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daily06-03-99's DAILY BULLETIN

June 4, 1999

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Market Data as of Close, 6/3/99:

o Dow Jones Industrial Average: 10,663.69 up 85.80, 0.81%

o Nasdaq Composite Index: 2,403.32 down 29.09, -1.20%

o S&P 500: 1,299.54 up 4.73, 0.37%

o TSC Internet: 534.30 down 22.31, -4.01%

o Russell 2000: 435.98 down 0.76, -0.17%

o 30-Year Treasury: 90 07/32, down 10/32, yield 5.946%

Companies in Today's Bulletin:

Genentech (GNE:NYSE)

Quantum (QNTM:Nasdaq)

Citigroup's (C:NYSE) Salomon Smith Barney

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TheStreet Recommends

Bank of Tokyo-Mitsubishi (MBK:NYSE ADR)

In Today's Bulletin:

o Biotech/Pharmaceuticals: New Digs for Genentech Shareholders: The Roche Motel
o Wrong! Rear Echelon Revelations: What I Really Think of Disk Drives
o Evening Update: Bank of Tokyo-Mitsubishi Exec, Former Salomon Staffer Charged With Insider Trading
o Bond Focus: Bonds Drift, Counting the Hours Until Tomorrow's Jobs Report

Also on

Market Features: TSC's Guide to Bonds Online

Investing in bonds has never been a do-it-yourself business. Our guide gives the lowdown on getting information fit for the pros.

Europe: Crossing Customs: U.K., Germany Lead Europe in Burgeoning Online Trading Market

As more Brits head to their computers to invest, online brokers stand ready to catch the wave. Germany is not far behind.

Europe: Crossing Customs: After Recent Downturn, Germany's Neuer Markt Comes of Age

With the heady days of sky-high returns over, the Neuer Markt can now reposition itself as a vital part of Germany's equity culture.

Mutual Funds: Quiet Giant Dominates International Funds

EuroPacific Growth doesn't talk to the press about its stellar performance.

Biotech/Pharmaceuticals: New Digs for Genentech Shareholders: The Roche Motel


Jesse Eisinger

Senior Writer


(GNE) - Get Genie Energy Ltd. Class B Stock Report

shareholders lost.

In a clever deal that Swiss drug company


ginned up, it will buy the part of Genentech that it doesn't already own for $82.50 a share, the strike price it negotiated in 1995. Roche scores in a big way, buying the remaining 33% at below the market price. Genentech closed Wednesday at 86 1/2 a share.

Roche will continue to score big when it spins off up to 19% of Genentech in an offering slated for the next couple of months. It will file a registration statement in the middle of this month.

For Genentech, it's a wash: Employees will be told to hold on and that Genentech will remain the quasi-independent research shop it has been for the last nine years. Employees will still be able to get options on Genentech stock, and there likely will not be a brain drain, analysts predict.

But all the saps who bought -- or told investors to buy -- Genentech stock above 82 1/2 a share were just plain wrong. "The losers are the Genentech shareholders. Roche has just screwed anyone dumb enough to have bought over $82.50 a share," says one New York health care hedge fund manager who had no position in the stock.

"It was almost a dare," adds Jon Alsenas of

ING Baring Furman Selz

. "The market was saying Genentech is worth so much more than $82.50 that it was willing to take the risk of having the rug taken out from under them." (Furman Selz rates Genentech a hold and hasn't done banking for the company.)

On the news Thursday, Genentech's stock fell 4 1/2 to 82.

These investors and analysts didn't figure that Roche would take their dare. As if the big company wouldn't be dictated by the finances. It was kind of like thinking that

The Donald

dates models for the scintillating conversation. More importantly, many on Wall Street didn't foresee that Roche might buy the company and then spin off a portion to investors.

Salomon Smith Barney's

Meirav Chovav,

Merrill Lynch's

Eric Hecht and

BancBoston Robertson Stephens'

Jay Silverman were the analysts with buy ratings going into the Roche decision. The three couldn't be reached for comment.

Some analysts, however, were cautious. Along with Alsenas,

CIBC World Markets'

Matt Geller,

SG Cowen's

Eric Schmidt and


May Kin Ho were among those with holds.

Roche bought the first 60% of Genentech in February 1990 for about $2.1 billion and spent about $400 million on the open market in the intervening years, estimates Alsenas. Buying the remaining portion of Genentech will cost Roche about $3.7 billion.

But Genentech was sitting on $1.3 billion in cash and cash equivalents and another $767 million in long-term securities at the end of the first quarter. That means Roche's net cost is about $4.1 billion. Genentech's market cap is $11.07 billion. Not a bad investment for Roche.

And it gets better when Roche spins off the Genentech stake. Analysts say they expect the price to be well in excess of 100 a share, possibly 110 to 120. Selling 19% at 110 a share would give Roche around $2.75 billion, depending on the structure of the company. It's a brilliant arbitrage by the Swiss; no wonder investors are cheesed.

Roche and Genentech didn't return phone calls seeking comment.

Questions remain about what kind of baggage Roche will saddle Genentech with. Roche will have to give back some of the cash for working capital, certainly in the hundreds of millions. The lower that grant, the worse for Genentech. Then there's the question of what kind of rights Genentech will have to its products. Today, Roche gets the right of first refusal on marketing Genentech products outside the U.S. If Roche alters that deal to make it more attractive for itself, the Genentech spinoff would be less attractive. Further, it's not known what kind of governance Genentech will have. Currently, Roche has two of the 13 Genentech board seats.

Genentech is widely regarded as the premier research concern in biotech, and President and CEO Art Levinson is viewed as one of the best in the business. Genentech's


for breast cancer and


for lymphoma (developed by



) are both growing nicely and bettering expectations. Genentech's pipeline is regarded as strong with approval of


, a heart attack drug, and

Nutropin Depot

, an extended release version of human growth hormone, expected in the next year or so. In July, the company will make public Phase III data on


, an oral anti-clotting agent. An allergy drug, called


, has promise.

But the pipeline has had two high-profile failures recently. Its nerve growth factor bit the dust in Phase III and the company had a setback with its blood vessel growth drug this year.

Analysts estimate that the company will earn $1.73 a share this year, $2.19 a share next year and $3 a share in 2001. At 110 a share, Genentech would trade at 50 times 2000 earnings, a pretty hefty price. Analysts seem to think it's appropriate to buy stock at twice its growth rate these days.

Then again, they thought that Roche would leave Genentech alone.

Wrong! Rear Echelon Revelations: What I Really Think of Disk Drives


James J. Cramer

It's 3:15 p.m. and I am driving my partner,

Jeff Berkowitz

, crazy, as I usually do, right about then, with massive second-guessing of things we should have done. I tell him we shouldn't have sold the


so aggressively. He nods, with grudging agreement. That we rebuilt the

Dayton Hudson


a point too soon, "Yeah, yeah, sure sure," he says like some punchdrunk fighter. By late afternoon, I have him pummeled into agreeing with my whole litany of inane prattle.

And then I say "Hey, and how about



? How did we miss Seagate up a buck and change? Huh? Huh? Who was responsible for missing that? We suck!"

The totally beaten 32-year-old, in the ring all day with the manic 44-year-old, simply can't be that submissive. Hold it, he says "DRIVES SUCK."

"But, but," I say, "come on, I mean like..."

"Nope, drives suck."

I make a face, but I am parried and silent. Just now it comes over the tape that Seagate's competitor,



, can't make the numbers. Looks like a terrible, terrible quarter, one that will take the Street by surprise and start the preannouncement season off with a nasty bang.

The culprit? Aggressive pricing in the disk-drive market.

Drives suck.

Random musings:

What a vicious market. Lycos now trading below where it was with the Diller bid! Punishing game,isn't it?


James J. Cramer is manager of a hedge fund and co-founder of At time of publication, his fund was long Dayton Hudson. 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: Bank of Tokyo-Mitsubishi Exec, Former Salomon Staffer Charged With Insider Trading


Heather Moore

Staff Reporter

A vice president at

Bank of Tokyo-Mitsubishi


and a former associate in the large-cap investment banking division of


(C) - Get Citigroup Inc. Report

Salomon Smith Barney

were charged with making more than $750,000 on trades based on inside information stolen from Salomon. Bank of Tokyo-Mitsubishi's Richard Ference, 51, and Kevin Kirkbride, 30, formerly of Salomon Smith Barney, were charged in a Manhattan federal court with conspiracy and securities fraud.

Inflow into U.S. equity funds for the week ended yesterday totaled $2.4 billion, with 66% going into growth funds, according to

AMG Data Services

. International funds reported inflow into all sectors but Europe and Latin America. Among other categories, taxable bond funds reported inflow of $111 million, although high-yield funds reported outflow of $342 million. Money market funds reported inflow of $3.07 billion and municipal bond funds reported inflow of $208 million.


reported earlier,

Federal Reserve

Vice Chairwoman

Alice Rivlin

announced plans to resign from the Fed and join the

Brookings Institution

, a Washington-based think tank.

In other postclose news (earnings estimates from

First Call

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

Earnings/revenue reports and previews

AEP Industries


reported second-quarter operating earnings of 28 cents a share, missing the single-analyst estimate for 32 cents but moving ahead of the year-ago 16 cents.



reported first-quarter earnings of 32 cents a share, 1 cent above the two-analyst view and higher than the year-ago 29 cents.

Haverty Furniture

(HVT) - Get Haverty Furniture Companies Inc. Report

said its May same-store sales jumped 15.3%. Separately,

Sports Authority


said its same-store sales for the month fell 6.4%.

Michaels Stores


posted first-quarter earnings of 18 cents a share, 3 cents above the 11-analyst estimate and a repeat of the year-ago figure.



said it sees first-quarter earnings of 5 cents to 15 cents a share, citing aggressive pricing in the desktop hard-drive market. The 11-analyst forecast called for 31 cents vs. the year-ago 2 cents. The company also sees first-quarter revenue coming in below the fourth quarter's.

Mergers, acquisitions and joint ventures

Abbott Laboratories

(ABT) - Get Abbott Laboratories Report


Triangle Pharmaceuticals


formed a worldwide marketing alliance for six antiviral products. The companies will co-promote four Triangle products for HIV and hepatits B and Abbott's two HIV protease inhibitors. The deal calls for Abbott to buy 6.57 million Triangle shares at $18 apiece.


(EMMS) - Get Emmis Communications Corp. - Class A Report

said it will buy an Orlando TV station for $191.5 million.

Kent Electronics


said it bought privately held electronic components supplier


for $33 million in a move to expand its parts supply network.



said it agreed to acquire most of the assets of

Newtech Electronics Industries

for an undisclosed amount. Windmere expects to take a $8.3 million charge related to the purchase.

Offerings and stock actions

Lehman Brothers


High Speed Access'

(HSAC:Nasdaq) 13-million-share IPO top-range at $13 a share. High Speed Access provides Internet access via cable modem. Elsewhere in initial offerings,

Bear Stearns


Wit Capital's

(WITC:Nasdaq) 7.6-million-share IPO top-range at $9 a share. The company is an Internet investment banking and brokerage firm. Finally,

Donaldson Lufkin & Jenrette


Network Access Solutions'

(NASC:Nasdaq) 7.5-million-share IPO below-range -- ouch! -- at $12 a share. The price range for the data communications company's offering was $14 to $16.

Bond Focus: Bonds Drift, Counting the Hours Until Tomorrow's Jobs Report


David A. Gaffen

Staff Reporter

Today's bond market activity is most notable for its predictability. In advance of tomorrow's important May


report, the expectations were for a quiet day, without buyers to take bets before the release.

It worked out as planned -- a rarity in these bearish times. Volume, according to tracker


, was down 33.2% when compared with the average second-quarter Friday. A total of $47.8 billion changed hands by 3 p.m. EDT, GovPX reported. The Treasury market drifted lower, not so much due to heavy selling, but more on a lack of buying in advance of the jobs figure, which many are hoping provides the market another clue as to whether the


will raise interest rates at the end of June.

The 30-year Treasury bond fell 6/32 to 90 12/32. The yield rose by 1 basis point to 5.94%, its highest closing yield since May 15, 1998.

Today's ups and downs were governed mostly by the latest rumor on how tomorrow's payrolls figure will turn out. The consensus estimate for new nonfarm payrolls, according to


, is for a 216,000 gain in May. Early in the day it was rumored payrolls would turn out weaker than the estimate, and later in the day, a rumor emerged suggesting payrolls might turn out stronger than consensus.

The Treasury market also has to account for the yearly seasonal adjustments to the nonfarm payroll data made by the

Labor Department

, undertaken to obtain a clearer picture of this country's labor situation. "If you look at the factors for this year versus 1998 they would lower the adjusted totals by 50,000 to 60,000," said William Sullivan, chief money-market economist at

Morgan Stanley Dean Witter

. These adjustments aren't unique to this year, but "it's in the market's mindset as we go into tomorrow's figures and the market will be affected by these calibrations," Sullivan said.

The market has been particularly edgy about the payroll figure since the

National Association of Purchasing Management's

May survey of manufacturing sentiment was released Tuesday. This survey indicated positive sentiment among purchasing executives with regard to future employment, though the evidence is more or less anecdotal.

Tom Ruff, vice president in proprietary trading at

Daiwa Securities

, believes the only way the market is going to rally tomorrow is if all the major components come in way below forecasts, because that would reduce the chances of an imminent interest-rate hike. Expectations are for the household unemployment rate to hold steady at 4.3% and for average hourly earnings to rise by 0.3%.

"Those are not weak numbers," he said. "The growth of the labor force is about 150,000 per month, and if the economy is adding 215,000 it means the labor force is getting tighter."

Precisely what Fed officials have been worried about. Today's only major speaker was

Fed Governor Ed Gramlich

, who today said in comments that "there could be signs of an acceleration which we hadn't seen before." Gramlich, thought to be somewhat of a dove, said later to reporters: "The question is, was the

0.7% increase in April's

Consumer Price Index

a one-month fluke, or was this a real warning sign?"

"The Fed, in various comments, whether it's

New York Fed President William



Governor Edward


or Gramlich today, have basically told you the gun is loaded," Ruff said. The Fed adopted a bias in favor of tightening interest rates at its May 18 committee meeting.

Today's data didn't impact the bond market.

Factory orders

fell by 1.2% in April, compared with the market's expectation for a 0.9% decline. In March, factory orders rose by 1.9%, revised downward from the

Commerce Department's

original 2% estimate.

The NAPM's

non-manufacturing index

, a survey of business sentiment in the non-manufacturing sector, fell to 60 in May from 64 in April. This indicates expansion in this sector of the economy, but since this data isn't being seasonally adjusted yet, it's paid little attention.


Street Sightings

"The Buysider" columnist and investment manager Jeffrey Bronchick will be appearing on CNBC's Squawk Box Friday, June 4, at 9:40 a.m. EDT.


Copyright 1999,