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July 21, 2000

Market Data as of 7/21/00, 2:13 PM ET:

o Dow Jones Industrial Average: 10,727.19 down 116.68, -1.08%

o Nasdaq Composite Index: 4,109.80 down 74.76, -1.79%

o S&P 500: 1,479.20 down 16.27, -1.09%

o TSC Internet: 824.97 down 40.18, -4.64%

o Russell 2000: 525.54 down 9.21, -1.72%

o 30-Year Treasury: 106 12/32 up 5/32, yield 5.791%

In Today's Bulletin:

o Wrong! Rear Echelon Revelations: Dr. Cramer's Guide to Spotting 'Unpriced Securities', Part 1
Internet: Growth Worries Slash Ventro Shares, and Other B2Bs Follow

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Wrong! Rear Echelon Revelations: Dr. Cramer's Guide to Spotting 'Unpriced Securities', Part 1


James J. Cramer

7/21/00 11:15 AM ET

When we first started

I ran a trading school online. I did a dozen pieces about how to become a better trader. I want to reprise some of the best of that now because, unlike then, we actually have a few readers! The most important piece I did involved how to take a loss like a man. I think I would have written a man or a woman now, but that's colloquial, so, what can you do? So here I go with a contemporary look at the problem of losses, something that is in vogue now more than ever, given the stunning decline in the dot-coms.

Have you ever ridden a stock to zero? When I say zero I am not talking about goose eggs. That would be too painful for brokerage houses to inflict upon their clients. Instead, you've probably ridden it down to an asterisk or the words "no price." Or "cannot be found." These are all brokerage euphemisms for worthless, as plain as passing for dead.

It doesn't feel good. It is not something you want to experience more than once. It is embarrassing. And, most important,

it is avoidable


What would you have done to be able to salvage some portion of that investment? What would you do to be able to get out with something, when it was at least moderately good, or at least not terribly bad or, ultimately, asterisked?

Well, you have come to the right place. I am about to give you Dr. Cramer's handy six-point pathology guide to spotting "unpriced securities" before they end up in the stock morgue.


The first sign that you may have merchandise on your sheets that is not coming back to life would be when the broker who suggested it to you doesn't mention it when you call in for a rundown. Or when the analyst at the brokerage house who recommended it dropped coverage -- especially if the firm underwrote the stock. I see this stuff happening all the time now in the dot-com world.

It is like the company was never brought public. Brokerage houses rarely fumble balls like this, unless the ball is meant to be dropped. Take that as an early warning that the stock is ailing. It is much easier to drop coverage than to tell the truth, which may be that the company might not make it. Unlike a headline which says "Merrill upgrades Amazon," you will never see word that coverage has been dropped. You will have to sleuth around to know the truth. The dropping of coverage is done deftly and quietly to avoid the horrible embarrassment and stigma that comes with the process.


Second, any time you read that your stock is in violation of loan covenants, don't read any further. Every firm that is recommending the stock will say that the violations will be cured and the company will not default.

Do not believe them

. Every one of my disappearing securities was highly confident that the balance sheet could be rectified before we were blown to kingdom come. Only a handful made it, and they never compensated for the losers.

Most of the time my getting no money back was a key feature of the ability of the entity to stay alive. That's because my equity was crunched so that others, debtors, could take control of the company. I can't tell you how many times I have been lied to by CEOs telling me that the language about loan covenants is just boilerplate and that I was wrong to worry. People who say these things tend to be judgment proof and they have nothing to lose. They won't be worth a plugged nickel when things are through so what do they have to lose?

Company execs never want to have to reveal they are in violation.

If there is a deal to be crafted that will allow that language not to be used, it will be crafted

. But if it can't be crafted and you get this language on a quarterly earnings report, take what you can,

even if it is a dollar

. It won't be there a few months from now.


Third, any time the company announces a restructuring that will cram the common or issue a dramatically new measure of common, perhaps through a convertible security, you should immediately wake up and smell the formaldehyde. You are dead. This stuff amounts to the company losing its own destiny. The management that you have dealt with is probably not even making the decision to create the stock. Someone more important to the company now is pulling the strings. It is most likely the senior lender. He is ordering the dilution and management isn't even in a position to fight for you.

What are the telltale signs of this betrayal? Usually it is in the form of a convertible bond with interest rates much higher than the current on the run 30-year bond and the right to be able to own at least 10% of the company. When you see one of these done privately, meaning issuer to private group, you can kiss your asset goodbye. Get out before the buying entity begins to short the stock to oblivion to hedge the entity risk and pick up the dividend. I had this happen to me three years ago and I am still reeling from it. Management insisted it was good news when he wheeled in the big horse full of Trojans. I believed him. I could have sold at $4. Instead I got asterisked. I won't let this happen to you.

Check back later today for Part 2.

An event you won't want to miss: James J. Cramer -- Live in New York City on Aug. 7, 2000.

Click here for details: live

James J. Cramer is manager of a hedge fund and co-founder of At time of publication, his fund had no positions in any stocks mentioned. 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

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