What a Week: Shakiness Mirrors Maelstrom of a First Quarter

SAN FRANCISCO -- Following a period of debilitating losses, the period began with a renewed sense of hope. Then came withering declines that seemed to eliminate optimism from all but a shrinking minority of investors. The period ended with a faint hint of better times ahead, but few dared to believe.

The above loosely describes this week, which -- after Friday's modest upswing -- saw the Dow Jones Industrial Average rise 3.9%, the S&P 500 gain 1.8%, but the Nasdaq Composite lose 4.6%.

But the opening paragraph more aptly describes the first quarter, one of the most daunting for even the jaded market veterans. In the first three months of 2001, the Dow shed 8.4%, the S&P lost 12.1%, and the Nasdaq tumbled 25.5%; the down quarter is the fourth straight for both the S&P and the Comp.

Yet those results, which followed a terrifically difficult 2000, fail to encapsulate the pain. As reflected in major averages (and the table below), several big-cap bellwethers suffered incredible losses in the quarter, including Cisco Systems CSCO, down 58.7%; Sun Microsystems SUNW, off 44.9%; and Yahoo! YHOO, which fell 49.5%.

The Worst of Both Worlds The bottom 15 performers on the Big Board and the Nasdaq for the first quarter 2001 with a minimum market capitalization of $1 billion*
NYSE		Nasdaq
Applera - App Biosystems	-71.6%	Ariba	-85.1%
Corning	-62.2	TIBCO Software	-83.1
Nortel Networks	-57.9	Brocade Communications	-78.9
EMC	-55.4	Applied Micro Circuits	-77.3
C-Mac Industries	-53.6	Emulex	-76.8
Perkinelmer	-52.9	Webmethods	-75.5
Celestica	-49.3	Network Appliance	-74.6
Amer Tower	-49.2	i2 Technologies	-74.4
Entravision Communications	-48.3	Handspring	-74.3
Primedia	-47.6	Research in Motion	-73.8
Computer Sciences	-46.8	Sycamore Networks	-73.4
Waters	-46.6	Corvis	-72.7
Charles Schwab	-46.1	Palm	-71.7
Agilent Technologies	-45.2	Redback Networks	-70.5
Solectron	-44.8	Interwoven	-70
Genentech	-40.7	Qlogic	-69.7
*Through COB 3/29/01. Minimum market cap of $1 billion.

Perhaps most jarring to investors was the tumble stocks suffered after the big rally in January; from its peak on Jan. 24, the Nasdaq is now down 35.6%, while the S&P 500 is down 15.6% from its Jan. 30 closing high. The Dow's quarterly peak came on Feb. 1; since then, it's down 10%.

The January rally was spurred by the Federal Reserve's intermeeting 50-basis-point rate cut on Jan. 3. The Fed eased by 50 points each at its regularly scheduled meetings on Jan. 31 and March 20, making the first quarter the period of the steepest rate cuts since 1987. That such dramatic Fed action failed to inspire stocks only further enhanced investors' angst and anger. When I wrote in mid-December that Fed chairman Alan Greenspan might lose his championship belt in 2001, I didn't realize he'd find himself so far behind on points so early in the bout.

The fact that stocks sank in the face of Fed action and prospects for tax cuts have left many market pros "confused, cautious and uncertain," according to Dwight Anderson, manager of the Ospraie Funds, a basic-industry-only hedge fund offered by Tudor Investments.

Anderson declined to provide specifics on asset size or return, but said the fund was basically flat for the first-quarter.

"The Fed is jamming liquidity into the system and you're always taught 'Don't fight the Fed,'" he said. "However, every company [barring energy] is saying volume and pricing are coming down and earning estimates are too high."

Anderson remains bullish on energy stocks -- including the names mentioned here earlier this month -- and noted the larger consolidation theme in the commodity arena continues apace.

Just this week, Pure Resources PRS agreed to buy Hallwood Energy HECO; Vintage Petroleum VPI agreed to acquire Canada's Genesis Exploration; Baytex Energy agreed to acquire fellow Canadian oil and gas producer OGY Petroleums; and Ocean Energy OEI agreed to buy $121 million of assets from EnSight.

Ospraie has long positions in Vintage, Baytex and Ocean Energy and was long Hallwood prior to Friday. The equity portion of the hedge fund is "net long materially energy and net short" just above every other sector, Anderson said, reflecting the aforementioned uncertainty "about how things play out."

Energy fell 8.8% in the quarter but was still one of the better-performing sectors in the S&P 500.

Sector Blues*
S&P Sector	Q1 2001 Return
Consumer Discretionary	-0.4%
Telecom	-1.4
Materials	-6.5
Energy	-8.8
Utilities	-9.6
Consumer Staples	-11.4
Industrials	-11.8
Financials	-12.1
Health care	-15.8
Infotech	-26.2
S&P 500 Index	-13.1
Source: Standard & Poor's. *Returns through 3/29/01.

How Things Play Out

Uncertainty and skepticism were common themes in the waning hours of the quarter.

Brett Gallagher, head of U.S equities and deputy chief investment officer at Julius Baer Investment Management, which manages about $3.5 billion, made a prescient call in late November that the Nasdaq was heading to 1800. He reiterated a cautious view on tech in late February, but was fully invested at the time.

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Being 'Unpopular' Could Have Saved You Money This Quarter -- and Next

No Quarter: The Fund World Offers Few Ports in 2001's First Quarter

Fund Investors: Do Not Feed the Bears

The Best- and the Worst-Performing Stocks of First Quarter 2001

Then came the steep swoons for the Dow and S&P in the middle of March -- "a signal the weakness we were looking at in the Nasdaq may be spreading," Gallagher said today. "For the first time, we began raising cash."

Versus 2% to 3% normally, as much as 12% cash was raised in the firm's roughly $450 million U.S. equity portfolios, he said. Apparently, that decision came too late: After rising 4.3% in 2000, the firm's U.S. equity portfolio is down 9.7% so far in 2001.

"Right now, I'm a little more cautious on the market as a whole" Gallagher said, offering several reasons why. The first being an absence of capitulation, which remains a loosely defined point of contention.

Gallagher believes panic selling -- by both institutions and individuals -- started to occur in that mid-March swoon, but the market's about-face revived optimism. "I still think investors generally are of the view these are good companies that are going to work out long term if [they] just hold," he said. "You need a bearish feeling for a longer period of time before investors are willing to throw in the towel."

Gallagher also frets that earning estimates are still too optimistic and believes "lower interest rates aren't going to cure the slowdown, because the slowdown was not caused by higher interest rates."

Rather, he cited overly aggressive capital spending and overly optimistic investment in companies with dubious business plans. Specific concerns over the telecom industry's debt-albatross are commonly heard on Wall Street. The fact that some say today's overcapacity problems were the result of the Fed's aggressive easing in the fall of 1998 seems almost beside the point.

Gallagher noted that only a small handful of telecom companies have positive cash flow and Julius Baer is long two of them: SBC Communications SBC and Verizon Communications VZ.

Finally, he noted that valuations today remain much higher than at other similar points in Fed easing cycles. "I think we're closer to fair value but not compelling valuation," he said. "I wouldn't say you pull out at this point. I just think we've got a little further [down] to go."

Currently, Gallagher said he's focusing more on the options market and is writing calls out of the money, "so we can participate if the market runs" but are protected on the downside.

Compuware CPWR being one example. With the stock trading around $9.50 yesterday, he was able to write a January 2002 call with a $12.50 strike price, meaning Julius Baer will pocket $3 if the call is exercised, in addition to the $1.75 premium paid by the investor who bought the rights. If the stock falls, that premium protects the firm from the first 18% to 20% of the downside.

Julius Baer is long Compuware common stock with a cost basis around $10.

Elsewhere, Rick Ziesing, founder of Versant Advisors in Kennett Square, Pa., said he got burned by an "ill-fated" attempt to play the long side after the market's January rally. "We were looking at stocks not going down on bad news but had our [heads] handed to us," he said.

Ziesing, whose relatively small ($10 million) hedge fund is down about 4% year to date, is currently long no stocks and short many, including Micron Technology MU, Dell DELL, National Semiconductor NSM, Wal-Mart WMT, Qualcomm QCOM, Microsoft MSFT, Scientific Atlanta SFA and Kimberly Clark KMB.

"People still want to believe everything is going to be fine -- I don't believe it," he said. "The consumer is tapped out, Japan is in the cesspool, Germany is rolling over, banks are tightening lending, [and] the Fed is pushing on a string. It doesn't augur well."

That said, Ziesing conceded he's "keeping a light hand" with his shorts, noting "snapback rallies can kill you."

Over at New Amsterdam Partners, which manages about $1 billion (long only), Nat Paull, senior portfolio manager, fears the market won't "find some footing" until the trend of downward earning revisions stabilizes.

As a result, the fund group is "moving toward the value end of the spectrum because of the declining economic growth and high valuations getting crunched down," he said. "But there are some attractive-looking names," and he cited Kemet KEM, Pogo Producing PPP and PepsiCo PEP as examples. (New Amsterdam is long all three.)

The numbers weren't finalized Friday afternoon, but New Amsterdam's equity funds were down between 5% and 7% for the quarter.

With all the sources mentioned here, the old saw that "you can't eat relative performance" comes to mind. The fact they were among the Street's better performers reflects what a difficult period it has been. As a result, very few are optimistic about the approaching second quarter, despite myriad reasons to be bullish and the fact that some stocks fared well in a quarter most investors are happy to see end.

The Best of Both Worlds The top 15 performers on the Big Board and the Nasdaq for the first quarter 2001 with a minimum market capitalization of $1 billion*
NYSE		Nasdaq
Company Name	Quarterly Return	Company Name	Quarterly Return
Rite Aid	191.4%	Earthlink	132.3%
Service Corp. Int'l	148	Nvidia	111
Arch Coal	115.6	Network Associates	85.1
Advanced Micro Devices	104.9	Lam Research	77.6
Massey Energy	97	Efficient Networks	75.2
Dillard's	85.1	Electronic For Imaging	74
Kmart	81.6	Informix	65.3
Blockbuster	75.5	Compuware	56.5
Abercrombie & Fitch	64.3	Dell Computer	54.5
Visx	58.9	Radio One	52
Owens-Illinois	52.6	Apple Computer	51.5
Cendant	50.6	ASE Test	42.6
Toys 'R Us	49.6	Worldcom	36.2
Freeport-MCM	49	Semtech	34.8
Autonation	48.3	Electronic Arts	31.7
*Through March 29.