May 11, 2000

Market Data as of Close, 5/10/00:

o Dow Jones Industrial Average: 10,367.78 down 168.97, -1.60%

o Nasdaq Composite Index: 3,384.73 down 200.28, -5.59%

o S&P 500: 1,383.05 down 29.09, -2.06%

o TSC Internet: 807.67 down 43.21, -5.08%

o Russell 2000: 474.28 down 16.58, -3.38%

o 30-Year Treasury: 101 11/32 up 26/32, yield 6.165%

Companies in Today's Bulletin:

Cisco (CSCO:Nasdaq)

Nortel (NT:NYSE)

Dell (DELL:Nasdaq)

Compaq (CPQ:NYSE)

Gateway (GTW:NYSE)

Microsoft (MSFT:Nasdaq)

In Today's Bulletin:

o Telecom: Shining a Light on Cisco's Opticals Weakness
o Wrong! Dispatches from the Front: On Sticking With Cisco
o Evening Update: Applied Materials Posts In-Line Earnings; Microsoft Replies to the Judge
o Bond Focus: Treasuries Squeezed Higher After a Strong Auction

Also on

Hardware & PCs: Anxious PC Investors Await the Dell Tell

The boxmaker's outlook for the second quarter and beyond could foretell the industry's prospects.

Brokerages/Wall Street: Nasdaq and NYSE: Creating Empires on Which the Sun Never Sets

The exchanges expand into the wider world but still face problems at home.

Europe: Costly Licenses Send Warning Signal to European Telcos

A recent $35 billion bidding frenzy in the U.K. for UMTS licenses prompts merger urgency.

Mutual Funds: Fidelity's Terrana to Step Down From Three Funds

The latest of many manager departures, she has run the Fidelity, Destiny II and Advisor Growth & Income funds.

Telecom: Shining a Light on Cisco's Opticals Weakness


Scott Moritz

Staff Reporter

5/10/00 8:39 PM ET

Maybe talk isn't so cheap after all. Just ask


(CSCO) - Get Report


The maker of devices that link computers together has seen its shares fall 13% this week amid questions over the stock's valuation and the company's massive acquisition slate. Wednesday saw a techwide selloff push Cisco shares down 4 1/4, or 6.8%, to 58 1/2 in spite of a characteristically strong third-quarter earnings report Tuesday.

Investors have long known that Cisco dominates the market for equipment that connects computers. But now they're catching on to the fact that it is scrambling to catch up in a less sexy but equally lucrative area: the market for equipment that enables people to talk to one another. Cisco's earnings report showed sales to telephone companies rose just 15% from second-quarter levels, falling short of many observers' expectations.

Now, having lost out to rival



in a key acquisition, Cisco faces the prospect that weakness in optical transport equipment -- the backbone of next-generation phone carriers -- could further pressure a stock that, at 170 times trailing earnings, is still rather pricey.


As Cisco moves beyond its core business of selling routers, or gear that directs data traffic from one computer to another, it is vulnerable to telco-equipment giants such as



and Nortel. Call it home-court advantage: Phone companies built their networks in large measure using equipment from Lucent and Nortel. And having sunk fortunes into this infrastructure, outfits like

Bell Atlantic










(T) - Get Report

aren't keen on trashing their networks in order to accommodate Cisco's Internet-based technology.

By some estimates, more than 50 cents of every dollar spent on network equipment comes from the established telcos and regional Bell telephone companies.

But Cisco's problems in cracking this market are illustrated by the creation and subsequent dissolution of a joint broadband development group with



and Sprint, called



Together the three companies aimed to design an Internet protocol-based platform that could bridge the voice and Internet world. Sprint found that other vendors could address the problem more effectively than the Cisco group, says a Sprint spokesman.

Shrinking Slice

Cisco's performance with phone-industry customers is shining the spotlight on its strategy in this area.

"That 15% number seems to be on the low side," says

Yankee Group

networking analyst Michael Speyer. "They also haven't gained much traction on the optical side, where Nortel seems to be doing particularly well." Yankee consults to all the major communications equipment and services companies.

Indeed, Nortel is the runaway leader in the optical-transport market, while Cisco ranks a distant fourth. Cisco's less-than-10% slice of the pie is actually shrinking, says Dana Cooperson, an analyst at

Ryan Hankin Kent

, a market research firm that consults to all the major equipment makers. The competition in this segment underlines the roster of significant challenges Cisco faces in trying to crack the phone market.

"I think telecom is a harder market to win than a lot of people imagine," says

Giga Information Group

networking analyst Lisa Pierce. "This doesn't mean Cisco can't be successful, but most existing carriers that serve the vast majority of customers have an infrastructure. They aren't going to throw it out -- they're going to be operating for years and years."

The One That Got Away

While much attention has been focused on Cisco's strategy of buying small companies to get its hands on promising technologies, in the optical transport area the biggest deal appears to be one Cisco failed to make. In January, the company lost out to Nortel in a bid to woo long-haul optical player


, says Qtera founder Fahri Diner. Cisco declined to comment on what it called rumors and speculation.

Qtera, which Nortel bought for $3.25 billion, began proving its value Tuesday when Qwest agreed to buy a few hundred-million dollars' worth of Qtera optical gear to light up long portions of its 18,500-mile U.S. network. The Qwest/Nortel contract makes it imperative that Cisco bring something more to the market if it hopes to gain some footing.

"Nortel has always held the high end of the high-speed market and this sort of solidifies their positioning as the player to beat," says Cooperson. "It's clear Cisco wants to play in the long-haul market. The question is whether they'll be able to do it internally ... or externally through another acquisition."

Cisco's new strategy chief and top deal-maker, Michaelangelo Volpi, says that with the acquisition of


, Cisco has long-haul technology. He adds: "We are going to wait and see how large this market segment is going to be and how much in terms of resources we want to invest. If we feel we need to look externally to fill that, we'll do so at that point in time."

Wrong! Dispatches from the Front: On Sticking With Cisco


James J. Cramer

5/10/00 5:42 PM ET

Did I hope too much for


(CSCO) - Get Report

? Did I err in

saying that it was good that it opened down and that it would be even more disappointing had it opened higher?

Welcome to the world of money management. I have been long Cisco since it became public. I have battled it, and stayed the course for almost a decade. I have, at various times, been driven to distraction by it. There have been moments where I regretted the day I ever heard of John Chambers.

But I have not cashiered the stock. I haven't cashiered it despite seeing its multiple climb and hearing that the company will have to do a phenomenal amount of business in the future to justify its price.

I haven't because I have heard it all before.

Look, maybe this is it for Cisco. Maybe it is all downhill from here because it didn't rally today. Maybe I should just kick it out and forget about it. I won't, though. Maybe I have to ride it down some. Maybe the stock will be "finished" until its earnings allow its multiple to shrink.

But consider this: If I had listened to these siren songs to sell this stock years ago (or worse, to short it), I would have been wrong. I would have left a huge amount of money on the table. I don't really feel like "defending" Cisco as long as it keeps delivering and raising the bar.

And consider this: If Cisco is "no good" there are a ton of stocks, make that a megaton, that will go down and I will find them and buy puts on them or short them.

Don't bother me none.

But to just pick a moment in time, this week, and say, "You know something, Cisco is done going up because


says it is done and a bunch of wiseacres who don't like the market say it is going down," -- that's too hard for me. It is the type of thinking that has cost me huge amounts of money in the last 20 years.

Maybe, just maybe, this time it would be the right kind of thinking. If so, wow, I will have learned something brand-new today. Could be. Nothing shocks me.

I am just glad I didn't have this revelation 400 times in the last 10 years. I wouldn't have done nearly as well for my partners as I have. That's kind of all that matters. *******************************************************************

James J. Cramer is manager of a hedge fund and co-founder of At time of publication, his fund was long Cisco. 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: Applied Materials Posts In-Line Earnings; Microsoft Replies to the Judge


Tara Murphy

Staff Reporter

5/10/00 7:39 PM ET

Applied Materials

(AMAT) - Get Report

posted second-quarter earnings of 55 cents a share, in line with the 27-analyst estimate and up from the year-ago 18-cent profit. The company, which makes semiconductor-chip-making equipment, saw sales jump to $2.19 billion, an 87% increase from the year-ago report of $1.17 billion. New orders grew 19% to $2.93 billion from the first quarter, and were twice last year's $1.46 billion.

Applied Materials forecasted third-quarter earnings between 64 cents to 68 cents a share, topping the 25-analyst estimate of 62 cents a share, while chip-making-equipment orders should hit $3 billion.

For more on Applied Materials

first-quarter earnings, check out



(MSFT) - Get Report

filed its counterproposal to the government's

breakup plan Wednesday, asking instead for a remedy involving limits on its business practices.

The proposal asks Judge Thomas Penfield Jackson, who has ruled the software company violated antitrust laws, to set restrictions governing its license agreements with computer makers. The restrictions would prohibit Microsoft from withholding license agreements from companies that ship or promote operating systems other than its ubiquitous Windows system.

The proposal would also require Microsoft to allow computer makers to ship versions of Windows that do not include Internet Explorer, the company's Web browser, as a default browser.


Michael Brick

In other postclose news (earnings estimates from

First Call/Thomson Financial

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

Mergers, acquisitions and joint ventures

Policy Management


said it was negotiating a possible $700 million agreement with



. Policy Management executive vice president and general counsel Steve Morrison told


in a telephone interview that the company signed a confidentiality pact, giving EDS the go-ahead to examine its non-public financial information. Last month, EDS suggested a possible acquisition for Policy Management for $18 to $20 a share.



, a telecom-equipment maker, said it entered a $1.8 billion cash and stock deal to buy closely held

Photonic Integration Research

. According to the terms, SDL would pay $31.25 million in cash and 10.2 million shares for the company, which makes fiber-optic enhancement products.

Earnings/revenue reports

First Data

(FDC) - Get Report

set a $1 billion-share buy-back.

Fox Entertainment

(FOX) - Get Report

posted third-quarter earnings of 3 cents a share, a penny better than the nine-analyst estimate and up from the year-ago 1-cent profit.

News Corp

(NWS) - Get Report

posted third-quarter earnings of 18 cents a share, in line with the eight-analyst estimate and a penny better than the year-ago report.



reported fourth-quarter earnings of 24 cents a share, beating the six-analyst estimate of 21 cents a share and up from the year-ago 11-cent profit.

Serena Software


posted first-quarter earnings of 13 cents a share, topping the three-analyst estimate of 9 cents and up from the year-ago report of 7 cents a share.

Trans World Entertainment

(TWMC) - Get Report

reported first-quarter earnings of 18 cents a share, beating the three-analyst estimate of 14 cents and up from the year-ago 12-cent profit.

W.R. Grace

(GRA) - Get Report

said it sees a 7% increase in annual revenue growth, which would propel double-digit earnings. Chairman, President and CEO Paul J. Norris told investors that revenue should be $2 billion, edging out the 1999 report of $1.5 billion. W.R Grace also set a stock buy-back of up to 12 million shares.

24/7 Media


reported a first-quarter loss of 44 cents a share, narrower than the 12-analyst estimate of a 53-cent loss but wider than the year-ago 29-cent loss.

Offerings and stock actions



set a 3-for-2 stock split.

SEI Investments

(SEIC) - Get Report

set a 3-for-1 stock split.



said it would not allow users to access major label songs contained in its data base, while it works toward settling a copyright infringement suit brought on by major record companies. Last month, a district judge decided that the company violated copyrights held by major record labels, including

Time Warner's


Warner Brothers Music


Sony Music Entertainment



(VO) - Get Report

through the development of its

data base. The database gives users the capability to obtain and store music digitally, and then retrieve it using any computer.

Sony Computer Entertainment America

, a division of


(SNE) - Get Report

, said at the

Electronic Equipment Expo

that its

PlayStation 2

will hit shelves in the U.S. on Oct. 26. The entertainment system, which has already been launched in Japan, will carry the suggested retail price of $299. One million units will be shipped to the U.S. for its debut in October.

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

The Night Watch.

Bond Focus: Treasuries Squeezed Higher After a Strong Auction


Elizabeth Roy Stanton

Senior Writer

5/10/00 5:55 PM ET

With only a little help from the sagging stock market, Treasury prices moved higher for a second consecutive day, benefiting chiefly from a short squeeze after the

Treasury Department

sold new 10-year notes to dealers, market watchers said.

The yield at which the department sold the notes -- 6.475% -- was slightly lower-than-expected, indicating that some market participants had expected to win securities at higher yields (lower prices). If they had short positions to cover, they were up a creek. They had to pay up to do so, and their buying lifted the market even higher.

The benchmark 10-year Treasury note ended up 20/32 at 100 14/32, dropping its yield 8.6 basis points to 6.438%. Shorter-maturity notes fell by roughly similar amounts. The 30-year Treasury bond gained 27/32 to 101 10/32, lowering its yield 6 basis points to 6.154%.

At the

Chicago Board of Trade

, the June

Treasury futures contract gained 20/32 to 94 2/32.

At the 1 p.m. EDT bidding deadline for the new 10-year notes, the benchmark issue was up just 11/32.

At the deadline, the existing 10-year note traded at a yield closer to 6.50%, indicating that some market participants expected to be awarded the notes at that level. In another indication of strong demand, the bid-to-cover ratio, which compares the volume of securities bid for to the amount offered for sale, was 2.62, the highest since the Treasury Department switched to its current format for 10-year note auctions in November 1998.

The department sold $8 billion of new notes. Rather than creating a brand-new 10-year security that would have matured in May 2010, the department added securities to its last 10-year note, creating additional securities that will mature in February 2010. The additional securities should improve the liquidity of the issue.

Prices rose after the auction,

Paribas Capital Markets

senior bond strategist Richard Gilhooly said, because "there was a big short base going into the auctions, but the auctions weren't difficult, in fact they went very well, so the market got squeezed up afterwards." Because the notes were awarded only to bidders who had agreed to accept a yield of 6.475% or lower, "if you bid 6.50% you got no paper, so you had to chase the market higher after 1 o'clock," Gilhooly said.

The stock market's weakness today helped the Treasury market slightly, but only slightly, market analysts said. Gilhooly noted that there was no outperformance by short-maturity Treasuries today, which one would expect to see in a rally driven by flight from stocks, since the shortest-maturity issues are the most liquid.

There has been a fundamental change, analysts said, in the general perception of how much power stock prices have to influence the

Fed on interest rates.


Federal Open Market Committee "is not going to not raise rates because the Nasdaq drops by 200 points," said Tom Connor, head of government bond trading at

J.P. Morgan

. "In early April, people thought that was a possibility." Rather, Connor said, "stocks being up is one of the problems in the economy, and they're going to have to deal with it."

Rapidly rising stock prices are troubling to the Fed when the economy is growing at an above-trend clip, threatening to ignite inflation, because it is presumed that quickly rising stock prices embolden consumers to spend, and consumer spending is the main driver of the economy.

Uncertainty about how much the Fed will hike the

fed funds rate over the coming months is also keeping Treasuries from rallying, Connor said. "How excited do you want to get about the bond market when the funds rate is going up by 50" basis points at the FOMC's next meeting on May 16, and possibly by another 50 basis points at the subsequent meeting in June, he said. The funds rate currently stands at 6%.

"The accepted view now is that the Fed is not watching stocks, it's just doing what's necessary on rates," Gilhooly concurred. Of course, he added: "It's a question of the magnitude of the fall. If stocks were to fall another 5% or 10%, it might be a different story."

In the meantime, Gilhooly thinks intermediate- and long-term Treasury yields will continue to improve now that the quarterly refunding auctions are over -- aided by Treasury Department buybacks of old long-maturity issues. "We think the Treasury market is very, very cheap right now -- 20 basis points on the bond, at least."

There were no major economic releases or other events of interest to Treasury traders today.

Economic Indicators

The weekly

Mortgage Applications Survey detected increases in both refinancing and new mortgage activity, in spite of an uptick in the average mortgage interest rate. The Refinancing Index rose to 357.7 from 336.2, while the Purchase Index rose to a 19-month high of 341.2 from 299.4. In the same week,

Freddie Mac's


30-year mortgage rate rose to 8.28% from 8.13%.

Currency and Commodities

The dollar gained against the yen and the euro. It lately was worth 109.51 yen, up from 109.24. The euro was worth $0.9068, down from $0.9073. For more on currencies, please take a look at


Currencies column.

Crude oil for June delivery at the

New York Mercantile Exchange

fell to $28.10 a barrel from $28.65.


Bridge Commodity Research Bureau Index

rose to 218.93, nearly a two-year high, from 217.13.

Gold for June delivery at the


rose to $278.70 an ounce from $278.20.


Copyright 2000,