daily06-05-00 - TheStreet

TheStreet.com's DAILY BULLETIN

June 6, 2000


Market Data as of Close, 6/5/00:

o Dow Jones Industrial Average: 10,815.30 up 20.54, 0.19%

o Nasdaq Composite Index: 3,821.76 up 8.38, 0.22%

o S&P 500: 1,467.63 down 9.63, -0.65%

o TSC Internet: 930.26 down 15.16, -1.60%

o Russell 2000: 513.30 up 0.27, 0.05%

o 30-Year Treasury: 104 21/32 up 14/32, yield 5.905%

Companies in Today's Bulletin:

Knight Trading Group (NITE:Nasdaq)

Merrill Lynch (MER:NYSE)

Juniper (JNPR:Nasdaq)

Texas Instruments (TXN:Nasdaq)

Foundry (FDRY:Nasdaq)

In Today's Bulletin:

o Brokerages/Wall Street: Merrill No Knight in Shining Armor
o Wrong! Rear Echelon Revelations: A Close Call
o Evening Update: Albertson's Reports Earnings, Philip Morris Pulls Ads After the Close
o Bond Focus: Treasury Yields Dip to One-Month Lows as Corporate Calendar Swells

Also on TheStreet.com:

Mutual Funds: Tech No: 401(k) Plans Skip the Tech Fund Rave to Employees' Dismay

Plan sponsors fret about risks, while employees fret about missing the biggest game in town.


Market Features: Bull's Head Revisited: Beale Still Says Buy

Technical analyst Tom Beale, whose buy signal last week anticipated the big rally, sees more short-term gains ahead.


Telecom: Qualcomm Trying to Scale Great Wall in China, Korea

Uncertainty about access to those Asian markets has been a drag on shares. But there's always the Americas.


The TaskMaster: Biotechs Help Keep the Bull Running

This sector picked up the pace today while the rest of the market dozed.


Brokerages/Wall Street: Merrill No Knight in Shining Armor


Caroline Humer

Senior Writer

6/5/00 8:48 PM ET




Herzog Heine Geduld

ties the knot, competitor

Knight Trading Group


will look more and more like the groom's suffering ex.

Retail brokerage giant

Merrill Lynch


is planning to buy privately held Herzog for less than $1 billion, according to one person with knowledge of the deal, which was first reported Monday by

Dow Jones

. (



wrote about the possible deal earlier in the day.)

The news is anything but good for Knight, which at one point was getting cozy with Merrill but now is on the outs with the mighty bull while at the same time struggling to maintain its once-dominant Nasdaq market share.

If Merrill buys Herzog, Knight will face a large competitor that will quickly challenge it as the largest destination for order flow. (Market makers match buy and sell orders from other firms, and they make their money from the difference between the bid and ask prices.) In April, a combined Merrill/Herzog would've had 12% of the Nasdaq and over-the-counter volume (Herzog 8% and Merrill 4%), right behind Knight's 13.7%, according to



"If (Merrill and Herzog) are going to do this, they are clearly going to try to take market share away from Knight," says Paul Stocking, a senior analyst at

American Express

, which was long Knight according to its May 11 filing with the

Securities and Exchange Commission


Merrill and Herzog declined to comment. Knight also declined to comment.

As reports of the purchase circulated Monday, Knight's shares took a dive, closing at 30 15/16, off 13%, or 4 9/16, as investors finally accepted that not only are Merrill and Knight no longer dating, they're also on their way to becoming out-and-out rivals. Knight's stock already has been punished by concerns about weak overall trading volumes. It's well off a 52-week high of 64 13/16.

More Downward Pressure to Come?
A stronger competitor for Knight could cut into its business, eroding its stock market value.

The Merrill/Herzog deal also makes Knight's shares look fairly expensive, even at these lower levels. Based on the April market share data from AutEx/BlockDATA, Knight does about 1.6 times Herzog's volume in Nasdaq and over-the-counter stocks. One investor who's short Knight estimates Herzog will be sold for $820 million, which by using the 1.6 times figure, implies that Knight's valuation should be $1.31 billion, the short-seller says. Based on 1.22 million outstanding shares, that means Knight should trade at about 10 3/4.

Amy Butte, an analyst at

Bear Stearns

, wrote in a research note Monday that Knight's valuation should be only about one-quarter of the 35 1/2 it closed at Friday, or 8 7/8, based in part on the number of stocks in which the firm makes markets, and on competitors' valuations. Butte, who rates Knight unattractive, values Herzog at $800 million to $900 million. (Bear hasn't done any underwriting for Knight or Merrill.)

However, Amex's Stocking notes that because Herzog is private, it's unclear what kind of margins the business has compared with Knight. Investors don't know its revenue, either. In addition, the market also values Knight for its potential earnings growth. Knight trades at about 10 times 2001 earnings estimates. That compares with

New York Stock Exchange




, which trades at seven times 2001 earnings estimates.

But a Merrill/Herzog deal could call that earnings-growth potential into question.

Knight started serious flirting with Merrill late last year when the two signed a clearing agreement, under which Knight took care of some of the back-office end of stock trading for Merrill. Merrill also began sending more and more of its Nasdaq order flow to the Jersey City, N.J., market maker.

That all changed a few months ago. A few weeks after

The Wall Street Journal

in March criticized Knight's trading tactics, Merrill let be known that it planned to get some control back over its orders by

almost quadrupling its own Nasdaq market-making operations. It

had cut those operations by about 40% three years ago to 550 stocks.

Since then, Knight's market share has

clearly suffered while its competitors' shares have grown. Merrill,

Morgan Stanley Dean Witter



Goldman Sachs

(GS) - Get Report

all have increased their share of Nasdaq market-making business. A stronger Merrill may just quicken this pace.

Tim Arango, a TheStreet.com/NYTimes.com staff reporter, contributed to this story.

Wrong! Rear Echelon Revelations: A Close Call


James J. Cramer

6/5/00 4:49 PM ET

Looking for Signs That Things Have Changed II: The last hour of trading has been certain death for the highfliers. Every time they collapse at the end of the day.

But that's not the case today. Check out


(JNPR) - Get Report

. This stock had been faltering for weeks at the bell. Today, however, it ramped. Same with

Texas Instruments

(TXN) - Get Report





That kind of closing action signals strength, not weakness.

We regarded today's session as a positive. We thought it exhibited lots of positive signs, especially when you consider that the pre-Memorial Day tape could never put together a couple-of-days-long streak.

Understand what we are trying to do here: We are trying to distinguish between an oversold bear-market rally, which we have had many of since March, and the real deal, which we think we might be witnessing now.

We will keep looking for clues and pass them on to you when we see them.

Random musings:

Nasty blowup at

Electronics for Imaging

(EFII) - Get Report

(the company warned of an earnings shortfall after the close today). Ouch!

James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Juniper and Texas Instruments. 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: Albertson's Reports Earnings, Philip Morris Pulls Ads After the Close


Tara Murphy

Staff Reporter

6/5/00 7:58 PM ET



posted first-quarter earnings of 53 cents a share, in line with both the 16-analyst estimate and the year-ago report.

The supermarket chain operator said it expects to report a 62-cent profit in the second quarter, which would meet the 14-analyst forecast. For the third-quarter, the company is expecting a 66-cent profit that would beat 14-analyst outlook of 63 cents a share.

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

Electronics for Imaging

(EFII) - Get Report

warned investors that it would post second-quarter earnings between 38 cents to 40 cents a share, falling below the six-analyst estimate of a 51-cent profit.

The software maker said it also set a $100 million stock buyback program.

Offerings and stock actions

SPX Corp


said it filed with the

Securities and Exchange Commission

for an IPO of its

Inrange Technologies


Wavecom SA


said it would move ahead with its 1,446,667-ADR secondary offering, after postponing earlier plans in April.


Standard & Poor's






(SBUX) - Get Report

will replace

Times Mirror



Shared Medical Systems


in the

S&P 500 Index.

Tobacco giant

Philip Morris

(MO) - Get Report

said they would discontinue advertising in publications where a minimum of 15% of the readers are under 18. The decision will affect 40 to 50 publications -- including

Sports Illustrated


Rolling Stone

-- the company said.


(TDY) - Get Report

said its CFO Stefan Riesenfeld, has stepped down from his role to pursue another venture. The engineering products maker said it tapped its Corporate Controller, Dale Schnittjer to serve as the interim CFO until a successor is found.

Bond Focus: Treasury Yields Dip to One-Month Lows as Corporate Calendar Swells


Elizabeth Roy Stanton

Senior Writer

6/5/00 5:34 PM ET

The Treasury market rallied on light volume today in spite of a decent showing by stocks and the specter of competition from the corporate bond market, where a heavy new-issue calendar is building. The rally dropped yields to their lowest levels in more than a month.

There were no major economic releases, but an anti-inflationary drop in the price of oil appeared to give bond prices a bit of a boost, said Bill Hornbarger, Treasury market strategist at

A.G. Edwards

in St. Louis.

The benchmark 10-year Treasury note rose 12/32 to 102 24/32, dropping its yield 5.3 basis points to 6.116%, the lowest since April 24. Shorter-maturity yields fell somewhat less, but also to new one-month lows.

The 30-year Treasury bond gained 12/32 to 104 18/32, lowering its yield 2.8 basis points to 5.921%, the lowest since April 26. And at the

Chicago Board of Trade

, the September

Treasury futures contract rose 11/32 to 96 31/32.

"We have to be impressed that the market was able to bounce off its lows in spite of firming stocks and a supply calendar that's building substantially," said Ken Logan, managing analyst at


in Boston.

Rising stock prices can discourage investment in bonds both as an alternative investment and because they are seen as potentially inflationary. Meanwhile, a heavy corporate new-issue calendar can hurt Treasury prices by competing with them for investor cash.

But while today's price action may indicate that Treasury investors are bullish, Logan doubts they can make highs exceeding

Friday's intraday highs before the release of the next

employment report

. "Treasuries have discounted a lot of positive news going forward," he said. Investors -- as opposed to traders -- see more value at the moment in higher-yielding corporate and agency bonds, Logan said.

The corporate new-issue calendar, including investment-grade corporate issues only, looks set to total about $12 billion this week, at which size it would be among the heaviest weeks of the year, according to John Atkins, market analyst at


. (The heaviest week, the first full week of March, saw $15 billion of new corporate issuance.)

This week's biggest issuers include

Ford Motor Credit

(a unit of


(F) - Get Report

), slated to sell $4 billion;

Morgan Stanley Dean Witter


with $2 billion; and possibly

International Paper

(IP) - Get Report

with $3 billion.

Corporate issuers are flocking to market because corporate bond yields have dropped sharply relative to Treasury yields in the last week, as investors have reassessed the likelihood that the

Fed will continue hiking interest rates in the months ahead, Atkins said. With recent economic data indicating that economic growth is slowing, "people seem to be unwinding the risk premiums they'd built in," he said.

But if investors have regained their appetite for corporate bonds, Atkins noted that they strongly favor large, liquid issues, as they have all year. Corporate issuance is running well behind last year's pace, but this year's average deal size is over $700 million, compared to $554 million last year.

Economic Indicators

In the only economic news of the day, the

Purchasing Managers' Non-Manufacturing Index

fell to 61.5 in May from 65.0 in April.

Currency and Commodities

The dollar fell against the yen and the euro. It lately was worth 107.32 yen, up from 108.05. The euro was worth $0.9481, up from $0.9463. For more on currencies, please take a look at


Currencies column.

Crude oil for July delivery at the

New York Mercantile Exchange

fell to $29.70 a barrel from $30.35.


Bridge Commodity Research Bureau Index

fell to 225.35 from 225.52.

Gold for August delivery at the


rose to $288.20 an ounce, a one-month high, from $284.20.

TO VIEW TSC'S ECONOMIC DATABANK, SEE: http://www.thestreet.com/markets/databank/950751.html

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