Bricks in the Wall: Part 2

Editors note: This is the second installment in a 3-part series. Please be sure to check out Part 1 (published earlier this morning) and Part 3!

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Continuation of the "What Went Wrong?" checklist:

3. We Lost Nokia

Oh, you may not think so. You may cling to the idea that Nokia (NOK Quote) can come right back. But we think we are going to have to wait a whole quarter before we play Nokia straight to the long side again. (We are long calls against short common, a hedged position we put on to profit from the volatility). We would never put such a position on if we thought the stock was going right back up to old highs.

Nokia had become the most important stock in this market because it had the greatest growth path in one of the fastest-growing industries: wireless. It caused us to lose wireless as a theme for the bulls -- and left us only with fiber optics (and the nosebleed valuations in that group make it difficult to make much more money from these levels). Without Nokia, we lose all of the component makers that go into cell phones as possible longs and we don't have a big-cap wireless play we can jump on when the macro numbers get weak.

Prognosis: negative.

4. Lucent Really Stunk Up the Joint

A wounded Lucent (LU Quote) hurts just about everybody because it sells to just about everybody in the telecommunications business. Once Lucent ceases to be a factor and everybody just steals business from the company (a la what Cisco did to Cabletron, Bay and 3Com) the group will act better. But Lucent is still trying to compete in the worst way. That can put pressure on everybody's margins. Short-term the pressure will remain until Cisco reports a good number.

5. Supply Came Back

We know from reading Ben Holmes that we got a ton of new deals. Surprise, surprise, they aren't that large. But they contribute to more supply than the market can handle right now. I think the fact that Divine got priced meant that bankers thought anything could get priced and they rushed to do some business. Too much too soon. That much supply simply scared people. Can't fight supply. It determines (and is sating) demand fast.

6. The Wonder Stocks

You know, the Broadvisions (BVSN Quote), the Kanas (KANA Quote), the Scients (SCNT Quote) and the Vignettes (VIGN Quote) had expectations raised so high that they could not raise them any more. Some of the expectations had been raised in defense. In other words, during the bad days of April and May, these companies let everybody know that things were pretty good, which put lift in their stocks.

But simply saying, "They are still pretty good" didn't cut it and, given the slowdown in IPOs, there wasn't enough money coming these companies' way to raise expectations. I think things get worse from here, as the Web infrastructure build-out slows.

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