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December 1, 2000

Investors Scraping Flattened Stocks Off Pavement
By Kristen French,

Bear Market Bounce Is Just a Dribble ... Weiss comments

NEW YORK - Stocks started a bargain-hunting bounce this morning as investors scraped the pavement for stocks flattened by yesterday's raging tech sell-off. Staging an early comeback were former hotshot JDS Uniphase, networker Cisco Systems and telecom Worldcom.

Computer-maker Gateway -- the eye of Thursday's hurricane -- was rebounding this morning after it lost 36% of its value yesterday. Gateway and specialty semiconductor-maker Altera helped spark the selling spree in tech after both companies lowered profit and revenue estimates for upcoming quarters.

Those warnings were the last straw for a market that's already intensely worried about future corporate earnings.

A technical bounce is no surprise at this point. The Nasdaq has been just about cut in half since hitting a high of 5132 only nine months ago. In the month of November alone, the Nasdaq lost 25%, making it the second-worst month in its history. That's a lot of money to lose in a short time.

But it's hard to gauge how long a bounce might stick. Today is Friday, for one, and investors don't usually like to throw a lot of cash at a jittery market going into a weekend. More importantly, the Nasdaq has lost its shirt in the rallying game over and over again in the past three months, as buyers coming into the market ultimately lose their nerve and duck back out.

There isn't any real catalyst for an upswing this morning. There's no company announcing that sales are going gangbusters. There's no rate cut being announced by the Federal Reserve.

No catalyst, that is, unless the U.S. Supreme Court decision resolves once and for all who will be the country's next president. The U.S. Supreme Court will hear arguments from both Bush and Gore's legal teams today over whether the Florida Supreme Court overstepped its boundaries by extending the vote recount deadline. If the court rules the state court did overstep its authority, George Bush, who has already been certified by the Florida secretary of state as the winner of the state's 25 Electoral College votes, would become president.

Price-to-earnings, or p/e, valuations also remain a lingering question. Certainly these are in a far more reasonable and prudent place than they were just a few months ago. But a quick look at some of the high-tech names in the Morgan Stanley High-Technology 35 Index shows that only 12 companies have p/e ratios below 30 -- still well above the historical average of 15 to 20. Nearly a quarter of the companies in the index still have p/e ratios north of 100.

The market is enjoying a bounce today, but this rally is built on nothing but smoke and mirrors. Sure, the Nasdaq has dropped 50%. But of the 76 companies in the Nasdaq 100 with earnings, 50 have price-to-earnings (p/e) ratios higher than 30 and the average p/e ratio is still a whopping 88.5. Investors are snapping up "bargains" such as Juniper Networks, who sits atop the list with a p/e ratio of over 525. That means it would take 525 years of present earnings for a share of Juniper to make back its price.

That doesn't seem like a bargain to us. Rather, we believe these so-called "bargains" are overvalued disasters waiting to happen. As the market moves deeper into fourth quarter earnings season, it is highly probable, given the earnings and economic news of recent days, that company earnings warnings will be even more numerous than last quarter.

We've already seen $4 trillion in market cap disappear from the Nasdaq over the past 11 months. It's not over - not by a long shot.

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