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May 16, 2000

Market Data as of Close, 5/15/00:

o Dow Jones Industrial Average: 10,807.78 up 198.41, 1.87%

o Nasdaq Composite Index: 3,607.65 up 78.59, 2.23%

o S&P 500: 1,452.36 up 31.40, 2.21%

o TSC Internet: 881.27 up 37.71, 4.47%

o Russell 2000: 497.81 up 6.87, 1.40%

o 30-Year Treasury: 101 09/32 up 19/32, yield 6.165%

Companies in Today's Bulletin:

Unilever (UN:NYSE)

Bestfoods (BFO:NYSE)

Lycos (LCOS:Nasdaq)

Terra Networks (TRRA:Nasdaq)

In Today's Bulletin:

o Internet: Terra-Lycos Talk Highlights Rush to Buy U.S. Tech Assets
o Wrong! Tactics and Strategies: Getting In Shape for Tomorrow
o Evening Update: Evening Update: Unilever Won't Launch Hostile Bid for Bestfoods
o Bond Focus: Optimistic Breeze Blows Through Treasury Market

Donald Luskin, president, CEO and co-founder of, will be the guest on "" show on Fox News Channel May 20 and 21.

Also on

Market Features: Fifty Basis Points or Bust, Say Fed Forecasters

Any less of a hike in the fed funds rate could be disastrous for inflation-wary markets.

Software: Ex-Microsoft Employee Publicizes a Potential Security Flaw

The former employee is an active opponent of Internet censorship who lives in Seattle.

Nothing but Net: DOT Eases Higher Late in Day's Session Ahead of "Fed-Day"

The TaskMaster: Rates Do Matter

Recent history shows that major stock proxies rally after a Fed announcement. But will they this time?

Internet: Terra-Lycos Talk Highlights Rush to Buy U.S. Tech Assets


George Mannes

Senior Writer

5/15/00 8:37 PM ET

Does a possible

merger of




Terra Networks


herald a trend toward overseas acquisitions of U.S. Internet operations and other tech companies?

Well, they're too late. The trend has already begun.

In fact, since the first of the year, the total dollar volume of deals in which non-U.S. firms have said they'd be acquiring U.S. tech companies has exceeded U.S. acquisitions of overseas firms by about 75%, according to figures supplied by

Thomson Financial Securities Data


Merger talks between Terra, a subsidiary of Spanish communications giant


(TEF) - Get Free Report

, and Lycos follow other recently announced investments in Internet firms from companies outside the U.S. border, such as the Netherlands'

Royal Ahold


deal to acquire a majority stake in






deal for ISP and Web hoster



; and Mexican billionaire Carlos Slim Helu's purchase of a stake in online music retailer




Youssef Squali, Internet analyst at

ING Barings

, says he wouldn't be surprised if other European firms follow in Terra's apparent footsteps. "The Europeans, generally, have been relatively late to the Internet game," he says. "This is an attempt, on their part, to acquire the technology and the know-how from where the Internet started ... especially at a time when the valuations have come down dramatically.

"Some of these assets are viewed, believe it or not, as bargains," Squali adds, even in the face of continued weakness in some foreign currencies, particularly the euro.

It's not just the price that makes U.S. Net companies attractive elsewhere, Squali says. "A U.S. Internet company, whether on the content side or the access side, just really does provide a set of assets it would take years for these foreign companies to develop in-house," he says.

But it's the infrastructure companies that Squali thinks will be more attractive to potential buyers. Infrastructure companies "often have a recurring set of revenues you don't often have with a content provider," he says.

Rob Martin, senior Internet analyst at

Friedman Billings Ramsey

, says the interest of foreign firms in U.S. Net operations has "definitely" picked up, thanks in part to recent price declines among tech stocks. When Martin visited Europe last October, he says, institutional and strategic investors were having trouble stomaching the valuations of Internet companies. "Imagine the trouble they were having in March," he says.

"There are properties that have fallen below the radar of American investors that may represent a great beachhead in establishing a larger international strategy," he says.

Martin speculates that international firms might be interested in portals that haven't achieved first-tier status in the U.S. but could create a significant audience when combined with audiences from other countries around the world. Possible acquisition candidates include the portals








. "Any one of those could potentially get picked off by an international media company that wants to broaden its exposure," he says. (The Australian-rooted LookSmart announced earlier this month that it was in discussions regarding a "proposed business relationship" with Australian telecom giant



Squali cautions that the success of transoceanic deals, starting with a merged Lycos-Terra Networks, isn't certain. "It's a long way from being a slam dunk," he says. "We're not only talking about corporate culture differences," he says. "We're talking


culture differences."

Wrong! Tactics and Strategies: Getting In Shape for Tomorrow


James J. Cramer

5/15/00 2:04 PM ET

Shorts are scrambling to cover their positions in the financials ahead of the

Fed. As they go higher I am tempted to blow them out myself if only to get in shape if they get hit tomorrow.

This financial group is the one I like the least ahead of a tightening. (See my 1994

series). These stocks are most affected negatively by the higher short-term rates.

Why are the shorts covering? Simple. They fear a statement from the Fed, notably something like "We are confident, in light of the recent softer economic numbers, that we no longer need a tightening bias."

That statement would cause a spike in the financials that most short-sellers couldn't handle.

I don't think that we will get such a change. But I don't blame short-sellers for panicking ahead of that possibility because I know I would be one of those people reaching for


(C) - Get Free Report





Wells Fargo

(WFC) - Get Free Report

if I got that news.

Random musings:

Am I the only one who doesn't like the HoneyDots? Can I get a box of trained attack weasels and sic them on the advertising agency that created those horrible Williams ads?

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: Unilever Won't Launch Hostile Bid for Bestfoods


Eileen Kinsella

Staff Reporter

5/15/00 7:31 PM ET


(UN) - Get Free Report

Chairman Niall FitzGerald told


the company will not launch a hostile bid for


(BFO) - Get Free Report

after it rejected Unilever's $18.4 billion takeover bid. FitzGerald, one of two co-chairmen, said he is content to wait for Bestfoods to consider its alternatives and conclude that a deal with Unilever is in its best interests.

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

Health-care systems company


(CERN) - Get Free Report

said it will acquire

Citation Computer Systems


, a provider of laboratory systems for small-to-midsized hospitals. Cerner will pay 0.153 shares of its stock and 51 cents cash for each Citation share.



said it will acquire


for 1.2 million shares and $20 million in cash, or a total of about $42 million. Apptitude analyzes Internet traffic for developers of network infrastructure devices.

Back to top

Earnings/revenue reports and previews

Computer Associates

(CA) - Get Free Report

posted fourth-quarter earnings of $1.13 a share, in line with the lowered 22-analyst estimate, dispelling jitters about its delayed report. The year-ago earnings were 90 cents a share.

The Islandia, N.Y.-based company reported record fourth-quarter revenues of $2.13 billion, up 31% from the year-ago $1.63 billion. However, revenue was cut by $33 million due to the negative impact of translating foreign currency into U.S. dollars, the company said. Last week, shares tumbled about 16% after the company said it would report earnings a week later than expected.

joint newsroom covered the Computer Associates report in a

story this evening.

Brocade Communications


reported second-quarter pro forma earnings of 11 cents a share, topping the 15-analyst estimate of 8 cents and up from the year-ago loss of a penny.

Coca-Cola Enterprises


said it sees 2000 earnings before items of about 50 cents a share, below the current 17-analyst estimate of 71 cents a share. Coca-Cola cited weakness in the British market caused by sterling's gains against the euro. The company said it expects a charge of 2 cents a share related to its U.K. restructuring and also said it sees North American volume for the remainder of 2000, up 1% to 2% over 1999.

Ligand Pharmaceuticals

(LGND) - Get Free Report

posted a first-quarter operating loss of 24 cents a share, wider than the lone-analyst estimate of a loss of 18 cents but narrower than the year-ago loss of 32 cents.

US Oncology


posted first-quarter earnings of 29 cents a share, which includes a gain of 17 cents. The eight-analyst estimate was for 10 cents. The year-ago results were 16 cents a share.

Back to top

Offerings and stock actions

Bank holding company

Investors Financial


set a 2-for-1 stock split.


(KEM) - Get Free Report

set a 2-for-1 stock split.

Back to top

Bond Focus: Optimistic Breeze Blows Through Treasury Market


Elizabeth Roy Stanton

Senior Writer

5/15/00 6:17 PM ET

Treasuries rallied today in spite of some stronger-than-expected economic data, with long-maturity issues outperforming short-maturity ones for much of the day ahead of tomorrow's expected rate hike by the


With the Fed poised to raise the

fed funds rate from 6% to, forecasters presume, 6.5%, it makes sense that investors would prefer long-maturity instruments. Short-maturity yields generally stay in the vicinity of the fed funds rate, but longer-maturity instruments are valued based on inflation expectations. When the fed funds rate goes up, investors may lower their inflation expectations, giving intermediate- and long-term Treasuries a boost.

The benchmark 10-year Treasury note gained 16/32 to 100 10/32, dropping its yield 7.3 basis points to 6.452%. But the two-year note gained 5/32 to 99 4/32, trimming its yield only 5.6 basis points to 6.880%.

The 30-year Treasury bond rose 21/32 to 101 8/32, lowering its yield 5 basis points to 6.156%. At the

Chicago Board of Trade

, the June

Treasury futures contract added 18/32 to 94 2/32.

Tony Crescenzi, chief bond market strategist at

Miller Tabak

, said yield-curve trading, or betting on the relationships between short- and long-maturity issues, was a dominant trend in Treasuries today. As traders bought long-term issues against short-term ones, the difference in yield between the two- and 30-year Treasuries approached the 18-year low of minus 73 basis points it reached on May 1, Crescenzi said. That spread ended the day at around minus 72 basis points.

The yield-curve-flattening trend that has been in place for much of this year has also been driven by the

Treasury Department's

buyback program, in which federal government surplus funds are being used to buy old, long-maturity issues -- its most expensive debt -- back from investors willing to tender them. The fact that the government wants to buy long-maturity issues has inflated their prices relative to shorter-term ones. That dynamic is also in play this week, with the department planning to announce the details of its next operation on Wednesday, and to execute it on Thursday.

In addition, Crescenzi said, the market may have "overly discounted" the possibility of a 50-basis-point fed funds hike tomorrow, making today's action corrective.

Meanwhile, traders may have been making bets on the more suspenseful elements of tomorrow's session -- the statement that accompanies the

Federal Open Market Committee's action, and the April

Consumer Price Index.

While a rate hike is assured, and while most forecasters expect the FOMC in its statement to characterize the economy as at risk of higher inflation, the possibility that it will say the risks to the economy are balanced between higher inflation and too-slow growth has energized some Treasury market participants,

Merrill Lynch

government bond strategist Jerry Lucas said.

"The market has rallied going into recent Fed hikes, hoping it's the last," Lucas said.

Regardless of which way the committee characterizes the economy tomorrow, the difference between short- and long-term Treasury yields will collapse further, he said. If it highlights the risk of inflation ("admitting they're behind the curve"), Lucas thinks both short- and long-term yields will rise, with short-term yields rising more. But if it surprises the market with a statement that calls the risks to the economy balanced, long-maturity issues could rally substantially, as short-term yields rally less, he said.

As for the CPI, it is expected to experience the gentlest rise in months thanks to last month's steep drop in gas prices.

Economic Indicators

The industrial economy was stronger than expected in April, according to the

industrial production report released this morning (a few minutes prematurely after a wire service inadvertently broke the Fed's embargo on the news). Industrial production rose 0.9%, vs. an average forecast of 0.7%.

Industrial production is now rising at a 6.1% rate, vs. 3.7% for industrial capacity. If this gap persists, the consequences could be inflationary.

In April, the capacity utilization rate, which measures anti-inflationary slack in the industrial economy, found less of it, rising to 82.1%, the highest since May 1998, from 81.7%. It had been forecast to rise to 81.8%.

In other news, the

Housing Market Index rose to 63 in May from 62 in April. It is down from a December 1998 peak of 78.

Currency and Commodities

The dollar gained against the yen and the euro. It lately was worth 109.28 yen, up from 108.38. The euro was worth $0.9107, down from $0.9197. For more on currencies, please take a look at


Currencies column.

Crude oil for June delivery at the

New York Mercantile Exchange

rose to $29.92 a barrel from $29.62.


Bridge Commodity Research Bureau Index

fell to 219.98 from 220.74.

Gold for June delivery at the


fell to $276.40 an ounce from $276.90.

Hot off the news of Alan Greenspan's Fed meeting, James J.Cramer and longtime short-seller Bill Fleckenstein take your questions and discuss the future of the market. Tuesday, May 16 at 5 p.m. EDT, on Yahoo! Register for Yahoo! chat at: It's free!

To view the TSC Economic Databank, see:

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