Some degree of skepticism will soon begin to help, not hurt us, when it comes to the Net. Oh sure, after Friday's
bonanza this statement seems pretty wrongheaded. But things are about to cool off Net-wise, so we have to be ready. There are forces at work that will soon make the Net offerings more like other stocks, and when that happens we will be forced to evaluate these stocks in a more rigorous fashion.
First, corporations will begin to demand a higher price for their wares in the underwriting process. Don't forget that successful offerings aren't just deemed successful if the stock went higher from the offering price. The underwriting client wants more than just a skyrocketing stock, it wants capital. So there will be more pressure coming from the client to raise prices of the offerings -- more bountiful valuations upfront -- to capture some more of that wealth that these underwritings create. That change will severely diminish the exciting pop these stocks generate.
Second, supply is becoming more bountiful. This past week was a bad week for
. The stock peaked at 440 and then headed inexorably downhill to 316 7/8 on Friday. Some of the pressure might have come from option holders. One-tenth of the float was held in January calls, many of which had to be kicked out by Friday, lest holders have to take delivery of a very expensive stock. But a lot of stock got booted this past week by long-term holders who were free to sell. Yahoo! did not take the new supply that well. Expect more insider selling from the owners of these stocks as they watch Yahoo! like a hawk and nobody liked the action.
Third, the spike up we had this past week, the days when
almost doubled, looked suspiciously liked the final phase of the short give-up, where people who had been battling these stocks finally either covered their shorts or went headlong to the long side. These moves are more associated with a topping process than any other I have seen on the Net to date. This is the 1929 problem, when stocks begin to look suspiciously like
, two companies with charts that looked like aborted missiles in flight during the first few months of that fateful year. These were great companies, but their stocks got way too ahead of themselves.
Fourth, the pipeline is full with Net companies of lesser quality, some of which had been considered dogs even by a venture capital community that has been less skeptical of the Net of late then a couple of years ago. That means we are entering a phase where less seasoned, less competent execs will be managing the stocks of companies with lesser prospects. The people who run Yahoo!,
, Excite, Lycos,
are more adept at this new form of investor relations stock managing than many of the
500 companies. But the management ranks of these newcomers don't know how to play the game as well. Expect disappointments.
Fifth, the seasonality of the Net has long been ignored because the growth has been so staggering. But we had a huge blip up in Christmas commerce on the Net. With that past, I would not be surprised if some of the more retailing-oriented Net companies stumbled. If you don't understand seasonality of retail, spend some time at
National Gift Wrap & Box Co.
, where the whole year is done in the fourth quarter with seasonal gift wrap, and the only spending in the first quarter comes from the two weeks leading up to Valentine's Day.
Sixth, the skeptics are almost all convinced that the Net is here to stay. That means we are late in the game. I thought of this Sunday when we took the kids to the
in Philadelphia, a virtual monument to man's harnessing of nature. In a telecommunication room, I found this tidbit on the wall: "We are in great haste to construct a telegraph from Maine to Texas but Maine and Texas may have nothing to say to each other." That quote, from
Henry David Thoreau
, 150 years ago, pretty much sums up a whole strain of skeptical thought about invention. Until a year ago, I think it would have represented the mainstream view about the Net, as many people believed the Net would work, but few knew who would use it and why. Now the sheer recognition of the Net's potential is behind us. Everybody is in the pool. Without the skeptics, we lack the rocket fuel to go dramatically higher.
Seventh, the powers that be, the brokers and the
, want the speculation cooled down. The brokers want it cooled down because they are afraid that some Net stocks will be cut in half in a day, and when that happens, those who put up 50% collateral, will walk away from the stocks rather than take delivery. This is the true worry of the brokers. They are so afraid of being left holding the bag. The Fed, on the other hand, hates speculation in any form, whether it be over houses, or farm equipment, or land, or stocks. The Fed never wants to condone a situation where people would be WISE to lever up in order to profit. Yet, that's where the Net is now. I expect new margin rules within the month that will sharply curtail people's ability to borrow money to play the Net.
Finally, we are in the heightened believer phase, one that always comes before a fall. This is where people argue that if we all stand together and no one sells, we will not get hurt. Of the thousands of emails I get a week, the ones that really stuck out were those angry souls who were mad at me for selling my Yahoo!. Some of these emailers urged me to go positive on the stock again. But remember, I don't write this column to tout or recommend. I can't tell you to buy Yahoo! if I don't own it, and I don't own it. Yahoo! is a great company. I hope that it comes down so I can buy some. But I am not going to buy the stock so I can then write that I am long it, so I can help out the holders of Yahoo!. I am a businessman, not a snake charmer. This snake will go higher if it should, it will go lower if it should, and no columnist, broker or analyst can get it to change direction right now.
James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication his fund was long America Online, although positions can 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 TheStreet.com.