigger pool of customers willing and eager to pay for their services. “Google” has even entered the language as a useful verb for describing a web search. For now it seems inconceivable that it, or a big competitor, might disappear. But there is little doubt that Google’s valuation looks suspiciously frothy. Do investors in internet stocks really need reminding that what shoots up can just as easily come crashing down?

These days you can make more screwing up: Actually it's not true. Philip Purcell who messed up Morgan Stanley, doesn't have a severance package. But he must have figured his days were numbered last year when he upped his 2004 compensation by 2004 and awarded himself (oops, the board went along) huge stock and option grants of $48 million plus. Jealous, don't be. In adition to the $62.3 million, he's only getting a pension of $1.27 million a year for life -- his life, not Morgan Stanley's life.

Morgan Stanley (MWD) under Philip Purcell.

This stock is not worth buying until we find out who will replace Purcell. The Wall Street Journal reports Morgans is having huge difficulties finding a replacement. My personal recommendation: Dan Good, who long ago ran A.G. Becker, an ultra-successful Chicago investment.

At least someone loves this weather. A young editor, Mark Young, who once worked for me, found slim pickings in the magazine business during the Tech Wreck of 2000 to 2002. He went to ice cream school and opened an ice cream store in New York. He loves his new business. Yesterday I lamented the yuchy weather we've been having. Mark emailed me:

Humidity is great!! We sell a shitload of ice cream when it is hot, sticky and disgusting. Bring it on!!

Eat more bananas: Bananas contain a natural chemical which acts as a mood enhancer. This same chemical is also found in Prozac. Bananas are cheaper and probably better for you. Don't they have potassium?

How To Duck Cell Phone Taxes: Forbes has a piece on how to save a few dollars on your cell phone:

Cell phones have not been proven to cause cancer, so why exactly are they taxed like they do?

Steve Largent, head of the main cell phone lobbying group, recently complained to Congress that the average 16.8% in combined federal, state and local taxes his customers pay has traditionally been levied on products like cigarettes. Americans pay an average of just 6.9% for typical non-carcinogenic goods and services.

Exorbitant cell phone taxes may seem like one of life's annoyances you just can't do anything about. In fact, as I recently discovered, you can.

So far, cities and towns have gotten away with treating the country's 182 million cell phone subscribers as easy marks. Cell phones taxes increased nine times faster than taxes on other goods and services between January 2003 and April 2004, according to one industry study. In a particularly egregious case, Baltimore just hit its residents with a new $3.50 per month tax.

But ever-higher cell phone taxes are likely to have another effect: More people will go to the effort of dodging them.

That's what I did. A year after moving to Los Angeles from New York, I was reading my Verizon Wireless bill and noticed I was still paying New York taxes. New York, as it happens, has the highest state and local taxes in the country: 16.2% (if you add federal charges, it's 22.2%). I estimated I was giving my former city and state about $75 per year they didn't deserve.

When I called Verizon Wireless, a joint venture of Verizon Communications (VZ) and Vodafone ( VOD), to complain about the tax screw-up, I learned something odd. The operator told me that as long as I kept my old New York number, I would have to keep my old New York tax bill. It didn't matter that I had switched my billing address to L.A., she said, taxes are linked to area codes. If I wanted to pay L.A. taxes, she suggested, I needed to switch my phone number to an L.A. area code.

That gave me a better idea. There are some states, blessedly, that don't soak their cell phone-using residents. One of those, I happened to know, is Idaho--a state I visit regularly. (The Gem State has a 2.2% tax rate, I would later discover, the fourth lowest in the country.) Well, I triumphantly informed the operator, I am moving to Idaho.

Since it was clear I'd have to lose my coveted New York number to avoid Verizon-levied taxes, I changed to an Idaho number, provided an Idaho address, then promptly turned around and requested paperless billing, which I paid from my Los Angeles address.

Since my fake move, my monthly bill has shown a tiny Idaho tax of about $1.15 per month. At that rate I figure I am saving about $60 per year. If I was a bigger cell phone user, I would have saved far more. (I learned later, if I wanted to be a real cheapskate, I should have "moved" to Nevada, which holds the record for the country's lowest cell phone taxes at just 1.1%.)...

Why do we have to speak English?
A U.S. Navy Admiral was attending a naval conference including admirals from the U.S., English, Canadian, Australian and French Navies.

At a cocktail reception, he found himself standing with a group of half dozen or so officers that included personnel from most of the countries.

Everyone was chatting away in English as they sipped their drinks, but a French admiral suddenly complained, whereas Europeans learn many languages, Americans learn only English.

He then asked: "Why is it that we always have to speak English in these conferences rather than speaking French?"

Without hesitating, the American Admiral replied: "Maybe it's because the Brits, Canadians, Aussies and Americans arranged it so you wouldn't have to speak German."

The group became very quiet.

Rewriting the code: I rewrote some code on this site. My column should now load faster.

Harry Newton

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads. Thus I cannot endorse any, though some look mighty interesting. If you click on a link, Google may send me money. That money will help pay Claire's law school tuition. Read more about Google AdSense, click here and here.
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