Editor's note: This is the final part of a multipart article. Please read
Part 1 and
Part 2! In March of 2000, we saw the beginning of the margined selloffs -- those vicious, sickening midday declines, as margin clerks went from one account to another, selling out levered investors' holdings. These started right at the time of the
MicroStrategy blowups. They were crucial to my
"take money off the table" call because, unlike most of the momentum managers, many of whom came of age post-1994, I had worked in a brokerage house where I sold overly margined people out of their holdings. I called my old friends in margin and they told me frightening stories the likes of which I hadn't heard since 1987.
I knew that nobody could really withstand the selloffs that margin clerks cause. If you thought the rally was artificial, wait until you see what the margin clerks can do to a stock, I told the younger troops at my hedge fund. Margin-selling scares even this grizzled investor. I remember thinking that the market had become more treacherous than I had ever seen. I had hoped that we could be on a course that would be like 1994, when the
Fed eased aggressively and we were saved from large capital losses. But the sheer mountain of margin debt was so high that there was no way the Fed could switch from being tight to being easy. The speculators had to be punished and the longest period of capital-appreciation-seeking was now behind us.
It had become capital preservation time. And when you are in capital preservation mode you can't be in anything that is speculative without losing your shirt.
The fall of MicroStrategy did one other thing, something that in another time wouldn't mean much at all, but in this momentum-driven market might have been fatal: It dented the charts of many a pristine
Nasdaq stock. With so many people buying stocks on the "technicals," any sign of a serious dip meant that you had to be wary if there was no quick snapback. Because of all of the other variables above, the snapback didn't occur. The dip, which has been buyable for six years, would prove deadly this time. And the charts went from being dented to totaled in no time flat.
In the spring of 2000 the combination of margin selling, insider selling and secondary selling overwhelmed the small band of buyers that had kept so many of these new stocks aloft. Remember, with the exception of MicroStrategy, the declines in these stocks preceded any turndown in the fundamentals. In fact, the earnings that were reported in April were stellar for almost all technology companies, including the dot-coms and the business-to-business plays. Earnings got bumped, in some cases bumped huge, and momentum funds and growth funds swarmed back to the market at the end of reporting season in May.
But the Nasdaq could not return to its pre-MicroStrategy form. And by the summer it became increasingly clear that we had lost the earnings momentum, too. In many ways the climb to Nasdaq 4000 was more seductive than the hurried run to 5000, because it encouraged those individuals who were used to making big money at home, but had taken hefty losses in the spring, to give it one more try, to average down, to buy more of the highfliers. The mutual funds, too, clustered in the areas where growth was still identifiable, notably storage and wireless and the so-called enterprise software -- that is, giant software companies that helped clients integrate their databases in a Net-friendly way.
So, the rare second chance to get out came and went with few investors taking advantage of it. This was the summer for me when
Todd Harrison ascended. Taking over from me during my summer vacation, Todd told the world to get bearish, that the second drop could be more frightening than the first. He would preach to us in our investment meetings that the momentum mutual funds hadn't seen redemptions yet and when they did, you would see a further pancaking of the highfliers. It was as great a call as the "take it off the table" call in March, and I embraced it wholeheartedly.
(Coincidentally, it also showed me where my strength going forward would be: picking stocks, leaving the levels -- a pure technical issue -- to my trader Todd-o. Later on, when I decided to retire from minute-to-minute trading, I knew the site would be in good hands because all you were getting from me was the same side as you were getting from Todd. That duplication, measured in our respective Trading Diaries, made our site seem overly focused on trading. Since the vast majority of people
TheStreet.com is trying to reach don't trade like Todd does and I did, it became imperative for my writings to reflect longer-term considerations. Hence, I have a new role as an private investor with strict time horizons and taxable implications that I could dismiss at the rock-'em, sock-'em hedge fund, but that 98% of our readers out there deal with every day.)
As the year limped to a close, the MicroStrategies of the world faded into oblivion, with the highfliers sinking and sinking and sinking under waves of selling pressure from individuals taking losses, mutual funds facing redemptions, venture capitalists still above water and insiders who had to sell because they had margined or because they didn't make enough money at their day jobs to maintain the lifestyles they had established. All of the sellers found themselves without buyers and the losses became staggering.
Year 2000 never recovered from that March selloff. Now it is up to us to recognize that the game has changed, forever, and to come up with new, less daring, more capital-preserving ways to make money. I am confident that together we can do so.
Jim Cramer
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