Stocks, the Internet and Black Folk

The last week has been a troubling one for Wall St. investors and a confusing one for Main St. observers. But the events surrounding the stock market turbulence are really not as complicated as they may first appear when viewing news reports. Basic to the discussion is an understanding that two separate markets were affected by what occurred: the Dow Jones Industrial Average made up of thirty of the largest companies in America and the National Association of Securities Dealers Automated Quotations (NASDAQ) made up of much smaller companies. The Dow did much better than the NASDAQ. The NASDAQ, which consists of many technology-related stocks, took a beating, losing nearly $1.5 trillion in market value. By early this week it was easy to see that the two markets were moving in opposite directions-- the Dow Jones average was moving up while the NASDAQ was falling, and fast.

Some saw the NASDAQ loss as an indication that the Internet boom had ended and that investors were finally moving out of technology stocks and into safer and older companies. But that was not the case at all. In fact, the older, less technology-related companies are actually under greater pressures than the Internet companies due to the fact that larger corporations depend greatly upon bank loans and corporate debt as a source of available funds. Today, such a dependence especially upon bank loans is not as profitable as it used to be. In recent months, the Federal Reserve has raised interest rates, which makes these loans more expensive to pay back and which, of course, means less profits for the borrowing corporation. On the other hand, the NASDAQ market depends upon free-flowing equity from a variety of investors and is not as affected by the Federal Reserve's decision to raise interest rates. These companies hardly ever find bank loans to be attractive sources of available income and have been relatively immune from the worst aspects of the recent Federal Reserve decisions to raise rates.

Therefore, the theory that investors are fleeing from young Internet start-ups in favor of old reliable industrials because investors are giving up on the internet should be viewed with suspicion. Something else is at work. Rather, the burden currently being carried by technology stocks has much to do with the threat of government patent law and fiscal policies which threaten to stifle the creativity of tech firms as well as take more money from their treasuries. Rumblings throughout the political world have been heard from America to Europe regarding the possibility that governments would not grant companies patents to protect their own inventions and developed techniques. For a young start up firm this would be devastating as firms at this level of business often have little more than an invention to use to compete with larger companies that have less creativity but more cash and stronger marketing arms. In addition to that, the U.S. Congress and the National Governors Association (NGA) have discussed the possibility that Internet firms that currently are earning revenues tax-free may soon have to pay sales taxes on each of their transactions. This negatively affects Internet companies in the market place because investors view sales taxes as a threat to profits that companies hope to generate. Over the last few weeks, the patent and tax issues have created a climate of uncertainty in the market place that has affected the sentiment of investors; this was further influenced by the constant speculation that Internet stocks appear to be overvalued. Another factor weighing down prices in the market were margin calls and investors liquidating assets prior to the tax-filing deadline.

How does all of this affect Black America? Well, for those Black companies that are Internet -related they face the daunting task of overcoming the perception that has seeped into the market that their enterprises will be crushed under the weight of patent and tax laws that appear to be on the horizon. For Black investors in these types of firms they must be concerned with whether to pull their money out of technology companies or ride the roller coaster out and cash in their stocks down the road. But the sector of the Black community that is most likely to be affected by these market disruptions are those Black businesses that are Internet-related and contemplating going public (making their privately-held shares available for the public to purchase). These companies that may have zero dollars in profits or who may have several million dollars in profits now are faced with the uphill battle of trying to raise money in the stock market when investors are beginning to frown upon making such investments. While many don't realize it there are several such firms that fit the above profile; they are loaded with profitable ideas and have even turned a handsome profit but are still privately owned. Several such enterprises are in the music and fashion industries. For these companies to raise the millions of dollars necessary for them to go to the next level the stock market is an attractive source of capital. Certainly few banks will make a favorable loan to these enterprises and in that is in the long-term interest of that company's bottom line. Of course, by now we all know that there exists discrimination against Black businesses that are seeking financing from banks.

And next, there are the members of the Black community that do not currently use the Internet. While many point out the need to address this problem in the hopes that Blacks will be able to earn a job due to their ability to properly use a computer, few point out the fact that the Internet has actually turned the detrimental aspects of world globalization into an asset. And many economists fail to show that Blacks with small businesses, even one-person operations, can compete with corporations throughout the world with the simple use of a home computer or laptop. This is so because the Internet boosts efficiency and increases the spread of information and technological advancements that would otherwise not be available to Blacks. The Internet allows a Black tailor living in Atlanta, Georgia to sell clothes in Canada or even in Asia or Europe, even clothes that there may not be a market for at the downtown mall. As global consumers look for the best buys they will treat an item made by a group of high-school dropouts just the same as an item made by a Fortune 500 company. This certainly is a scenario that works in favor of the Black entrepreneur. But if Blacks do not own computers they operate in the global market place at a disadvantage. This recent downward turn in the Internet sector of the American economy makes it less attractive for investors to invest in the creative operations of Black entrepreneurs and makes it more difficult for parents, teachers and political leaders to show the benefits of using technology such as the Internet.

Finally, there are Blacks across the globe in economically developing countries that are even further behind in regards to making use of the Internet. In these countries, throughout Africa, products that come from the earth are the number one sources of income, whether it be oil, gold, copper, aluminum or cocoa, it is all the same: the chief source of income for these nations is derived from the exporting of a natural resource. These countries do not have a technology infrastructure developed and often have established laws that do not permit individuals to directly profit from the manifestation of their talents, skills and abilities and the offering of this creativity in the marketplace. This is particularly important because such laws stifle creativity and kill the incentive of the individual to invent and produce according to the unique talent with which they have been blessed. Instead of creating a viable technological sector, the leaders and governments of many African nations have misplaced priorities and continue to roll down one track: the cultivation and sale of natural resources. The result is that these nations view technology and the Internet as an enemy to revenues and not as an ally that can increase revenues and have a positive effect upon the citizenry. This was evident during last year's World Trade Organization (WTO) meeting that saw Western nations in a tug-of-war with Africa and developing nations in Asia and Latin America over e-commerce rules. The United States was pushing to extend the WTO moratorium on duties on Internet transactions while African nations who do not have developed technology sectors resisted any new rules that would have prevented them from taxing sales made via the Internet in their country -- whether by foreign or domestic companies.

Unfortunately for African nations if the capital flowing in the technology markets in America and worldwide dries up and they do not commit to funding the development of the sector, they face an uphill battle trying to break into the world of e-commerce. Those who have already staked their territory on the Internet will surely slam the door in the face of late-arrivals if investment funds are scarce.

So the stock market, the Internet and Black folks are much more closely related than many have thought or dare to admit.

Cedric Muhammad

Thursday, April 6, 2000