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Pretty basic question, but worthy of deeper exploration. I sent an email to Trenchrat discussing some of the things I'm about to present, but feel it is worthy enough for all to consider being that it does involve a number of the Fat Pipe broadband companies and what is going on in the 'underlying market'.

Let's take a look at some of the well known larger weighted Nasdaq 100 Index companies and see how far they've fallen from their 52 week highs. In addition, I list their percentage of the Nasdaq 100 Index as of 10/13/00. The loss from their 52 week high is represented in (-xx%) and their percentage of the index is represented in [x.xx%]:

QQQ = (-32%) [100% of the Nasdaq 100 Index]

COMPX (Nasdaq) = (-36%)

From largest weighting to smallest weighting

Cisco = (-34%) [7.69%]
Microsoft = (-58%) [5.06%]
Intel = (-53%) [4.93%]
JDS Uniphase = (-38%) [4.35%]
Oracle = (-26%) [4.34%]
Sun Microsystems = (-11%) [3.99%]
Qualcomm = (-62%) [3.26%]
Nextel = (-58%) [1.85%]
Xilinx = (-27%) [1.69%]
Amgen = (-21%) [1.61%]
Verisign = (-36%) [1.54%]
Maxim = (-22%) [1.51%]
Gemstar = (-39%) [1.46%]
SDL, Inc. = (-33%) [1.42%]
ADC Telecommunications = (-46%) [1.36%]
Dell Computer = (-58%) [1.35%]
Worldcom = (-62%) [1.30%]
Global Crossing = (-60%) [1.27%]
Applied Materials = (-58%) [1.16%]
Yahoo! = (-78%) [0.82%]
Apple Computer = (-71%) [0.52%]

That's 52.48% of the Nasdaq 100 Index

Average loss for this large group = (-45%)

Why has the largest group taken more of a hit than the QQQ or the Nasdaq Composite?

That's an interesting question and leads into the 'theory' of possible new leadership emerging within the Nasdaq which will be at the heart of the next leg of a bull market when the environment is ripe. Names like Juniper, Redback, Network Appliance, Brocade, Ciena, BEA Systems, Siebel, i2 Technologies, Ariba, Broadvision, Veritas, PMC Sierra, Appied Micro Circuits, CommerceOne, Emulex, McData, Sycamore, Broadcom to name but a few. Many of these don't even have a weighting in the Nasdaq 100 Index (yet).


Interesting Steet.com article:

http://www.thestreet.com/_yahoo/markets/aarontaskfree/1128013.html

Here's the link to the percentages each of the those Nasdaq 100 Index companies:

http://dynamic.nasdaq-amex.com/dynamic/nasdaq100_activity.stm


This is an interesting phenomenon that I thought would be worthy of discussion. This year in terms of Microsoft, Intel, Cisco, Applied Materials, Worldcom, Dell, etc... has been a difficult one. These were the leaders, the generals, the 'safe dominant large-caps' that ruled the roost. Set the standards. Owned the market. Printed cash. Made millionaires the world over. In technology the dominant leaders are awarded something called a CAP (competitive advantage period). For those of you who have read and are familiar with The Gorilla Game, turn to page 87 and review how the process works and what can alter the CAP of a gorilla or dominant company. It is a theory congruent with EVA theory (Economic Value Added). Interest rates and taxation rates for business profits of corporations has a direct effect on the CAP awarded to a dominant company. There is a correlation between the risk adjusted rate of return for the bond and the increase or decrease of the economic value add for the risk adjusted return for an equity. In short, interest rates go down, stock price and bond price go up. Interest rates go up and the reverse is true.

No point in mentioning that interest rates have gone up over the past quarters and bond prices and stock prices of those with the largest CAPs have seen some serious adjustment. More than half of the Nasdaq 100 Index weighting has an average (-45%) loss in share price.

Tweedle dee and tweedle dum. Share prices go down and therefore it is the end of the world, right? Wrong! That's simply the way the economic model works in regards to interest rates, bond rates and taxation on business profits.

Now we've seen those CAPs that were built up over the past decade start to deflate. This is a normal process and also signals a major transition. The more important issue is why they are deflating. Yes, the interest rate environment and the discounting the market is doing for the economic situation based on the growth rate over the next couple of years is certainly a major part of it. However, I think it goes much deeper to the issue that the transition from the previous leaders to the new leaders and emerging new leaders also is contributing to the rotation and share price decline of some of the major high technology companies. It's happening right in front of our faces or underneath the surface. We have seen the CAPs of the new emerging leaders start to increase in the face of this year while we've seen the others come back down. Now we will start to see the value guys come out and say that 'finally, Intel and Microsoft are starting to look like good value'. They did the same for IBM, Wang, Honeywell, Xerox, Digital and other previous leaders that were usurped by a major transistion. In my opinion, that's like buying the stocks after the party was over. That doesn't mean great companies like Dell, Microsoft, Intel, Cisco, IBM, etc... are not great companies and won't do well into the future. They are and will continue to exist and do quite well as companies. However, they will now be judged on their growth and execution and the CAP deflation we have seen may not return once the interest rate, bond rate and taxation on business profits effects turns in the other direction. That's just a theory, but warrants watching.

Why haven't the we seen the new leaders CAPs adjusted for the interest rate economic situation discounting model like the older leaders? It's most likely because that is not the entire issue like everyone on the surface would like to make it be, but rather the high technology market is establishing the new leaders of the market and the Nasdaq which will dominate over the next 5 to 10 years (or longer). I'm sitting back in amazement watching it take place. It's quite possible that this is what the market is waiting for to signal a 'bottom'. All the CAPs adjusted. Old and new. It's difficult to say because the growth and potential for many of the new and emerging leaders has more to do with two, three, four, five, six years out from now. As we know, anyone going out that far with growth projections and trying to nail down a risk adjusted rate of return is out on a thin limb. You simply cannot go out that far with any kind of accurate or exactness. Hence, the befuddlement of dominant companies - especially in technology - when their CAPs have been awarded and plenty scream 'overvaluation' based on current or projected earnings. The professional analysts go out a maximum of 12 - 18 months and adjust to the upside as the quarters march on into the future. The possible revenue peak of the NGN space was pegged around $1 Trillion over the next two decades, with a decade being pegged more around the $100 -$110 Billion peak. Cisco's enterprise peak revenue market was $50 Billion. Most would say that's absurd and crazy because it is simply too far out in the future, yet you see CAP's being awarded to the companies that are the best poised to dominate that kind of pie eating contest.

That brings us to this action in Microsoft, Intel, Applied Materials, Cisco, Dell, Worldcom, Apple and others that are off an amazing amount for the year. Apple and Yahoo! are off over (-70%) and they represent the most of the group above for losses while Sun, Oracle and Cisco represent the least carnage of losses for the larger weighted group.

I didn't put together a list of the new emerging leaders like Juniper, Redback, Ciena, Broadcom, AMCC, PMC-Sierra, i2, Siebel, Ariba and others in terms of weighting because they are not all on the Nasdaq 100 Index yet. Juniper has a weighting of 2.45%, i2 has a weighting of 2.01%, Siebel has a weighting of 2.5% and Ciena has a weighting of 2.24%. Those four major up and comings are 9.2% of the Nasdaq 100 Index. Contrast that with 17.68% of the Nasdaq 100 Index being Cisco, Intel and Microsoft.

As usual, I went through all of that and didn't say a heck of a lot. However, we know there is a list of 20 - 25 solid young and mid-cap companies that in spite of the CAP reduction in the old generals of the Nasdaq have zoomed ahead this year in the face of this transition. If we add the implosion of the numerous dot.com companies that came and went, although their percentage is much, much lower on the the Composite and not represented on the Nasdaq 100 Index, certainly has had a drastic effect on the market. We should look at CAP reduction on the more mature leaders of the PC technology adoption life cycle to see how they fare once the economic situation turns in the other direction in the future, the emerging new leaders for the IP/Broadband and networking application industries to see how and what kind of CAP they are gaining as well as the continued wash out of the weakest business models that were built around the Internet.

BB


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