Dec. 29–In the next five years, the proliferation of broadband and wi-fi will create huge opportunities for growing companies and even greater risks for those with entrenched positions.

Broadband access is ramping up in the home, and wi-fi is becoming available in restaurants, hotels, and public areas. This will make Internet access far easier than it is now, changing the way consumers act.

Online shopping will continue to take share from traditional stores, especially if the Internet continues to enjoy tax freedom. But the greatest penetration in the short term, will come from service businesses, such as travel, tickets, and stock trading. No company is better positioned than Barry Diller’s InterActiveCorp. Diller has built an infrastructure behemoth that continues to be underrated by most investors.

InterActive recently bought Lending Tree, a mortgage and real estate services firm. It’s a good bet real estate will be the next major industry to migrate to the web, benefiting consumers, but hurting industry players with high costs.

Online stock trading should increase for both individual and professionals. This will benefit firms like E*trade and Ameritrade, but it will also continue to pressure traditional brokers.

Films will also be received online. I subscribe to Cinemanow.com, a company controlled by Lions Gate. Downloading from the computer is becoming easier than trekking to Blockbuster in the cold. This will have a profound impact only on how films are delivered. Easy downloading and growth of home theaters will force movie producers and theater companies to find new ways to attract consumers. Imax should be a big beneficiary with its unique viewing experience.

The Internet will also become a staple in the automobile. Harman International builds infotainment systems that combine audio, GPS, and DVDs. It’s only a matter of time before these systems become wi-fi enabled.

Education will also change. I’ve visited schools where every student has a laptop and every room is wired for wi-fi. A five pound laptop weighs less and contains more information than the bags of text books most students carry — threatening text book publishers.

Perhaps the most significant change will come in Internet telephony. Services from companies like Vonage are still in their infancy. But five years from now, Internet telephony will be commonplace. Long distance will be a thing of the past. This means companies focusing on long distance, like AT&T, MCI, or Sprint, are in trouble.

Internet telephony will also pressure the Baby Bells. People are increasingly replacing land lines with broadband and cellular connections.

The field of battle is still taking shape, but this much is clear — proliferation of broadband and wi-fi will change the way we act as consumers and create major risks and opportunities for investors.

Peter Siris (guerrillainvesting@hotmail.com), a New York hedge fund manager, owns IACI, Lions Gate, E*Trade, Harman, and Imax.

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(c) 2003, Daily News, New York. Distributed by Knight Ridder/Tribune Business News.

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Dec. 22–A year ago, the economy was in the doldrums. No one wanted to look at stocks, and if they did, they only saw the worst.

When I talked up auto retailers and home builders, people asked, “what if there’s a depression?”

When I pushed a stock with $8 in cash selling for $4, people said, “but management could do something stupid.” Fear dominated rationality.

There has been a big change. Now everything is perfect. Investors have great optimism. They see order rates increasing, costs are under tight control, low interest rates, and upside surprises in profits.

Listen to them talk about the techs that have led the rally. Few care about this year’s numbers. They only want to see the promise of improvement. Instead, they are looking at a profit recovery.

If you took every analysts estimate for every stock for 2005, you would conclude we are going to have a great recovery. There is only one small problem. If every stock does as well as the analysts’ project, interest rates are not going to stay at current levels.

Consumers keep spending like there is no tomorrow. Our savings rate could be the lowest in the developed world. Budget deficits are massive. We are spending billions in Iraq and Afghanistan, and increasing social programs, while cutting taxes.

Until now, we have relied on foreigners to finance our deficit; but with the declining dollar, this will be more difficult. All this means that interest rates could spike up in the next few years.

Interest rates have an important impact on the stock market in general and growth stocks in particular. A doubling of interest rates could cut stock prices in half.

Right now, we are taking this year’s historically low interest rates and applying them to 2005’s recovery earnings. But if 2005 is as good as analysts expect it to be, interest rates may be much higher, and stock prices would likely be much lower.

This does not mean we are going to have a crash, but it may mean the high multiple growth stocks that have led this market will underperform.

Conservative stocks can be supported by their dividends, but stock declines most hurt the high-fliers.

Right now, most investors are fat and happy. They think the Fed will not increase rates until the late spring. They also think there is no need to worry until they see the second or third rate bump. They may be right.

But I am starting now to reposition my portfolio. I am taking profits in companies that are sensitive to interest rates, such as REITs or mortgage lenders, and selling high multiple techs. I am buying lower multiple companies with solid records, as well as energy producers.

My crystal ball is not perfect. But I suspect a year from now, the economy will be better, interest rates will be higher and the stock market will be up only modestly.

If you are investing in bonds, keep to short maturities. Your returns will be lower, but I think long term bonds will decline in price in the next two years. If you are thinking about a new mortgage, lock it in now. Rates will go up.

Everyone is now very optimistic about the stock market and the economy. Of course, last year, everyone was very pessimistic, and look how much money we all made. The time to start worrying is when everyone thinks only good things can happen. That time may be now.

Peter Siris (guerrillainvesting@hotmail.com) is a New York hedge fund manager.

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(c) 2003, Daily News, New York. Distributed by Knight Ridder/Tribune Business News.

Dec. 8–The recovery keeps chugging along. Orders are up. Earnings are up. Stocks are up, and, thanks to tax refunds, consumer spending is up. Everything is great, except for one small problem. Jobsaren’t coming back.

When the weekly job numbers came out on Friday, the economists scratched their heads, blaming everything from a supermarket strike in California to storms in the Midwest.

But I think something far more serious is going on. With improved communications and better education in many lesser developed countries, service jobs are moving overseas. And this move may be permanent.

A few weeks ago, I called the help desk of my Internet company. The first call was answered by a technician in Indiana. When he couldn’t solve the problem, he transferred me to an engineer in India. Both the technician and the engineer had phones and Internet access, both had read the manuals, and both spoke English. The difference was the engineer had an advanced degree and was paid less than the technician.

The loss of info service jobs presents a far more serious challenge than the loss of manufacturing jobs. Domestic manufacturers had some advantages. There were tariffs and shipping costs and shorter lead times. Still even with these advantages, industry after industry lost share to Asian competitors.

Some of it was the cost of labor, but some of it was organization and management.

The Bush administration is now focusing on trade barriers for bras and other sinking domestic industries. Instead, it should focus on how we can compete with low-cost service businesses emerging in India, the Philippines, and China.

Corporations love these off-shore outposts. Wages are lower, and they don’t have to worry about pensions or unions. Consumers like them, because they help restrain costs. But there’s a danger to the economy. With overseas labor much cheaper, jobs will keep moving

Foreign outsourcing is gaining steam. With better global communications, medical companies are setting up centers to read MRIs, computer companies are building help desks and credit card companies are shipping billing off-shore.

This means the employment recovery we’re expecting may continue to lag. Short-term, this should be fine for stocks. Interest rates should remain low, and profits, buoyed by cost-cutting overseas, should be strong. But with our economy more and more reliant on consumer, many good job are not going to these consumers.

If we are to remain the world’s strongest nation, our leaders must start talking about how to stay competitive.

Peter Siris (guerrillainvesting@hotmail.com) is a New York hedge fund manager.

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To see more of the Daily News, or to subscribe to the newspaper, go to http://www.NYDailyNews.com

(c) 2003, Daily News, New York. Distributed by Knight Ridder/Tribune Business News.

Dec. 8–The recovery keeps chugging along. Orders are up. Earnings are up. Stocks are up, and, thanks to tax refunds, consumer spending is up. Everything is great, except for one small problem. Jobsaren’t coming back.

When the weekly job numbers came out on Friday, the economists scratched their heads, blaming everything from a supermarket strike in California to storms in the Midwest.

But I think something far more serious is going on. With improved communications and better education in many lesser developed countries, service jobs are moving overseas. And this move may be permanent.

A few weeks ago, I called the help desk of my Internet company. The first call was answered by a technician in Indiana. When he couldn’t solve the problem, he transferred me to an engineer in India. Both the technician and the engineer had phones and Internet access, both had read the manuals, and both spoke English. The difference was the engineer had an advanced degree and was paid less than the technician.

The loss of info service jobs presents a far more serious challenge than the loss of manufacturing jobs. Domestic manufacturers had some advantages. There were tariffs and shipping costs and shorter lead times. Still even with these advantages, industry after industry lost share to Asian competitors.

Some of it was the cost of labor, but some of it was organization and management.

The Bush administration is now focusing on trade barriers for bras and other sinking domestic industries. Instead, it should focus on how we can compete with low-cost service businesses emerging in India, the Philippines, and China.

Corporations love these off-shore outposts. Wages are lower, and they don’t have to worry about pensions or unions. Consumers like them, because they help restrain costs. But there’s a danger to the economy. With overseas labor much cheaper, jobs will keep moving

Foreign outsourcing is gaining steam. With better global communications, medical companies are setting up centers to read MRIs, computer companies are building help desks and credit card companies are shipping billing off-shore.

This means the employment recovery we’re expecting may continue to lag. Short-term, this should be fine for stocks. Interest rates should remain low, and profits, buoyed by cost-cutting overseas, should be strong. But with our economy more and more reliant on consumer, many good job are not going to these consumers.

If we are to remain the world’s strongest nation, our leaders must start talking about how to stay competitive.

Peter Siris (guerrillainvesting@hotmail.com) is a New York hedge fund manager.

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To see more of the Daily News, or to subscribe to the newspaper, go to http://www.NYDailyNews.com

(c) 2003, Daily News, New York. Distributed by Knight Ridder/Tribune Business News.

Dec. 1–The changes on Wall Street are making life more difficult for investors who want to trade big-cap stocks or follow the advice of brokerages’ analysts.

But they are creating great opportunities for investors willing to spend the time looking at small stocks.

With the advent of Reg FD, companies are giving analysts less information. This has shifted the balance of power to big funds that spend millions attending conferences and talking to a company’s competitors and customers. They are almost always a step ahead of individuals. If you, as an individual investor, want to trade a mega-cap stock, you are at a real disadvantage. Your only chance of competing is to pick stocks you love and hold them for an extended period.

The cutback in analysts at major brokerages also works against individuals who rely on brokerages’ research. Without investment banking to pay the bills, there are fewer companies being covered. The advantage here shifts to the few analysts who cover the stocks and the funds that spend the time doing the research.

But the cutback has created a vacuum for investors willing to do a little work. Because smaller companies are being ignored by analysts and funds, you do not have to worry about being blindsided. And because most companies broadcast their conference calls, you can get good access to information on your own.

Over the past two years, I have gravitated to smaller stocks with less coverage, because the competition is easier and the growth opportunities are better. Small companies can grow faster, and become acquisition bait. This year, thirteen stocks in my fund have been acquired or recapitalized by bigger companies.

There is always risk in small stocks. That is why I never buy more than a 3 percent position in any one. But I prefer a game in which I can do my own research without worrying about what big boys are doing.

I even own unlisted stocks that trade on the bulletin board. These stocks do not have the market cap, earnings, or net worth to qualify for a listing on a major exchange. But this does not necessarily make them bad. It just makes them small.

Here are a few unknown stocks I own, that I think are worth taking the time to get to know:

— Hartville Group, the only pure play in pet health insurance. With the focus on pets and high vet costs, this company should be a real winner.

— Ediets.com, which runs an online diet and health service and features the Atkins, Zone, and Dr. Phil’s diets among others. Ediets has 1.3 million members.

— Tefron, a the technological leader in producing intimate apparel and active wear. Based in Israel, Tefron could be a big beneficiary of the trade restrictions slapped against China.

— Derma Sciences, a very small but rapidly growing wound care company. Derma has solid management that is carefully building a very strong company.

— National Medical Health Card, a rapidly growing pharmacy benefit management company that should benefit from the new health care regulations and the merger of larger competitors.

— Tengtu International has a 20-year contract to provide e-learning to schools in China. The company has reached profitability and should be ready to gain economies of scale from expected new contracts.

— Bon Ton, a regional department store chain selling below book value. With a recent acquisition, it should have $2.50 or more of earnings power.

These companies are virtually unknown on Wall Street. Their small size means big funds and big analysts will stay away. But to me, that is an opportunity, not a risk.

Peter Siris (guerrillainvesting@hotmail.com) is a New York hedge fund manager.

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(c) 2003, Daily News, New York. Distributed by Knight Ridder/Tribune Business News.

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