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  • Publish date:'s DAILY BULLETIN

February 1, 2000

Market Data as of Close, 1/31/00:

o Dow Jones Industrial Average: 10,940.53 up 201.66, 1.88%

o Nasdaq Composite Index: 3,940.35 up 53.28, 1.37%

o S&P 500: 1,394.46 up 34.30, 2.52%

o TSC Internet: 1,052.14 down 22.86, -2.13%

o Russell 2000: 496.23 down 8.39, -1.66%

o 30-Year Treasury: 95 10/32 down 12/32, yield 6.491%

Companies in Today's Bulletin:

Expedia (EXPE:Nasdaq)

Microsoft (MSFT:Nasdaq)

eXcelon (EXLN:Nasdaq)

Internet Capital Group (ICGE:Nasdaq)

In Today's Bulletin:

o Internet: As Tech Stocks Slip, Investors in e-Commerce Look to Fundamentals
o Wrong! Tactics and Strategies: No Luck Picking Up These Pennies
o Evening Update: Evening Update: Expedia Reports Stronger-Than-Expected Results, Announces Two Acquisitions
o Bond Focus: Treasuries Lose Ground Despite Widening Credit Spreads

Also on

Hardware & PCs: Funding Start-Up With Stock, Internet Capital Raises Eyebrows

Some wonder whether the move won't boost start-ups' risk to a market downturn.

Internet: At eXcelon, Switching Lanes to Ride the B2B Momentum

The former Object Design was a maker of database software, but do investors care? It appears not.

Brokerages/Wall Street: Traditional Brokers Sprint to Online Bond-Trading Finish Line

Online systems could make buying bonds easier for retail as well as institutional investors.

Europe: The Anglo File: Mannesmann Even Lonelier After French Friends Leave for London

Vodafone made Vivendi an offer it just could not refuse.

Internet: As Tech Stocks Slip, Investors in e-Commerce Look to Fundamentals


Joe Bousquin

Staff Reporter

1/31/00 12:29 PM ET

Ha. Right when you finally accepted that valuation really doesn't matter and that e-commerce stocks were preordained by the market gods to

just trade that way

, a little reality sets in.

Since the beginning of the year, a winter chill has set in among some of your favorite dot-com stocks, as the market has begun to mull interest rates and other real-world concerns. But not every dot-com has been hit. In some regards, the new year has seen the re-emergence of conventional investing discipline, as investors are starting to look toward the bottom line to separate winners from losers, rather than simply focusing on measures such as revenue and customer growth.

"We all know that at some point these companies have to stand on a fundamental economic basis," says Mark Rowen, e-commerce analyst for

Prudential Securities

. "The question is at what point does the market start paying more attention to that."

Guiding Light

The time may be now. With the


down more than 4% for the year and Internet Sector

index off 7%, analysts are saying concepts such as "mind share" and "stickiness" are taking a back seat to progress in areas such as gross profit margins.

That's the big-picture metric that's derived from dividing gross profits by revenue. While the number doesn't actually translate into whether a company is making money or not, it's being viewed now as a guiding light to whether a company is likely to do so in the future.

The sector's winners this month -- companies such as





, which are both up more than 20% -- notably feature rising gross profit margins. The losers -- names like





, which are down 19% and 39%, respectively -- are companies whose revenue growth hasn't managed to push them toward profitability.


"Right now we're seeing the market pay more attention than it ever has to gross margins," says Michael May, an analyst with e-consultant

Jupiter Communications

. "Unfortunately, none of the e-commerce companies that are poised to be shaken out are looking at it too closely themselves."

Or if they are, they haven't been able to figure out how to make sufficient progress. Take

Value America


, for example. The stock has lost two-thirds of its value since Nov. 23, and now trades around 5. The company's big offense, aside from well-documented managerial turmoil? Not being able to raise gross profit margins out of the single-digit arena despite triple-digit revenue growth.

Value America didn't immediately return phone calls for comment.

The focus on gross profits translates to less emphasis on price-to-revenue or price-to-book valuations. Instead, investors want to know how much companies are able to hold onto in the marketing gale that has continually blown revenue dollars out the back door.

Incremental Value

"You've got to look at the incremental value of your last marketing dollar," says Kian Ghazi, an analyst with

Midtown Research

in New York. "At some point, these companies are spending too much. It doesn't make sense. The question at the back of investors' minds is, are companies getting poor returns on their marketing dollars?"

That was the catalyst to selling in the e-commerce sector this year: Namely, when

said that while its revenue was growing, profits wouldn't be forthcoming in the near future because of increased expansion costs.

Still, not everyone is convinced that a profit-now mentality is the right one. After all, as larger companies become more dominant in the space, it will only become more expensive, not less, to attract attention to a dot-com name.

"I would still focus on the top line," says James Vogtle, director of e-commerce research for the

Boston Consulting Group

. "Of course, you want to see the progression toward profitability, but it will likely not be any cheaper to acquire customers than it is now."

Instead, he says investors should look for companies with defensible business models that have the potential to become profitable with a fast-growing customer base.

"If a company said, 'No, I'm not going to grow my customer base as fast as I possibly can because I want to see profit,' I think that's far too short term," he says. "They're forfeiting a long-term revenue stream in order to achieve a profitable quarter."

Of course, the best of both worlds would be having a company that's expanding its customer base while driving its gross margins onward and upward. But those companies are still the rare gem, and not the average, in the e-commerce space.

Wrong! Tactics and Strategies: No Luck Picking Up These Pennies


James J. Cramer

1/31/00 8:56 PM ET

Uh oh, it looks like the penny-stock crowd has taken hold of the after-hours game.

I check in to the site every night to see what's been buzzing, and the disturbing trend of stocks under a couple of smackers garnering all of the volume has just taken hold.

I know that many of you feel the urge from time to time to play in these stocks. Some of you even think that you can get in and out in time to make a few pennies. When I used to trade these stocks exclusively, it was my experience that you will never be able to make any money with them, even if you are on the inside of a pump-and-dump scandal.

Join the discussion on


Message Boards.

It's one thing when I say I won't touch a



anymore because of the low guidance (and thanks for announcing that potential Chinese biz after you shook us all out of the stock, guys).

It's another thing to say that I won't touch a penny stock, period. Ever.

Invariably you will meet someone who got in at 22 cents and sold at 88 cents and thinks that will happen again and again. To which I say that you must imagine that the penny-stock game is like any sucker's game.

They want you to win a couple of times. That's part of the allure. That's when they go in for the kill -- and you are the prey. I would rather have you be long my most dependable short, my single least-likely-to-succeed major equity, than be long any of the junk I see trading tonight.

But then again, what you do is your business and what I do is mine. I just don't like to see anybody, anywhere, lose money.


James J. Cramer is manager of a hedge fund and co-founder of At time of publication, his fund had no positions in any stocks mentioned. His fund often buys and sells securities that are the subject of his columns, both before and after the columns are published, and the positions that his fund takes may change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Cramer's writings provide insights into the dynamics of money management and are not a solicitation for transactions. While he cannot provide investment advice or recommendations, he invites you to comment on his column at

Evening Update: Evening Update: Expedia Reports Stronger-Than-Expected Results, Announces Two Acquisitions


Tara Murphy

Staff Reporter

1/31/00 7:52 PM ET



posted a second-quarter loss of 16 cents a share, narrower than the single-analyst estimate of a 29-cent loss.




affiliate also said it has agreed to acquire


. The company said that it would issue roughly 2.6 million shares and options worth about $82 million for and issue an another 3 million shares, options and warrants valued at roughly $95 million for

Three new stocks will make their trading debuts tomorrow. For more pricing and underwriting information, check out's

offerings and stock action coverage below.

In other postclose news (earnings estimates from

First Call/Thomson Financial

; earnings reported on a diluted basis unless otherwise specified):

Earnings/revenue reports and previews

Advanced Fibre


reported fourth-quarter earnings of 10 cents a share, a penny better than the 15-analyst estimate and the year-ago earnings of 8 cents.

Airborne Freight


reported fourth-quarter earnings of 35 cents a share, including a gain of 6 cents. The 13-analyst estimate called for earnings of 26 cents, while the company earned 78 cents in the year-ago period. Airbourne said the lack of growth in domestic shipments handled by the company and the high cost of jet fuel hurt results in the latest fourth quarter.



said it expects to reported fourth-quarter results between breakeven and three cents a share. The report would miss the two-analyst estimate of an 11-cent profit.

CEC Entertainment


said it sees fourth-quarter earnings at about 29 cents and 1999 earnings of about $1.58 a share. This is above the 10-analyst estimate of 28 cents in the fourth quarter and $1.57 for the year.

Computer Sciences


posted third-quarter earnings of 66 cents a share, in line with the 15-analyst estimate and up from the year-ago 55 cents, which was restated to reflect the acquisition of

Nichols Research


Stac Software


reported a first-quarter loss of seven cents a share, wider than the lone-analyst estimate of 5 cents, but narrower than the year-ago loss of 33 cents a share.

Structural Dynamics


reported fourth-quarter earnings of 13 cents a share,a penny better than the seven-analyst estimate . The year-ago earnings of 26 cents includes a charge.

Offerings and stock actions

Corporate Executive Board


has filed with the

Securities and Exchange Commission

for 5 million-share secondary offering. The company said shareholders are set to sell the shares, with Corporate Executive receiving none of the offering's profits

Exchange Applications


said it has set a 2-for-1 stock split.

Morgan Stanley Dean Witter

priced an 11.5 million-share IPO for

Impsat Fiber Networks


at $17 a share.

Onyx Software


said it set a 2-for-1 stock split. The company posted fourth-quarter earnings of 7 cents a share, beating the six-analyst estimate of 4 cents and up from the year-ago 10-cent loss.

Otter Tail Power


said it set a 2-for-1 stock split. The company also posted fourth-quarter earnings of 81 cents a share, a penny better than the single-analyst estimate but down from the year-ago 87-cent profit.

Papa John's


said it upped its current stock buyback plan to $150 million.

PE Corp

said it has filed with the SEC for a follow-on public offering of 1.6 million shares of

Celera Genomics Group


. Morgan Stanley Dean Witter and

Goldman Sachs

are serving as the deal's lead underwriters.

Morgan Stanley priced a 3 million-share IPO for

Quantum Effect Devices


at $16 a share.

Warburg Dillon Read

priced a 5 million-share IPO for



at $26 a share.


Bristol-Myers Squibb


said it has applied to test a new formulation of its anti-HIV drug


. Patients would take one pill, once a day, instead the current two-tablet daily prescription.

For a look into this evening's after-hours trading action, please check out's

The Night Watch.

Bond Focus: Treasuries Lose Ground Despite Widening Credit Spreads


Elizabeth Roy

Senior Writer

1/31/00 4:28 PM ET

Nervousness about the outcome of this week's

Federal Open Market Committee

meeting and higher energy prices weighed on Treasury prices today.

The losses lifted the 30-year bond and 10-year note yields to their highest levels in several sessions, and the two- and five-year note yields to their highest levels in more than two years.

The bond fell 15/32 to 95 7/32, lifting its yield 4 basis points to 6.493%. The 10-year note fell 2/32, lifting its yield to 6.667%. The five-year note fell 2/32, its yield rising to 6.685%. And the two-year note lost 2/32, raising its yield to 6.595%.

The Treasury yield curve maintains the unusual shape it took on last week, with the five-year note yielding more than any other benchmark issue, and the 30-year bond yielding less than any other benchmark.

At the

Chicago Board of Trade

, the March

Treasury futures contract finished down 23/32 at 92 7/32.

The market: Join the discussion on


message boards.

Fear of the Fed was part of the reason why Treasuries surrendered their midday gains, market participants said. The FOMC convenes tomorrow, and any change in monetary policy will be announced on Wednesday afternoon. The committee is universally expected to hike the

fed funds rate

to 5.75% from 5.5%. The suspense centers on whether it might hike the rate to 6% in the first 50-basis-point rate hike since February 1995, and on what the FOMC will say in its accompanying statement.

"There's definitely a camp that thinks the Fed is going to tighten 50 basis points," said Matt Frymier, a Treasury note trader at

Banc of America Securities

in San Francisco. "If that's the case, you're not supposed to be buying anything."

The Treasury market is also being hampered by the upcoming quarterly refunding, in which the Treasury auctions new five-, 10- and 30-year notes and bonds, Frymier said. "You're going to have a chance to buy in the next couple of weeks."

Ergo, there's no particular reason to buy now. And if you're a dealer hoping to pick up the new notes and bonds on the cheap, there's a clear incentive


to buy now. The auctions are slated for next Tuesday, Wednesday and Thursday.

Finally, big rallies in the energy sector spooked the bond market with the threat of bigger inflation numbers down the road. Crude oil gained only 1.2%, but natural gas rose 4.3% and heating oil ramped more than 9% before closing down 1%.

The losses occurred in spite of continuing pain in other debt and debt derivatives markets. On

Friday, falling prices in those markets (together with falling stock prices) translated into gains for Treasuries.

The pain in those other markets appears to stem from the fact that while the Treasury yield curve inverted in the last two weeks, related curves -- the credit curve and the swap curve -- did not, or did not to the same extent.

The Treasury yield curve inverted, meaning that most long-term yields went (and remain) below most shorter-term yields, as the long-term instruments outperformed the shorter-term ones. It happened because the government is planning on reducing the supply of long-maturity issues, its most expensive debt.

But the credit curve, representing the yields on corporate and other risky bonds, and the swap curve, representing the fixed interest rate that can be swapped with a floating interest rate, have merely flattened, or inverted slightly. The supply and demand dynamics that inverted the Treasury curve don't exist in those other markets.

By definition, this widened the difference in yield between some risky bonds and swaps on the one hand and long-term Treasuries on the other.

At the same time, swap spreads are widening because with the


poised to hike interest rates at its meeting this week, floating-rate payors are demanding high fixed rates in exchange, said John Atkins, market analyst at


On Friday, widening credit and swap spreads were said to be the reason why the Treasury market rallied back, after strong economic data hurt it early in the session. People sold credit instruments and buying Treasuries, market analysts said.

Credit and swap spreads widened further today, but Treasuries aren't benefiting. The 10-year swap spread, a benchmark, widened to 78 basis points from 71 on Friday. It was lately 85.50.

Economic Indicators

There were no first-tier economic releases today. This week's highlights are the

Purchasing Managers' Index

for January, tomorrow, and the January

employment report

on Friday.

In today's economic news,

personal income and consumption

for December was more or less as expected.

Personal income rose 0.3%, versus a preliminary forecast of 0.5% among economists surveyed by


. Consumption rose 0.8%, in line with the average forecast. However the November gain in consumption was revised up to 0.7% from 0.5%. And for all of 1999, consumption rose 6.9%, the biggest gain since 1989, when it rose 7.2%


APICS Business Outlook Index

fell to 48.3 in January from 51.2 in December.


Chicago Purchasing Managers' Index

fell to 55.6 from a revised 56.0 in December.

Currency and Commodities

The dollar reversed earlier losses against both the yen and the euro, adding to last week's big gains. It was lately worth 107.37 yen, up from 107.12 Friday. The euro was lately worth $0.9694, down from $0.9745 Friday.

Crude oil for March delivery at the

New York Mercantile Exchange

rose to $27.64 a barrel from $27.22 on Friday.


Bridge Commodity Research Bureau Index

fell to 210.38 from 210.72 on Friday.

Gold for April delivery at the


was unchanged at 286.0.


Street Sightings:

Vern Hayden will be a guest on CNBC's PowerLunch Tuesday, Feb. 8 at 12 p.m. ET.

Copyright 2000,