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    Posted at 1:04 a.m. PST Monday, Dec. 4, 2000

    What's gone wrong with the Nasdaq this year

    Mercury News

    Four days after I began writing this column -- at the end of Thursday, March 10 -- the Nasdaq stock index reached its crest for the year, more than 5,132.52. On Friday, it closed at 2,645.29, a drop of 48.5 percent. For the year as a whole, the descent has been 35 percent -- and it could get still worse, making it the most miserable year in Nasdaq history.

    I'm not ready to concede a link between my commentary this year and the plunge -- though I admit the coincidence isn't pretty. But as we head into the last month of a mostly dismal year, it's worth pondering where we are and where we're headed. Call it a stock pundit's FAQ -- frequently asked questions -- about what went wrong.

    Q What does this low-water benchmark mean?

    A Anyone who has clung to tech stocks this year knows about pain, often a lot of pain. My friends wander around with glazed looks, pretending they don't care even when their plans for their kids' education or retirement are now radically changed.

    But any investor should understand that saying the ``worst year in Nasdaq history'' doesn't mean quite what it implies. The tech-heavy Nasdaq as we know it has been around for only a dozen years or so. Before that, it consisted of a lot of smaller companies spread over a range of industries.

    The right comparison is with various tech industry groups. And yes, the volatility there has been as bad as this year. The Philadelphia semiconductor index, for instance, dropped by 30 percent in the first nine months of 1998.

    The short-range nature of most tech investments -- some investors consider three or four months an eternity -- magnifies the dejection. Had you invested in an index fund based on the Nasdaq 100 at the beginning of 1999, for example, you would still be up by 38 percent today, an annual return of nearly 20 percent. But what you remember is the 31 percent loss this year.

    Q How did we get in this situation, anyway?

    A When historians write the history of the market in the year 2000, they may borrow from Elisabeth Kubler-Ross' study of how people react to dying: First, there's disbelief, then anger and finally acceptance.

    In the case of this market, you have to add premonition. A lot of market experts knew that stocks were in for a major correction. But they played the momentum game anyway, rationalizing that they were paid to play, not to sit. That set many stocks up for a cruel fall.

    ``Going into February of this year, there was clearly an awareness that the euphoria had reached a level that we were going to be in for a major spanking,'' said Arnold Berman, a tech strategist for WitSoundview. ``It was like being told you were going to get a spanking after dinner.''

    Throughout this year, money has tried to find safe havens -- in networking stocks like Juniper or Cisco, solid newcomers like Siebel Systems or Ariba, or old favorites like Intel or Oracle. One by one, they've all disappointed.

    ``The fact is that people were buying tech stocks last year because they were going up,'' says Berman. ``This year they're selling tech stocks because they're going down.''

    If you follow the Kubler-Ross analogy, we've gone through disbelief and anger. And while we haven't quite gotten to acceptance, it's coming.

    Q Have we reached a bottom?

    A After so much pain, it seems only logical to think we've finally reached the end. And there are arguably bargains out there. But there are several reasons for thinking that broad salvation isn't quite at hand.

    First of all, mutual fund managers aren't done selling tech stocks yet. Though much of their selling occurred two months ago because of the Oct. 31 deadline for tax purposes, some of them have no desire to show big losers on their year-end statements. It's bad for attracting business.

    Take Gateway Inc. (GTW), for example. After the computer maker announced last week that sales during the Thanksgiving weekend were 30 percent below last year, the market drove the stock down by 34 percent, from $29.50 to $19 per share. ``By the end of the year,'' says San Francisco stock trader and educator Harvey Baraban, ``you can't show Gateway in your portfolio and be paid. So Gateway has to be exited.''

    Finally, there is this to consider. In the long run, the market is not irrational. And many investors have sniffed the signs of a serious downturn in the economy. The Gateway news was no isolated example of a slowdown.

    Steve Milunovich, a tech strategist for Merrill Lynch, put out a sobering note last week that compared the arguments for a ``soft landing'' of the economy -- the hope of the optimists -- vs. that for a ``hard landing,'' the fear of the pessimists.

    On the side of the optimists, Milunovich reported that many Merrill analysts believed that the slowing demand was caused simply by companies burning through inventories. On the side of the pessimists, he noted heavy levels of debt and pointed out that a 200-year chart shows that periods of mania like 1995-2000 are generally followed by periods of panic.

    Did someone say panic? ``The burden of proof,'' Milunovich wrote, ``is on the optimists, in our view.''

    Scott Herhold's Stocks.comment appears every Monday and Thursday. Write him at the San Jose Mercury News, 750 Ridder Park Drive, San Jose, Calif. 95190; e-mail; phone (408) 920-5877.To read the columns online, see


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