THE WALL STREET DIGEST
Prepared by Donald H. Rowe
The Race To Build A Global Fiber Optic Network
(December 2000) The copper wire telephone system and the 56K modem will disappear within five years. Between now and then, fortunes will be made by investing in the right fiber optics companies. When you use a 56K modem to receive data through your computer now, that data is being transmitted at approximately 22,000 to 38,000 bits per second. Compare that to a new fiber optic network that handles 20 billion bits per second.
A continuing leap in transmission speeds will unfold over the next five years.
Venture capitalist John McQuillan has stated that "the emerging generation of optics will likely set off the biggest wave of wealth creation since the invention of the transistor in 1947." (See Business Week, October 9, 2000, page 145). Fiber optic technology transmits data, video, and voice in the form of light over glass instead of electrons over copper--the method of choice for more than 100 years.
Because light on glass is startlingly more efficient, it is increasing the capacity of the communications systems by staggering amounts.
With the latest optical technology, a single strand of fiber--thinner than a human hair--can now carry every phone call, e-mail, and Web page used by every person in the world. Combine that kind of speed with the explosive growth of the Internet and the implications are profound. The acceleration in future transmission speeds is similar to the difference between delivering mail from New York to California via Pony Express, versus e-mail delivering in a nanosecond.
Today, downloading a digital movie, such as The Matrix, takes more than seven hours over the fastest cable modem.
With an optical connection, it can be done in four seconds flat. "Communications capacity in the optical era will be so generous," states James Q. Crowe, CEO of Level 3 Communications, Inc., "that we soon will send hologram communications over mobile phones." Ten years ago, phone companies could send only one stream of data over a fiber-optic cable.
Current optical technology, called wavelength division multi-plexing, splits that fiber into 160 channels--with each channel capable of carrying as much traffic as the old single fiber.
The race to develop faster and more efficient technologies is frantic. Simon Cao of Avanex (AVNX) recently predicted that the number of wavelength bitstreams in a single fiber thread could be increased from the current 160 to 1,000--a level which Avanex has achieved during experiments. Simon Cao believes that an eventual level of hundreds of thousands is possible. Rapid implementation of new technologies is also critical to a company's survival.
Two years ago, Lucent Technologies was the runaway leader in telecommunications equipment in the United States. But in late 1996, Canada's Nortel Networks introduced a new optical system that routes data at 10 gigabits a second (10 billion bits per second). Lucent, convinced that demand for a complex technology would develop slowly, stayed with gear operating at one-quarter the speed. Nortel has been proven right and its market cap has soared 40 percent this year, to $200 billion, while Lucent's shares have tumbled 50 percent, leaving it with a market cap of $108 billion.
Greg Mumford, president of Nortel's optical division, is pushing forward with a new project to zip data along an optical fiber at 80 billion bits per second!
The optical sector is not going to go the way of Amazon.com, Priceline.com, and other "here-today-gone-tomorrow" dot-commers. Telecom players desperately need the most efficient gear. Internet traffic is doubling every three months, and optical technology is the only practical way to handle it. Spending on optical gear is expected to soar to $44 billion this year from $31 billion last year. If you are an entrepreneur and you mention optical, venture capitalists will stand in line to write you a check.
Venture capital earmarked for high tech has expanded from an annual $2 billion in 1990 to $100 billion this year.
Rich Karlgaard, publisher of Forbes Magazine, says "One can see global venture capital rising to a $1 trillion business within five years." In numerous issues of the Digest, I have stated that nothing will stop the global expansion of the Internet. Three million new Web pages appear on the Web each and every day; Internet traffic doubles every 90 days. Three hundred million people are online today.
Building out the Internet so that 2.4 billion people can log-on without crashing the system will create a new class of millionaires and billionaires.
Own the right Internet/Technology stocks and you can dramatically change your financial future.
The Coming Boom
Two forces drive today's economy: risk capital and technology. Both are going like gangbusters, although risk capital is fickle. It will dive for cover at the first hint of lousy tax or regulatory policy, which the November election could bring. Example: Think about liberal Congressman Charles Rangel on higher taxes.
Or recall Sen. Barbara Boxer's 1993 stab at taxing the inside gains of 401K savings.
Venture capital earmarked for high tech, probably the most effective economic lever of all, has expanded from $2 billion a year in 1990 to $100 billion this year. The actual number could be higher. American-style venture capital is now the rage in Europe and Asia. Tens of billions of dollars are pouring into raw American-style startups. Global venture capital could rise to a $1 trillion business within five years.
The Invading Geek Hordes
The underlying pace of technology moves faster and faster. Moore's Law on silicon still pertains and will for another ten years before molecular or quantum computing takes over. Just using silicon, PCs and Palm Pilots will be 50 times more powerful in 2010 than they are today, yet cost the same price. Today's zippy Pentium III chip will find employment tomorrow in the heel of your shoe, telling you why you have plantar fasciitis.
With wireless, that chip may book your appointment with a podiatrist or consult on the design of your orthotics.
Storage (see our November issue) is evolving faster than processing doubling every 12 months versus silicon's every 18 months and bandwidth is zooming fastest of all. The last mile today is a teeth grinder, and a rush of gigabits is headed your way. To sum up: Chip speeds double every 18 months; storage doubles every 12 months; bandwidth doubles every six months. These three horses dictate the pace of all Internet technology, all software, and every new business model worth a hoot.
When combined with $100 billion a year of venture capital, and maybe $1 trillion a year by 2005, the result is unavoidable.
Every 800 math S.A.T. geek with an eye toward killing your business will probably get a $20 million first-round check to try just that at least once. Bottom line: Get ready for an accelerated pace of business innovation and volatility--all of which is good for the stock market. The caveat is always policy. Bad decisions on trade, taxes and monetary policy turned a 1929 stock market hiccup into the 1930's-long Great Depression.
Higher tax rates on capital gains would flatten the uptrend in risk capital and bonk this boom, too. (Source: Publisher Rich Karlgaard, Forbes, October 30, 2000)
Investment Summary
The Bottom Line--What To Do Now
U.S. Stock Market--Money drives the stock market. Here are three reasons to be fully invested:
1) Money continues to pour into mutual funds. Currently, mutual funds are holding 5% cash, which is at the high end of the scale. The last time mutual funds had this much cash (5.1%) was November 1998. Mutual fund cash levels were at a record low (only 3.8% cash) in March of this year. To refresh your memory, the market rolled-over in April.
2) Credit is tight, but an abundance of money is available at higher interest than a year ago. The broad M3 money supply is growing at 10%, compared to 8% over the past six years. Is the Fed trying to prevent a "hard landing?"
3) During the last 50 years (1949-1999), the S&P 500 Index gained 97% of its annual gain between November 1st and April 30th. The remaining 3% unfolded between May 1st and October 31st during that 50 year period. The comparable figures for the Dow Industrial Average are 90% and 10%.
Guidelines For Selling Stocks
First, always sell your weakest performing stock to make room for a newly recommended company with cutting edge technology. Second, always sell companies in your portfolio when their technologies have become obsolete. Third, after purchasing a new position, watch it closely and maintain a 10% initial mental stop. If the new stock falls 10% or more from your purchase price, sell it immediately. After the new stock has gained 20% or more, use a trailing mental 20% stop. Always sell any position after it falls 20% from its high. Never sell into a panic in the market like the October 12th plunge, which was caused by problems in the Middle East.
December 2000 Donald H. Rowe, Editor and Publisher The Wall Street Digest One Sarasota Tower, Suite 602 Two North Tamiami Trail, Sarasota, Florida 941-954-5500
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