To the Moon

By James Cramer

Can this NASDAQ lunacy continue into next year? That's the question everyone on Wall Street keeps asking. And I have an answer that seems as hyperbolic as the stocks have been parabolic: you bet it can. In fact, it could accelerate in January, dwarfing some of the gigantic moves we have already seen. Here's why:

First, mutual funds, including index funds, the most popular form of investment, own very few of these newly created billion-dollar stocks. The mutual funds, stung previously when they created single-focus Latin American funds and Asian funds, have been loath to initiate Internet-only mutuals. And judging by a scan of the holdings of the largest funds, they spent more time trying to imitate the old-line Standard & Poor's 500 index than mimic the hot stocks that individuals have chased successfully. Now they have to scramble to own these red-hot stocks and dump the laggards if they are to keep up with the new benchmark to beat: the NASDAQ 100, which is much more overweighted with dotcom names.

Second, the Federal Reserve is expected to tighten rates, maybe even dramatically, to try to cool off the consumption boom. An aggressive tightening could wreck whole sections of this market, from cyclical industries like coal and steel and copper companies to banks and savings and loans. Cyclicals need low rates to keep the expansion going. Financials rely on the spread between short rates and long rates for much of their profits, and if the Fed takes up short-term rates, their margins will be squeezed and their earnings could disappear.

But the dotcoms and their Net-infrastructure brethren have proved immune to higher rates. How else can you explain the NASDAQ's 80% increase, the greatest uplift in any U.S. average's history, in light of the major interest-rate rises of 1999? Put simply, any Fed moves to tighten may set off a further stampede into the hottest stocks around.

Finally, even though the investment banks spewed new dotcoms at a record rate, there is simply not enough supply of these high-growth stocks out there to sate the demand of both the individuals and the institutions that want them. A slight curtailing of the new-issue pipeline, mandated by regulators as a pre-Y2K bug precaution, caused the few Business-to-Business plays out there, like VerticalNet, to soar. Stocks trade as a function of supply and demand, and right now every dotcom is Pokemon at Christmas--only in the case of stocks, the shortage won't be fixed anytime soon.

Too much Pangloss? Frankly, as a performance manager who gets paid by what I make, I can't afford to take the gloom-and-doom position that has enveloped so many managers who appear on television and pontificate about how the good times must end. Those are the same people who mouthed the same warnings last year. Had I listened to them, my investors would have saluted my caution and conservatism--right before waving goodbye.

That's why this year I am spending more time worrying about missing the upside than worrying about the potential declines of those stocks that have shot up at a velocity normally reserved for cheetahs, not bulls, and certainly not bears.

James Cramer is a hedge-fund manager and writes for thestreet.com This column should not be construed as advice to buy or sell stocks.