Summer bull... or just bear market rally?

Frankly, my dear, in a dynamic market, opportunity abounds regardless of trend:

Here are 5 rock-solid speculations for the Summer of 2003!

“I tell ya, Christoph,” said Taipan editorial board member and Taipan Trader chieftain Brit Ryle to me the other day, “I haven’t seen stocks move like this since 1999-2000! The downside to this rally is like Japanese interest rates—virtually zero. At least for the next couple of weeks!”

His colleague Brian Hicks concurred: “People still sitting on the sidelines waiting for ‘confirmation’ of a bull market better break out their checkbooks and send some funds to their brokerage accounts,” he says. “It’s a bull market all right, even if it’s only a baby bull.”

But let’s take a step back. What’s been going on over the past couple of weeks?

Ever since the broader market put in a solid bottom back in October, here’s what the major indices have done:

This, my friend, is a textbook bull-market rally from a major bottom. But it’s not so much the performance of the major averages that have me so optimistic. We’re seeing real, honest-to-goodness speculation returning to the markets. And speculation is not only the lifeblood of capitalism, but of bull markets as well.

You don’t have to look too far to see it: the NASDAQ Biotechnology Index is up 62% since its October 2002 lows… and up 43% this year alone!

And it’s not just the Yanks: the Nikkei 225 has shown exemplary resilience after hitting rock bottom in February, and is now flirting again with 9,000. Hong Kong is trending back up to 10,000… and Indonesia was up a stunning 21% for the year until “TLK-Gate” hit. (More on that later.)

Better still, we are not yet seeing “irrational exuberance” re-entering the market. In fact, those “weak hands”—novice and amateur investors lured by the mercenary lust for unearned gains that became the trademark of the Internet Bubble—are either out of the market for good or sitting on decimated positions vowing not to risk another buck until they have recouped their losses.

Instead, we’re seeing the return of institutions. Like the Bank of Japan, which has been buying dollars like there’s no tomorrow to keep the yen as weak and dollar-generated export profits as high as possible. And they’re buying US stocks and bonds with the cash. That’s money that isn’t going to wait for a dip to buy. Add that to the billions the Fed’s been pumping out every day, and you get an “irresistible force” that just might be able to take stock prices higher. And I mean significantly higher!

Brit comments:

“When the NASDAQ takes out 1,700 (which I think is likely in the VERY near future), 2,000 will be the next stop. It sounds crazy, especially coming from someone who did so well in the bear market, but the techs are on a beeline for 2,000.”

Glass half full

But even as the summer bull market in US equities continues, our friends the Perma-Bears keep grousing about stocks going up.

Sometimes I wish I had it in me to throw in my lot with this crowd. Life could be so easy: If the markets go down, lose money while blaming Alan Greenspan. If the markets go up, blame Alan Greenspan, lose money AND let the opportunity go by unused.

But Taipan looks at the equity markets as dynamic processes, not as products of static worldviews. We are too fond of motion and challenge… and the mutually refining give and take of stimulus and response… to find solace in the financial equivalents of air-conditioned indoor zoological exhibits.

Part of investing is the privilege of taking on risk, which your living intellect has to process, anticipate, and disarm—by rationally reconciling your own emotional well-being (and that of your spouse!) with your most unbridled optimism.

That can be done by developing your own constellations of indicators that you like to refer to before making an investment decision. This is how the members of the Taipan editorial board developed their respective systems… which can have spectacular successes.

That’s why, although each and every one of our editors fiercely believes that he or she has the best approach to investment (and considers him- or herself in constant internal competition with the others), we have all grudgingly arrived at the conclusion that the more informed views you are able to process before forming an opinion yourself, the better the result is going to be.

The Return of the Living Dead

So what do we make out of this seasonal upward trend? Our IPO specialist Siu-Yee Ng, for one, is seeing indications for a revival of a segment that was the poster child of the Internet Bubble.

“Get ready for a hot IPO market in 2003,” she writes:

“In the heyday of the bull market, you could throw a dart at a list of IPOs and walk away a happy investor. Well, let me qualify this: You could walk away happy if you were an underwriter, a promoter, or an overpaid analyst working for either.

“But the past three years have been the worst IPO market in recent memory. Just check out the statistics: there were approximately 486 IPO’s in 1999 and 406 in 2000. But when the bubble burst in March 2000, so did the IPO market. We saw only 83 IPO’s in 2001 and a paltry 70 in 2002.

“But if you think 2002 was a bad year for IPO’s, consider that as of June 5, 2003, only six IPO’s had debuted—compared to 37 in the same period last year. The downturn, however, may not be all bad. You see, the IPO’s that are coming out the door are pricing at a discount. And this is capturing investors’ attention.

“The six IPO’s that have debuted so far this year have shown an average aftermarket return of 35.9%. Not bad, considering the NASDAQ is up only 21% thus far. In the past, one of the worst things an investor could do was to buy on the first day an IPO debuted. But because of market conditions, IPO’s are either pricing at a discount or opening at or close to the offer. The hype is gone, and what remains are companies that have strong business models and revenues.

“What we are seeing in today’s market is a lot of consolidation. Companies that once saw triple-digit gains have either been acquired, merged, filed for bankruptcy or are now proving they can make it as public companies.

“Remember Palm (PALM:NASDAQ) and Handspring (HAND:NASDAQ) debuting back in 2000? The founders of Handspring came from Palm, and at the time both were trading at obscene valuations. But then again, what wasn’t? When the market turned sour, so did these two stocks. And on June 4 they announced a merger. Smart move.

“What is left today are the companies that have a chance at survival. And many investors see that too. IPO’s from the Internet boom are coming back from the dead. Just take a look at the table.

“Does this mean you should go out and buy all these beaten-down IPO’s? Not at all. Due diligence is still required. There are many things to look for in a winning company. Among them are low market cap and stock price, high industry group strength, increase in trading volume and new 52-week highs.

“Many of these stocks are seeing their first major rally since the NASDAQ topped out in March 2000. These stocks crashed with the market when their original backers ditched their positions. Now a new group of investors is coming in at low valuations. There are a lot of gems out there. If you chose the right ones, it will pay off.”

But what exactly should you be looking for? What stock is going to be the Netscape of 2004? Ian L. Cooper, editor of Red Zone Profits and the brains behind the brand-new Extreme Volatility Speculator trading service, has his eye on one particular candidate. Says Ian:

“In the post-bubble world of broke college-aged Internet hipsters who once filled New York harbors with their million-dollar yachts, if you can find the gems hidden deep within the muck, you can make a mint in no time at all. Sure, the IPO market has taken a beating worse than Martha Stewart, but there are still moneymaking plays to be found. Take Google, for example. In only five years, Google has gone from the simple brainchild of two college kids to a goldmine of information that has advertisers and rivals tripping over each other to garner the attention of the search engine’s millions of users. Its gateway provides access to about three billion web pages. More than 10,000 networked computers comb the web, ranking them with mathematical equations that reduce those billions of pages to a few thousand listings. Your search takes about 500 milliseconds.

“The portal is growing so quickly, in fact, that millions of former Yahoo users are switching over to Google. For Wall Street, Google is one of the few bright spots left in a world of IPO’s that have seen better days. In fact, only 70 IPO’s were issued in 2002—the lowest number since 1979. The hope is that a Google IPO could revive lifeless stocks and bring the Internet incubators back from their comatose state.

Making money from a Google IPO

“Your best bet for making money would be to play Internet incubators like Internet Capital Group (ICGE:NASDAQ). A strong Google IPO would not only bring back forgotten dot-coms, but also consumer confidence. This could lead to further IPO issues from the likes of ICGE, reloading your pockets with the green you lost in the dot-com stock implosion.

“Internet Capital Group is an Internet holding company actively engaged in business-to-business e-commerce through a network of partner companies. Sure, ICGE, like many Internet stocks, is extraordinarily volatile. But just because it is volatile doesn’t mean that it’s not worth buying.

Fall in love with B2B e-commerce all over again

“When B2B e-commerce first appeared in the early 1990’s, no one expected it to grow to a US$340 billion industry. Online B2B revenues could hit US$5 trillion by the time 2005 rolls around.

“A growth rate of that magnitude (fivefold!) may seem unimaginable. But with the public’s wider use of the Internet for shopping, homeland security concerns keeping many at home during holiday seasons, and the convergence of new technology with older business needs, it’s not that far-fetched.

“If a Google IPO becomes reality, you are likely to see more Internet-based IPO’s hit the marketplace, IPO’s that could be backed by incubator companies like Internet Capital Group. Couple that with future revenues of US$5 trillion B2B, and ICGE could climb out of the under-US$1 hole where it’s been languishing.

“Look to buy into Internet Capital Group (ICGE:NASDAQ) under US$1.”

Contact: 435 Devon Park Drive, Building 600, Wayne, PA 19087, tel. 610-989-0111, fax 601-989-0112, web www.internetcapital.com.