Publish date:

daily06-10-99's DAILY BULLETIN

June 11, 1999

Worden Brothers

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Market Data as of Close, 6/10/99:

o Dow Jones Industrial Average: 10,621.27 down 69.02, -0.65%

o Nasdaq Composite Index: 2,484.62 down 34.73, -1.38%

o S&P 500: 1,302.82 down 15.82, -1.20%

o TSC Internet: 570.08 down 4.95, -0.86%

o Russell 2000: 442.27 down 2.92, -0.66%

o 30-Year Treasury: 88 29/32, down 14/32, yield 6.049%

Companies in Today's Bulletin:

Liberty Financial (L:NYSE)

Time Warner (TWX:NYSE)

National Semiconductor (NSM:NYSE)

Cleveland-Cliffs (CLF:NYSE)

CMGI (CMGI:Nasdaq)

In Today's Bulletin:

o Mutual Funds: Stein Roe Calls Off Fund Merger
o Wrong! Dispatches from the Front: Pick Your Price
o Evening Update: National Semi's Fourth-Quarter Loss Meets Expectations
o Bond Focus: Bonds Set Adrift After Surprising Rise in Japanese GDP

Also on

Wing Tips: TWA: On the Brink

Unless all parties can agree to agree on a new employee contract, bankruptcy could be in store for TWA.

Retail: Rate Markup Could Roil Retail Stocks

The sector finds itself in the middle of an interest-rate tug-of-war between the bulls and the bears.

Tech Savvy: SuperComm '99: Trouble Brewing in ADSL Territory

The ambiguity surrounding the telecommunications technology is only growing.

Silicon Babylon: Old Money

For the geriatric set looking to invest, The Money Show pitches stakes in oil fields and big-promising penny stocks.

Mutual Funds: Stein Roe Calls Off Fund Merger


Joe Bousquin

Staff Reporter

The problem with establishing a history is that it sticks with you. That's what executives at

Stein Roe Mutual Funds

are learning about their


Capital Opportunities fund.

Just a month after announcing it would merge the lagging Capital Opportunities out of existence by folding it into its new

Growth Investor

fund, Stein Roe canceled the move on Thursday.

In a press release, Stein Roe said it determined that Capital Opportunities, with $600 million in assets, would wind up as the "surviving entity" in a merger.

Translation: The

Securities and Exchange Commission

would have none of it.

"Our research suggested that this transaction was reasonable, but the SEC took a different view," says spokeswoman Marilyn Morrison. "We certainly respect that view."

Growth Investor is a grownup-focused version of the $1 billion


Young Investor fund, which is aimed at encouraging children to start investing early. That fund has become one of Stein Roe's most popular offerings.

The SEC routinely reviews proposed mergers of mutual funds to make sure the surviving fund accurately reflects the size and track record of the combined funds, says Edward Nelling, a professor at

Georgia Tech University's

DuPree College of Management. He recently co-authored a report on mutual fund mergers, and says similar mergers have been blocked in the past.

"Usually the bigger fund would be the survivor," Nelling says.

By folding Capital Opportunity into Growth Investor, Nelling says Stein Roe may have been trying to sweep Capital Opportunity's track record -- it had a negative 1.6% return in 1998 -- under the rug.

"Ostensibly they created this Growth Investor fund to give adults the opportunity to have a more mature-sounding type of fund," Nelling says. "But a possible side benefit of that would be to use it as an opportunity to get rid of any of the funds that were laggards and erase their performance history."

Morrison denies that.

"We would really like the public to understand that this was not about bearing a track record, but about giving our shareholders access to a proven and compatible investment strategy," Morrison says. "If our sole concern was bearing a track record, we would have opted to merge the fund into another fund that wouldn't raise the same sorts of concerns."

But lately there have been other concerns about Stein Roe, a unit of

Liberty Financial

(L) - Get Loews Corporation (L) Report


Last month, Stein Roe

announced a restructuring that included the departure of Capital Opportunities manager Gloria Santella and


fund manager Gerry Sandel. That's when the company proposed the Capital Opportunities-Growth Investor merger, to be managed by Erick Gustafson and David Brady.

Canceling the merger puts even more pressure on Gustafson and

Brady, arguably Stein Roe's last two remaining stars. Gustafson will be managing $2.3 billion in assets and Brady $1.5 billion. Their duties now include co-managing Capital Opportunities as a separate, aggressive growth portfolio. They also co-manage Young Investor and Growth Investor. On top of that, Brady manages


Large Company Focus and Gustafson manages


Growth Stock.

Brady didn't seem phased by his new responsibities Thursday afternoon.

"There's no question about it -- it's a lot more work. I'm spending a lot more time at the office," said Brady, returning a call by cell phone from a golf course.

Thursday's events, and other shakeups in the past, make at least one financial planner wary of using Stein Roe's funds.

"Stein Roe is one that I've traditionally avoided because of the manager turnover," says Lou Stanasolovich of

Legend Financial Advisors

in Pittsburgh. He says the latest problems at the firm only highlight difficulties that mid-sized, non-boutique companies have in competing in the mutual fund industry.

"I don't think these mid-sized firms have done a good job adequately addressing the compensation of their managers in the form of an equity stake. And I think that's why there's a lot of turnover," Stanasolovich says.

Manager turnover is a fact of life in the industry, she added.

"We operate in a competitive industry and ... sometimes that means people are going to leave on their own to pursue other opportunities, and that sometimes we'll review fund manager performance to make sure that its in line with the expectations of our shareholders," Morrison says. "Over time, that might create some change for the organization."

Wrong! Dispatches from the Front: Pick Your Price


James J. Cramer

On days like today, with the sell programs burying you faster than the tide buries a kid's sand castle, I like to step off the desk and pick price levels where I would buy merchandise no matter what.

Let me give you a real-life example. I love

Time Warner


. I think these guys are doing many things right. The stock has been funky ever since that Portland ruling that hurt all of the cable stocks.

In our morning meeting I told

Jeff Berkowitz

that this stock, which was at $67 yesterday, intrigued me below $65. In other words, if I could buy it at $64 and change, I wanted to be there.

Sure enough, at 1:10 there it was, down about three, looking absolutely awful. You would think this stock was about to announce a shortfall. Or worse! No way did I want to stick a bid in. But we had agreed, in a benign, off-the-desk, analytic moment that $64 and change made sense to start a position. So I stuck a $64.675 bid in and got hit. On 15,000 shares.

Lo and behold, the sell program stopped, and the stock bounced to back above $65. I am not naive enough to call that a "good trade." But I love buying merchandise at my price, not someone else's. That gives me conviction, in a tape that is totally conviction-less.

Will this work for you? I don't know. I don't know your temperament. But I have done a massive amount of empirical research on these kinds of buys done with price objectives off the desk and they are almost always the springboards to successful trades.


James J. Cramer is manager of a hedge fund and co-founder of At time of publication, his fund was long Time Warner. 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: National Semi's Fourth-Quarter Loss Meets Expectations


Heather Moore

Staff Reporter

National Semiconductor


reported a fourth-quarter operating loss of 24 cents a share, on target with the 19-analyst

First Call

forecast and narrower than the year-ago loss of 42 cents. The company said it will exit the PC processor business during the first quarter and that it expects to pull in a profit in its second quarter. Analysts see earnings of a nickel for the second quarter. National Semi also said it sees first-quarter revenue growing 2% to 4%.

In other postclose news (earnings estimates from First Call; earnings reported on a diluted basis unless otherwise specified):

Earnings/revenue reports and previews


(CLF) - Get Cleveland-Cliffs Inc Report

warned its second-quarter and full-year 1999 earnings will fall below estimates due, in large part, to lower iron ore sales and production volumes. The three-analyst outlook called for quarter earnings of $1.22, vs. the year-ago $1.48, and annual earnings of $3.80, vs. the year-ago $4.75.



shares slipped to 97 7/8 in after-hours trading from a regular-session close of 101 1/2 after the Internet venture firm posted a third-quarter operating loss of 29 cents a share and a net loss of 30 cents. The seven-analyst forecast called for a quarter loss of 13 cents vs. earnings of 9 cents a year ago.



said its second-quarter earnings would meet or beat the 14-analyst estimate for 7 cents a share thanks to strong revenue growth. The e-commerce software provider made a dime in the year-ago quarter.

TCA Cable


TheStreet Recommends

recorded second-quarter earnings of 24 cents a share, 1 cent higher than the eight-analyst prediction and 4 cents higher than the year-ago figure.


(VFC) - Get V.F. Corporation Report

said it sees second-quarter earnings, excluding charges, coming in flat with the year-ago second quarter, when the company made 69 cents a share. The six-analyst estimate called for 75 cents. The maker of




jeans blamed a "difficult" European market and shipping difficulties.

Mergers, acquisitions and joint ventures


(AIT) - Get Applied Industrial Technologies, Inc. Report

said it asked Illinois regulators to issue a ruling on the company's planned merger with

SBC Communications


by late July instead of June 24, as originally scheduled.

Saying it's not for sale,

Columbia Energy

(CG) - Get Carlyle Group L.P. Report



(NI) - Get NiSource Inc (NI) Report

$5.7 billion takeover offer.


(F) - Get Ford Motor Company Report

agreed to acquire

Automobile Protection


for $13 a share, or $180 million.

Offerings and stock actions

MGM Grand


approved a buyback of up to 6 million shares at 50 a share.

Credit Suisse First Boston


(PHCM:Nasdaq) 4 million-share IPO above-range at $16 a share. The price range for the offering was raised to $14 to $15 from $10 to $12., formerly known as Unwired Planet, provides software for delivery of Internet services over wireless phones.



announced a 3-for-2 stock split.

TriQuint Semiconductor


set a 3-for-2 stock split.


Morgan Stanley Dean Witter's


chief legal officer, Christine Edwards, has resigned over the Christian Curry-Charles Luethke matter. Morgan Stanley said a company-sponsored investigation found that no laws were broken in its controversial payment to Luethke, an informant who assisted in the arrest of Curry, a former Morgan Stanley employee. (That payment resulted in an investigation of the firm by the Manhattan DA's office and in a decision by prosecutors to drop charges against the ex-employee.)

In a release, CEO Philip Purcell and President John Mack said Morgan Stanley management "fully supports" Edwards and asked her to reconsider her decision. "While the outside counsel review conducted by

Paul, Weiss

, found no problem with her conduct, Chris expressed the view that this matter 'happened on my watch.'"

A day after announcing a probe of the planned merger between





(XON) - Get Intrexon Corporation Report

, the

European Commission

said it opened a four-month investigation into

BP Amoco's


proposed acquisition of

Atlantic Richfield

(ARC) - Get ARC Document Solutions, Inc. Report



, a joint venture between

Lockheed Martin

(LMT) - Get Lockheed Martin Corporation (LMT) Report


Northrop Grumman

(NOC) - Get Northrop Grumman Corporation Report

, received a five-year contract worth up to $1.2 billion to build missiles and related equipment for the



Bond Focus: Bonds Set Adrift After Surprising Rise in Japanese GDP


David A. Gaffen

Staff Reporter

A surprising Japanese


report might be the first reason why bonds sold off today, but really, it's just a carbuncle on the butt that is the Treasury market right now. Today wasn't a debacle because prices are down just a handful of ticks, but that's because buyers and sellers alike are hunkering down, waiting for the expected

Federal Reserve

rate hike.

"We're waiting on confirming information that the Fed is going to raise rates," said Barry Evans, fixed-income strategist at

John Hancock Funds

. "Demand is pretty washed out; the strong GDP out of Japan takes away another layer of the deflation story."

The sense of inevitability over a Fed hike has been replaced with a sense of futility. With a rate increase expected at the end of the month, investors have no reason to purchase bonds now. The federal funds short-term lending target is currently 4.75%.

Of late, the 30-year Treasury bond was down 15/32 to 88 29/32, bouncing off the midday lows. The yield rose 3 basis points to 6.06%, the highest closing yield since April 29, 1998.

It's not surprising, then, that volume is extremely low. While stock markets toy with the idea of longer trading hours, activity in the bond market argues for a noon close, perhaps earlier. Volume today was down 38% when compared to the average second-quarter Thursday, according to tracker


. The busiest chunk of time was overnight, when volume was down just 7% when compared with the average. Between noon and 3 p.m. EDT, volume was down 46%.

What got the market going this morning was the unexpected 1.9% rise in GDP in the January-to-March quarter in Japan, the first positive GDP report in that country since the July-to-September period in 1997. In addition, England and China both cut interest rates, and Asian and European stock markets turned in strong performances. "Today was a strong worldwide growth day," said Ed Munshower, portfolio manager at



But this news hurt demand for U.S. assets, including corporate paper. Over $10 billion in new bonds were sold into the market during the last two days, and those deals have not performed well due to the threat of higher interest rates.

Bank of America

yesterday sold $1.5 billion in five-year notes at a yield spread of 90 basis points over the comparable Treasury -- today it was trading between 92 and 94 basis points, according to investors.

Dealers remain reluctant to take on added credit risk when the trend is the class bully. Corporate issuers, investors say, are exacerbating this problem: Mindful that rates will rise if the Fed hikes short-term lending rates, they're glutting the market with deals before the end of the month.


(F) - Get Ford Motor Company Report

, for example, is expected to sell between $6 billion and $9 billion in debt before the end of the month.

"What you've got here is a vicious cycle going on," said Mitch Stapley, chief fixed-income officer at

Kent Funds

. "Basically, every link in the chain is saying, 'It is not in my interest to be trading right now or to be actively buying.' Issuers are trying to push stuff in, and the buy side says, 'Man, I'm getting hosed on this stuff.'"

In time, investors say Treasury and corporate bond yields could look attractive. Some, such as Carl Ericson, director of taxable fixed income at

Liberty Funds

, said: "Inflation is going to creep up -- not spring up. If we do back up another 20 basis points, we may be overdiscounting a turn in the economy that we've waiting for. The length and anticipation might be bigger than the actual event."

A clearer picture may emerge tomorrow when the May

Producer Price Index

and May

retail sales

reports are released. The PPI is expected to rise 0.2%, according to


, but just 0.1% when excluding volatile food and energy prices. Last month the market breathed a sigh of relief when the core PPI only rose 0.1%, hoping that figure would be mirrored in the

Consumer Price Index

. It didn't -- the core CPI rose 0.4% in April, and the inflation worries began.

Retail sales are expected to rise 0.8% in May, while excluding automobiles, sales are called up 0.5%.

Oh, and the day wouldn't be complete without a Fed governor to scare people. Today's was

Roger Ferguson

, who

said in New Jersey that "under the circumstances, we must be concerned that, with the economy operating at such a high level of labor utilization and growth robust, we might be in some jeopardy of setting the stage for an upturn in inflation."

"There aren't a lot of rosy pictures out there, which is probably a sign that it's time to buy," said Munshower.

Street Sightings

James J. Cramer will be appearing on CNBC's "Squawk Box" Friday, June 11, beginning at 7 a.m. EDT.

Check here for updates on Cramer's future Squawk appearances.


Copyright 1999,