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Oops, You Did It Again

Wasn't anybody listening? I warned that tech wasn't through breaking your heart, but you let its pumped-up, steroid-addled physique seduce you once more.

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Shame on you! In January, you jumped right back into tech. You couldn't say no. You couldn't resist. You had to have your Cisco fix. Your Corning drink. Your JDSU hit. You piled back into those aggressive growth funds hoping for a little more of that double-digit-gain elixir you'd gotten so used to. Instead, you're already down double digits and the first quarter isn't even through.

With the January tech rally now just one more colossal, brutal fake-out, we have to ask ourselves: How did it happen again? After the pasting people took last year, how did they jump right back into tech, only to get their heads handed to them one more time?

I think I know the answer. People can't stop thinking about those great gains of yesteryear. They can't accept the fact that the roaring market of the late nineties has vanished and isn't coming back. They're addicted. Even as dozens of stocks in other industry groups hit new highs daily, the public can't bear to leave tech. They would rather lose it all than come to grips with the need to diversify.

Despite the rolling collapse of stocks of hardware-manufacturers (think Gateway and Sun), semiconductor-makers (think Intel), networkers (think Cisco and Nortel), software companies (think Oracle), fiber optics firms (think Corning and JDSU), and, at long last, the storage outfits (Brocade, Emulex, and EMC), people keep thinking the worst is finally over. They keep trying to bottom-fish, betting that every decline is the last decline. They keep believing! And who can blame them? These stocks were like bodybuilders on too many steroids. Consider this confluence of incredible factors:

1. The stock market pumped billions into the dot-com movement, with tech getting far more than its fair share of the proceeds. That money all went to tech providers.

2. The rush by the bricks-and-mortar folks to build up Web infrastructure to prevent being Amazon'd created a massive second wave of spending for tech vendors that dwarfed that of the dot-coms.

3. Mutual-fund managers who marketed their funds as aggressive growers, like Kevin Landis from First Hand Funds and the folks at Janus, told us that prospects were so great that they could afford to pay virtually anything for stocks and they would still go higher. They took in money well beyond their capacity to handle it, then took on more on top of that!

4. Individual investors, turned on by e-mail alerts and chat rooms and the over-confident television talking heads, many of whom had a massive amount to gain from the tech-investing wave, never met a tech stock they didn't like. They poured money into individual tech issues. And when they ran out of money to buy, they borrowed record amounts of house money to buy more.

5. The companies themselves, flush with so much cash, all became venture capitalists throwing their own dollars into start-ups. They helped inflate the values beyond reason.

6. The venture capitalists, with deal after deal in the pipeline, and the brokerages, eager to manufacture product for their customers, created an unholy alliance of hot initial public offerings that stoked the process and ended any semblance of discipline.

Now these bodybuilders have, one by one, turned to flab. The venture capitalists, that bunch of alchemists, keep talking about raising new money. You have to love their hubris; sure wish I'd had those kinds of stones when I was in the hedge-fund game. If they worked for charity, we wouldn't need social services -- that's how good they are at raising new capital.

The bricks-and-mortar people who tossed millions into dot-com divisions have finally accepted that there will be no second Amazons. Of course, they didn't wise up in time to stop the bloodletting at their silly divisions that never went public and are now killing their parents' results. Now they just want the Web to go away quietly. "Keep those losses to under $50 million" must be the most common seven words spoken from offline execs to the online nuisances at Fortune 500 companies right now. Forget it, offliners -- you'll have to fire those guys. (We've just seen the results from corporate America on the various tech investments they made during the past five years: Write-down after write-down has been taken.)

But the true sinners are the mutual funds labeled "tech." Some of these folks have gone from up 15 percent to down 15 percent in a matter of weeks. The worst were the managers who said they were so close to Silicon Valley that they could see any coming train wrecks well in advance. They still come on television to play the "future is tech" game, but they're fast losing credibility.

And remember the individual investor? I don't. What a disappearing act that fellow pulled. In retrospect, though, don't judge the public too harshly. They saw hundreds of confident mutual-fund managers and brokerage analysts saying over and over again that the slowdown would never hit Corning and JDSU. PMC Sierra and Applied Microcircuits were supposed to be immune. Only nuclear war would take down Qlogic and Emulex. Without the promotion machine of television to pump up their assets -- yes, that's why fund managers come on TV, not to enlighten us about great stocks -- and without the red-hot records of the past, these embattled funds could turn out to be the same sources of selling pressure that we saw in the oils during the eighties, as every time the stocks lifted, the energy-based mutual funds had to do some selling.

By now, most people have given up the gains of 1999, let alone the beautiful wins of the first part of 2000. I think it is in the cards that the winnings of 1998 will get repealed this year before we see an end to the bloodletting. Of course, no one thinks he is a tech-oholic. You think you are betting on the future instead of mortgaging it. My advice: Take a look at your holdings. If the name of every company you own could be found by taking a chain saw to your personal computer and poking around inside, you are too invested in tech. It's never too late to kick the habit.

TheStreet.com
Check out TheStreet.com's "10 Questions" this week. Evan McCulloch, manager of the Franklin Global Health Care and Franklin Biotechnology Discovery funds, is on the hot seat. Available for free at www.thestreet.com.


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