The Record (Bergen County, NJ)
04-08-2001
REVERSAL OF FORTUNE -- THE NEW MILLIONAIRES' MARKET BREAKS MANY IT MADE
By KEVIN G. DeMARRAIS, Staff Writer
Date: 04-08-2001, Sunday
Section: BUSINESS
Edition: All Editions -- Sunday
Consuelo Buono could hardly contain herself.
"I'm a millionaire!" she shouted, jumping and giggling and dancing a
celebratory dance that would make an NFL wide receiver proud. In a
matter of minutes, she had made several bold investment decisions,
pushing her earnings over the $1 million mark. "I'm a millionaire!"
Alas, that wasn't quite true. Buono, a college student from
Millstone in Monmouth County, was merely a virtual millionaire, making
$1,029,501 in an interactive investment game played by visitors to what
is in many ways a virtual stock exchange, the Nasdaq Stock Market.
The Nasdaq has gained a reputation as the maker of instant
millionaires during boom times, helping 20-somethings with a computer
and an idea to net fortunes, and giving a generation of older workers
hope for the type of financially secure retirement about which many had
only dreamed.
The exchange was launched in 1971, and its index meandered to the
1,000-point mark and didn't top 2,000 points until 1998. Then the Nasdaq
took off on its wild ride: taking less than a year to crack 3,000, less
than two months more to top 4,000, and about 2 1/2 months more, on March
9, 2000, to go over 5,000.
However, almost as fast as Buono lost her fortune when the game
ended, the Nasdaq index did an about-face and headed south: In the last
year, many of those investor fortunes became recent memories as start-up
Internet companies went out of business and the value of established
companies plummeted.
None of the stock markets has performed well in recent months, but
the Nasdaq has led the retreat, falling more than 62 percent in the past
13 months. After staying around the 5,000 mark for just two days, the
Nasdaq index has fallen steadily, sinking below 2,000 on March 12 for
the first time since Dec. 14, 1998.
What goes up, apparently has to come down.
The Great White Way
Unlike the old, established New York Stock Exchange, where stocks
are bought and sold on the floor of the stately bourse on Wall Street,
the upstart Nasdaq market has no trading floor.
This is a purely electronic market, with trading executed through a
sophisticated computer and telecommunications network that transmits
data at lightning speed to more than 350,000 computer screens around the
globe. Buy and sell orders are executed far from Wall Street, at data
centers in Rockville, Md., and Trumbull, Conn.
If the NYSE is identified by its classical-revival,
turn-of-the-century granite and marble building in the heart of New
York's historic financial district, Nasdaq's image is the neon-glitzy,
high-tech communications center/television studio that opened last year
in the heart of New York's Times Square. The facility, known as the
MarketSite, is where Buono made her "fortune," and where tourists come
each day before visiting the ESPN Zone, or the Warner Bros. Studio
Store, or any of dozens of other Times Square tourist attractions.
MarketSite fits in well with Broadway's bright lights, and, with
its futuristic 47-foot information wall, robotic cameras, and special
video effects, it wouldn't be out of place in a Disney theme park.
"It's the market for the electronic age," said Larry Froelich, a
professor at Berkeley College
in Woodbridge, who brought Buono and nine
other students to the glass-walled building at the intersection of
Broadway and 43rd Street recently.
But looks in this case are deceiving, because the steady stream of
information flowing across 96 multimedia screens tells a serious story,
the daily fate of hundreds of companies and millions of retirement
accounts.
Reality and fantasy come face to face at the MarketSite, where
overhead monitors carry CNBC, CNNfn, Bloomberg, and CBS MarketWatch
reports, measuring real investors' real gains and losses even as a
steady stream of tourists hope to match Buono's virtual bonanza by
playing the Nasdaq MarketMaster game at special kiosks.
Instructions for MarketMaster are simple: Buy low and sell high,
the most basic rule from Investing 101.
Real-life investors, many of them first-timers introduced to stocks
through company-administered 401(k) funds, had little trouble following
that advice during the soaring bull market of the Nineties. Stocks and
mutual funds, especially on the Nasdaq market, seemed to go in one
direction only -- up -- and investors came to think of annual double-digit
gains as the norm.
But reality has replaced those Pollyannaish expectations: The
Nasdaq is dominated by technology and new-economy/dot-com companies that
have lost billions in market value in the last year.
Many of the Internet companies that fueled the growth have gone out
of business, and others have cut back. A survey released last month by
Challenger, Gray & Christmas Inc. shows 75,525 people lost jobs at
Internet companies in the past 16 months, although the number dropped in
each of the past three months.
Despite the reversal, Nasdaq has moved from the fringe to the
mainstream of the American economy and will continue to be a place for
entrepreneurs to raise capital and investors to find growing companies,
said Markus Brunnermeier, an assistant professor of economics at
Princeton University.
But both groups will proceed with caution, having been burned by
"too much exuberance," said James Almedia, an assistant professor of
entrepreneurship studies at Fairleigh Dickinson University's Rothman
Institute.
From minnow to monster
The Nasdaq -- originally the National Association of Securities
Dealers Automated Quotation -- was created in 1971 based on a Securities
and Exchange Commission proposal that automation could solve the problem
of fragmentation in the over-the-counter market, which traditionally
consisted of smaller companies that did not meet the listing
requirements of the NSYE.
Until then, stocks were bought and sold over the telephone without
a central marketplace, and it was hard to tell if you were getting a
good price, said Andy Macmillan, a Nasdaq spokesman.
"The Nasdaq Stock Market added a dimension to America's capital
markets that didn't exist anywhere else in the world: access to public
investors for your rapidly growing companies," said Joseph Hardiman,
Nasdaq's chairman from 1987 to 1996.
Each of the 10 biggest companies on the Nasdaq -- Microsoft Corp.,
Cisco Systems Inc., Intel Corp., Oracle Corp., Sun Microsystems Inc.,
Amgen Inc., Dell Computer Corp., Qualcomm Inc., WorldCom Inc., and JDS
Uniphase Corp. -- is a technology company, and each is among the world
leaders in its industry.
But the exchange is not limited to technology, and not all the
losing technology stocks are on the Nasdaq exchange, as investors in
NYSE-traded Lucent Technologies Inc. know. Many of the companies with
stock trading on the Nasdaq come from other industries, including such
well-known corporations as Union-based Bed Bath & Beyond Inc., a home
furnishings retailer; Starbucks Corp., the Seattle-based coffee company;
and Staples Inc., the Framingham, Mass.-based office supply company.
Actually, there are two Nasdaqs, the Nasdaq National Market, which
lists more than 4,010 of the exchange's largest and most actively traded
securities, and the Nasdaq SmallCap Market for more than 1,000 emerging
growth companies. News of daily changes in the Nasdaq refers to the
national market.
Many small companies owe their very existence to the Nasdaq, having
raised money there through initial public offerings of their stock,
Brunnermeier said.
It's a place for venture capitalists to finance start-ups, and that
role "has become more and more important in recent years," Brunnermeier
said. From 1997 to 2000, Nasdaq brought 1,649 companies public, raising
$316.5 billion.
The recent shakeout is likely to make the Nasdaq stronger in the
years ahead, because investors will be more demanding, FDU's Almedia
said. Many businesses that went public through Nasdaq IPOs "did not
deserve to be funded," he said.
"For the past couple of years, start-up companies' business plans
could be figments of someone's imagination, and it could be financed,"
Almedia said. "There was pressure on entering the market, to take the
company public as soon as possible. Consequently, a lot of companies
made it to the market that would not have otherwise been able to issue
an IPO."
The Nasdaq also plays a unique and crucial role in stock trading
through the use of market makers, Brunnermeier said. Because many of the
stocks are not as heavily traded as those on the Big Board, as the NYSE
is known, market makers use their own capital to jump in when a buyer or
seller can't be found, allowing trades to go through.
"They smooth out temporary shocks, small dips in a day,"
Brunnermeier said.
In contrast to traditional floor-based stock markets, Nasdaq has no
single specialist through which transactions pass. Instead, it has a
structure that allows multiple market participants to trade stock
through a computer network that links buyers and sellers from around the
world.
Since its inception on Feb. 8, 1971, Nasdaq has been the
fastest-growing stock market in the United States, and two years ago it
became the nation's largest stock market, with a 56 percent market
share, compared with the NYSE's 42 percent share. At the end of 1972,
its first full year of operation, the Nasdaq reported trading of 2.2
billion shares. That is now the daily average, and volume got as high as
3.2 billion shares on Jan. 3.
Some of the stock market's spectacular growth came from "momentum
trading," being influenced by other investors and projections of how
much you'll earn if the stock keeps growing as its present rate,
Brunnermeier said. "It's hard when all your friends tell you about all
this money they make in the stock market."
Until last spring, dramatic growth defined almost every aspect of
the exchange. The Nasdaq composite soared, from 97.88 at the end of 1976
to a record close of 5,048.62 on March 10, 2000. But it has slid
steadily since, and closed Friday at 1,720.36, dropping 119.90 points
last week.
"We're still at a correcting phase to a sustainable level,"
Brunnermeier said.
Staff Writer Kevin DeMarrais' e-mail address is
demarrais(at)northjersey.com
(SIDEBAR, page b02)
Nasdaq slump spreads hurt among investors
When it comes to investing, Howard Mackey is a professional and Al
Contreras is an amateur.
But the two have have had very similar experiences when investing
in the Nasdaq Stock Market -- experiences shared by millions of
investors.
Both saw the value of some of their stocks soar in the heady days
of the Nineties, and both have seen some of those stocks plummet in the
past sobering year.
And both remain optimistic about Nasdaq's long-term prognosis, even
as it suffers from declining financial health.
"I think it's going to come back and do well," said Mackey, a
Teaneck resident who is executive vice president of M. R. Beal and Co.,
a small New York investment banking firm.
After staying mostly on the sidelines the past 10 months, Mackey
said he's preparing to get back into the market by investing in a Nasdaq
index fund.
But not quite yet.
"I think we have more to go," he said of Nasdaq's decline.
Like most investors, Mackey has stories of recent big gains and big
losses.
"One that did very well was ViaSat," Mackey said. He bought stock
in the digital satellite communications equipment company for about $19
a share and sold it last spring when the price soared to nearly $100.
Since then, the price has fallen steadily and, accounting for a 2-for-1
split, has been mired in the $10 range for months.
"I got out before it crashed," Mackey said.
But his timing wasn't as good when investing in a poultry company
whose name Mackey couldn't recall. "I bought it at $15 to $16, and it
went up a little to close to $20," he said. "It then started to back
down, and I held it, which I shouldn't have. I bailed out at $12."
Timing was also a problem for Contreras, an advertising sales
representative from West Orange. Mention Nasdaq to him, and Contreras'
mouth curls into a shy grin.
"It's a down year," he said. Like many investors, Contreras has
suffered big losses, but most of them have been paper, reflecting the
elimination of paper gains he realized a year earlier.
But there have also been some real losses as well.
"I bought Cisco on the way down at $50; I thought it had bottomed
out," he said.
But Cisco Systems Inc., the Internet network provider -- and one of
Nasdaq's blue chip companies -- still had more bottoming out to go. After
hitting $80.06 on March 27, 2000, the stock's price has gone down
steadily. It dropped $1.31 or 8.77 percent Friday to close at $13.63.
"It'll go back," Contreras said. "I'm very optimistic. The economy
is still strong."
That may be so, but some investors, still smarting from recent
losses, are taking a wait-and-see approach.
"I'm staying on the sidelines," said John Ferraro of Montvale, who
lost money investing in a number of technology stocks, including Cisco
and Lucent Technologies Inc.
"A lot of people were fooled."
Staff Writer Kevin DeMarrais' e-mail address is
demarrais(at)northjersey.com
(GRAPHIC, page b01)
Nasdaq Stock Market
Started: Feb. 8, 1971
No. companies: 4,734*
No. issues: 5,053*
Trading capacity: 6 billion shares a day
Record volume: 3.2 billion shares (Jan. 3, 2001).
Biggest daily increase: 324.83 points (Jan. 3, 2001)
14.17 percent (Jan. 3, 2001)
Biggest daily decline: 355.49 points (April 14, 2000)
11.35 percent (Oct. 19, 1987)
Top 5 companies: (Based on market capitalization):
Microsoft Corp.
Cisco Systems Inc.
Intel corp.
Oracel Corp.
Sun Microsystems Inc.
* As of 12/29/2000.
Illustrations/Photos: 1 - COLOR PHOTO - ASSOCIATED PRESS - Glowing blue letters
from the Nasdaq MarketSite Tower helped illuminate Times Square on Jan. 3, a
stellar day for the battered composite index. 2 - COLOR GRAPHIC - Nasdaq Stock
Market
Keywords: STOCK. ECONOMIC
Copyright 2001 Bergen Record Corp. All rights reserved.
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