Well, well, well. How have all you little chickadees been, since we last visited on November 12? Ask me how I've been. Not very damn well, thank you, thanks to this insane stock market.

In truth, I've made a few bucks, but this market is so worrisome. You know I have been in the market for 50 years (Count 'em - 50 big fat years), and I have never even remotely seen such madness as we see today. If I wanted to be in a more reasoned, conservative atmosphere, I would go to Las Vegas. The guys betting the $100 chips would be much more studious and careful, and would have a more business-like air about them.

Then you come to the stock market. Since our last article, we saw crazy Chinese stocks go from 50 cents to $12 in one day, then to $80 the second day, only to mercifully return to earth on the third day. Now we see IPO's come out at $30 and zoom up to $320 the same day, and then close around $270. That was today. My numbers may be off a little bit because I can't stand to get too many particulars, but the point's the same. It's MADNESS.

I follow an interesting technology stock called Sycamore Networks (SCMR). They went public October 22, 1999, at $38 per share. The same day the stock hit $270 7/8, before closing at $184 3/4. The following week it traded at a low of $170, and in mid-November it reached $281 1/2.

I have been toying with the thought of grabbing this tiger by the tail, and maybe buying a few shares. Their technology enables the transmission of data solely on wavelengths of light, which is an advantage over current technology that requires optical signals traveling across fibers to be converted into electrical signals. The science is real, as validated by Williams Communications Group (WCG) agreeing on November 22 to buy $100 million of Sycamore products per year for four years.

The two men that started Sycamore are for real too, as they started Cascade Communications which routinely beat Cisco for business, before they sold Cascade to Ascend Communications for $3.7 billion in 1997. The problem with buying stock in Sycamore is that they're not expected to make a profit before 2001 at the earliest. So how do you value a stock like this? Let's look at today. It opened up from yesterday's close of $253 1/2, at $264 ½ up $11. Now that's an acceptable overnight profit, right? I'd love to do it every time. A few minutes later it went to $267, and then went into reverse gear, going to $226 ½ shortly after 9:00 A.M., PST. A little before 11:00 A.M. it was at $240 7/8. It closed at $242, down $11 1/2.

Now I don't think the mutual fund portfolio managers are doing most of this pushing and shoving. I think it's the Phi Beta Kappa's of the day-trading world, that are following price momentum in either direction, of course. With this modest write-up here, you probably know more than one-half the day-traders out there. The main thrust of this article is not to sell you on the virtues of Sycamore Networks, even though I do believe it has considerable promise.

I am writing this to warn you of a potential stock market disaster. I firmly believe it is coming, but of course, the timing can never be known. But I can tell you that after one-half century in the arena, this stock market is sick. Yesterday I heard that at least one analyst is recommending Cisco to go to even higher prices, with the valuation based on 2001 earnings. Don't get me wrong. Cisco is one of the great technology stocks of this or any other time. It just costs too darned much. And when analysts justify their projections based on results two years out, you better run, not walk to the nearest exit. I recall this methodology in past times of bloated P.E.'s, and you can be sure that many trusting little shareholders subsequently inhaled vast quantities of stock market gas.

When I get going, I love to overdo a good slamming. When do you recall seeing maybe five or ten stocks being up 10, 20, or 30 points? Or how about 230 points? I'll answer for you, in case your brain is a little numb from looking at these big numbers. NEVER! Got that? NEVER! This is fun. I must repeat that. NEVER, NEVER, NEVER! If Graham and Dodd, the fathers of modern investment analysis were to give a one sentence summary of these goings-on, they would say this is not investment, it is MANIA!

Well, what should we do if I'm right? That sure would be easier to answer if we knew when the greater fool party would be over. Since we mortals can't even look one second into the future, I would recommend you consider the following:

1. Eliminate the use of margin. If you use only cash, you may be hurt, but not scalped.
2. Do not chase momentum stocks. If you do, you will see hunters become the hunted.
3. If you have a low risk tolerance, put 30% of your portfolio in government bonds.
4. Keep 10% of your portfolio in money market funds/CD's, etc.
5. Put 10% of your portfolio in Japanese or European stocks.
6. Your remaining 50% can well be in U.S. stocks.

We'll be writing again soon about dealing with your recommended 50% in U.S. stocks. If nothing else, I hope this article reminds you that no stock market party goes on forever, and that there are ominous signs all around us. I gave you a few anecdotes to think about, without going into the narrow breadth of the advance, advance-decline ratios and new lows vs. new highs statistics. They are all bad. Unless you're a Bear, in which case they're great.

I won't say cash is king yet, because there will be plenty of tax-loss selling this month, which has already begun. This means opportunity to you. But looking into the future, we should get a big dose of investment money through the first half of next month. Then BEWARE THE IDES OF JANUARY! Stay tuned.

The Market Pro - December 9. 1999