Publish date:

TheStreet.com's DAILY BULLETIN

May 25, 2000


Market Data as of Close, 5/24/00:

o Dow Jones Industrial Average: 10,535.35 up 113.08, 1.08%

o Nasdaq Composite Index: 3,270.61 up 106.06, 3.35%

o S&P 500: 1,399.05 up 25.19, 1.83%

o TSC Internet: 771.25 up 12.44, 1.64%

o Russell 2000: 461.74 up 2.73, 0.59%

o 30-Year Treasury: 100 23/32 down 14/32, yield 6.185%

Companies in Today's Bulletin:

Chase (CMB:NYSE)

Cisco (CSCO:Nasdaq)


Morgan Stanley Dean Witter (MWD:NYSE)

In Today's Bulletin:

o Market Features: Navigating a Slowdown: Place Your Bets; the Economic Wheel Spins!
o Smarter Money: JJC's Favorite Fishbowl
o Evening Update: Agile, Firepod Report Earnings; Congress Passes China Accord
o Bond Focus: Data-Starved Treasuries Cower as Stocks Run

Also on TheStreet.com:

Banking: Chase Spending Big to Push Investment Banking Ambitions

The latest move nets the financial services giant former Goldman exec Geoffrey Boisi.


Brokerages/Wall Street: Securities Industry Forum Weighs Disparate Views of the Future

The Internet is cultivating a fear in some that markets could become increasingly fragmented.


Retail: Bricks Are Back in Retail, Gap Chief Shows

E-commerce isn't about to go away, but the old-line retailers aren't quaking in their boots anymore.


Mutual Funds: As Volume Declines, Fund Investors Ask: Where is the Money Going?

Indications are that fund managers are letting their cash levels rise.


Market Features: Navigating a Slowdown: Place Your Bets; the Economic Wheel Spins!


David A. Gaffen

Staff Reporter

5/24/00 2:03 PM ET

Knowing where we are in an economic cycle -- or where we think we are -- can be critical to making the right stock-picking decisions.

Even if you're convinced that the burst of productivity associated with huge investments in new information technology has caused profound changes in the U.S. economy, there are still economic cycles -- established patterns of growth, inflation, and contraction. And different stocks perform better in each phase.

Where we stand now is harder to figure out than it used to be, given the anomalous record of high growth and low inflation in recent years. One thing is clear, however: The

Federal Reserve is trying to bring down superheated growth to avoid the inflation that is associated with the late stages of a business expansion.

So, the Fed has raised the short-term

fed funds rate by 1.75% percentage points in the last year to 6.5%, the highest level in nine years. Inevitably, the hikes will lead to slower growth as companies and consumers find the costs of financing -- from new plants to new cars -- rising.

Predicting a slowdown from rapid 5.4% growth last quarter isn't hard. What is hard is figuring out whether the economy will slow enough, soon enough to keep the Federal Reserve from raising rates many more times this year. And in turn, how prolonged the slowing will be and how slow will it go?

Generally, the nation's business cycles display periods of growth with declining inflation, followed by longer periods of growth with inflation. A model devised by

Merrill Lynch

shows that U.S. investors are currently getting defensive, but remain optimistic that the economy, for now, is nearing a peak in terms of inflation. The model, constructed as a wheel, shows that investors look to different types of stocks when their perception of the economy changes. During a period of rising growth and declining inflation, it's time to bet on tech. Of course, that period lasted for quite a few years. When inflation bottoms but growth continues, as some believe it has, it's a signal to move into cyclical value stocks, such as oil, paper and chemicals.

The Global Sector Wheel of Fortune

Source: Merrill Lynch

However, Merrill's global strategist David Bowers points out the move into commodity stocks was strong for just a couple of months before U.S. investors began to shift into defensive value stocks. Indices such as the

Philadelphia Stock Exchange Oil Service Index

and the

American Stock Exchange Natural Gas Index

seem to have topped out in recent weeks. In just a few months, the market went from taking Fed jawboning about inflation as gospel and pouring cash into commodity-type names to a view that growth was going to slow, but inflation was less of a threat.

Slowing or Not?

That sentiment, and the mix of sectors that strategists are looking at represents a sunnier outlook than Bowers would expect. They're looking at traditional slowdown-type stocks -- such as food, tobacco and utilities -- which people need at all times, but they're also looking ahead to "defensive growth" type stocks, such as insurance companies and pharmaceuticals, which are typically stronger when investors presume growth is soon to hit bottom.

Other sectors include capital goods companies such as


(BA) - Get Report



(CAT) - Get Report

, because global growth is strengthening. This still-optimistic sentiment is a testament to the low-inflation environment that currently exists: Even if inflation does rise, it's still historically at very low levels. If growth slows, to say 3%, that rate would have been welcomed in the past.

"The uncertainty is the extent of a slowdown," Bowers says. "If you're going to get a slowdown, then you'd be a heck of a lot more defensive than if you're in a low-inflation, good-growth area. People are taking a more optimistic stance. The fund managers we're speaking to are getting more defensive, but they're going for quality, rather than cash. People don't believe we have an inflation problem."

That is, they believe the Fed won't raise interest rates much more this year. In addition, if rate hikes take 12 to 18 months to work their way into the economy, early evidence of a slowing should emerge later this year. If those signs emerge, the Fed could get out of the way, and that could usher in a period of steady, albeit slower, growth through 2001.

If the data start to show a slowdown, "the Fed will come to its senses and do only one more hike" this year, says Peter Canelo, U.S. investment strategist at

Morgan Stanley Dean Witter

. He believes the leadership once the market breaks out of this slump (and he does believe that will happen) will be dominated by "good companies from the old economy."

That last statement illustrates the problem with sector bets right now. It's a theory repeated by several strategists that the way to go may not be to concentrate on sectors, but rather on stocks with P/E ratios that rank in the bottom half of the

S&P 500


Are they poised for a move? Small caps like the

S&P 600 Small-Cap Index

have not gotten back on track since the entire market dropped in March and April. Of course, many of these low P/E stocks have been touted for a long time and haven't produced, but with technology spending expected to slow (and growth as well) it's much harder to justify a bet on the same technology stocks.

Canelo does foresee a time to get back into technology names. He says if the Fed is near the end of its current phase of tightening, technology leadership should reassert itself sometime around the presidential election and propel the market through 2001.

"I think you go back to tech before the end of the year as soon as you start to see more conviction about the slowing," he says. "We know that there's going to be the same old leadership problem.


(CSCO) - Get Report

and other very high P/E stocks may go sideways for a long time." He compared Cisco's valuation to


(WMT) - Get Report

in the 1980s, a stock that eventually could no longer justify its valuation and went sideways for more than four years, despite the company's quality.

Smarter Money: JJC's Favorite Fishbowl


James J. Cramer

5/24/00 5:30 PM ET

What makes everything so contentious, of course, is that this game is about money. When I decided to put myself in this fishbowl four years ago, I did it for better or for worse. I figured I had a good enough record and enough confidence to tell it like it is.

On a day like today, for example, I leave myself wide open when I admit that

I threw a favorite stock into the volcano. Let me count the ways:

    I reveal that I am superstitious, a true flaw for the rational thinkers out there. I share with you my desperation and my understanding that everybody has to form his own bottom. I expose myself as someone who is ... let's see, how about ... human?

None of these three qualities is becoming in a profession that is supposed to be bloodless, clinical and precise. But I know the truth. It isn't. It is about the emotion and fear and greed of the people

behind the curtain

. Before


you only saw the people who scared cowardly lions and scarecrows into thinking they had no courage or brains about their money.

Now you know better. If I didn't feel that my naked, real-time writing made you into a better client or broker -- I would quit today. It is a huge pain in the butt, and often quite embarrassing.

And I wouldn't give it up for all of the money in the world. Because it gives purpose to the whole enterprise at this stage in my life.

Thanks for listening.

Random musings:

In another time and

another place, I asked you to fill out this poll. Here it is again, with the choice you asked to be included:

Are you:

Committing less to the market than last year?

Enticed by these higher cash returns?

Committing the same amount as ever?

Can't commit, because my capital has been vaporized! ******************************************************************

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. 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: Agile, Firepod Report Earnings; Congress Passes China Accord


Tara Murphy

Staff Reporter

5/24/00 7:19 PM ET


U.S. House of Representatives

passed a measure extending permanent trade benefits to China, by a vote of 237 to 197. The legislation now goes to the


, where approval is almost assured by next month.

Big businesses supported the legislation, which would eliminate yearly reviews of Bejing's trade status and would assure low tariffs on Chinese goods being imported to the U.S. markets. In return, China would give US businesses access to its markets. The bill's approval was a victory for

President Bill Clinton

, but a defeat to labor unions, who offered stiff opposition to the bill.

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



and Colombian-based

Valores Bavaria

announced that BellSouth will acquire a 33.8% stake in


, a leading wireless communications provider with approximately 466,000 subscribers in Eastern and Atlantic regions of Colombia. BellSouth will operate Celumovil and partner with Valores Bavaria, the largest shareholder of Celumovil.

Specialty materials maker


(DEX) - Get Report

said it was disappointed with

International Specialty's


reduced offer, saying that it reflects a "pattern of unreliability."

Yesterday, ISP scaled its offer for Dexter back to its initial bid of $45 a share. The move is the latest development in the takeover effort, which began last December, when ISP, which already holds a 10% stake in Dexter, launched its first bid. ISP, which upped its bid to $52 a share, said it was reinstating its first offer, even after Dexter said last week that it was ready to negotiate a possible merger.

Back to top

Earnings/revenue reports and previews

Agile Software


posted a fourth-quarter loss of 2 cents, narrower than both the eight-analyst estimate of a 6 cent loss and the year-ago nine-cent loss.



, an e-business sales solutions provider reported a second-quarter loss of 5 cents a share, excluding stock-based compensation. The three-analyst estimate expected the company to post a 17-cent loss. The quarter's loss is narrower than the year-ago 23-cent loss.



reported a first-quarter loss of 18 cents a share, wider than the four-analyst estimate of a 28-cent loss but in line with the year-ago 19 cent loss.

J.D. Edwards


posted second-quarter earnings of 2 cents a share, topping both the eight-analyst estimate of an 11-cent loss and the year-ago 8-cent loss.

JLG Industries


, posted third-quarter earnings of 40 cents a share, topping the eight-analyst estimate of 34 cents and up from the year-ago 39-cent profit.


(PLL) - Get Report

reported third-quarter earnings of 34 cents a share, in line with the analyst estimate and up from the year-ago 28-cent profit. The filtration systems maker forecasted a 30%-35% increase in EPS for the year.

Back to top

Offerings and stock actions



, a B2B e-commerce print company, said it would ask the

Securities and Exchange Commission

to withdraw its 3.5 million-share IPO. Impresse blamed the cancellation on the recent volatile market conditions.

Morgan Stanley Dean Witter


Merrill Lynch


Deutsche Banc Alex Brown

are serving as the deal's lead underwriters.

Deutsche Banc Alex. Brown

priced a 4 million-share IPO for

Stanford Microdevices


at $12 a share, the low end of the $12-$14 range.

Back to top


The Association of Flight Attendants

announced that it sees "tremendous potential" in


(UAL) - Get Report

proposed $4.3 billion purchase of

US Airways

(U) - Get Report

but that UAL's United Airlines must be more forthcoming on the deal to win union support.

Vanguard Airlines


tapped Jeff Potter as its new president and CEO. Potter replaces Robert Spane, who will remain the company's chairman.

Back to top

Bond Focus: Data-Starved Treasuries Cower as Stocks Run


Elizabeth Roy Stanton

Senior Writer

5/24/00 5:43 PM ET

Treasuries lost ground in a low-volume session highlighted by the monthly auction of new two-year notes and the announcement of the details of tomorrow's buyback operation.

There were no major economic releases. Rather, rising stock prices appeared to be the chief catalyst for the selloff in Treasuries, which penalized short- and long-maturity issues more or less equally. Firming stock prices "gave a negative tone to the Treasury market,"

Lehman Brothers

economist Michael Gregory said.

Amid the economic-data drought conditions that have prevailed since last Tuesday, the Treasury market has been reacting principally to the stock market, rallying when stocks fall and falling when stocks rally. That's because the stock market is seen as having the potential to influence

Fed policy: Lower stock prices will likely slow consumer spending, possibly limiting the amount by which the Fed hikes the

fed funds rate in the months ahead. Also, falling stock prices encourage investment in bonds, where wealth is less rapidly destroyed.

The benchmark 10-year Treasury note fell 11/32 to 100 5/32, lifting its yield 4.7 basis points to 6.475%. The two-year note fell 3/32 to 99 5/32, boosting its yield 4.9 basis points to 6.841%. The 30-year bond lost 16/32 to 100 22/32, its yield adding 3.3 basis points to 6.198%. And at the

Chicago Board of Trade

, the June

Treasury futures contract fell 8/32 to 93 22/32.

The action left prices and yields more or less in the middle of the range they have occupied all month. For the market to move into new ground, be it higher or lower, it needs important new economic information, said Ray Remy, executive managing director at

HSBC Securities

. "I think the market's going to turn its attention to economic fundamentals, but it's in a holding pattern as we wait for information on whether the economy's slowing or not," he said.

Tomorrow brings revised first-quarter


numbers and Friday has the April

durable goods orders

report, but the first A-list indicator on the horizon is the June

employment report

on June 2.

Also contributing to the negative tone in Treasuries today, Lehman's Gregory said, was the announcement of the details of the Treasury Department's next buyback operation, slated for tomorrow. The department announced that it will take offers on up to $2 billion of 30-year bonds issued between February 1989 and August 1993 at 11 a.m. EDT tomorrow.

Because the details were as-expected and not better-than-expected (a larger amount would have been better), some market participants pulled the old "buy on the rumor, sell on the fact," Gregory said.

Federal government surpluses have made it possible for the government to pay down debt, which takes the form of Treasury securities outstanding. Accordingly, the Treasury Department launched its first buyback program since the 1930s in March.

Meanwhile, the Treasury auctioned new two-year notes today, selling $10 billion at a yield of 6.749%, the highest since February 1995. The bid-to-cover ratio, which measures demand for the new securities, was higher than the recent average at 2.52.

The Treasury Department continues to issue new Treasury securities even as it conducts buybacks because trading activity in Treasuries is concentrated in the newest issues. The old issues that the buybacks have taken out of circulation change hands much less frequently. The decision to continue to issue new Treasuries reflects the view that it is in the government's best interest to maintain a liquid market for its debt.

Economic Indicators

The weekly

Mortgage Applications Survey detected a slight decline in refinancing activity but an increase in new mortgage activity, in spite of rising interest rates. The Refinancing Index fell to 328.9 from a revised 330.9, while the Purchase Index rose to 326.3 from a revised 296.6. Last week,

Freddie Mac's


30-year mortgage rate rose to 8.64%, the highest since February 1995.

Currency and Commodities

The dollar rose against the yen and the euro. It lately was worth 107.85 yen, up from 106.45. The euro was worth $0.9047, down from $0.9074. For more on currencies, please take a look at


Currencies column.

Crude oil for July delivery at the

New York Mercantile Exchange

rose to $29.93 a barrel from $28.78.


Bridge Commodity Research Bureau Index

rose to 225.47 from 224.08.

Gold for June delivery at the


fell to $273.80 an ounce from $274.70.



James J. Cramer on AOL --Thursday, May 25

Chat with James J. Cramer on AOL at 5 p.m. EDT. (Keyword: Live)

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