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daily06-17-99's DAILY BULLETIN

June 18, 1999


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Market Data as of Close, 6/17/99:

o Dow Jones Industrial Average: 10,841.63 up 56.68, 0.53%

o Nasdaq Composite Index: 2,544.15 up 26.32, 1.05%

o S&P 500: 1,339.90 up 9.49, 0.71%

o TSC Internet: 555.73 up 7.09, 1.29%

o Russell 2000: 443.38 up 2.18, 0.49%

o 30-Year Treasury: 90 04/32, up 1 10/32, yield 5.951%

Companies in Today's Bulletin:

Compaq (CPQ:NYSE)


Gillette (G:NYSE)

Adobe Systems (ADBE:Nasdaq)

In Today's Bulletin:

o Hardware & PCs: Captainless Compaq Still in Rough Waters, and Shareholders Are Seasick
o Wrong! Rear Echelon Revelations: All in All, a Solid Session
o Evening Update: Gillette Issues Second-Quarter Warning; Adobe Beats Estimates
o Bond Focus: Yields Plummet as Greenspan Sees No Emergency

Also on

Silicon Babylon: How the Fourth Estate Fumbled the IPO

Mainstream media miss the point with this and all other public offerings.

Herb on TheStreet: *Extra* Graveyard Gossip: The Stewart Plot (Get It?!) Thickens

Stewart responds, as does a bullish analyst.

Brokerages/Wall Street: Deutsche Bank Finding Money Can't Buy BT Crew's Love

Ex-Bankers Trust workers are in much demand, so Wall Streeters expect many to find new jobs.

Mutual Funds: Internet Fund Investors Paid Premium Price For Their Top-Ranked Returns: Plus, More on Munder NetNet

The fund's annual expense ratio jumped by more than 50% last year, despite the rapid growth in assets.

Hardware & PCs: Captainless Compaq Still in Rough Waters, and Shareholders Are Seasick


Eric Moskowitz

Senior Writer



, the world's largest computer maker, is unlikely to earn a cent in

profit this year. Caught between excess inventory and continued pressure from direct sellers, what Compaq desperately needs is a chief executive to pull the company out of its current malaise.

For the second consecutive quarter, the Houston-based PC maker warned Wall Street that it would miss analysts' earnings expectations by a wide margin. Compaq forecast a second-quarter loss of up to 15 cents a share; consensus expectations had Compaq earning 20 cents a share. Despite the bad news, the stock edged 1/4 higher to 22 1/2 at the close Thursday.

Perhaps investors are willing to cede chairman and acting CEO Ben Rosen some breathing room as he cleans up the mess left behind by previous management.

On the other hand, Rosen's substantial reorganization plan announced Thursday may just be a repeat of last year's mishaps. Then, faced with the threat of sub-$1,000 PCs, Compaq flooded the retail market and cut prices to clear out 11 weeks of inventory. This escalated a price war as PC makers fought to maintain market share.


(IBM) - Get International Business Machines (IBM) Report

alone lost $1 billion last year playing this game.

This year Compaq's inventory channel is around 5 1/2 weeks, estimates

International Data

analyst Amir Ahari, not as bad as last year's but still well above the four-week level the company claims.

"A lot of the crap that happened during Compaq CFO Earl Mason's time is filtering through to the customer, and those customers are deciding to side with Dell and IBM," says International Data's Amir Ahari.

Compaq's other problem stems from its failure in the direct sales model. Compaq is caught in a bind: Although the company announced plans Thursday to ramp up its direct sales to 25% of total revenue by the end of the year, this will hurt its relationship with its resellers.

The direct sellers,


(DELL) - Get Dell Technologies Inc Class C Report




, have been gaining from Compaq's missteps. International Data reported that Dell had 20% of the small-business market in the first quarter, up from around 15% in the fourth quarter of last year.

Compaq Needs an Executioner

Rosen's recent radical moves seem to be part of plan to undo much of the vision created by ex-CEO Eckhard Pfeiffer. Pfeiffer wanted to grow through acquisitions. He snapped up two struggling companies,



Digital Equipment

, to move beyond the PC. As the acquisitions failed to generate momentum, CFO Earl Mason hid the company's poor operational performance through an accounting maneuver called contra-revenue -- payments to resellers that are recorded against gross revenue. (


wrote about Compaq's contra-revenue

last month.)

"A lot of the crap that happened during Mason's time is filtering through to the customer, and those customers are deciding to side with Dell and IBM," says Ahari, who talked recently with a number of long-time Compaq customers not pleased with Compaq's muddled message. "I could see the froth at the sides of

these customer's mouths."

How can Compaq right itself? Start at the top. Analysts say it should hire visionaries as division heads, but not for the top post. "Compaq needs to fill its CEO role with an executioner like Michael Dell, someone who can present the Street with consistent financial results," says

US Bancorp Piper Jaffray's

Ashok Kumar.

Wrong! Rear Echelon Revelations: All in All, a Solid Session


James J. Cramer

These expirations work in mysterious ways. I saw good buying in a ton of the indices for a one-day move into tomorrow, which is pretty gutsy. But I also saw that when we were up 80 on the


, real sellers came in and blitzed it back to the up 50 level.

I am judging this stuff by flow. In other words, brokers all day are pitching me merchandise. It's "50


(IBM) - Get International Business Machines (IBM) Report

to buy. Or 30


(PFE) - Get Pfizer Inc. Report

to go."

When the market got up 70-80 Dow points, all of the merchandise turned negative. It was as if the programs had brought the stock market up to where there was real supply, where real sellers wanted out.

That's pretty healthy given the run we have had. If the market were on shakier ground, sellers would have come in from the get-go. All in all a solid session. A spare to yesterday's strike.

Random musings

: Must-reads on site today included an excellent piece explaining IPOs by

Cory Johnson and a great article about bottom dwelling mutual funds by

Brenda Buttner. Despite what I hear,


held up rather well considering the decline in some prominent semi names.


James J. Cramer is manager of a hedge fund and co-founder of At time of publication, his fund was long IBM and Pfizer. 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: Gillette Issues Second-Quarter Warning; Adobe Beats Estimates


Heather Moore

Staff Reporter


(G) - Get Genpact Limited Report

said it expects to report about a 20% decrease in second-quarter earnings compared with a year ago. The 14-analyst

First Call

estimate called for quarter earnings of 29 cents a share vs. the year-ago 33 cents. The internationally exposed Gillette, which said it sees quarter sales increasing by a low-single-digit percentage, blamed the warning on disappointing sales of its


, stationery and toiletries products.

Elsewhere in earnings,

Adobe Systems

(ADBE) - Get Adobe Inc. Report

posted second-quarter earnings of 70 cents a share, beating the 11-analyst outlook by a nickel and moving ahead of the year-ago 41 cents. Shares of the company hopped up 2 1/8 to 76 in after-hours trading.

Inflow into U.S. equity funds for the week ended yesterday totaled $2.6 billion, with 58% going into growth funds, according to

TheStreet Recommends

AMG Data Services

. International equity funds reported inflow of $495 million. Among other categories, taxable bond funds posted outflow of $443 million, municipal bond funds posted outflow of $247 million and money market funds posted outflow of $10.95 billion.

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

Earnings/revenue reports and previews



said it sees a first-quarter loss of $13 million to $15 million, including a restructuring charge and a pretax goodwill writedown. The company, which did not provide per-share estimates, said it's experiencing a downturn in demand for its services which it believes is related to decreased investment in information technology infrastructures while companies analyze their Y2K compliance status.

J.M. Smucker


posted fourth-quarter earnings of 34 cents a share, in line with the two-analyst view and above the year-ago 33 cents.

MSC Industrial Direct

(MSM) - Get MSC Industrial Direct Co., Inc. Class A Report

said it expects to record third-quarter earnings around 18 cents a share, which would be below the 10-analyst forecast of 25 cents. The company, which earned 21 cents in the year-earlier period, cited a declining growth rate in May.



said its full-year 2000 earnings will come in around $1.48 to $1.52 a share, which would be below the seven-analyst estimate of $1.72. Meanwhile, the company said its fiscal 1999 earnings will be in line with analysts' expectations for $1.13 a share. Nova blamed higher costs for operating expenses, taxes and service delivery for the warning. The company also announced the repurchase of up to $250 million in stock.

Sunrise Medical


said it expects to post a break-even fourth-quarter due to changes in Medicare. The five-analyst estimate called for earnings of 12 cents vs. the year-ago loss of 5 cents. The company said it will cut 600 jobs instead of the previously planned 375.

Valley Media


said it sees a first-quarter loss of 8 cents to 10 cents a share due to higher than expected warehouse moving expenses. The two-analyst estimate called for earnings of 2 cents vs. the year-ago loss of 25 cents.

Wet Seal


said it sees second-quarter earnings coming in around the year-ago 35 cents if comparable-store sales don't improve. The four-analyst prediction called for 44 cents.

Woodhead Industries


said it sees third-quarter earnings coming in around 18 cents to 21 cents a share. The four-analyst estimate called for 28 cents vs. the year-ago 25 cents. Woodhead said sales for the industrial communications and connectivity segments of its business haven't met expectations.

Mergers, acquisitions and joint ventures



shareholders approved a merger with


. PacifiCorp shareholders will receive 0.58 of an American Depositary Share, or 2.32 ordinary shares, of ScottishPower.

Walden Residential Properties


said it received several indications of interest to buy the company. While Chief Executive Marshall Edwards said Walden is not actively seeking a buyer, the company retained

J.P. Morgan

to assess the offers.

Offerings and stock actions

Goldman Sachs



(VIAN:Nasdaq) 3 million-share IPO top-range at $16 a share. The price range for the Internet services company's offering was raised to $14 to $16 from $10 to $12.

Cutter & Buck


announced a 1.7 million-share stock offering.


Gilda Radner

so beautifully put it:

Never mind


National Discount Brokers


said that, in view of current market conditions, it will go ahead with its planned 2.6 million-share stock offering. Two days ago, the firm canceled the offering -- due to (then-)current market conditions, of course.



(NRC) - Get National Research Corporation Report

said it rescinded a 6 million-share stock repurchase program to comply with a previously reported merger agreement with

XL Capital

(XL) - Get XL FLEET CORP. Report



New York Times

(NYT) - Get New York Times Company Class A Report

said it would buy back $500 million in stock.



hired Daniel Schulman, president of


(T) - Get AT&T Inc. Report

consumer long-distance and segment marketing business, as its new president.

Bond Focus: Yields Plummet as Greenspan Sees No Emergency


Elizabeth Roy

Senior Writer

Bonds rallied hugely today, pushing the benchmark 30-year Treasury's yield back under 6%, after



Alan Greenspan

let investors know that while at least one interest-rate hike is in the offing, monetary policymakers don't foresee having to raise the fed funds rate more than three times in the months ahead.

Propelled only by Greenspan's

remarks, the long bond soared 1 1/32 to 90 5/32, dropping its yield 11 basis points to 5.96%. Shorter-maturity note yields fell by similar amounts. The two-year note, for example, shed 10 basis points to 5.49% from 5.59%.

In the wake of the Fed chairman's comments to the congressional

Joint Economic Committee

, bond market mavens are in broader agreement than ever that the

Federal Open Market Committee

, the Fed's monetary policy body, will raise the fed funds rate from 4.75% to 5% at its next meeting on June 29-30. Who could disagree? In what

Fleet Financial

chief economist Nicholas Perna called "the most candid testimony I've ever heard him give," Greenspan signaled the move with the words: "When we can be preemptive we should be, because modest preemptive actions can obviate the need of more drastic actions at a later date that could destabilize the economy."

Beyond the repeal of one of the three rate cuts that were administered last fall to massage financial markets that had seized up after Russia defaulted on its foreign obligations, there's much less agreement about what the Fed might do in the months ahead.

"He wasn't clear at all" on that point, said Mark Mahoney, Treasury market strategist at

Warburg Dillon Read

. "People were braced for: 'Stand by for a lot of tightenings.' Instead they got: 'We're going to do 25 at the end of June, and then we're going to think about it.'"

Others are more certain that the first hike will be followed by at least one more.

Greenspan's early reference to the conditions of last fall that prompted the rate cuts and the extent to which they have receded suggests strongly that that's the case, Perna thinks. He puts the odds of a second hike in August at 75%, and the odds of a third in October at slightly better than even.

People who think the Fed might only hike once, as it did in March 1997, are engaging in wishful thinking, Perna says, noting that "extraordinary circumstances" prevailed at the time. Namely, inflation, which had been rising, suddenly started going the other way.

Scott Graham, co-head of government bond trading at

Prudentual Securities

, has similar odds for the first two possible moves, but slimmer ones on the third. "They're going to take a long, hard look, and the timing will coincide with not wanting to do much in front of Y2K," he said.

But as important as the number of rate hikes that lie ahead is the general sense of command of the inflation situation that Greenspan communicated, Graham said. "He said exactly what the Street wanted to hear: The Fed's ahead of the curve, not behind it."

Still, the size of the bond market's move was surprising to some, who'd predicted the bond would have trouble pushing its yield through the 6% level. "We were expecting the market to do better on that type of speech, but we didn't think it would do


much better," Mahoney said. The size of the move testifies to the amount of money that had piled up on the sidelines over the last couple of weeks, as investors waited first for a series of key economic reports (

retail sales

, the

Producer Price Index

and the

Consumer Price Index

) and then for Greenspan, before jumping back in, he said.

Graham said the Treasury market defined a new range today, with a 5.90% yield on the long bond defining the top and a 6.10% yield marking the bottom. At the low-yield end, corporate issuers will tap the market, dimming Treasuries' appeal, he said.

Next up for the bond market: The rate hike itself, and what the Fed has to say in the statement that traditionally accompanies any change in rates.



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