Newspaper article THE JOURNAL RECORD

Forces of Nature, Immutable Truths

Newspaper article THE JOURNAL RECORD

Forces of Nature, Immutable Truths

Article excerpt

NEW YORK -- So the laws of physics apply to new-economy stocks after all.

The Nasdaq Composite surrendered to the force of gravity last week, falling 7.9 percent. The composite, which was up 24 percent at its peak on March 10, is now up 12.4 percent in 2000. Not bad for three months' work, but the trend is troubling.

So troubling that Edward Kerschner, chief market strategist at Paine Webber, says we are witnessing the beginning of the end of the mania.

"The reason I think all excesses correct is I have this silly belief that markets are efficient," Kerschner said. "From time to time, people make excuses to chase stocks. But ultimately, all a shareholder gets is a right to earnings. These stocks do not have earnings."

An index that Kerschner created out of the 20 hottest and newest Nasdaq stocks, what he calls the "new, new industrials" has lost half its value in the last three weeks or so. And he believes these shares could decline an additional 50 percent in coming months.

Although the Nasdaq soared on Friday on quarter-end buying by institutional investors, it remains vulnerable to another immutable law, that of supply and demand.

Recent heavy selling in Nasdaq shares is almost certainly owing to the excessive use of borrowed funds by investors buying shares. Margin debt stands at record levels -- up 9 percent in February alone -- and analysts who study the figures say the borrowing is concentrated in Nasdaq stocks.

As these stocks fall, brokerage firms that lend to their clients ask for additional funds to shore up their portfolios. Since many investors don't have fresh money with which to meet their brokers' calls, the shares are sold, putting more pressure on already damaged stocks. Buying the dips becomes impossible.

Executives at Nasdaq companies that have gone public recently are another big selling force in the market. …

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