Fool Portfolio Report
Tuesday, April 8, 1997
by Jeff Fischer (MF BudFox)

ALEXANDRIA, VA.,(April 8, 1997) -- As of Monday morning, trailing fifty-week returns show that the S&P 500 has gained 50% more than the Nasdaq Composite in the past year. The S&P gained 15% from April 5th, 1996, to April 4th, 1997, while the Nasdaq gained only 10%. Granted, the "50%" number is deceptively high, but statistically true.

1997 has well demonstrated the divergence between the two indexes, and between the different markets. The first three months of this year the Dow and the NYSE rose, while the Nasdaq dramatically fell, and only lately, the Nasdaq has been rising while the NYSE has been falling. The "old school" sees the divergence as a bad sign -- an indication of a weak or "coming apart at the seams" market.

In the past the Nasdaq often moved in step with the NYSE, but the importance of tandem moves is over-rated by the Wise. Just as some sectors are destroyed during a bull market (as with semiconductors in 1995) while others soar (networking at the time), it makes sense that two markets representing different aspects of the economy diverge periodically as well. "Sector rotation" is a natural part of an economy, and so too with stocks. "Market rotation," more or less, is arguably natural, too, when the discussed markets represent different aspects of the economy.

Quickly, most of us realize that the NYSE consists of larger-cap and often more mature companies, while the Nasdaq mainly consists of small-caps and younger firms. Depending on the economic situation and current market valuations granted, small caps are at times much more attractive (or unattractive) than large caps. Simply put: Markets diverge.

Next time you hear or read stock gurus state, "The markets are going separate ways, which is bearish," ask them, if you can, "Why is this bearish?" I've yet to hear qualitative reasons why diversity of fundamentally different markets is bearish. I've only heard, "It's been a bearish sign in the past." The past is never now, though. The Nasdaq's weaning of the NYSE is over, if it ever was.

Nasdaq's accomplishments are not short of astounding. Only 26 years old, Nasdaq is already the second largest stock market in the world. The equity value of all its stocks well exceeds a trillion dollars, up from only $78 billion in 1976, when Nasdaq first started counting. From an initial 2.2 billion shares traded in 1971, Nasdaq's 1994 volume of 74 billion shares first surpassed that of the NYSE, and since then volume has consistently been above that of the NYSE. Nasdaq's volume shames that of the famous markets in London, Tokyo, Germany and Switzerland.

On a share volume basis, the Nasdaq accounted for over 50% of combined trading last year, beating out both the NYSE and AMEX. Many complain that Nasdaq volume is measured by "double counting." The total volume consists of both buying and selling transactions. The SEC considered and validated the method, though, calling it very reasonable after the AMEX challenged it. If both buying and selling is taking place, two transactions are made, so why not count both?

Nasdaq easily leads in the total number of companies going public, and now over 5,000 companies trade on its system. Since January of 1984, about 4,400 companies have gone public on Nasdaq, and have initially raised around $100 billion.

Nasdaq broke away from its "OTC" roots in 1990, and now has over 500 active market makers, averaging 10 dealers providing quotes for each Nasdaq security. Nasdaq won a Smithsonian Award in 1994 for the ingenuity of its system, which is the first computer-screen based stock market in the world. Nasdaq prices are displayed on about 400,000 terminals around the planet, with steadfast reliability (a few brown-outs and one attack from a squirrel being the notable exceptions).

Meanwhile, what Nasdaq has done for young American companies shouldn't be underestimated. Nearly 90% of America's fastest growing companies are listed on Nasdaq, and the majority of stocks with the largest annual gains, in price and profits, have been on Nasdaq since the system's inception.

This isn't a commercial for Nasdaq, believe it or not. But the fact that it moves on its own shouldn't be a surprise anymore. Nasdaq has developed a world and market of its own, separate from that of the NYSE. Now, in Germany, a new computer-screen market is being modeled after Nasdaq. If it does for Germany and Europe what Nasdaq has done for U.S. companies, great!

Many are waiting for MICROSOFT (Nasdaq: MSFT) and INTEL (Nasdaq: INTC) to leave Nasdaq. Don't hold your breath. Microsoft began on the exchange in 1986 with a market cap of only $342 million. It is now holds the largest cap of all, at over $100 billion. (In 1985 the top 35 Nasdaq companies combined were capped at less than $50 billion).

Not only is Microsoft's CFO, Mike Brown, on the Nasdaq Board of Directors, but Microsoft values the inroads Nasdaq allows small, high-technology firms to make, over the NYSE. Microsoft has alliances with many suppliers and vendors that are listed on Nasdaq, and also prunes many of its ideas from new firms -- Nasdaq-listed firms -- so it's in Microsoft's best interest to see Nasdaq thrive. It's doubtful Microsoft will leave the Nasdaq anytime soon, and probably likewise with Intel. Rather, perhaps someday companies will be moving to Nasdaq from the NYSE, eh? We are, after-all, in the computer age.

Meanwhile, let the different markets diverge as they may. As Mahatma Ghandhi said: "Honest differences are often a healthy sign of progress."

Differences abound. For the year, the S&P is up 3.43%, while the Nasdaq is down 2.61%. In Fool History (FH), beginning August of 1994, the Nasdaq is up 74% and the S&P only 67%. The Fool is up 158%.

Today Foolishness gained a healthy 1.86%, while the Nasdaq enjoyed its fourth straight rise, now up nearly 3% this month. It rose 0.48% today, and the S&P gained 0.52%.

The Fool gained on a rebound from AMERICA ONLINE (NYSE: AOL). Its ANS Communications branch formed an alliance with Connect Inc, and HEWLETT-PACKARD (NYSE: HWP). The alliance will offer companies Internet commerce solutions (commerce and advertising being two growing revenue streams for AOL).

No word today on the rumored COMPUSERVE (Nasdaq: CSRV) and AOL talks. Compuserve's revenues have been decreasing, except for its network-services division, which offers private networks to companies. Clients include Visa and Federal Express. This branch of CompuServe has grown 35% annually, while $260 million is expected in revenues this year. AOL is rumored to be offering CompuServe around $1.2 billion in stock. AOL would be paying for revenues and "hope," obviously, not earnings. The rumored $11 per share acquisition price may have CompuServe shareholders up in arms, seeing how the stock just came public Arpil 22nd, 1996, at $30 per share. Yet, none of this is confirmed.

IOMEGA (NYSE: IOM) rose $3/8 today. J.P. Morgan stated its buy rating on the stock, with a $38 price target, as it surmised that the PC industry is strong and will remain strong through 1997 and 1998. The analyst has buy ratings on Dell, Compaq, and Gateway 2000.

Iomega also shared that UMAX Computer Corporation will include internal Zip drives as standard in a Mac compatible line of computers. Iomega and the word "standard" have been used together in the same sentence at least a dozen times this year, by a dozen different PC manufacturers. In the future, for no significant price difference, you have a choice:

1) Buy a computer with the normal old Floppy drive.
2) Buy a computer with a Zip, at 70 times storage capacity.

Which would you buy?

GENERAL MOTORS (NYSE: GM) rose $3/8. An analyst feels the company and FORD (NYSE: F) face brighter earnings prospects this year, as orders pick up. General Motors, meanwhile, is facing another strike in Oklahoma City.

To close, a very convenient feature was added to the Fool's Web site today. If you read our Evening News on the Web site (or this column, or anything) included with each stock ticker are links to the mentioned company's press releases (N) and snapshots (S), as well a link to the current price quote, of course. Kudos to the technology Fools here! There's more coming to the Web site, too, before long. Pizza and Coke are obviously brain-food, and also powerful enough to stave off sleep for days.

Fool on!

Stock Change Bid -------------------- AOL +1 1/8 45.38 T - 1/4 34.50 ATCT + 1/16 5.69 CHV + 1/4 65.25 GM + 5/8 54.63 IOM + 1/2 17.88 KLAC + 1/8 44.13 LU -1 53.50 MMM +2 1/2 84.63 COMS + 1/2 34.63
Day Month Year History FOOL +1.86% 4.43% -3.09% 158.64% S&P: +0.52% 1.19% 3.43% 67.13% NASDAQ: +0.48% 2.92% -2.61% 74.59% Rec'd # Security In At Now Change 5/17/95 2010 Iomega Cor 2.52 17.88 609.62% 8/5/94 680 AmOnline 7.27 45.38 523.89% 8/11/95 125 Chevron 50.28 65.25 29.76% 8/12/96 110 Minn M&M 65.68 84.63 28.85% 10/1/96 42 LucentTech 47.62 53.50 12.36% 8/12/96 280 Gen'l Moto 51.97 54.63 5.10% 8/24/95 130 KLA Instrm 44.71 44.13 -1.31% 8/12/96 130 AT&T 39.58 34.50 -12.83% 8/13/96 250 3Com Corp. 46.86 34.63 -26.11% 10/22/96 600 ATC Comm. 22.94 5.69 -75.20% Rec'd # Security In At Value Change 8/5/94 680 AmOnline 4945.56 30855.00 $25909.44 5/17/95 2010 Iomega Cor 5063.13 35928.75 $30865.62 8/12/96 110 Minn M&M 7224.44 9308.75 $2084.31 8/11/95 125 Chevron 6285.61 8156.25 $1870.64 8/12/96 280 Gen'l Moto 14552.49 15295.00 $742.51 10/1/96 42 LucentTech 1999.88 2247.00 $247.12 8/24/95 130 KLA Instrm 5812.49 5736.25 -$76.24 8/12/96 130 AT&T 5145.11 4485.00 -$660.11 8/13/96 250 3Com Corp. 11714.99 8656.25 -$3058.74 10/22/96 600 ATC Comm. 13761.50 3412.50-$10349.00 CASH $5240.09 TOTAL $129320.84