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Technology Stocks : Wind River going up, up, up! -- Ignore unavailable to you. Want to Upgrade?

To: Allen Benn who wrote (8946)	12/26/2000 3:37:24 AM
From: lkj	Respond to of 10309

There's a reason stocks are cheap now BY SCOTT HERHOLD Mercury News Posted at 10:05 a.m. PST Monday, Dec. 25, 2000 One of the signs that contrarians look for in judging a market's potential to recover is the surrender of hope among individual investors, the raising of the white flag in the public mind. All through the market's slide this fall, individual investors remained optimistic about the market. So maybe we reached a turning point last week when the American Association of Individual Investors survey finally showed that a bare majority -- 51 percent -- of its respondents were bearish. This might be a sign that we're close to long hoped-for capitulation, a time that savvy investors begin thinking about bargains. Driven down by mutual fund selling, a lot of tech stocks look awfully cheap. But anyone trolling through the sales rack in the basement ought to keep a basic lesson in mind. There's a reason things are marked down so sharply. Harvey Baraban, a San Francisco-based educator and stock trader, says that this is likely to be a decent week in the market, maybe even a very good one. As he sees it, one reason lies with the activity of hedge funds, the private investment partnerships that invest in a variety of stock instruments, including options. Unlike mutual funds, hedge funds are allowed to ``short'' a stock, meaning they are betting it will decline. Naturally, this has been a very successful tactic this year. But at the end of the year -- read this week -- hedge fund managers have a motive for settling their accounts and locking in their profit for reporting purposes. Typically, hedge fund managers are paid a 1 percent management fee plus 20 percent of their profits. This means that at least some of them will be ``covering'' their shorts, or actually buying stock. (Remember, a short investor has borrowed the stock from an investment house and sold it, often months ago. The profit comes from buying back the stock at a lower price and returning the shares to the investment house). Baraban sees a special twist that may make this week different than most: Although the hedge fund can lock in gains for reporting purposes this week, the IRS allows three days for trades to settle. That means that the capital gains will be pushed into next year, and not due to be paid until April, 2002. On the theory that taxes delayed are a positive benefit, this could offer a motive for more trading activity this week. Now not everyone sees things quite this way. James Owen, a hedge fund manager and the author of the forthcoming book ``The Prudent Investor's Guide to Hedge Funds,'' (John Wylie & Sons), says that investors in hedge funds are typically not thinking in terms of maximum tax efficiency. And he points out that the hedge fund industry, unlike mutual funds, does not have to worry about annual rankings by Morningstar, a well-known mutual fund rating service. But Owen does acknowledge that there may be some hedge fund managers who may pull out the stops -- sometimes borrowing money -- to show that they've finished ahead for the year. ``God forbid a hedge fund is underwater in late December,'' Owen says. ``But if they are, they try to goose the performance to show that they're ahead for the year. That's why you often see activity in the stocks they own. They can also scurry around to cover their shorts if the market is really strong.'' Amid all this selling, some stocks are so beaten down that bargain hunters are wondering: What to invest in? Well, first of all, keep in mind that a bet on this week is different from a long-term bet on tech stocks. While much of the bad news has already taken effect, it's tough to argue we've reached an absolute bottom. The news of the national economy is simply too worrisome -- and wearisome. But Baraban, for one, likes the idea of investing in established stocks that are trading at least 20 percent below their 50-day moving average, while remaining above $25. (For the record, that describes some of the tech world's major stocks, like Cisco Systems Inc. (CSCO) and Sun Microsystems (SUNW) . It could also mean looking at a bet in the Nasdaq 100-shares (QQQ), which represents the bigger tech stocks. All of these rallied strongly last Friday. Too optimistic a point of view at the end of a very bad year? Well, you can always lick your wounds and spend the money on a New Year's Eve party. Next year doesn't look altogether festive.