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For the QLGC lovers:

The tech bubble that won't burst

Paul Kedrosky
National Post


Tuesday, November 12, 2002
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On the list of most actively traded stocks in Canada and the United States it is still 1997.

Pick any day at random and the list of companies with the greatest number of their shares being traded will likely include the following companies: Cisco Systems, Sun Microsystems, Oracle Corporation, Intel Corporation, Microsoft Corporation and Nortel Networks. The list should look familiar: It is not markedly different from what the top-ten list would have looked like during the peak of the technology boom.

Thought that the boom was over? Thought that with the boom turned to dust investors had moved on to other playthings? They haven't. Take a closer look and you'll see, because there are bizarre excesses galore.

Consider how quickly the company's float of shares changes hands. Because a company with 100 million shares outstanding could trade a million shares a day without meaning much. But for a company with five million shares outstanding that would amount to 20% of the company's shares changing owners in a single day. That is noteworthy.

So if you re-sort the list of most actively traded stocks by order of how quickly their float of shares changes hands, here is what you find. The new leader becomes U.S.-based storage technology company QLogic. Almost 20 million of the US$380-million company's shares trade every day. To put it in perspective, that is two-thirds of the volume that Nortel's shares see -- but for a company with 3% of the revenue.

If you compare QLogic's and Nortel's trading in terms of their respective floats, however, the situation is even more striking. At the above volume, QLogic's float of 93 million shares changes hands about every 5 days. That is astounding. By way of comparison, at Nortel's average trading volume of 33 million shares per day, the company's float changes owners over a much longer 116 days.

Making things more striking is that most holders of QLogic (and Nortel) stock don't actually trade the shares very often. Most shareholders, like you and I, cower under the covers, praying that no one notices that we actually own these stocks, just hoping against hope that the price will go up before we bug out and go back to TransCanada Pipelines. So if most shareholders aren't trading at all, then there are some QLogic (and Nortel, but to a much lesser extent) shareholders that do nothing but trade their stock. How else to explain the astounding speed with which the company's float changes hands?

QLogic is not alone in seeing such astounding trading. KLA-Tencor and Nvidia, a semiconductor equipment maker and a graphics accelerator company, both trade with such rapidity that their entire floats change hands in 10 and 14 days, respectively.

So who is doing all of this trading? Who are the bipolar sorts who can't bear to hold on to some of these tech stocks, but then buy them back 20 seconds later?

The answer is that at least one part of 1997 never ended. Which part? Day traders. Remember them? They were those basement-dwelling cover-article sorts who made millions buying Amazon before you did, and selling it two hundred times before you bought it. Rather than disappearing, day traders have evolved into momentum traders who set up shop in a stock and, like a bad smell, just won't go away.

Stocks like KLA-Tencor, Nvidia and others have been almost entirely taken over by these traders. It is to the point that self-respecting money-management firms won't go near the stocks. Why? Because it is (to borrow a song-title from the B-52's) a party out of bounds -- a wild affair that has been completely taken over by folks who were supposed to have gone home a long time ago. But when they were kicked out of the party they just moved into the room next door and made even more noise, scaring most sensible people away entirely.

All these traders are constantly arbitraging minute pieces of the company, sometimes doing hundreds of trades per day. They are looking to squeeze tiny fractions from one another as the stock moves up, then do the opposite as it moves down again.

While all of this action is entertaining, it is, of course, meaningless noise trading. It is frantic and onanistic, like a bored monkey in a cage. It will eventually end in classic gambler's ruin, but until it does it puts the lie to those who believe the technology bubble deflated and disappeared. It didn't. It is still out there, hidden in interstitial places like the excess money in the venture capital market and in the giddy popularity of yesterday's fallen tech stocks.

So if you want to know when the tide has turned, when investors have finally learned their lesson from the bubble, watch the most actively traded lists. When the four horsemen of the technopalypse (Cisco, Intel, Dell and Microsoft) are replaced by new companies, perhaps in alternative energy, perhaps in some other area of emerging growth, then you'll know that investors have abandoned childish dreams and finally moved on from 1997.

© Copyright 2002 National Post

http://www.nationalpost.com/financialpost/story.html?id={73A11D66-CC65-46CF-9731-5CC08CC86CF3}

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