midday04-14-00

TheStreet.com's MIDDAY UPDATE

April 14, 2000

http://www.thestreet.com

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Market Data as of 4/14/00, 1:38 PM ET:

o Dow Jones Industrial Average: 10,557.46 down 366.09, -3.35%
o Nasdaq Composite Index: 3,467.92 down 208.86, -5.68%
o S&P 500: 1,389.63 down 50.88, -3.53%
o TSC Internet: 755.84 down 57.18, -7.03%
o Russell 2000: 466.11 down 23.11, -4.72%
o 30-Year Treasury: 106 11/32 down 3/32, yield 5.795%

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In Today's Bulletin:

o Midday Musings: Stock Market Blitzkrieg Continues; Dow, Nasdaq Near Day's Lows
o Herb Greenberg: Why Compuware's Bad News Shouldn't Have Been a Surprise

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"Ask Cramer" on TSC on Fox News Channel

You have another chance to ask Cramer about your favorite stocks Friday. Call 1-888-TELL-FOX (1-888-835-5369) Friday, April 14, at 6:45 p.m. EDT during our taping to get your question in. Then tune in to watch the show at 10 a.m. and 6 p.m. ET Saturday and at 10 a.m. ET Sunday.

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Also on TheStreet.com:

Wrong! Rear Echelon Revelations: The Brokers Are Busted

The trader sees this beleaguered group as a proxy for the underwriting business.

http://www.thestreet.com/comment/wrongrear/920307.html

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Tech Savvy: Dell to Exit Boxmaking? Part 1

Has Seymour gone over the edge? In a two-part column, he explains why he sees a different future for Dell.

http://www.thestreet.com/comment/techsavvy/919816.html

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Internet: For B2B Stocks, the $50 Trillion Math Doesn't Add Up

Tracing the decline of the sector in the face of increasingly bullish estimates.

http://www.thestreet.com/tech/internet/919719.html

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Smarter Money: Getting Naked

Selling naked puts is one of the dumbest things an investor can do, according to the trader.

http://www.thestreet.com/funds/smarter/919875.html

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Midday Musings: Stock Market Blitzkrieg Continues; Dow, Nasdaq Near Day's Lows

By David A. Gaffen
Staff Reporter
4/14/00 12:57 PM ETIt's like death from above, as the stock market is collapsing under the weight of selling pressure. Four times as many stocks are down as up on the New York Stock Exchange and seven times as many on the Nasdaq Stock Market.

Today's pounding has traders and strategists again surmising that the market is nearing its bottom, but emotionally, few are willing to go out on a limb and make that call.

Major Indices INDEX CHANGE % VALUE Dow -320.56 -2.93% 10,602.99 S&P 500 -49.04 -3.40% 1391.47 Nasdaq -245.21 -6.67% 3431.57 Russell 2000 -17.14 -3.50% 472.08 TSC Internet -72.16 -8.88% 740.86 BOND CHANGE PRICE YIELD 30-Year Treasury -3/32 106 10/32 5.822% Market data as of: 12:45 PM EDT, Fri Apr 14 2000

"If all the hype about the bear market is reality going forward, that would clearly put a whole different complexion on what going on," said Ciaran O'Kelly, trader at Salomon Smith Barney. "As opposed to the 'we're bottoming, buy the dip,' what we're seeing right now is a bloody massacre and it's not taking prisoners."

Nothing has been immune to the pain this morning. The Dow Jones Industrial Average is down 320.56 to 10,602.99, a 2.93% decline, and the S&P 500 was off 49.04 to 1391.47. The Nasdaq Composite Index is down 245.21 to 3431.57, a 6.67% decline, and it's off more than 31% from its all-time closing high of 5048.62. The Nasdaq and Dow, it should be noted, are near their worst levels of the day.

The hardest hit sectors have been the brokerages, Net stocks, semiconductors and other technology stocks, but nearly every sector (except maybe gold) is getting destroyed. By early afternoon, only one (ExxonMobil (XOM Quote), by the way) of the 30 Dow industrials were in positive territory.

CPI Sets the Stage

This morning's core Consumer Price Index, which rose 0.4%, doubling expectations, headed off at the pass the few buyers who were poised to try and take the market up at the open. The overall CPI rose 0.7% in March, due to higher energy costs. Since then, it's been nothing but ugly. After the initial flurry of selling, the market attempted to rally back, but those who bought in are regretting it now.

"I thought it was bottoming out earlier this week, but the bottom is always deeper than what you think," said Doug Myers, vice president in equity trading at IJL Wachovia. "It doesn't feel good -- it forces a lot of people to sell positions they may not want to sell."

The Morgan Stanley High Tech 35 was lately down 6.3% and the Philadelphia Stock Exchange Semiconductor Index was off 8%. Big-cap technology stocks were down, led by the likes of Dow component Microsoft (MSFT Quote), down 5.3%, and the Nasdaq's most active, Cisco (CSCO Quote), down 6.8% on 70 million shares.

Banks and brokerages are being hurt by renewed inflation worries, with the American Stock Exchange Broker/Dealer Index off by 9.5% and the Philadelphia Stock Exchange/KBW Bank Index lost 5.6%.

TheStreet.com Internet Sector index continues to get blitzed, off 8.88% today, after losing 22.7% of its value for the first four days of the week. The NYSE's most active is America Online (AOL Quote), off 4 1/4 to 55 on 18 million shares.

Small- and mid-cap stocks are getting hurt too. The Russell 2000 is off 17.14 to 472.08.

That every sector is getting hurt now is a marked change from the earlier part of this month, when the Nasdaq's pattern was often divergent from Dow stocks. Earlier this week, large-cap tech names had managed to dig in reasonably well despite the swoon in the Nasdaq -- and many "Old Economy" sectors were holding up despite technology's woes.

"Going up to about a day-and-a-half ago you had many sectors performing well," said Steven Goldman, market strategist at Weeden. "Consumer and cyclical stocks were up 8% to 9% during that two week span, and if you tech out a lot of sectors were doing quite well, despite the pullback."

A day like this brings out a lot of contrarian wisdom. People are trying to point to the recent increase in the Chicago Board Options Exchange volatility index, or the VIX, as an indicator that a bottom is being reached. The VIX, a leading indicator of investor fear, today traded as high as 41.13, and it hasn't been this high since October 1998 -- right before the end of that market sell-off.

The ratio of put options to call options is also considered high, which means investors are scared enough to take steps to protect themselves (a put makes you money on the way down while a call makes you money on the way up).

"You've got to think that (the VIX) may signal we're getting close to a bottom," said O'Kelly. "But the problem is, that's been going on for a week. Unfortunately, the psyche of most investors has been damaged. As opposed to a nice V bottom, the market has gone down, down, down."

Goldman said this morning that "We're in this panic, and we should be able to try by early next week to be out of this mode."

But traders like to link a bottoming with an extremely heavily traded day, when investors who had remained on the sidelines and limited themselves to careful, strategic selling throw up their hands and sell into the market. Volume isn't low -- the Nasdaq had reached about a billion shares right around noon, but New York Stock Exchange volume isn't quite as strong.

The feeling among traders is that it's good, but not quite good enough, unless trading gets a bit heavier in the afternoon.

"The bottom is not confirmed by the volume," said Bill Schneider, head of U.S. equity block trading at Warburg Dillon Read. "But the trend of (increasing volume this week) has been encouraging. Technically, I should be encouraged...but I'm not encouraged by anything."

Market Internals

Breadth was horrific on strong volume.

New York Stock Exchange: 487 advancers, 2,391 decliners, 659 million shares. 13 new highs, 79 new lows.

Nasdaq Stock Market: 504 advancers, 3,711 decliners, 1.351 billion shares. 5 new highs, 414 new lows.

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Herb Greenberg: Why Compuware's Bad News Shouldn't Have Been a Surprise

By Herb Greenberg
Senior Columnist
4/14/00 6:30 AM ET

Credit where credit's due: to Michael Kagan, of the Salomon Brothers Fund, who was on our Fox show several weeks ago. It was on that show he was asked about Compuware (CPWR Quote), a pick from an earlier appearance. And it was on that show that he said he no longer owned it because he was troubled by the company's receivables. It was also on that show that Gary B. Smith said that based on his chart, he'd short it, and Cramer said, "It stinks."

Fast forward to this week: The Michigan company, which provides software and services for corporate networks, tumbled 40%, after the company warned that its fiscal fourth-quarter earnings would miss analysts' estimates. The news startled many on Wall Street (sorry to say you didn't get a heads-up from this column) but not money manager Aaron Edelheit of Sabre Value Management in Florida, who actually researched -- and sold short -- the company after seeing Kagan on TheStreet.com's show. He sent me an email the day before the bad news explaining why he thought the company was headed for trouble. (Better late than never!)

It's instructional because it shows that nobody other than Kagan, Edelheit and a few others were looking at the financials (if they were, they wouldn't have been startled by the announcement) and it shows what they would've found if they had bothered to look beyond what had been a good story.

"It looked like a great company," Edelheit says. "It was free cash-flow positive. [He defines free cash flow as cash flow from operations minus capital expenditures and capitalized software.] It had no debt. And it had great margins. Then it started acquiring companies and it took on around $500 million in debt. And its free cash has turned negative."

He backed into all of that after looking at the company's accounts receivable, thanks to the tip, via our Fox show, from Kagan. As readers of this column know all too well, a sudden rise in accounts receivables (the amount owed by customers) is always noteworthy, especially if they rise faster than sales and/or become a greater percentage of sales.

That suggests a company is pulling out all stops to convince customers to take more product than they really need. It's especially worth noting when the days outstanding of receivables -- the amount of time customers are taking to pay - also are rising. The higher the number, the worse it is. (Normal for a software company is 45 days.)

At Compuware, long-term receivables jumped from $145.8 million, or 27.85% of sales in March 1999, to $380 million, or 60% of sales, in December. What's more, days outstanding of all receivables in December leaped to 153 days from 114 days in March. A closer scan of the last 10-Q offers an explanation: Most of the company's contracts include deferred payment terms -- mostly for software maintenance, which clients are required to take as part of the deal.

According to the disclosure (and this is the important part, folks), during the past year the volume of contracts with deferred revenues posted "significant growth as the practice expanded internationally and as the company added additional sales representatives focused exclusively on these types of transactions."

These type of transactions? Suggests to our emailing money manager that the company was trying to mask a slowdown in revenue by making acquisitions and entering into the kind of contracts that generate higher receivables. "So, they stole from future quarters," he says, "and eventually they had to pre-announce bad news."

Which they did, and which could be the first of several bad quarters for Compuware.

A Compuware spokesman didn't return my call seeking comment. The company, however, has told Wall Street that it will have more info on receivables and cash flow when it reports earnings May 1 -- and that it expects receivables' days outstanding to fall. What they say, Edelheit says, will determine whether he covers his short.

Market mania: What happens when shorts get squeezed out of their stocks via the mother of short squeezes? You get what is happening now -- the mother of long squeezes!

Herb Greenberg writes daily for TheStreet.com. In keeping with TSC's editorial policy, he doesn't own or short individual stocks, though he owns stock in TheStreet.com. He also doesn't invest in hedge funds or other private investment partnerships. He welcomes your feedback at [e-mail]. Greenberg also writes a monthly column for Fortune.

Mark Martinez assisted with the reporting of this column.

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