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Soon They'll Call It a Correction

With the recent Onsale research comments, we got our first miss. Now, Cramer says, people are beginning to think about things like gross margins and the Net.
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Pretty soon they are going to be calling it a correction. I mean you can't just ignore drops of 30% to 40% of your market cap, as some of these Net guys have done since the griddle got too hot last week. You gotta call it something.

When does it end? Heck, it just began. Give the selloff a chance to digest. At our shop, we are split; we figure you can buy these stocks maybe for a trade fairly soon, but you have to get through the whole underwriting gauntlet before you can feel safe just walking around with a wad of





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in your pocket.

So, what caused this pinprick? A couple of things. We finally got a lot of insider and mutual-fund selling, especially by venture capitalists and early money managers not willing to lose big profits. We got to levels that were so superheated that people could make the case these companies would soon threaten to be the size of


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if they kept up the pace. Microsoft is the only icon that people care about. Nobody cares if Amazon passes


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, or


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for that matter. But Microsoft! No way -- not our benchmark! That's our generation's Elvis, and nobody touches the King.

Most important, we got our first miss:



. I can't remember seeing a piece of research about the Net that had a downgrade or something negative to say about the fundamentals, but Onsale's research comments sure changed that. The company was very smooth in its


"Squawk Box" interview, but the bottom line was that Onsale missed. It became the first Internet stock to blow a number that could not be explained away. Gross margins were under pressure. Until now, we never even thought about gross margins and the Net. They were irrelevant.

No longer.

As soon as regular criteria begins to get used in the world of the Net, all of these stocks have to go down a notch or two. As long as nobody missed estimates or blew away numbers, we felt free from the chains of gross margins and supply and demand. There was just way too much demand.

But Onsale triggered the same level of scorn reserved for non-Net companies that miss. Hey, I heard Onsale being referred to as a retailer with declining margins; think

Toys R Us


when you hear that. Get that chart out, why don't you. Ug-ly.

On top of that,


comments about the toughness of owning Amazon right now resonated loudly. This Oppenheimer analyst was the same guy who used the out-of-control price target of 400 before the split. His wild-eyed-believer credentials were fixed by that price target call, so his negativity stung beyond a simple downgrade. He's got what others crave in the analyst biz: instant credibility.

The sudden downturn might still run its course if it weren't for the massive IPO calendar and the shutdown of some of the Internet rocket fuel -- borrowed money -- by some of the formerly more encouraging brokerage houses. Let's talk about both of these, as they are the keys to recognizing when the selloff might be finished.

Almost all of the brokerage firms have tightened credit or margin rules that they have for trading Internet stocks. That has the effect, after the type of correction we are having, of shaking out the more leveraged players. I say great, good riddance -- you always screw it up for the rest of us cash guys anyway. This shakeout process should be over in a couple of days, if not Thursday! Margin is alcohol for these people; without it, they are driving like the rest of us instead of DWI.

They buy a lot slower and more carefully.

The IPO nemesis, though, is here to stay. There are so many .coms in the chute that you will want to shoot your broker in a couple of weeks for even mentioning .com. That doesn't mean the whole thing can't start right back up. We know from the hazardous days of late summer of '98, things can look very bleak and then restart in a flash when the pressure is taken away. Heck, half the new Net companies trading now or about to trade were ones that couldn't come public before because the tape was so unforgiving last autumn.

These deals have a habit of getting people long much faster than they thought they would be. They have a habit of creating an inventory overhang, which can only be worked off through still lower prices. It is called the cycle, and not even the Net is immune to it.

I have always been a big believer in the Net. I have been a sunshine patriot, however, when it comes to e-tailing, and all of the press-releasing players in that segment. That's where the pain is and will remain.

Sure a bounce can be played. But even I am not nimble enough to be able to put all the money out on the table and then take it right back when the bounce is about over.

Random musings:

Looks like I didn't get through to many of you who are sharing one password in the office. Let me give you a positive and a negative about this freeloading.

First, I save my best stuff for Saturday morning -- my rewrites -- and you can't get those at the office unless you go in on Saturday. So take a home subscription already.

But, more justly, I have a


on my desk. I have my own password. Bloomberg costs a fortune, an outright fortune.


, my partner, has a Bloomberg, too. So do a bunch of other people in my office. If I wanted to save money, I guess I could give them my password. Why don't I do it? Because it would be dishonest and wrong. Pretty good reasons where I am from.

We, on the other hand, deliberately try to keep the price reasonable for our product. For that we get penalized because it is easier to steal $10 a month then $1,500 a month. You don't feel the shame, and you don't think we feel the pain. That's nonsense. We are a subscription-based business, and we need you to have an individual subscription. We make it incredibly easy to subscribe. Heck, we have a customer-service department to make it easy for you. Please don't freeload.

Oh, and one more thing: If you stop freeloading, I will devote this column to helping people make money and not preaching for subs!

So somebody emails me yesterday and says if I am so negative on the Net, why do I disclose that I am long



. Here's a Catch-22. I don't answer individual email requests for information about stocks. I am not a tout, and I don't want you buying off of my disclosure or off of my pieces. I want you to do your own work.

But I feel compelled to address this issue to everyone. First, I am not negative on the Net. It just got a little too hot for me. I happen to like AOL. As I said before this shakeout began, I am going to pick a couple of Net names that I think aren't all hype, and I am going to ride them through.

I never think to myself that I better not disclose AOL because it is not consistent with the thesis of the piece. If I am long AOL and I mention it, I am going to disclose it -- them's the rules. I don't regard it as inconsistent to be long some stocks having something to do with the Net and yet not have big Net positions.

I am long


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, two big Net plays, but I wouldn't sell them because things got too hot for Yahoo!. I leave that hobgoblin stuff to those of little mind and pocketbook. If I had my druthers, I would like you never to do what I am doing. But I will not disguise what I am doing to get you to do things differently.

And I won't write about anything small-cap (except

National Gift Wrap

) because I don't want to be accused of doing what I see almost every other public money manager do: Talk up small-caps, whether it is in an interview or in an article. I did that once, and I still have the journalist tire tracks down my back. (Still waiting for all of those journalists who jumped all over me to take a hard look at what goes on every day in the press, courtesy of


with managers.) So please, don't start holding the disclosure against me or as a weapon in some arsenal of consistency that I don't use.

James J. Cramer is manager of a hedge fund and co-founder of At the time of publication, his fund was long Dell, America Online, Cisco and Microsoft, though positions 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 by sending a letter to