April 22, 2000

In Today's Bulletin:

o Market Features: Six Weeks That Shook the Markets: Where Do We Stand Now?
o Smarter Money: Microsoft's True Tragedy
o Market Features: Economic Growth Likely to Continue
o Market Features: Sagging Overseas Markets Could Dampen Hopes for Dot-Com Domination

Also on

Market Features: Internet Shakeout: B2C Stock Price Charts Hit the Slopes

While everyone's going downhill, some observers see opportunity in oversold, but solid companies.

Market Features: Strong Earnings Could Hatch B2B Recovery

The recent shakeout might be beneficial in the long run.

Market Features: Chips Ahoy! Semis a Safe Haven in Stormy Seas

The world's growing reliance on computer chips may make for smooth sailing in this sector.

Market Features: E-Tails of Terror: Pure-Play E-Tailers Are Among the Hardest-Hit

Though most companies are lagging, the shakeout in this sector may be a necessary growing pain.

Market Features: Six Weeks That Shook the Markets: Where Do We Stand Now?


Brett D. Fromson

Chief Markets Writer

4/21/00 10:00 AM ET

Still complacent?

Markets like nothing more than humiliating the greatest number of people. And they certainly have in the past six weeks or so.

Let's review the damage:

  • The Russell 2000 topped out on March 9 and closed Thursday down 21%.
  • The Nasdaq Composite Index peaked at 5048.6 a day later and is now down 28% from the high.
  • Microsoft (MSFT) - Get Report collapsed April 3 after Judge Jackson issued his ruling of law in the federal antitrust suit. The next stop: the "remedies" phase. The stock has yet to recover.
  • April 4, the Comp rollercoastered down and up -- over and over -- for a total of 2650 points of stomach-churning movement, or roughly 2/3 of the index's then-value. It ended the day at 4148.8 -- off just 74.8 from the prior close.
  • And who can forget the bloody week of April 10 to 14? It was a horror show climaxing on Friday the 14th as all the major market indices suffered their largest one-day point declines in history on news of a scary inflation report.
  • As you'll see in the sector reports to follow, many market leaders of the past two years (the vaunted technology, media and telecom) lie wounded. Some of the highest flyers have fallen 40% to 60% off their highs, and they may never see those heights again. TMT turned into TNT.

So now what? Despite all the turmoil, credible market analysts are still making the bull case for stocks.

Goldman Sachs


Abby Joseph Cohen

articulated it only last Monday: Company earnings will remain robust. Inflation does not inflate. The


will not surprise us with sharp short-term interest rate increases. Mutual fund investors keep pouring money into stocks. There are still cheap stocks if you look beyond the well-known tech and blue-chip names. Bottom line, Abby predicts, is a 15% gain in the


this year.

Abby is not alone. The majority of money managers remain bullish. Value investors have been making money as folks flee tech stocks for food, booze, cigarettes and bombs. (Yes, there is life after Julian Robertson.) Plenty of small-cap stocks sell below 15 times earnings. The flight to bonds has for the moment abated and interest rates seem to have stabilized, albeit with a slightly inverted yield curve. It's an election year, which has historically treated investors well in the second half.

So why do the months ahead seem particularly unpredictable for stocks? One reason may be that Mr. Market's mood has shifted in ways as yet difficult to quantify. Yes, some tech stocks are still up significantly for the year, but that is cold comfort to investors who have given back much of their gains since mid-March. Some of the names that investors recently fell in love with, in rising sectors such as B2B Internet services, may never recover. And many of the techs that have been around a while remain mired in April's muck despite good first-quarter earnings announcements.

Conclusion: It is legit to wonder if all the good news is priced in for some time to come. There has been some rotation out of more speculative issues into defensive companies with real earnings and sales. But do people truly believe that a bull market will be led by


(GT) - Get Report


Phillip Morris

(MO) - Get Report

? In such an environment, the market may tread water.

The week before the holiday ended inconclusively. Monday and Tuesday were huge rallies, but the next two days were a fade. Thursday was quiet. No one expects that to last.

For a full list of the stories, see the special



Smarter Money: Microsoft's True Tragedy


James J. Cramer

4/21/00 11:23 AM ET

First things first: I am not afraid. When you are writing things on the fly, trying to get them done, you aren't as sensitive to punctuation and ordering as you should be. "Terrible transition and terrible timing for Microsoft, I am afraid," the killer last line of my on-the-fly brief last night, should have read "I am afraid this is a terrible transition and terrible timing for Microsoft."

But if you only knew the half of it.

We came Thursday long


(MSFT) - Get Report

. We are always long Microsoft. It is not a big position, but I have insisted that we be long Microsoft for as long as we have had this firm, and for before that, when I worked at

Goldman Sachs

and the company came public. It, along with


(INTC) - Get Report



(CSCO) - Get Report



(SUNW) - Get Report

have long been my favorite companies. If you go back to when I was the stock columnist for

Manhattan Lawyer

magazine in the late '80s, you would know this for all but Cisco, and that exception is only because it hadn't come public yet. By the time I moved on to


, my bias was on my sleeve about all four companies.

My history with Mister Softee goes back to the '70s -- pre-Soft -- during the summer of my third year at Harvard when Microsoft's now-president Steve Ballmer was my roommate and he ran the business side of the


when I ran editorial. I am always proud of the fact that we had great editorial


we turned a profit under Ballmer. We had been a money-losing institution for years, but Steve and I collaborated on a new section that brought entertainment and restaurant advertising to the


for the first time and we turned the financial ship around. He is the best businessman I have ever worked with and he is a fabulous guy. I remember when he was debating


(PG) - Get Report

vs. Microsoft at some Christmas party we were both at almost 20 years ago and I know where I stood -- "Go West, young man." I regard him as a friend for life, even though we haven't spoken in some time. Just to nail this long history timeline home: We both had a ton of hair during that conversation!

In other words, I love Microsoft.

But I am not a dictator at my firm. I am a partner.

Jeff Berkowitz

is my partner. We are teammates, and Jeff is "primary" on Microsoft, not me. (These days I am primary on everything but tech, covering the 70% of the


that is not tech. It is my job to be on the P& G and


(CLX) - Get Report







calls, and some of the dot-coms. Jeff handles tech with profits. Matt handles tech with losses. Just my short-hand, but it works.)

In other words, I listen to and take Jeff's counsel on 'Soft. The week before, when Rick Sherlund at Goldman Sachs had trimmed revenue forecasts, Jeff had sold a chunk of Microsoft without even checking with me. That was sure right. I would have only agreed.

We don't like revenue cuts. We care more about revenue than we care about earnings because revenue shows a truer picture of growth. True, just true. Go with me on this. But we didn't sell it all, and I think we didn't out of Jeff's respect for me and my love of the company. In a business where love is a costly line item, we still show a modicum of it for certain companies because of respect for the money-making culture they have created. 'Soft is one of a few. So is



, by the way. And of course, so is Cisco.

So last night I was

late man, having left early the night before. I was on the Microsoft call. I was, reluctantly, primary. I always like to be on the call, but I am usually a sightseer as opposed to Jeff, who is in charge.

The call started at 5:30 p.m. EDT. Jeff was still on his way home. But he got on it immediately and he went on



Instant Messaging as I did -- we are always on, so we can stay on the phone -- and we listened and watched together.

Conference calls start with generalities about the past quarter, then go to specifics about the last quarter, then switch to outlook and then guidance. Think of them as plays where you get involved with the characters and know their histories in Act One, find out what they've done most recently in Act Two, and then in Act Three you find out what is going to happen and how things end. As the quarters are continual, it is more like a series of ongoing plays then a one-off production. A continuum.

During the first act of last night's call, I felt quite good about Microsoft. You forget how strong this company is. How its gains quarter over quarter are more than most companies will ever make. It's like comparing the annual gross domestic product of this great nation to the total sum of all of the gross domestic products of 100 other nations for a year and knowing we still exceed it. Makes you proud. Makes you proud to be a shareholder.

Act Two was more difficult and a tad worrisome. Act Two was about how business demand for the second quarter was not so hot. I had heard this before from


(IBM) - Get Report



(UIS) - Get Report

, mostly because of that now-wacky Y2K thing. (Don't email me, I am kidding.) I didn't want to hear it from Microsoft.

In the middle of Act Two, I penned a piece to my editor,

Jane Penner

, that said that while things were not great, they weren't bad, but more later.

I wanted to give a real-time kind of insight. I dashed it off in the middle of Act Two.

Act Three began around 6 p.m. I was conscious of the time because we had exercised Microsoft calls, the April 75 calls, which would make us long Microsoft Monday. The exercise was automatic. The stock was three points

in-the-money (meaning it was three points above the strike price when the market closed). I was conscious because I knew when Act Three began that it would be a mistake to have exercised those calls. It would have been worth it to have them go out worthless, to write off the three points of stock that we would get in order not to have to come in long this stock on Monday.

It would have been worthless because Act Three was a disaster, a tragedy when I thought we were witnessing a history. Most of Microsoft calls are a comedy in the true Shakespearean meaning of comedy, so I didn't expect to run into this spiraling down drama.

In Act Three, the analysts learned that everything they had thought about the future of Mister Softee was too rosy. Revenue, earnings, growth rate, they were all too high. Those who were thinking 20% growth rate learned they were dealing with a 15% growth rate. Those who thought that the slowdown in PCs was just temporary learned otherwise. Hundreds of millions of dollars of prospective revenue got vaporized on that call. Sherlund, the most conservative 'Softee, was still too high. As this part of the call went on, I hastily flashed "Urgent Kill Piece," to my editor. It hadn't been posted, but I knew that this call was too much of a work in progress to draw any conclusions yet. My editor killed the piece. The wonders of the slowness of net technology; it hadn't been posted yet. Phewww!

The call droned on. Time to be more conservative. Time to be more guarded. Time to be less optimistic. Time to be all right already, I wanted to say into the muted phone.

We were in disbelief.

"A disaster" came the Instant Message from Jeff.

"Wait," I wrote. "Too soon to judge."

"No, it is bad. You know it."

"Y" I wrote back, for yes, I knew. "Disastyer," 'cause nobody spells anything right on IM.

"Are you selling it all?"

"Leaving some."




"OK, Gone"

And with that, Microsoft vanished from our sheets. Microsoft. Fixture on the sheets like the names Cramer and Berkowitz on the top. Root of the sheets. Sheet bedrock.

While we were still selling, I sent off that

piece that you read, the "I am afraid" piece, which was meant as a heads up to our readers that this was no ordinary conference call. This was the true tragedy, the one we had never had from Mister Softee. This time the piece went up immediately. Glad it was this one that went up, I thought to myself. "Softee Melts" if the


were on it.

After the Act Three's guidance, the critics get their shot in the Q&A. How many times have I heard "Congratulations, gentlemen, on a great quarter" from this production? How many times have there been lovefest Q&As?

This one felt like the what the Q&A would sound like after "Springtime for Hitler" in the Mel Brooks movie, "The Producers."

By the time it was over and the smoke had cleared, we were short 10,000 Microsoft, confident we could cover at the opening on Monday into the prospective downgrades that would certainly come.

After I posted, I went home and went to bed. It was 8:00 p.m. I woke up 12 hours later to dozens of e-mails calling me a sellout and a traitor.

Some insisted that I was a fool for believing that Microsoft was doing anything other than posturing as a wounded dog rather than a powerful monopolist as a way to gain sympathy with the American public in its titanic battle with the

Justice Department


Give me a break. This is business, not law. Microsoft is cautious. I am not supposed to believe them? I am supposed to believe that this company that has always forecast conservatively but never guided down before is just posturing?

Almost every email said I was selling out at the bottom. To which I say, "I sure hope so," because if it is the bottom I will buy it right back and get long again. We didn't own that much anyway. But why get in front of the freight train? Why not wait till the accident to play out and then cross the tracks? You have to put yourself back in that theater the first time you saw "The Fugitive." Do you want to be on that bus with Harrison Ford, or do you want to be Tommy Lee Jones?

Now you understand.

I long to be long Mister Softee come Monday. I long to buy it in the 60s and own it for the rest of my life. I long to have that opportunity. But in the end Microsoft's stock, like those of Cisco, like Intel, like SUNW, is just a stock. You don't ride through damage, you bolt from it.

Loss avoidance, not pride and love determines things in this market right now.

That, by the way, is why I am not afraid. I will buy my


(MRK) - Get Report

and my

General Mills

(GIS) - Get Report

and my


(BFO) - Get Report

on Monday into the futures-led decline that will come from Microsoft's giant overweighting in every conceivable index. Maybe I will scoop up some more Cisco or



. Maybe I won't.

In the end, this business comes down to judgment. Our judgment was that Microsoft could be a train wreck on Monday. If it isn't, that's fine too.

But I slept soundly last night and I wouldn't have had I not taken action. So maybe all I bought myself was a good night sleep. I think I bought myself a clear head for Monday. That's what's needed more than anything right now.

And I have one.

Random musings:

You have to read two things on this site. First is the excellent

Brett Fromson


piece at the top talking about the damage done here. I have known Brett for 12 years. He did a piece about me and my wife in


a decade ago calling us "The New Warren Buffetts" when that was the most treasured accolade in the universe. Brett is the single greatest markets writer in the country right now and I am thrilled to see him in our cyberpages, bolstering a team that is the envy of our competitors. ... Then go to

Gary B. Smith's

piece about what he is seeing in the


. This is the best piece of technical research I have ever seen on our site and you must understand it to know what is going on. I am making everyone at my firm read it and study it so they know why someone who has the pulse of this market has gotten so negative. Grazie! to Gary and Brett!

James J. Cramer is manager of a hedge fund and co-founder of At time of publication, his fund was long America Online, Cisco Systems, Intel, Sun Microsystems, Yahoo!, Nortel, General Mills, Merck, Bestfoods and Clorox, and short Microsoft. 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

Market Features: Economic Growth Likely to Continue


Steven Vames Staff Reporter

4/21/00 10:02 AM ET

As the unstoppable U.S economy heads into the 111th month of its stunning expansion, economists are starting to believe that strong growth could continue through the end of the year, despite the efforts of

Federal Reserve

policymakers to slow down the boom. The latest sign of strength: Solid first-quarter corporate earnings reports that helped pull the markets out of their tailspin this week.

There are some signs that growth will moderate in the second quarter and second half of 2000, especially if the important housing sector and consumer confidence continue to back off from their highs. Those pullbacks are the result of several interest-rate increases by the

Federal Reserve, but the broader economy has been largely immune to higher rates so far. In fact, based on recent growth data, some economists have raised earlier projections for

GDP growth in 2000.

One of the biggest wild cards for the economy will be the stock market itself, which has helped turbocharge economic growth through the "wealth effect." Consumers, rich on paper with stock market gains, have been confidently spending money on goods and services faster than U.S. producers can supply, causing fears of inflation.

But a broad and lasting pullback in the stock market would dampen consumer spending and cause an economic slowdown. "A widespread decline in the stock markets would probably filter through the economy, as a slowing agent, much faster than higher interest rates have," said Anthony Crescenzi, market strategist at

Miller Tabak Hirsch

Likewise, if the stock market heads higher, consumers will likely continue shrugging off higher interest rates.

Thus far, however, strong consumer spending, a rebounding stock market, a pickup in overseas markets and a roaring manufacturing sector promise to help push economic growth at an accelerated rate through the end of the year.

The economy grew at an astounding 7.3% annualized pace in fourth-quarter 1999 and looks poised to have grown at a 6% pace in the first quarter, according to many economists.

"Economic momentum this year is far stronger than anyone could have anticipated last year," said Dr. Sung Won Sohn, chief economist at

Wells Fargo Bank

. "There's a sense that people have been underestimating the economy, and that could be the case again."

Sohn expects that the nation's gross domestic product will likely slow to a 4% annual pace in the second quarter and to 3.2% in the second half. That forecast is in line with a feeling among many economists that second-quarter annualized GDP will fall to the 4% to 4.5% range and creep lower in the second half to the 3% to 3.5% range.

A bulk of the slowdown is likely to come in the housing market, which has already slowed somewhat in reaction to higher mortgage rates. For example, the

Commerce Department

recently reported that housing starts fell 11.2% in March, the largest drop in six years, to an annual rate of 1.60 million.

Housing aside, the overall economy has thus far thumbed its nose at the Federal Reserve's attempts to bring relentless growth to a more comfortable level. In a speech last week, Laurence Meyer, a Fed governor, said the central bank's efforts have so far had "nearly zero" success in slowing the economy.

But Meyer also reiterated the Fed's mantra that there is still a big risk of the economy overheating because demand continues to grossly outpace supply.

The Fed has raised rates five times in quarter-percentage-point increments since last June, bringing the overnight lending rate to 6% in an attempt to ease the strong economic growth -- for fear that it will eventually push wages and inflation higher.

Another risk of inflation comes from the steady growth seen in various overseas markets. When a large number of Asian and Latin American economies were depressed and their currencies weakened, the U.S. was able to import goods cheaply. But as those countries start to import more U.S. goods and as better returns in their markets provide competition for U.S. investments, the U.S. might not be able to finance its bulging trade deficit, which would lead to a weaker dollar and higher prices for goods and services.

"The Fed has been patient so far because inflation has not moved meaningfully higher, but if we start to see a continuation of what we saw in March, the Fed might need to make more of a statement," Sohn said. "Many of the factors that have kept inflation muted, especially the weakness in overseas economies, are simply not there anymore."

However inflation creeps into the economy, it remains the arch nemesis of the Fed and financial markets. If it continues to tick higher, the Fed may step up its defensive efforts, which could come in the form of interest-rate increases of half a percentage point or raising rates unexpectedly in between the Fed policymakers' scheduled meetings.

But even if the central bank pounds its fists harder on the table, there are some indications that the economy could continue to run on pure momentum. Though technology stocks have faltered in recent weeks, broad measures of the stock market are still very healthy and have been helped by a slew of strong corporate earnings. Tight labor markets have also begun to push wages higher, and though consumer confidence has been dented in recent months, it remains near historical highs.

"We are going to see some degree of slowdown in interest rate-sensitive activity in the second quarter as higher rates take a bite out of residential investment and business expansion," said Joe LaVorgna, senior U.S. economist at

Deutsche Bank

. "However, the risk is clearly that second-quarter growth will continue to run well above trend based on its already-broad strength and the potential that stock markets and rising wages will continue to support a wealth effect."

LaVorgna expects the economy to grow about 4% in the second quarter and about 3.5% to 3.6% in the second half of the year. That's a rate that might make

Alan Greenspan

sleep more easily.

Market Features: Sagging Overseas Markets Could Dampen Hopes for Dot-Com Domination


Philip Segal

Senior Asian Correspondent and

Suzanne Kapner

U.K. Correspondent

4/21/00 10:04 AM ET



crazy gyrations have done more than evaporate the good cheer of soon-to-be-rich dot-com CEOs in Silicon Valley.

While the selloff in the U.S. seems to be slowing -- the optimistic


view Thursday's 1.7% slide in the tech barometer as a slowdown after the previous week's debacle -- tech entrepreneurs around the world have begun to wonder just how they'll fund their dreams of global domination.

Perhaps nowhere is this more evident than in Hong Kong, where skeptical net investors could end up scuppering one of the most audacious acquisitions of the dot-com era: upstart

Pacific Century CyberWorks'

cash-and-stock takeover of Hong Kong's largest phone company.

This week, PCCW's plunging stock price prompted concerns that the company's main force, the well-connected Richard Li, would prevail in his attempt to buy

Cable & Wireless HKT


. Those worries were fueled when media tycoon

Rupert Murdoch

floated a story in his own paper,

The Australian

, that said he was still interested in buying into HKT. Li's deal was sealed ahead of an earlier buyout attempt by

Singapore Telecom

, which had enlisted a cash sweetener by Murdoch at the last minute in an effort to swing things Singapore's way.

If Li, whose company makes money on its investments in other Internet companies, is sent packing by HKT's parent,

Cable & Wireless


, it would signal the end of Pacific Century's honeymoon with investors. Li's attempt to buy into an Old Economy phone company took investors' eyes off what is supposed to be PCCW's main story: delivering a broadband satellite Net content across Asia. There is still no evidence that Li can make that embryonic business go.

Should American investors care about the outcome of this saga, particularly given that it involves two companies without main listings in the U.S? Absolutely, and not just because it's good sport.

PCCW is held by some of the biggest American mutual fund companies, including

Nicholas-Applegate Capital Management


Loomis Sayles & Co.


Legg Mason

, according to

. HKT's American Depositary Receipts, shares denominated in dollars that trade on a U.S. exchange, are held by

Scudder Kemper Investments


Gabelli Funds


Morgan Stanley Dean Witter

, as well as many others.

Hong Kong isn't alone in seeing highly valued tech shares slump. Take a look at the U.K. markets, where tech issues have the dubious honor of being the most expensive in the world.

Nainish Bapna, a tech analyst at


in London, argues that even after the recent rout, U.K. technology stocks were pricier than those of comparable companies in France, Germany, Scandinavia and even the U.S.

"When we compare similar companies in the U.K. and the U.S., we almost always find the U.S. examples offer better value," Bapna wrote in an April 13 research note. He adds that as British technology stocks have risen in lock step with the


since his report was published, that disparity still holds true despite the turmoil of the past week. "Overall the U.K. software and services market has lagged behind U.S. earnings by 4% compounded over the last 15 years."

If earnings are lagging, why have valuations soared?

In a word: scarcity. With fewer tech plays in the U.K., investors snap up any issues they can get their hands on regardless of fundamentals. That phenomena should ease as more companies go public, although the recent market volatility threatens the flow of new issues, points out Neil Austin, the head of new issues at the consultancy firm



What is certain is that U.K. technology, media and telecom companies, which as of March 17 were down more than 20% from their March 6 highs, as measured by financial services provider


, could fall further.

"Is there a bear market in tech?" asks one U.K. money manager who asked not to be named. "Yes."

Bapna is calling for a 30% decline over the next few months. He expects a recovery to set in by late summer at the outset of earnings season for many of these companies.

One stock that could suffer more than most is


, a provider of electronic procurement software. Comparable companies in the U.S., such as

Commerce One








, have already been hit hard. Moreover, Infobank has yet to secure the same lucrative deals that, say,


(ORCL) - Get Report

has captured. The U.S. software company will be providing a buying platform,


, a partnership between




(S) - Get Report

, as well as for


, a similar buying group for the car industry.

With tech remaining treacherous, money managers are looking to other sectors for opportunities that have been ignored to date.

The U.K. manager says he has only a modest exposure to telecoms, and is instead buying energy and utility companies.

Likewise, strategists from

Salomon Smith Barney

recommend overweighting in pharmaceuticals, financials and utilities. Some of their favorites include


(AZN) - Get Report

, a pharmaceuticals company, oil and gas giant

BP Amoco



ING Group

(ING) - Get Report

, the financial company. (Salomon Smith Barney hasn't performed underwriting for AstraZeneca or ING Group, although it has performed banking services for BP Amoco.)

Indeed, when backing telecommunications, media and technology stocks, equity strategist Mark Howdle argues that the European equity markets appear to be fairly valued relative to bonds.

That could leave owners of tech stocks, particularly in the U.K., facing a power outage.

Copyright 2000,