Net IPOs, Step 1: Point Gun at Foot

New offerings flood to market in record-breaking numbers. For a forecast of the results, just dial 1-800-Flowers.
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Wall Street, that lasting bastion of kindness, took typical sympathy on the schmucks losing billions on Net stocks last week, as this joke made the rounds:

"What's the difference between a pigeon and a

Yahoo!

(YHOO)

shareholder?

"The pigeon can still make a deposit on a

BMW

."

By Wednesday of last week, the

TheStreet.com Internet Sector

index had plummeted 41% from its April highs, 27.5% since the Fourth of July. Last week was the worst of it -- a 12% three-day free fall.

Amazon.com

(AMZN) - Get Report

,

E*Trade

(EGRP)

, Yahoo! ... all the biggies were bouncing around their lows of the year. The Internet bubble seemed to have finally burst and, inexplicably, 36 Internet companies forged on with their plans to go public in early August. But there's the rub: The flood of companies going public may have actually caused the Net stock flameout, or at least thrown gasoline on the fire.

As the IPOs piled on, the market was collapsing under them. The problem is that much of Wall Street -- unlike the investment bankers doing these deals -- is still observing summer. Those traders left are afraid to make any moves, fearful of a rate hike by

Alan Greenspan

and the

Federal Reserve

, due to meet on Aug. 24. Add to that the traditional wariness with which investors approach tech stocks in the summer. The market simply couldn't handle another $5.5 billion in new IPOs -- there wasn't much left in the tank.

"For IPOs, this looks like it'll be the busiest August in the history of Wall Street," says Richard Peterson, of

Thomson Financial Securities Data.

"When 25 IPOs were priced two weeks ago, it became the busiest week since Nov. 21, 1997. We're in uncharted territory here."

With such an onslaught, it's little wonder last week's IPOs were unable to hold their offering price. To many on Wall Street, the true sign of market capitulation came Tuesday, when

1-800-Flowers.com

(FLWS) - Get Report

fell on its first day of trading, garnering the "broken IPO" stigma. Shares of the Westbury, N.Y., company fell 13% on the first day of trading. But it wasn't just that the deal fell -- that's happened before -- but that a

Goldman Sachs

deal fell. Goldman has a sterling reputation on the Street. It has been known to stand in the crowd and buy a new stock if there are no other takers, just to support its offering and its reputation. "Goldman deals

don't

break," says the manager of one $100 million New York-based hedge fund who had shares of the offering. "You see something like that and you just back up and get out of the way."

That attitude of capitulation depleted the few buyers left and investors jonesing for IPO shares all year long suddenly had more than they knew what to do with. "Usually, an institution will put in an order for 300,000 shares of an IPO and only get 25,000," says Tom Sheedy, head of institutional sales at

BancBoston Robertson Stephens

. "I'll bet you those same orders were getting filled at 250,000 shares

last week."

But as the overall market collapsed, investors dumped the new IPO shares in favor of more established Internet companies. "It's an August white sale on core Internet stocks," says Gail Bronson, senior analyst at

IPO Monitor

. "If you follow traditional investment theory -- buy low, sell high -- this would be an excellent time to look at Net issues that have been around for a while and have proven, sustainable businesses."

So on Thursday, as the IPOs continued to fall, the Net blue-chips suddenly rallied off their lows. Investors who'd missed the boat all year were suddenly able to buy

eBay

(EBAY) - Get Report

and

AOL

(AOL)

at January's prices. Forty-seven Internet IPOs were broken, but the blue-chip Net stocks rallied.

Incredibly, the

IPOs keep coming. "In September we're gonna rock and roll," says Peterson. "Looking at the calender, we could very well do 100 deals in September."

Some market watchers are left shaking their heads. "Taking an Internet IPO out right now is an absurd strategy," says Bronson. "Bankers want to make their 7% fee -- they seem to be pushing them out to the Street as fast as they can. But it's clearly not in the best interest of these companies to rush to go public right now. Why dash to the stage when there's nobody in the audience?"

But until some company bites the bullet and pulls an IPO, it seems that this show must go on.