Anatomy of a Shakeout

The trader gets into more detail about the forced selling in the Net, and explains why no one's sure when it will end.
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So when does the repo man finish? When does the forced selling in the Net end? Isn't that the toughest question? Let me tell you why it is so hard to determine, and why it is so open-ended.

First, there are more margined players than ever and they are housed with brokerages that are new to the game. There seems to be more forgiveness and more leeway given to the indebted players this time than I can recall in previous years.

Second, the players who are margined aren't biting the bullet as I would have expected. It is almost as if they don't know how to sell, so the selling is being done for them by brokers, a la that example I just

outlined. So the selling is done piecemeal and terribly.

I don't want to use individual stocks, as it is too supersensitive, but the average

NationalGiftWrap.com

stock is going down on 400 and 500 share lots that are being tossed from one poorly capitalized agent to another. Nobody is able to put anything to way. NationalGiftWrap and hot potato is more like it. So a $40 stock goes down seven points on 4,000 or 5,000 shares.

Of course, that triggers more margin calls as NationalGift's collateral value falls further. So, tomorrow those who were using NationalGift's stock to buy other stocks will have those sold out from underneath them.

Third, the companies themselves that are being sold have no control over their float whatsoever. None of these companies has a buyback to take out some of these individual shares. Most of the companies are burning cash like Duraflame logs. They can't stem the decline. That is quite different from big companies, all of which are eager to buy back their stock on down days and would salivate at some of the opportunities. So the companies can't help the margined players out of their jam.

Fourth, many of these stocks were hard to borrow so they weren't shorted. So there are no natural buyers of them. There is nobody looking to cover that can cushion the fall.

Fifth, the big institutions themselves don't really know these companies, having flipped them all out to the daytraders because of the big pops they got at the IPO day. They are now starting to make their calls. But unlike daytraders, many of who are technically inclined, institutions are fundamentally driven and they meet with managements, get to know the stories, be comfortable. As the decline really just occurred (although the Net has been going down since April) this process of gearing up for new names can't kick in in time to save the margined players.

Sixth, and finally, most importantly, no dot-com to date has been bought by a non-dot-com. There is no validation of any price by any non-dot-com buyer. Until a major player buys a dot-com company, you will not have such a validation.

Now, the good news. At this pace, many of these stocks will trade close to their cash levels. At that point, well-capitalized old-line players who have patiently waited can go buy these companies for their own stock and the venture capitalists and insiders will be glad to get something. Right now many, many people who work at these companies have seen paper fortunes disappear and have options that now won't come into play.

If you are waiting for that takeover bid, though, you are wasting your time. We aren't there yet. But we are getting there.

Fast.

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. 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

jjcletters@thestreet.com.