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daily04-26-00's DAILY BULLETIN

April 27, 2000

Market Data as of Close, 4/26/00:

o Dow Jones Industrial Average: 10,945.50 down 179.30, -1.61%

o Nasdaq Composite Index: 3,630.09 down 81.14, -2.19%

o S&P 500: 1,460.99 down 16.15, -1.09%

o TSC Internet: 803.89 down 14.67, -1.79%

o Russell 2000: 484.24 down 4.79, -0.98%

o 30-Year Treasury: 104 06/32 down 3/32, yield 5.942%

Companies in Today's Bulletin:

Microsoft (MSFT:Nasdaq)

Coca-Cola (KO:NYSE)

Compaq (CPQ:NYSE)

Exodus (EXDS:Nasdaq)

In Today's Bulletin:

TheStreet Recommends

o Software: Microsoft Makes It Look Easy With New Options Grant
o Wrong! Tactics and Strategies: An Earnings Primer
o Evening Update: AT&T Wireless Prices Historic IPO, Misses the Mark
o Bond Focus: Awaiting ECI and GDP, Bonds Tread Water

Catch "" on

Fox News Channel

Saturdays at 10 a.m. and 6 p.m. and Sundays at 10 a.m. (ET).

Scott Bleier

, Chief Investment Strategist at

Prime Charter

, will be our guest April 29, 30.

Also on

Biotech/Pharmaceuticals: Patent Win Soothes Amgen Holders, but Pipeline Is Still the Story

The biotech has a strong stable of drugs for coming years, so the patent news is really secondary.

Brokerages/Wall Street: Oversight Hearings: The Exchanges Fight Over the Future

The NYSE pitches its view of the market's structural future, but others see things differently.

The TaskMaster: Crosscurrents Confound Bottom Watchers

A fragile market is looking in every possible direction nearing Thursday's economic reports.

Mutual Funds: Bull Market for Tech Managers Continues Despite Sector's Troubles

New tech funds and hedge funds are competing for their specialized skills.

Software: Microsoft Makes It Look Easy With New Options Grant


George Mannes

Senior Writer

4/26/00 7:45 PM ET


(MSFT) - Get Microsoft Corporation Report

daring rescue of employees with underwater options looks like the right thing to do for selloff-afflicted tech companies. Unfortunately, however, most of the latter probably won't find the market as welcoming.

Amid the


downturn and the hammering Microsoft's stock has taken amid its antitrust woes, the company said Tuesday that it is issuing new, lower-priced stock options, making up for the out-of-the-water options that employees have received since last July. The move highlights a conundrum for many high-tech companies, which are increasingly compensating employees with stock options, presumably so they can share in the wealth companies create as their shares rise.

The big problem is that tech stocks, refusing to cooperate with tech-stock enthusiasm, have broadly fallen of late. And investors, partly because options-restoring measures can hurt earnings or dilute their holdings, don't always favor such measures.

That said, Microsoft doesn't appear to have angered investors with its latest move, news of which broke while the market was open Tuesday. Shares in the software colossus closed at 68 on Wednesday, up 1 3/8 from Monday's close.

People Person

One institutional shareholder says the move makes sense for Microsoft as it fights to retain a new generation of managers who haven't achieved the phenomenal wealth of their predecessors at the company.

"In the software business, it's all about people," says Walter C. Price Jr., managing director at

Dresdner RCM Global Investors

and co-manager of the

(DRGTX) - Get Virtus AllianzGI Technology Instl Report

Dresdner RCM Global Technology fund. "Your products basically expire after a year or two. ... To the extent that they can put a carrot out there that holds their employees and gives them a reason to stay, I think that's great." Dresdner RCM held $1.8 billion worth of Microsoft stock as of Dec. 31.

Though Microsoft is issuing new options, the usual remedy that companies take to cure their employee stock option programs is to reprice their options, or change the price at which options can be exercised. These options represent the right to buy shares at a particular price; options that are "underwater" are those with an exercise price that's more expensive than the price of the shares on the open market -- not much of a bargain.

The Reprice is Right

Already this year, Internet retailers





have said they are repricing employee stock options. PC hardware concern



said this month it would hold a shareholder vote on a repricing, but the results weren't immediately available.

In judging whether it's appropriate for a company to reprice its options, Price says he looks at several issues, such as how many employees benefit from the repricing. "If it's broad-based and covers the bulk of the employees, and not just a few executives, then we understand and tend to look at those situations more favorably," he says.

Like other investors, Price keeps an eye on how much employee options add to the number of shares outstanding, and thus dilute his firm's holdings in a stock. "What is the annual option grant as a percentage of shares of a company?" he asks. "If it's less than 4% or 5%, I think that's reasonable. If it's 5% or 10%, I have a problem with that."

Cash to Burn

Microsoft has several things going for it that make the new options palatable to shareholders, says Patrick McGurn, vice president of

Institutional Shareholder Services

, a firm that advises large investors on corporate governance and proxy issues.

Significantly, Microsoft has a huge pile of cash -- $21 billion as of March 31 -- that it can use to prevent the earnings dilution that the new shares would otherwise cause. "To Microsoft's credit, they're one of the shrewdest companies in terms of purchasing shares on the market to offset options grants," McGurn says. "They've been doing it in a very effective way over the past few years."

Other companies that reprice options, though, will have to contend with a recently passed accounting rule, McGurn says, that will force them to take a charge against earnings. For dot-coms that don't have any earnings yet, that may not be a problem unless the market punishes them "for digging the hole deeper." For some companies, granting restricted stock is an alternative to repricing options. They'll still have to take a charge against earnings, but they'll be able to eat the charges faster, McGurn says.

In the toughest spot, says McGurn, are companies that have decent earnings but no pile of cash, as Microsoft does. If those firms reprice or replace options, he says, they'll take an earnings hit. If they follow Microsoft's path and grant new options, they'll likely have to buy back shares to offset dilution. That means using up their free cash or going out and borrowing money -- moves that will hurt their balance sheet. "They're kind of between a rock and a hard place," McGurn added.

Wrong! Tactics and Strategies: An Earnings Primer


James J. Cramer

4/26/00 9:12 PM ET

It's time for a refresher course in what the "big money" is looking for out of earnings. Let's make this as simple as possible. You professionals out there will be yawning away, so go click on something else please. This piece is for the hundreds of thousands of you who get confused by all of this "better than expected," "worse than expected" gibberish.

When companies are reporting, people are looking for clues about how fast the company is growing (revenue) and how profitable the company might be (earnings). Younger companies are supposed to show outsized revenue growth. Older companies are supposed to have been able to figure out how to monetize that growing revenue into earnings. Old-line, boring companies are trying to maximize the cash flow to reward shareholders. Maybe they do it buying back stock or by raising the dividend.

If a company does "better than expected" revenue, that's a big deal, provided it is much better than expected. Too often we see the term "blowout" when we don't really have one, so be suspicious if a broker or a commentator uses that phrase. There was a time when companies used to get nailed for using that term "blowout" if they didn't do 20% better than expected. Now guys use it with in-line numbers, so scrutinize this lingo closely.

I care more about revenue than earnings these days because of all the obfuscations some of these once great growth companies seem to pull each quarter. For example, for the life of me, I can't see how


(KO) - Get Coca-Cola Company Report

is a growth company. It seems like it is a single-digit grower at best these days. But it always reports double-digit earnings, because the company is very good at maximizing its cash flow and very clever at off-loading costs.

That's why when I hear that so-and-so company reported "a penny better" I don't get too jazzed.

To drill down further, after revenue we care about gross-margin guidance. Take



. On the conference call yesterday Compaq said gross margins might decline a bit next quarter but that they would improve in the second half. I was worried that analysts would see that as a negative, but two firms upgraded the stock saying that you had to look through near-term margin problems. If gross margins go up, that revenue will obviously get translated into much higher earnings.

So it is right to focus on gross margins, even to the possible exclusion of the final printed number, the earnings-per-share number, because of concerns like tax rate and charges that might impact that final number. That's why I always urge caution to the cowboys out there who trade only on the "number," the earnings per share, because it doesn't tell you enough.



(INTC) - Get Intel Corporation Report

traded up when the earnings-per-share number came out, and then down when the revenue number came out because even though the earnings seemed OK, the revenue number missed a couple of the recently raised estimates.

So, to beat a dead horse,



reported a much smaller loss than expected but it didn't blow away revenue. To me, that's amazing, because this company has repeatedly blown away revenue estimates. I still haven't heard why it didn't and I probably never will because companies don't like to be pinned down on why they didn't do a number that was more than they were supposed to. The dialogue would go like this: "Why didn't you do more revenue than you were supposed to do?" "We did the amount of revenue that we forecasted we would do, isn't that enough?"

Of course, it should be, but in this bizarre world where doing what you are supposed to do takes out a third of your corporate value, you have to expect the worse if you meet any expectation.

Should any of this matter? Report cards do matter short term. But if a company is doing well, over the long term that should be reflected in the stock. I have found -- and I am not being facetious -- a very high correlation between companies that beat expectations of both revenue and earnings and higher stock prices. Until that correlation is repealed, we will always have to pay close attention to quarterly earnings.

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: AT&T Wireless Prices Historic IPO, Misses the Mark


Eileen Kinsella

Staff Reporter

4/26/00 9:06 PM ET

E-tailing behemoth

(AMZN) - Get, Inc. Report

posted a first-quarter loss of 35 cents a share, a penny narrower than the 26-analyst estimate, but wider than the year-ago loss of 12 cents a share. The company said it nearly doubled revenues and added more than 3 million new customers.

CFO Warren Jensen said Amazon should see strong growth in the second quarter, driven by a profitable U.S. book, music and video operation and rapid expansion in European markets.

For more on Amazon's

earnings, see coverage from's

joint newsroom.

AT&T Wireless Group


priced its historic initial public offering at $29.50 a share, raking in $10.62 billion for its parent


(T) - Get AT&T Inc. Report

making it the largest U.S. new issue ever. AT&T worked with underwriters

Goldman Sachs


Merrill Lynch


Salomon Smith Barney

on the deal.

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

Aether Systems


posted a first-quarter pro forma loss of $1.13 a share, in line with the four-analyst estimate and wider than the year-ago loss of 7 cents. The company said its operating loss per share was 29 cents.

(BYND) - Get Beyond Meat, Inc. Report

missed analysts¿ estimates by a wide margin in its first-quarter earnings release. The consensus estimate provided by

Thomson/First Call

was for a loss of 46 cents a share. Beyond reported a net loss of $20.6 million, or 55 cents a share. The company called it a transition quarter and claimed to have made substantial progress in its move away from consumer e-tailing.

Cirrus Logic

(CRUS) - Get Cirrus Logic, Inc. Report

posted fourth-quarter earnings of 5 cents a share, a penny better than the four-analyst estimate and in-line with the year-ago 5 cents. The company announced it will move its headquarters from Fremont, Calif. to Austin, Texas to take advantage of several operating efficiencies.


(HAL) - Get Halliburton Company Report

posted first-quarter earnings of 11 cents a share, in line with the 28-analyst estimate and a penny lower than the year-ago 12 cents a share. The company said it is planning to sell its Dresser Equipment Group unit which supplies equipment to the energy and chemical industries. Halliburton also said its board approved plans for a program to buy back up to 44 million shares, or about 10% of its outstanding stock.

Ingram Micro


reported first-quarter earnings of 17 cents a share, ahead of the 11-analyst estimate of 15 cents. The year-ago earnings of 29 cents includes items.

Sealed Air

(SEE) - Get Sealed Air Corporation Report

posted first-quarter earnings of 45 cents a share including preferred dividends of $17.1 million. The nine-analyst estimate called for 48 cents while the year-ago earnings of 34 cents also includes preferred dividends.

Wireless Facilities


posted first-quarter earnings of 14 cents a share excluding the impact of goodwill from acquisitions. Including the item, the company earned 12 cents. The four-analyst estimate called for 11 cents, while the year-ago earnings were 5 cents.

Mergers, acquisitions and joint ventures


(ALO) - Get Alio Gold Inc. Report

said it plans to buy the medicated feed additive business of Swiss drug maker

Roche Holding

for about $300 million.


(CBS) - Get CBS Corporation Class B Report



(VIA) - Get Via Renewables, Inc. Class A Report

said the

Department of Justice

approved their proposed $37 billion merger.

Offerings and stock actions

Powerwave Technologies


said its shareholders approved a 3-for-1 split of its stock.

Bond Focus: Awaiting ECI and GDP, Bonds Tread Water


David A. Gaffen

Staff Reporter

4/26/00 4:43 PM ET

It's all about acronyms in the bond market today. The ECI, the GDP, the ECB -- all conspired to keep things quiet as traders look forward to events tomorrow.


Treasury Department

sold $12 billion of two-year notes this afternoon, but the response was tepid because of the market's focus on tomorrow's reports, especially the quarterly

Employment Cost Index.

The ECI is considered one of the most important indicators of wage inflation, and the importance of tomorrow's 8:30 a.m. EDT release kept many on the sidelines, contributing to the poor auction. With most economists expecting at least a quarter-point increase in the fed funds rate at the May 16

Federal Open Market Committee meeting, traders are wary of buying short-term debt, which can have a severe reaction to changes in

Fed monetary policy.

Lately the benchmark 10-year Treasury bond was down 2/32 to 102 19/32, dropping the yield to 6.142%, down 0.6 basis points. The 30-year bond was up 5/32 to 104 4/32, driving the yield down to 5.952%, up 1 basis point. The five-year note was unchanged at 97 31/32, yielding 6.39%.

"It seems that there's almost a 100% probability -- let's call it 99% -- that they are going to tighten on May 16," said Maryann Hurley, vice president in trading at

D.A. Davidson

in Seattle. "That's going to bring the funds rate to 6.25%. The 6.484% level is on the expensive side. I'm surprised they were able to get it done at this level."

The Treasury sold $12 billion in notes at a yield of 6.484%. The poor performance, as measured by the bid-to-cover ratio, pressured the market late in the day, as it underscores the lack of confidence among bond investors. The bid-to-cover ratio was 2.31 to 1, which is better than the recent average, but low when considering the Treasury used to sell $15 billion at each two-year auction.

"Since the debacle in the

Nasdaq began, and especially since the

Consumer Price Index report on April 14, the two-year has been weakening," said Tony Crescenzi, chief bond market strategist at

Miller Tabak

. "The Fed's been orchestrating its message to warn the markets that they'll continue with this rate hike campaign... and that message has hit home with the short end, which has done badly."

Economists as polled by


are expecting for a 0.9% increase in the Employment Cost Index in the first quarter, after a 1.1% increase in the fourth quarter last year. Wage costs have been increasing at a slow, steady rate. They're rising 3.4% year-over-year, same as at the end of 1998, although that's an increase since the 1996-1997 period. However, they haven't, at least the way the government calculates it, exploded.

"Slowly but surely,

inflation is beginning to grind into the compensation measures," said Brian Jones, economist at

Salomon Smith Barney

, who expects a 1.1% increase in the ECI, which would put the year-over-year rate on the figure at 4.2%, the highest in about eight years.

A huge increase in the ECI could make the market more worried about a 50-basis-point hike in the

fed funds rate, something for which the bond market's been on guard since the April 14 CPI release.

However, Jones doesn't think it's going to happen. The first-quarter

gross domestic product figures are released tomorrow. The consensus is for growth of 5.9% for the quarter, exceedingly strong. Economists are also expecting a 2.2% increase in the implicit price deflator, the report's inflation component. Jones thinks this figure could come in below 2%, and he said that doesn't justify a 50-basis-point hike.

"The inflation numbers

like the CPI coming later in the month are going to be tame," said Jones. "That's not the sort of numbers you go 50 on."

Today's only major economic release was the durable goods report. As has become customary with economic data, this report was stronger-than-expected. The bond market held steady, however, because this figure doesn't command the attention that tomorrow's reports will.

Durable goods orders increased 2.6% in March, besting the economic consensus for a 1.8% increase, as reported by


. February's decline was revised to a 2% drop from an original 2.7% drop, underlying the continued strength in the manufacturing economy.

Excluding transportation orders, durable goods rose 2.8%, after a 0.5% increase in February, revised upward from an original 0.7% decline. Last month's drop was chiefly affected by the


(BA) - Get Boeing Company Report

strike, and therefore a rebound was expected this month.

Somewhat less important for the market tomorrow is the

European Central Bank

meeting. It's a toss-up as to whether the ECB raises its short-term lending rate, which currently sits at 3.25%.

Currency and Commodities

The dollar fell against the yen and rose against the euro. It lately was worth 106.25 yen, up from 105.79. The euro was worth $0.9233, down from $0.9240. For more on currencies, please take a look at



Currencies column.

Crude oil for June delivery at the

New York Mercantile Exchange

fell to $24.67 a barrel from $25.33.


Bridge Commodity Research Bureau Index

rose to 210.75 from 211.95.

Gold for June delivery at the


fell to $277.1 an ounce from $279.80 yesterday.




Brenda Buttner

will be the guest host of "YourWorld with Neil Cavuto" this week, 4/24-4/28 on

Fox News Channel

. "Your World with Neil Cavuto" airs at 5 p.m. EDT.

James J. Cramer

will be chatting on AOL at 5 p.m. EDT. (Keyword: AOL Live).

Copyright 2000,