Publish date:

TheStreet.com's DAILY BULLETIN

July 1, 1999



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Market Data as of Close, 6/30/99:

o Dow Jones Industrial Average: 10,970.80 up 155.45, 1.44%

o Nasdaq Composite Index: 2,686.12 up 44.01, 1.67%

o S&P 500: 1,372.66 up 21.21, 1.57%

o TSC Internet: 616.66 up 20.09, 3.37%

o Russell 2000: 457.68 up 3.60, 0.79%

o 30-Year Treasury: 90 03/32, up 1 07/32, yield 5.988%

Companies in Today's Bulletin:

Watson Pharmaceuticals (WPI:NYSE)

Microsoft (MSFT:Nasdaq)


Starbucks (SBUX:Nasdaq)

In Today's Bulletin:

o Biotech/Pharmaceuticals: Rumors Fly, but Watson Zips Its Lips
o Wrong! Rear Echelon Revelations: Fed Yanks the Tail of the Bulls
o Evening Update: SEC Probes Microsoft Cash-Reserve Policy; Nike Beats Estimates
o Bond Focus: Fed's Neutral Bias Surprise Sends Yields Tumbling

Also on TheStreet.com:

Market Features: The Fed's Just Getting Warmed Up

Analysts say the Fed is now on track to reverse its three rate cuts made in 1998.


The Invisible Mouth: Alan Tells It on the Mountain

And The Mouth has an interesting interpretation of the commandments inferred from the Fed's actions today.


Jim Griffin: *Extra* FOMC Gets It Half Right. Or Is That an Eighth?

Follow the forward-looking line, and don't bother with the Fed's historical gobbledygook.


Software: ADC May Be Eyeing Architel

Although recently jilted by Amdocs, Architel's clientele, products and fundamentals still have appeal.


Biotech/Pharmaceuticals: Rumors Fly, but Watson Zips Its Lips


Jesse Eisinger

Senior Writer

You want rumors on

Watson Pharmaceuticals


? The market's got 'em. But Watson is above all that. It doesn't comment on that stuff, you scurrilous gossips.

Watson traded as low as 30 1/2 Wednesday, as shorts and longs scrambled to figure out what the hell was going on. It bounced back, but still closed down 4 1/4, or 11%, at 35 1/16 on huge volume of 6.7 million shares.

As all this was going on, Watson's management, acting like six-year olds during a thunderstorm, hunkered down and refused to take calls from institutions and media alike. After the end of the trading day, the company issued a particularly informative statement saying, "The company does not comment on rumors nor make projections relative to earnings prior to the end of the quarter. The company plans to issue its earnings release in the normal course in late July or early August."

Now that's investor relations.

Watson, a grow-by-acquisition generic drug company, is under siege. The

Food and Drug Administration

has been sending it so many warning letters that the agency and the company should be on


Instant Messenger

with each other. The agency has concerns about numerous quality control lapses at Watson facilities, which the company has said it's addressed.

Short-sellers think the company is in trouble given the FDA concerns (which were covered in a


story and a


column), slowing growth and a falling stock price, which could make acquisitions tougher.

Further, well-known forensic accounting firm

Center for Financial Research and Analysis

, run by Howard Schilit, put out a damning report on the company June 18 noting some accounting worries. The report, obtained by


, cites flat sequential revenue growth, increases in inventory and receivables ratios, a cumulative operating cash flow shortfall, lengthy amortization periods for product rights, increasing customer concentration and the warning letters. It'd be nice to hear what the company has to say in response, but it didn't return three phone calls.

But none of these concerns explains today's movement. Instead, rumors were flying.

The word in the morning was that

Donaldson Lufkin & Jenrette

said the company would miss its second-quarter numbers. A DLJ analyst didn't return a call seeking a comment. Oh, neither did Watson.

Another rumor was that the FDA was going to shut down all or part of Watson's Corona, Calif., facility, which has been the subject of agency concern. An officer in the local FDA office wouldn't comment, and an FDA spokeswoman didn't return calls. Neither, for that matter, did Watson.

There were other rumors, some not appropriate for unconfirmed publication, all swirling around the market with different degrees of plausibility. But Watson doesn't comment.

And then there is a recently filed lawsuit against Watson. This isn't a rumor. The suit was filed in Utah District Court in early June. Filed by the founder and former chairman of a company called


that was taken over earlier this year by Watson, the suit alleges that Watson misrepresented what kind of conditions would be placed on new stock William Higuchi would receive.

Watson accounted for the purchase of Theratech as a pooling of interests, not as a purchase. To qualify for pooling accounting, which is more favorable for a company, a deal has to fit several criteria. One is that all "affiliates," such as some major shareholders and directors, be required to not sell stock in the newly combined company before it reports a certain period of combined financials. Before the deal, Watson didn't consider Higuchi an affiliate, meaning it didn't need the former Theratech chairman to sign off on the deal, according to Higuchi's lawyer. But after the deal went through, Higuchi was given restricted stock that he couldn't sell immediately. His lawsuit charges that not being able to sell cost him $11.5 million because the stock fell.

OK, it's small-time, but there's a theory involving the suit that may have contributed to Wednesday's stock action. One West Coast short-seller speculates that Watson needed to get the Theratech acquisition done to get the attendant revenue boost. Therefore, it was convenient to treat Higuchi like a non-affiliate before the merger and then as an affiliate afterwards, so that Higuchi wouldn't be able to immediately unload the stock. Higuchi's attorney, Greg Phillips, wouldn't speculate on why Higuchi was given restricted stock.

What does Watson think? The company didn't respond.

Wrong! Rear Echelon Revelations: Fed Yanks the Tail of the Bulls


James J. Cramer

Another quarter, and another half-year, where it pays to adopt my late mom's philosophy with a stock market twist: "Things always work out in the end -- if you are long."

It is amazing, isn't it, that if you just stayed long the biggest


stocks, the ones that represent the rock-bed core of large mutual funds, you are up 20%. That's extraordinary.

This time the


bailed you out. They got people thinking that things were not so hot. The Fed got people underinvested, particularly in large-cap growth. The Fed made people less bullish. And then the quarter ends, and what do they do? They make you pay for being less bullish by making the most aggressive stand they could make IN FAVOR OF GETTING LONG: small hike, no more tightening bias.

The Fed made things work out all right if you were long. Already, I am hearing cynical thoughts in the background. The Fed is setting the market up for a big fall to cool it off once and for all when the payroll numbers come out. Oh please, not even


can be that jaded and manipulative. Or the Fed really got it wrong. As if at this stage, I am going to second-guess Greenspan after he has helped preside over an incredible reinvigoration of the American economy.

Nah. Enough with the Fed gaming already. You can't handicap these guys. They are like a pick-em game where even the bookies won't make a line. You can't psych them out, and we better start using the word charlatan for those who think they can.

The simple truth, the one that I didn't put enough money behind, is that things simply aren't that bad, and the Fed, after a brief period of being the enemy, is now your friend.

I never fight the tape and I never fight the Fed. The Fed rejoined the side of the bulls today. And the tape, in case you have not noticed, is downright bullish.

Things always work out well in the end -- if you are long.

Random musings



, the Teddy Bear, comes running over to me to tell me that the government is investigating


(MSFT) - Get Report

for something else. I joke that any investigation is a buying opportunity. I turn out to be right. What a stock!


James J. Cramer is manager of a hedge fund and co-founder of TheStreet.com. At time of publication, his fund was long Microsoft. 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: SEC Probes Microsoft Cash-Reserve Policy; Nike Beats Estimates


Heather Moore

Staff Reporter


(MSFT) - Get Report

CFO Greg Maffei told analysts and reporters on a late-afternoon conference call that the

Securities and Exchange Commission

is investigating the software giant's accounting policy for setting aside cash reserves. The company said it's confident the investigation, which was prompted by a

Wall Street Journal

article quoting a former Microsoft internal auditor, won't have a negative impact on earnings.

Mister Softee also said a change in the way it classifies revenue will add 1 cent a share to fourth-quarter earnings and a penny to full-year 2000 earnings. A 27-analyst

First Call

prediction calls for 36 cents in the fourth quarter and a 28-analyst view calls for $1.34 for 2000.


took a look at the Microsoft news in an earlier



(NKE) - Get Report

reported fourth-quarter earnings of 38 cents a share, 1 cent higher than the 16-analyst

First Call

outlook and above the year-ago 4 cents. The retailer said it sees 2000 revenue growth in the mid-single digits. The stock added 1/8 to 63 7/16 in after-hours trading.


(SBUX) - Get Report

shares tumbled to 27 in after-hours trading from a close of 37 9/16 following a 1999 earnings warning. The coffee retailer said it sees full-year earnings of 54 cents a share, below the 20-analyst forecast of 60 cents but above the year-ago 44 cents. Starbucks said it expects the 6-cent difference in estimates to be evenly split between the last two quarters of the fiscal year. The company, which reported its June same-store sales hopped up 7%, cited slower-than-expected growth in non-retail businesses and costs related to its Internet strategy. The company said it would launch a new lifestyle portal -- expected to be running by the 1999 holiday season -- selling coffee, tea, music and products from retail partners.

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

Earnings/revenue reports and previews



announced plans to slash 350 jobs, or 20% of its staff, and take a second-quarter restructuring charge of $75 million to $90 million. The company, which also said it's exiting several international operations, expects to save $6 million every quarter through the plan.



said its same-store sales for the fourth quarter rose 1%; for fiscal 1999, same-store sales fell 3.4%.



said its second-quarter results will miss the four-analyst forecast for a loss of 55 cents a share due to weak sales of its disk drives. The company, which lost $1.40 in the year-ago quarter, also said it will cut 400 jobs and take a second-quarter restructuring charge.

Herman Miller

(MLHR) - Get Report

posted fourth-quarter earnings of 48 cents a share, topping both the seven-analyst outlook for 37 cents and the year-ago 40 cents.



said, excluding a gain from a change in German tax laws, its second-quarter operating earnings will fall below the six-analyst forecast of 56 cents a share. The automotive components maker, which made 47 cents in the year-ago period, blamed production disruptions in the last two weeks of June.

Mergers, acquisitions and joint ventures


Federal Communications Commission



(AT) - Get Report

$1.5 billion acquisition of

Aliant Communications



First Busey

(BUSE) - Get Report

agreed to acquire

Eagle BancGroup


for $26.6 million, or $25.74 a share, in cash.






have teamed up to jointly deliver personalized email messages to users of Yahoo! Mail and other email programs.

Privately held

Paul Allen's Charter Communications

, the fourth largest U.S. cable operator, agreed to buy

Bresnan Communications

for $2.1 billion in cash and stock.

Offerings and stock actions

Credit Suisse First Boston



(CLRN:Nasdaq) 4 million-share IPO top-range at $15. The telecommunications software company is based in Redwood City, Calif.

In other new issues,

Deutsche Banc Alex. Brown


Salem Communications

(SALM:Nasdaq) 8.4 million-share IPO above-range at $22.50. The company is a religious and family radio operator.

Hearst-Argyle Television


said it will issue about $100 million in new stock to its majority shareholder, Hearst, to raise cash for trimming debt.



set a 2-for-1 stock split.

Wind River Systems


rescinded both a $4 million-per-quarter stock repurchase program and a recently announced $25 million increase to the buyback plan. The company said it made the move to be eligible to account for future acquisitions using the pooling-of-interests method.


Following the

Federal Reserve's

rate hike today,

Bank of America

(BAC) - Get Report

raised its prime lending rate to 8.0% from 7.75%.

Bank One

(ONE) - Get Report





First Union




(KEY) - Get Report


PNC Bank

(PNC) - Get Report


Wells Fargo

(WFC) - Get Report

also lifted their prime rates to 8.0% from 7.75%.



filed suit against


(XRX) - Get Report

in federal court, alleging breach of contract and patent infringement. The suit follows H-P's terminating Xerox's license to use its color laser printing technology.



named George Wallner chief executive and Albert Irato chairman.

Two units of

Litton Industries

(LIT) - Get Report

pleaded guilty to federal charges stemming from payments made to foreign consultants in exchange for military contracts and were ordered to pay $18.5 million in fines and restitution.

Bond Focus: Fed's Neutral Bias Surprise Sends Yields Tumbling


Elizabeth Roy

Senior Writer



unexpected decision to drop its official bias in favor of raising the fed funds rate lit a fire under Treasuries in the final hour of the trading day. Most Wall Street economists had expected that the Fed would leave its tightening bias in place.

So even though Fed policymakers raised the fed funds rate from 4.75% to 5% -- a move everyone expected -- the benchmark 30-year Treasury bond rallied as much as 1 20/32 after the 2:15 p.m. EDT announcement, and ended the day up 1 5/32 at 90, trimming its yield 7 basis points to 5.97%. It was the long bond's first close below 6% since June 18.

Shorter-maturity notes, whose yields have a closer relationship to the fed funds rate, rallied even harder. The two-year Treasury note, for example, hopped 9/32 to 100 12/32, slashing its yield to 5.55% from 5.70%.

The rate hike, which Fed Chairman

Alan Greenspan

telegraphed in congressional

testimony on June 17, was the

Federal Open Market Committee's

first policy action since November, when it trimmed the fed funds rate from 5%, and the first rate hike since March 1997.

The Fed's bias is its view about how it might conduct monetary policy in the near future, and this was the first time since adopting a broader disclosure policy in December that policymakers have revealed their bias in conjunction with a rate action.


statement announcing the hike and the bias change said: "Owing to the uncertain resolution of the balance of conflicting forces in the economy going forward, the FOMC has chosen to adopt a directive that includes no predilection about near-term policy action."

Even though historically the FOMC more often than not has reverted to neutral after taking a rate action, most Fed watchers expected the committee to leave the tightening bias in place this time. Announcing a neutral bias at this stage, they reasoned, would signal a smaller likelihood of a second rate hike at the Fed's next meeting on Aug. 24 than actually exists.

ABN Amro

was one of the few firms to correctly predict that the Fed would revert to a neutral bias, and the firm is currently predicting that the Fed will stand pat in August. "If you look at the leading indicators of inflation, there are some pressures in the background, such as tight labor markets, but you don't see most of those things turning up yet," market strategist Charles Reinhard explained. They include the supplier deliveries component of the

Purchasing Managers' Index

, the June edition of which comes out tomorrow, and industrial materials prices, he said.

The Fed made clear in the conclusion of its statement that additional rate hikes can't be ruled out. "The Committee, nonetheless, recognizes that in the current dynamic environment it must be especially alert to the emergence, or potential emergence, of inflationary forces that could undermine economic growth," it said.

Still, Treasuries rallied on the unassailable logic that a Fed with a neutral bias is less likely than a Fed with a tightening bias to hike rates again in August. The fed funds futures contracts traded on the

Chicago Board of Trade

reveal exactly how much less likely. Yesterday, the September futures were discounting a rate of 5.20%, or an 80% likelihood of a second rate hike in August. At the end of today, they discounted a 5.13% rate, or a 52% chance of a second hike.

Now the focus turns to the economic reports that will tip the balance between now and then, two of which are due out this week. Tomorrow brings the June Purchasing Managers' Index, the key manufacturing indicator. Today, the June

Chicago Purchasing Manager's Index

, a regional manufacturing indicator, unsettled the Treasury market in the early hours with a strong reading of 60, up from 57.9 in May. And Friday brings the June

employment report


"Every piece of data is going to be scrutinized to determine if they will go in August or not go in August," said Marilyn Schaja, money-market economist at

Donaldson Lufkin & Jenrette

. "They left it wide open."



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