A Market Fit to Burst

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In a global marketplace, jitters travel across borders as quickly as megabytes of data. Consider the erratic momentum that last week cut a swath through the U.S. stock market, causing benchmark indexes to plunge heavily followed by equally dramatic recoveries. Far from losing power, the wild ride kept up its head of steam as it crossed the Atlantic, rattling European indexes and leaving shellshocked investors wondering what hit them.

As in the U.S., it was the former investment darlings like the dotcoms and other technology-related stocks that were the talk of the markets. Just as the high-profile NASDAQ plunged as much as 13.6% in a single day's trading before pulling off a strong rally, certain tech-heavy European benchmarks responded in kind. The Brussels-based easdaq fell 5.2% one day only to gain over 8% the next. London's FTSE TechMARK 100 rose 10% following an earlier drop of 8.6%. "America is where technology is most prominent, both in life and on the stock market," says Paul Kleiser, senior portfolio manager of Scottish Equitable's global technology fund. "Tech stocks are a bit thinner on the ground here, [so] we take our lead from Wall Street."

At the end of a turbulent week, those market commentators and analysts that weren't simply scratching their heads were tentatively heralding renewed enthusiasm for the stocks of the New Economy. Renewed possibly, but perhaps also more cautious. Despite last week's recovery, the marketplace seems unable to shake an underlying edginess, particularly about publicly listed dotcoms whose high share prices are based more on blue-sky optimism than concrete earnings within finite time horizons. Even as more and more professionals seek to cash in on the Internet bonanza by jumping ship from old-style firms and heading to market-bound start-ups, expressions like tulip economy and bubble.com continue to permeate the market as wary investors take a step back and assess what the future holds.

One thing to consider is the tendency for dotcoms to burn cash like there's no tomorrow. Because the conventional wisdom is that they must build brand awareness quickly, many Internet companies drain their limited capital to spend vast amounts on advertising and marketing--with no guaranteed return. "Everyone who invests in companies should take a close look at whether the business model is stable and sustainable," says Rolf Drees, an analyst and spokesman at Union Investment, an asset management concern in Frankfurt. "The key question is, 'Will there be a long-term positive margin?' For example, selling commodities over the Internet might be a large turnover story, but not a margin story."

Even before last week's market antics, the dotcom fallout had begun as disillusioned investors turned their backs on recent and highly hyped market entrants. At week's end, shares in Lastminute.com, the U.K. company which offers items like travel packages online, had fallen about 44% from their debut price on the London Stock Exchange last month. Similarly, shares of Dutch company World Online, which has been plagued by controversy over stock dealings by founder Nina Brink, were trading at around $18, well below their March listing price of about $41.

Such tumbles have combined with the market volatility to send up storm warnings not only to investors--Scottish Equitable's Kleiser likened the movement in World Online's share price to "a cold bath"--but also to Internet-related companies preparing to enter the market or to use shares for acquisitions. Last week, Deutsche Telekom set a price range of between about $25 and $30 per share for the flotation of its Internet service provider T-Online--around 25% lower than previous expectations. In the same vein, following a substantial drop in its share price, Bertelsmann subsidiary Pixelpark last week abandoned its plans to acquire two Swedish Internet consulting companies.

Still, as evidenced by the returns to fortune of many of the technology-related benchmarks in Europe, some investors saw the upheaval as an ideal time to dive in. In an address to investors and staff, Henderson Investors' head tech fund manager Brian Ashford-Russell said he viewed "this significant sell-off as a good buying opportunity." Indeed, some analysts believe that the wild ride will be good for the market in the long run, prompting it to be more discerning. Although he acknowledged that confidence in the sector might be damaged in the near term, Ashford-Russell said, "hopefully, investors will prove more discriminating after this shock."

But the turmoil in the markets last week buffeted even investors already wary of the New Economy. In a highly embarrassing glitch last Wednesday, trading on the London Stock Exchange was delayed for almost eight hours as a result of computer software problems, infuriating investors keen to finalize their affairs on the last day of the U.K. tax year. However, they could do little but sit and fume as the technology dictated terms.