7th Level Leads a Stunning Parade of Net Gains

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The Brits, of course, must be loving it.

Just a few days after

The Economist

penned a piece on an asset bubble in the U.S., second-tier Internet plays look like they're trying to provide a cogent example. Over the past few days, the story has been

K-tel

(KTEL)

, the top-40 hits company turned Internet play after its announcement that it would sell its wares over the Net. How innovative! From a 6 5/8 close on April 8, the company closed today at 43 7/8, up 2 1/16. A combination of Internet mania and a massive short squeeze is playing into K-tel's hands. And the company isn't getting in the way. After today's close, K-tel set a 2-for-1 stock split.

Wade Cook

would be proud.

Today, the standout is

7th Level

(SEVL)

, which closed up 7 1/2, or 428.5%, at 9 1/4 on the news that its character animation technology would be used for

WavePhore's

(WAVO)

Internet broadcast system. And though the market apparently values the deal at 7 1/2 points, terms were not announced.

"It's really crazy," says one stock salesman of today's 7th Level action. "The rising tide is carrying everything higher. You've gotta love the liquidity out there, but this will end in tears."

"This could be the new

Comparator

," said one fund manager, talking about 7th Level. Comparator went from pennies to $1.87 in three days in May 1996 before crashing. The FBI and U.S. Attorney's office in L.A. opened up an investigation into Comparator last month.

Traders were also comparing 7th Level to

Zenith Electronics

(ZE)

, which rocketed higher in May of 1996 (see the pattern?) on news that it was building a keen new Internet modem. A look at Zenith stock, before it came crashing back down, looks a lot like the action in 7th Level (and a slew of other Internet stocks) lately -- a flat line running into a big spike at the end of it.

Indeed, there are reasons to worry about 7th Level. The company concedes in documents filed with the

Securities and Exchange Commission

April 15 that, after posting operating losses of $23.8 million last year, it "does not have sufficient resources to meet its anticipated operating requirements during 1998 without obtaining additional financing."

Asked about today's action, a 7th Level spokesman says the stock spike was a reaction to news that's been building for the company. For example, in late March the Internet broadcaster

Audionet

agreed to market 7th Level's streaming animation technology to its advertisers and clients. But of course that didn't keep the company from including that April 15 document.

Perversely, a lot of the reason the 7th Level is up so much today is because of those concerns that it might not be able to make a go of it. As of March 24, there were 331,189 shares short in the company -- and one imagines some more shorts piled in after that SEC filing. It's not just a run-up in an Internet stock, the market is also showing us shorts in incredible pain. 7th Level shares changed hands 29 million times. (Contrast Monday's volume of 101,800.) The public float is listed as 5.9 million, meaning the company is about 57% held by insiders (one of whom is prostate cancer awareness activist

Mike Milken

).

The pain for the shorts goes beyond 7th Level, though. There were a slew of second-tier Internet companies (and, in some cases, "Internet" companies) going through the roof today. Among them:

Market Guide

(MARG)

rose 15 3/8, or 192.1%, to an all-time high of 23 (having touched 29 1/2 intraday) after inking a deal to provide financial data to

America Online's

(AOL)

Personal Finance channel. AOL gave up 1 1/8 to 74 13/16, reducing its price-to-earnings ratio to a modest 623.44 (not that such growth plays trade on P/E).

HomeCom Communications

(HCOM)

gained 5 17/32, or 85.5%, to 11 15/16 (having touched an all-time high of 18 1/4 intraday). The company provides Internet applications for the financial services industry. Just 15 days ago,

Reuters

reported that HomeCom, "whose stock is trading in the $1 range," had put an acquisition plan on hold because of its woeful stock price.

Sharper Image

(SHRP)

, retailer of items few people need and many people want, shot up 3 3/8, or 79.4%, to a nearly four-year high of 8. It touched 8 23/32 intraday. The company has a Web site and sells some of its merchandise thereon.

Navarre

(NAVR)

advanced 3 1/8, or 50%, to a two-year high of 9 1/2, having traded as high as 12 3/4. The company runs

NetRadio Network

, a Web-based, on-demand audio service.

Red Brick Systems

(REDB)

tacked on 2 7/16, or 47.3%, to 7 5/8 on news of a deal to provide a strategic data warehouse to

Amazon.com

(AMZN) - Get Report

to track the online bookseller's customer base. Amazon was off 1 1/16 to 93 1/16.

It's the kind of action that has one noted short-seller saying that the end is nigh.

"This is the biggest speculative bubble in the history of the planet, okay," says Bill Fleckenstein, portfolio manager at

Fleckenstein Capital

. "It's really not debatable for anyone who has an IQ of over 30 that this is an asset bubble. These are crappy businesses. This is just 100% unadulterated speculation."

Though it isn't always the case, there are plenty of people who agree with The Fleck on this one.

"This is out of control," says the stock salesman. "Who's buying this stuff? That's your next question: Who's the greater fool?"

Staff reporters John J. Edwards III, Kevin Petrie and Gregg Wirth contributed to this story

.