<THE RULE BREAKER PORTFOLIO>

Charged Waters of Amazon
Plus, the guv and AT&T, @Home

by Jeff Fischer (TMFJeff)

ALEXANDRIA, VA (June 8, 1999) -- Because stocks move based on expectations, uncertainty creates volatility. Currently, uncertainty is high. "Will interest rates rise?" "Will Amazon succeed?" "What will become of NATO?" and "Who wrote last night's column?"

We can answer all four questions: Yes. Maybe. Nothing (interpret that as you will), and Rick Munarriz, or TMF Edible. Rick wrote last night's Rule Breaker. Rick is a long time, all-around Fool who initiated and has managed Dueling Fools since inception, and who writes Daily Double and Daily Trouble columns, along with other Fool content, like a tireless, humor-saturated fiend.

As for other pertinent questions, today the 30-year bond yield reached 6% for the first time in over a year, causing many people to sell stocks that have historically yielded 11% annually over a lifetime. (Short-term thinkers.) Anyway, "yes" interest rates will rise someday.

Why?

Generally and simply, because economic situations fluctuate, and it's better to stave off pending inflation than to let it prosper. What will higher rates mean for Foolish investors? Until the interest rate situation is clearer, stocks will probably continue to be volatile. In fact, stocks might decline until rates are raised. (Once a situation is known, it usually becomes less frightening.) Interest rates always influence stocks near term, but over the long term, their importance is diminished. Hence, we usually brush over them.

Interest Rates and Rule Breakers
A rise in interest rates can cause stocks to decline because higher rates decrease the current value of all future net income at a company. However, this might not prove accurate with Rule Breaker-type companies that have high amounts of cash. In fact, higher rates might increase the value of future earnings by increasing actual earnings. An upward tick in interest rates could prove a good thing for a company like America Online (NYSE: AOL), with $2 billion in cash and equivalents, or Amazon.com (Nasdaq: AMZN), with over $1 billion.

Many new companies, especially those that recently came public, have large amounts of cash and little debt. Being cash-rich, higher interest rates would mean higher interest income. Analyst Keith Benjamin of BankBoston Robertson Stephens said today in a Reuters interview that higher rates should actually inflate his earnings estimates for certain cash-heavy companies (such as AOL).

Meanwhile, for a cash-flow positive company such as Amazon or eBay (Nasdaq: EBAY), higher rates help in a few ways: by increasing the potential income earned on 1) cash-on-hand (eBay is set to raise another billion, by the way) and by increasing the potential income earned on 2) the positive cash flow generated each month.

Overall, though, the most likely outcome over the next few years in regards to interest rates is a small hike or two (or three) to keep inflation at bay, but not a business killing (or stock killing) hike after hike after hike, and so on. (Hut, hut, hut, hike....)

Regulate or Deregulate?
Hard-hitting ladder climbers (judges, governmental bodies, regulatory commissions) are often confused. They break up perceived monopolies (telecommunications and oil giants), and then they let them remarry. They regulate entire industries (airlines), and then they don't. And then they sort of do again.

Friday's cable-access decision in Oregon might open a new can of regulatory worms. AT&T (NYSE: T) will appeal the decision that it must share its cable with competing companies, but in the meantime important details related to the court's decision are already cloudy at best. First, bandwidth through cable isn't unlimited. There is only so much available bandwidth. So, how can AT&T spread it fairly? Realistically, it can't. And realistically, it will provide the most bandwidth to its -- or @Home's (Nasdaq: ATHM) -- customers. To force AT&T to do otherwise would mean regulation at a level the government wants to avoid.

Second, the ruling allows for AT&T to charge competitors for using its cable. (How generous of the judge.) However, the court didn't name prices. Apparently, AT&T can charge anything.

Already, access technology owners are the winners in high-speed connection partnerships. A month of @Home costs $44 on average, but @Home collects only $14 and the remaining $30 goes to cable partners. AOL charges over $40 per month for high-speed DSL connection, but AOL collects only $10 and the remaining money goes to Bell companies. If AT&T essentially grants @Home $14 per user per month, what will it grant companies in which it doesn't hold a majority stake? My bet: not much. AT&T could even make profitable business through its cable network impossible for competitors, in which case regulation issues of an intense, undesired nature might arise.

All in all, a long war may be ahead. Meanwhile, AOL continues to add 1 million users every six weeks -- on dial-up access, boys and girls. Demand for slow-mo' access isn't waning, and in fact AOL doesn't believe that high bandwidth demand is even near giant, mass market levels yet. Instead, AOL feels that the country needs a brand like AOL to make high bandwidth appealing to the masses, and even then a majority might not be able to get or afford it. Either way, AOL believes that it has time and that it will have the means to serve all markets, and I wouldn't bet against it.

I wouldn't bet against @Home and its teeming pool of cable partners, either, because this needn't be an "either/or" situation. In strong industries, it is usually "both" -- or even "many" to varying degrees. Both Borders and Barnes & Noble. Both McDonald's and Wendy's. Both Yahoo! and Excite. Both Barney the Dinosaur and those British things. (What are they called? Can't remember. I've been brainwashed.)

Charged Waters
Amazon
(Nasdaq: AMZN) added full-length electronic downloadable music to its site, first offering 25 songs in their entirety. If you download a song, hopefully you'll like it enough to buy the whole CD in hardcopy.

The most likely future is that of electronic music whole-hog. Security and technological issues pending, online sales of music will prove more appealing (like online software sales) and efficient than any other means of selling music. Just wait a year or four and you'll be able to download music on your PC or Palm device and then beam it (after passing security) in infrared to your new stereo system. Or, your new stereo system will have Web capability built-in.

Same deal with videos. You'll have a TV-equivalent device that will allow you to download any video electronically from an online vendor. Books, too, will be sold and even embraced in electronic form.

Advances in technology will make reading a book on small electronic devices appealing via both form and function. Just think: you'll be able to mark text temporarily, for example, or copy/paste and save or email favorite text, or cross reference quickly between several e-books all on one slim electronic device. The educational possibilities are endless. I'd love to be a student when there's no need to haul around eight different, 400 page books all day.

Amazon will probably prove to be one of the most interesting companies to follow from its inception to our sun-tinted, active retirement. Is it a coincidence that Amazon's first three product lines (books, music, and videos) could all primarily be electronic products in 15 years?

Potential Return on Investment
Starbucks
(Nasdaq: SBUX) invested in Talk City. Talk City filed to go public. Hence, Starbucks stands to make money. Amazon invested in several online ventures, including Drugstore.com. Some have speculated that following key IPOs, Amazon could make a profit during some quarters from its investments alone. Interesting thought. All the bears would say, "It isn't a real profit, though" -- despite it being real money, recorded on real books, by accountants of a real company.

More Foolishness
Do you have credit cards? Are you paying the lowest rate possible on the debt? Probably not. But you can. Read the Fool's special on cutting your credit card interest rates. Today a Fool wrote to say: "Thanks for the advice. With one call and one operator, I changed my Wells Fargo Mastercard rate from 17.15% to 8.9%. It was so low, I didn't have the heart to bargain. Thanks!"

Also, Drip Port Fools are discussing when to sell a company's stock. And finally, do you wish to receive Fool columns in your e-mail box? You can. Click here for Motley Fool Direct. It's free.

Fool on!

06/08/99 Close

Stock  Change    Bid 
------------------ 
AMGN  -1 7/16    59.25
AMZN  -5 13/16  111.56
AOL   -4 1/8    110.38
ATHM  -6 1/2     97.25
CAT   -1 1/8     62.13
CHV   +  11/16   92.75
DD    -3 5/16    69.50
DJT   +  3/16     5.19
EBAY  +  1/2    183.75
GT    +  5/16    63.25
IOM   +  1/8      4.38
SBUX  -  27/32   35.31
TDFX  -  3/16    17.75

                  Day     Month  Year   History   Annualized 
      R-BREAKER  -3.33%  -5.95%  25.87% 1163.31%  68.87%
        S&P:     -1.29%   1.19%   7.49%  200.94%   25.56%
        NASDAQ:  -1.97%   0.16%  12.85%  243.60%   29.05%


    Rec'd    #  Security     In At       Now      Change
   8/5/94  2200 AmOnline       0.91    110.38   12044.47%
   9/9/97  1320 Amazon.com     6.58    111.56    1595.67%
  5/17/95  1960 Iomega Cor     1.28      4.38     241.69%
  2/26/99   300 eBay         100.53    183.75      82.79%
  12/4/98   450 @Home Corp    56.08     97.25      73.41%
  4/30/97 -1170*Trump*         8.47      5.19      38.75%
 12/16/98   580 Amgen         42.88     59.25      38.19%
  2/23/99   300 Caterpilla    46.96     62.13      32.28%
  2/23/99   290 Goodyear T    48.72     63.25      29.84%
   7/2/98   470 Starbucks     27.95     35.31      26.32%
  2/20/98   260 DuPont        58.84     69.50      18.11%
  2/23/99   180 Chevron       79.17     92.75      17.15%
   1/8/98   425 3Dfx          25.67     17.75     -30.85%

    Rec'd    #  Security     In At     Value      Change
   8/5/94  2200 AmOnline    1999.47 242825.00  $240825.53
   9/9/97  1320 Amazon.com  8684.60 147262.50  $138577.90
  2/26/99   300 eBay       30158.00  55125.00   $24967.00
  12/4/98   450 @Home Corp 25236.13  43762.50   $18526.37
 12/16/98   580 Amgen      24867.50  34365.00    $9497.50
  5/17/95  1960 Iomega Cor  2509.60   8575.00    $6065.40
  2/23/99   300 Caterpilla 14089.25  18637.50    $4548.25
  2/23/99   290 Goodyear T 14127.38  18342.50    $4215.13
  4/30/97 -1170*Trump*     -9908.50  -6069.38    $3839.13
   7/2/98   470 Starbucks  13138.63  16596.88    $3458.25
  2/20/98   260 DuPont     15299.43  18070.00    $2770.57
  2/23/99   180 Chevron    14250.50  16695.00    $2444.50
   1/8/98   425 3Dfx       10908.63   7543.75   -$3364.88

                              CASH   $9924.87
                             TOTAL $631656.12
 
Note: The Rule Breaker Portfolio was launched on August 5, 1994, with $50,000. Additional cash is never added, all transactions are shared and explained publicly before being made, and returns are compared daily to the S&P 500 (including dividends in the yearly, historic and annualized returns). For a history of all transactions, please click here.

</THE RULE BREAKER PORTFOLIO>

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