Houdini Time: Can Tech Growth Funds Pull a Rabbit Out of the Hat?

Growth stock managers are so chest-deep in these telco equipment plays that it is difficult to imagine them being able to generate solid returns given the decline in the group's fortunes. Heck, DSL alone has created so much havoc that managers who ate this stuff up in the expectation of big rollouts by the big telcos are almost certain to be struggling to beat their benchmarks. I can't see fiber and optic plays coming back strong in the remaining six weeks given that we are just now discovering that demand has started to slacken. We had a fiber deal the other day that failed, usually a sure sign that the move is at last over. ("Failed" meaning it went below where it was offered as an initial public offering.) I see people trying to prop up JDS Uniphase (JDSU:Nasdaq - news - boards) and Glow Worm (GLW:NYSE - news - boards) (Wall Street slang for Corning Glass) every day.

They actually, on really short squeeze-prone days, succeed. But does anyone really doubt that the fiber cycle is slowing down, given how much fiber is out there already and how much still has to be lit and how little money these telco networks now have to build out and how low the price per voice or data a phone call is? I know that writing such comments six months ago would have been heresy. But heresy becomes gospel overnight in this market.

Same thing with semiconductors that make telco equipment better and faster. Seems like the next piece of incremental data will be weaker, not stronger. That's why the Merrill downgrade rings so true. Cable, another predictable profit center during these last few years, is also feeling heavy, weighed down by the nonessential stakes that AT&T must now blow out to satisfy the bond analysts. AT&T has pieces of lots of these cable plays and has to line them up and get rid of all of them if it is going to keep borrowing at a respectable rate. That should put a lid on the whole industry.

Contract manufacturers have been good all year, but we think that, without a clear sign that inventory has been worked off in the end markets for technology, the next thing we will hear is shortfalls in this group, not upside surprises. These stocks have been among the best performers, and I am talking here about Celestica (CLS:NYSE - news - boards), Jabil (JABL:Nasdaq - news - boards), Solectron (SLR:NYSE - news - boards), Flextronics (FLEX:Nasdaq - news - boards) and Sanmina (SANM:Nasdaq - news - boards), as the growth story for outsourcing remains strong. But is the "story" as good as the near-term fundamentals? I think portfolio managers would be scared to gun these up too far, given what happened to SCI Systems (SCI:NYSE - news - boards) earlier in the summer.

Of course, there are always specialty areas that could work. Companies that compete against Lucent (LU:NYSE - news - boards), perhaps, because that company is ailing so badly. Companies that make some sort of specialty fill-in computer product that is in short supply. And there is always the hope that the big semiconductor downturn is over because the SOX, the semi index, doesn't want to go below 600. Could DRAM prices finally be bottoming? Yeah, sure, maybe.

Right now, I just don't see what these tech growth managers have, other than a hope that things will get better eventually. But not this year. Which is why when I hear the terms "year-end rally" or "Santa Claus rally," I regard them as strictly the relief and trading kind when it comes to tech. It is far more likely that a relief rally comes in healthcare and even in, yes, the "overvalued" and dreaded "bubble" of biotech -- because there are still plenty of rational people out there who can argue that it isn't a bubble. By this point, observers of the dot-com, fiber, optical and storage bubbles know better. We don't want to hear it anymore. We are willing to play the bubble, but the fact that it is a bubble is clear. We have lost too much money in storage and optical and dot-com and fiber when they deflated, when they went pffftt, to even bother with the protestations of those who think it isn't. In fact their protestations repulse us because we know they use these nonbubble sirens like Circe, to suck us in and take our money.

So we wait and we try to figure out how Putnam OTC & Emerging Growth fund and Amerindo and the Seligman Communications fund and, yes, the Jacob Internet fund will pull it out this time. The only thing we know is that they have always done it, and that, like a great escape artists in chains underwater in a box deep where the Hudson joins the East River, they will certainly figure it out in time to save their year. Or will they?

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James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund had no positions in any stocks mentioned. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at [e-mail].