Publish date:

daily06-14-99's DAILY BULLETIN

June 15, 1999


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Market Data as of Close, 6/14/99:

o Dow Jones Industrial Average: 10,563.33 up 72.82, 0.69%

o Nasdaq Composite Index: 2,398.31 down 49.57, -2.03%

o S&P 500: 1,294.00 up 0.36, 0.03%

o TSC Internet: 502.13 down 48.11, -8.74%

o Russell 2000: 431.53 down 6.48, -1.48%

o 30-Year Treasury: 88 14/32, up 25/32, yield 6.102%

Companies in Today's Bulletin:

Intel (INTC:Nasdaq)

Level One Communications (LEVL:Nasdaq)

VLSI Technology (VLSI:Nasdaq)

SEEQ Technology (SEEQ:NYSE)


HealthSouth (HRC:NYSE)

In Today's Bulletin:

o Mutual Funds: Diversification Is Not the Cushion Munder NetNet Had Hoped It Would Be
o Wrong! Rear Echelon Revelations: Cold, Bloodless and All-Powerful
o Evening Update: HealthSouth To Split Into Two Publicly Traded Companies
o Bond Focus: Bonds Begin Forbidding Week With a Rally

Also on

Herb on TheStreet: *Extra* Hidden Assets at S3 and Alliance Semi Finally Get Valued

Investors may be surprised at what they see.

Europe: A Split at Philips Could Bring It All Together

The Dutch electronics firm denies it will split up, but the rumors remain and analysts say it makes sense.

The Invisible Mouth: The Unkind Price Picture

Why the Fed's going to start tightening -- and keep at it.

Tech Savvy: Carnac Rides Again: Answers to the Big Qwest Questions

The market has already voted on this deal, and the response is not good.

Mutual Funds: Diversification Is Not the Cushion Munder NetNet Had Hoped It Would Be


Joe Bousquin

Staff Reporter

In the rough-and-tumble world of Internet mutual funds,

(MNNAX) - Get Victory Munder Multi-Cap A Report

Munder NetNet was supposed to be a safer bet than most.

Michigan-based Munder has aggressively marketed the $2.3 billion NetNet as a "diversified" Internet fund, one that invests in bricks-and-mortar businesses that benefit from the Internet's rise as well as the pure-play Net companies.

But that conservative orientation has not paid off recently for investors in the three-year-old grandfather of Internet funds. While NetNet enjoyed only half the stratospheric returns of the purer-play

(WWWFX) - Get Kinetics Internet Fund NL Report

Internet fund in 1998, it lost as much or more as the Internet fund during down periods in the market.

For instance, from these funds' April 13 highs through their most recent lows on June 3, the Internet fund was down 26%; NetNet lost an almost identical 26.1%.

Both funds fared better than the pure-play


Monument Internet fund, which lost 33.5%. But


WWW Internet fund, which also touts itself as a broadly diversified Internet fund, lost only 19.2%.

When you hold the returns of NetNet and the Internet fund up to the light during other down periods, the trend becomes more pronounced. During 1998's third quarter, when the market sunk badly, the Internet fund outperformed NetNet. It lost 9.8% that quarter while NetNet gave up 14.1%. The average science and technology fund, by comparison, lost 11% during the period, according to



Moreover, from the beginning of 1998's summer selloff on July 17 to its bottom on Oct. 8, the two funds posted nearly identical losses of 39.6% for Internet and 37.2% for NetNet.

NetNet's portfolio includes Internet-enabled retailers like


(GPS) - Get Gap, Inc. (GPS) Report


Office Depot


as well as some companies with less-obvious Net connections, such as




Racing Champions


, a maker of race-car collectibles. Why didn't this diversification provide a cushion during these down-market periods?

Brian Salerno, co-manager of the fund, says it did. He suggests that the Internet fund, managed by Ryan Jacob, didn't fall further because it has become less of a pure-play Internet investment as it has been forced to find new companies in which to invest its cash.

"They've moved toward what we're doing," Salerno says. "We haven't changed a bit." He noticed the similarity in returns himself and even had to explain them to his own marketing department, which had its own questions on the subject.

But the Internet fund's Jacob rejects any suggestion his fund is less than pure.

"You know, what's an Internet stock?" Jacob queries. "If you start getting into that definition, I think it's a little deceptive. Within the Internet sector, there are a variety of sub-sectors we invest in."

The Internet fund did start buying more telecommunications and general technology stocks in

February. And



, a catalog retailer of teen clothing that has embraced the Net, is among his top 25 holdings.

But it did some well-timed selling too. Internet fund reduced its exposure to

(AMZN) - Get, Inc. Report


America Online


as both stocks tanked this spring.

AOL, which dropped 41.1% from April 13 to June 3, and, which fell 33.6% during the same period, are no longer among Internet fund's top 25 holdings (though they're still in its portfolio). In contrast, AOL was in NetNet's top 10 on March 31, according to


. Both stocks are still in NetNet's portfolio, according to its Web site.

Jacob crows about the fact that his highly concentrated fund -- he holds 30 to 35 stocks compared with NetNet's 90 -- fared as well as NetNet in the downturn.

"I hate to pat ourselves on the back, but it makes us look good," Jacob says.

On the up side, the Internet fund has returned a remarkable 92.8% this year, more than double NetNet's 42% return. During 1998, it returned 196.1%, while NetNet returned 97.9%.

Salerno says the gap in returns will begin to narrow as the Internet fund broadens out. He suggests that while Internet fund was a truly pure Internet play

last year when it had as little as $8 million in assets, it now can't put its $700 million to work solely in the Internet space.

"It's like for the first lap he was running 100 miles an hour and we were running 50," Salerno says. "So he got a lead. But in the second lap, we're both running 50."

But Jacob says the onslaught of new Internet stocks this year has made it easier to put his cash to work.

Internet funds, in general, started broadening out late last year, says Reuben G. Brewer, manager of mutual fund research at the

Value Line Mutual Fund Survey


"They were starting to look a lot more like technology funds with a bias toward the Internet," he says.

In the end, though, he says returns merely reflect the talent of a manager. And there, he tips his hat to Jacob.

"They made better bets," he says of the Internet fund. "And you could also say that the diversification aspect of the Munder NetNet didn't allow them to concentrate on the upside as much."

That's something NetNet investors already know and Internet fund investors can be smug about.

Wrong! Rear Echelon Revelations: Cold, Bloodless and All-Powerful


TheStreet Recommends

James J. Cramer


Stephen King


Thomas Harris

has ever seen something as horrible as a forced sell of a Net stock. In fact, I have this vision of King and Harris getting color for the villains of their next novels by hanging over the shoulders of these clerks as they issued margin call after margin call to brokers this afternoon.

Cold, bloodless and all-powerful.

Yes, the losses on the Internet Sector

index only

gained steam as brokers cashiered their clients' stocks to raise cash to meet the calls. The selling goes unabated until the calls are met, and the clients themselves are helpless to stop them.

Making things worse of course, was the news that



had less visibility in its business than when it did its deal. This was not the day to announce that things aren't what they seemed a few short weeks ago.

In the meantime, the cyclicals, heavily underowned by individuals, mocked the losses of those riding the Internet crash -- and down 50% does seem like a bit of a crash to me -- by moving up all day. The DOT closes a point off its low, the

Morgan Stanley Cyclical Index

closes a point off its high. Soon we will regard the cyclicals as safe because they WON'T BE SOLD BY HANNIBAL THE MARGIN CLERK!

Imagine that.

Random musings:

If you can handle it, I will be doing a


chat at 5 p.m. EDT.


James J. Cramer is manager of a hedge fund and co-founder of At time of publication, his fund was long Yahoo!. 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: HealthSouth To Split Into Two Publicly Traded Companies


Heather Moore

Staff Reporter


(HRC) - Get Hill-Rom Holdings, Inc. Report

announced plans to split its operations into two separate publicly traded companies -- one for inpatients and patients needing hospitalization (to be called

HealthSouth Hospital

), and the other for the company's larger outpatient group.

In other postclose news (earnings estimates from

First Call

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

Earnings/revenue reports and previews


(AVA) - Get Avista Corporation Report

warned it sees second-quarter earnings falling below the three-analyst prediction for 33 cents a share. The company, which made 27 cents in the year-ago period, said its energy marketing and trading unit experienced losses during the first two months of the second quarter.



said it will record a wider-than-anticipated second-quarter loss. The 10-analyst estimate called for a repeat of the year-ago earnings of a penny a share. Maxtor blamed the warning on aggressive pricing of desktop hard disk drives.

Rexall Sundown


reported third-quarter earnings of 28 cents a share, missing the six-analyst view by 3 cents but topping the year-ago figure by 2 cents.

Rite Aid

(RAD) - Get Rite Aid Corporation Report

reported first-quarter earnings of 31 cents a share, including relocation charges. The 14-analyst estimate called for operating earnings of 32 cents vs. the year-earlier 30 cents.



posted third-quarter earnings of 29 cents a share, in line with the 21-analyst forecast and above the year-ago 20 cents.

Mergers, acquisitions and joint ventures

AFC Cable Systems


said its planned merger with

Thomas & Betts


won't be completed in the first half of 1999 as expected. AFC Cable cited

Securities and Exchange Commission

concerns about the availability of the pooling of interests accounting treatment.

Metamor Worldwide


agreed to sell its software unit for $96 million to



Offerings and stock actions

The price range for


(CARI:Nasdaq) IPO was lifted to $16 to $18 a share from $14 to $16 a share. The company, which develops and provides Internet-based healthcare e-commerce and links doctors with suppliers, patients and payers, plans to price the 5.65 million-share offering tomorrow after the close.

Bond Focus: Bonds Begin Forbidding Week With a Rally


David A. Gaffen

Staff Reporter

It was bound to happen sooner or later -- a positive day for the bond market, that is.

For want of a fundamental reason to trade, bond yields ended lower today for the first time in 10 sessions. Analysts attributed the strength to short-covering after Friday's surprisingly large rout. In addition, the dollar rose sharply against the yen today, buoyed by the

Bank of Japan's

intervention in the currency markets.

Of late, the 30-year Treasury bond was 24/32 higher to 88 14/32, moving 6 basis points lower to yield 6.10%. The entire Treasury curve rose, including the two-year note, which rose 4/32 to yield 5.65%.

Before rejoicing, bond investors may want to keep a little perspective. Between May 25 and yesterday, the yield on the 30-year Treasury bond rose 37 basis points -- previously it took the bond market three months to accomplish that.

"Almost anything you write would be overstating" today's gains, said John Canavan, Treasury market analyst at

Stone & McCarthy

. "We've lost so much ground recently that at this point, in the absence of anything else today to drive prices lower, we were able to see some short-covering."



said volume was down 20% when compared to the average second-quarter Monday, so it's obvious that the back of the rally bandwagon is mostly empty. A total of $39.5 billion in securities changed hands as of 3 p.m. EDT, according to GovPX.

Michael Krauss, chief technical strategist at

Chase Securities

, said the market is simply taking a breather before getting ready to plunge back underwater. There are two red-letter days this week: Wednesday, when the May

Consumer Price Index

, a key inflation indicator, is released, and Thursday, when



Alan Greenspan

addresses the

Joint Economic Committee

. The CPI is expected to rise 0.2%, and the core CPI, which excludes food and energy prices, is also expected to rise 0.2%. The bond market's perception is that unless the core CPI comes in at 0.1% or lower -- and even if it does -- the Federal Reserve will raise interest rates at its June 29-30 meeting.

The selloff is built on the perception that the Fed will indeed increase the current 4.75% short-term lending target, a view shared by most of the financial community. However, the bond market's become even more dour during the last two weeks -- two different analysts interviewed believe it is pricing in two rate increases, not just one.

"It's discounting so much unfriendly news that it becomes vulnerable to a friendly surprise," said Krauss, who believes the market is oversold. "The momentum will hopefully become more two-sided, and that would be a welcome event."

The dollar's action hasn't been important to the Treasury market during the last two months as investors have turned their attention inward to U.S. economic data, but it provided a modicum of support today, more because there was little else to pay attention to.

During the weekend, the Bank of Japan bought U.S. dollars, because officials there have been worried about the recent strength in the yen. (Strength in the yen undermines that country's economic recovery, because it makes its exports more expensive.)

Dollar/yen rose 2.5 to 120.56 today.



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