Smarter Money: PMC-Sierra Is the Waterloo for Tech Momentum Funds

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Before Thursday, 2001 already seemed to be too good to be true for tech momentum funds. After the disaster of 2000, I am sure many of these managers expected redemptions and a continuation of the awful tech tape that we saw in the fourth quarter.

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Instead, buoyed by the Fed's cuts, the stocks of the technology companies these funds held exploded to the upside. Some of the hardest-hit areas -- personal computers, networking and telecom -- were on fire for most of January. The result? Many momentum funds were already up 20% from the first days of the year. The performance numbers going into Thursday were huge! By contrast, balanced funds -- funds with assets in an array of industries -- were performing well, respectably, even. But they had been left wallowing in the mud while these hares dashed off. You only saw the tech momentum funds' fluffy little white tails if you strained real hard and had Leica binoculars.

Today, the tortoise will be neck and neck with the hare, courtesy of high-end chipmaker PMC-Sierra (PMCS Quote), which blew up, in a hideous, horrid fashion, stumbling terribly with no positives that I can see. This incredibly over-owned stock now must be sold according to the hares' brains, because PMC-Sierra's management didn't say, "We see a temporary slowdown" or "a brief cessation" or "a hiccup." It said it had no visibility. It said things were bad. You can't ever say things are bad and be expected to be kept by the likes of these momentum jackrabbits. Hares don't like that. To them that's like saying, "Hey, the lynx is here, let's have him over for tea!" They jettison your stock hard. The losses today will be excruciating in the name.

How pervasive was PMC-Sierra in the account base of these funds? I have long regarded it as the linchpin for these funds, the one that they rode in on in 1998 and stayed with and was meant to be their Cisco (CSCO Quote), circa 1992. In particular, Kevin Landis from Firsthand Funds basically created his reputation on the back of PMC-Sierra. He pumped it every single time he was on television, and no one ever called him out on it the last few times, even though my sources -- shared here -- indicated things had slowed badly for the firm. Landis and his acolytes wouldn't listen. They were proselytizing down to the wire on this one. This company, for some reason, was special, more special than any other of the new crop of star stocks of the late '90s. Now this stock will bury these funds.

Somehow, I think some of these funds should have seen it coming, especially those in Silicon Valley who claim to have such firsthand insight. In the end, PMC-Sierra is simply a supplier of a product to an end market. The end market here is levered to telecom. PMC-Sierra can't trump its end market. Nobody trumps the end market. So now we will see the wholesale liquidation of the stock, and the funds will be thinking, "Oh man, where did my lead go?"

They just got caught by the turtle, doing his little S&P thing with the financials and the growth cyclicals and the retailers. And they didn't even hear his footsteps. My advice: This is the year where you have to stick with the turtles. I continue to believe that the momentum funds have too much risk (remember that arcane term?) for all but the youngest of mutual fund investors. Why the youngest? Because they have their whole lives ahead of them to make back the losses some of these firms are going to generate.