Feel the Fire

SAN FRANCISCO -- As promised, here is a list of some of the mutual funds with the biggest year-to-date losses, along with their largest individual holdings that are up significantly for the year.

Losers and Their Winners
Fund Name	Year-to-Date Percentage Decline* (through 11/30/00)	Big Holdings* With Year-to-Date Percentage Gain** (through 11/30/00)
(PNETX Quote - Cramer on PNETX - Stock Picks)Potomac Internet Plus	74.6	BEA Systems: 67.5 Check Point Software: 107
(BMCGX Quote - Cramer on BMCGX - Stock Picks)Apex Mid Cap Growth	72.6	Ciena: 164 National Discount Brokers: 86.2 ICN Pharmaceutical: 33.1 Noven Pharmaceutical:39.3
(INGAX Quote - Cramer on INGAX - Stock Picks)ING Internet A	67.8	Check Point Software: 107 Automatic Data Processing: 22.5
(UOPIX Quote - Cramer on UOPIX - Stock Picks)ProFunds UltraOTC	68.3	Linear Technology: 32.2
(ATCHX Quote - Cramer on ATCHX - Stock Picks)Amerindo Technology D	60	Siebel Systems: 66.4 Gilead Sciences: 50.5
(WWWEX Quote - Cramer on WWWEX - Stock Picks)Kinetics Internet	59	IDT: 37.7 Eshed Robotec: 109
(IPSFX Quote - Cramer on IPSFX - Stock Picks)IPS New Frontier	57.4	SDL: 66.7 Juniper: 120 Brocade: 89.8 Ciena: 164
(POEYX Quote - Cramer on POEYX - Stock Picks)Putnam OTC Emerging Growth Y	55.8	SDL: 66.7 AMCC: 52.3 Manugistics: 134 Informatica: 31.4 Brocade: 89.8 GlobeSpan: 44.2 PMC Sierra: 15
(HIPAX Quote - Cramer on HIPAX - Stock Picks)H&Q IPO & Emerging Growth	51.9	Extreme: 23.1 Globespan: 44.2 Brocade: 89.8 Juniper: 120 Nvidia: 72.6 Exar: 28
(THRGX Quote - Cramer on THRGX - Stock Picks)Thurlow Growth	49.9	Brocade: 89.8 Newport: 274 Rambus: 128 Cross Timbers Oil : 229 Corning: 36.1 Quanta Services: 65.6 Vertex Pharmaceuticals: 219 Prima Energy: 137
(TCFQX Quote - Cramer on TCFQX - Stock Picks)Firsthand Communications	44	Ciena: 164 Tekelec: 37.8
(VWMDX Quote - Cramer on VWMDX - Stock Picks)Van Wagoner Mid-Cap Growth	29.9	Powerwave Technologies: 153 Globespan: 44.2 SDL: 66.7 Juniper Networks: 120 Brocade: 89.8 TranSwitch: 12.7 Network Appliance: 18.9
* Source: Morningstar.com **Source: Baseline

Before we get to the nitty-gritty, a couple of observations:

• One, how badly did the managers of Apex Mid Cap Growth and Thurlow Growth (most notably) have to blow their other picks to have such steep overall losses despite having a number of big winners?

• Two, could someone explain to me how Amerindo Technology can still have Morningstar's coveted five-star ranking?

OK, down to brass tacks. When I started down this road Wednesday evening I theorized that funds with big overall losses would be pressured to sell their individual winners. Why? Both to counterbalance capital losses sustained in other names and to raise cash in order to meet potential redemptions.

But of course, nothing is that simple -- at least not on Wall Street. The list above contains Van Wagoner Mid-Cap Growth, which really doesn't deserve to be lumped with these other bumpkins in terms of overall performance. It's on the list because Van Wagoner shares many of the same holdings as its more depressed brethren, Globespan (GSPN Quote - Cramer on GSPN - Stock Picks), SDL (SDLI Quote - Cramer on SDLI - Stock Picks), Juniper Networks (JNPR Quote - Cramer on JNPR - Stock Picks) and Brocade (BRCD Quote - Cramer on BRCD - Stock Picks) being among the most notable areas of commonality.

The manager of a fund like Van Wagoner, and others in similar straits, might be more inclined to sell losers and put all his efforts (i.e., funds) into the winners, hoping they will continue to rise and help dramatically pare the fund's overall loss -- maybe even salvage the year if everything breaks just right. Fund managers with the bigger overall losses might also be likely to put all their proverbial eggs in the few stocks where they can hang their winning hats (how's that for a mixed metaphor/cliche mangle?). This gets to the heart of the "markup" process Jim Cramer has described the fictitious Buzz & Batch undertaking. Thus, you have to be very nimble if you're going to shoot against these names, as Friday's trading evinced.

Midday Friday, it looked like the Buzz & Batch types were back in charge. While the Nasdaq Composite was up and healthy 4.8% around 1 p.m. EST, a host of names on the above list were up well more than 10%. So many in fact, I'm limiting examples to those up at least 15%, which included: SDL, Noven Pharmaceuticals (NOVN Quote - Cramer on NOVN - Stock Picks), Powerwave Technologies (PWAV Quote - Cramer on PWAV - Stock Picks), Newport (NEWP Quote - Cramer on NEWP - Stock Picks), Rambus (RMBS Quote - Cramer on RMBS - Stock Picks), Vertex Pharmaceuticals (VRTX Quote - Cramer on VRTX - Stock Picks), Applied Micro Circuits (AMCC Quote - Cramer on AMCC - Stock Picks), Informatica (INFA Quote - Cramer on INFA - Stock Picks), Extreme Networks (EXTR Quote - Cramer on EXTR - Stock Picks) and Nvidia (NVDA Quote - Cramer on NVDA - Stock Picks).

Many of you will no doubt believe the names above have better growth prospects, and thus deserve to outperform. As always, I urge you to investigate the fundamentals of a given company before investing -- long or short.

But as a general statement, the momentum game and those who play it are to me like monkeys in a forest that's on fire. No matter how high they climb, eventually the flames reach the top. That, or the weight of everyone scampering to the tops of the trees, causes the branches to snap, or bend enough to dip some into the fire. And I don't think even Alan Greenspan has a strong enough extinguisher to put out this conflagration -- even if he did have the will to try.

Separate, But Related

Finally, regarding the issue of the mechanics of tax-related selling -- I am not an expert, nor do I play one on TV. But Paul Mark does, maybe not on the telly, but as tax manager in mutual fund administration at Investors Bank & Trust in Boston. Recently, Mark emailed the following observations:

Because the [Internal Revenue Service] requires all mutual funds to pay, by Dec. 31 of each year, 98% of their capital gains generated during the 12 months ended Oct. 31, many funds sell off depreciated securities during October to offset any gains, thus reducing the required distributions to shareholders. This keeps the money in the funds and benefits the shareholders as well, in the form of a lower tax bill.

However, because of the wash sales rules, a taxpayer that sells a security at a loss cannot buy the same security again within 30 days after the losing sale. This means that [the funds] can't repurchase a security that they sold at a loss at the end of October until December, or maybe late November. [Author's note: Looks like they waited 'til December.]

Compound this with the fact that savvy individual investors and other institutional investors will go through this same process during late November and December. They want to sell at a loss now and take the loss for tax purposes in 2000. This means that they cannot start buying again until late in 2000 or early 2001.

Combine these two items together, we've got lots of people selling -- concentrated in down stocks and many people not stepping up to buy until the wash sales window closes.

The key is the Oct. 31 'year end' for funds. The IRS knew that funds need time to calculate their tax basis gains and losses, so saying that funds had to pay out calendar year capital gains wouldn't work. So they arbitrarily decided that if they required a distribution of 12 months of capital gains for the period ending Oct. 31, funds would have sufficient time to calculate and pay before Dec. 31. This set in motion all the selling pressures and wash sales issues."