Publish date:

daily07-01-99's DAILY BULLETIN

July 2, 1999


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Market Data as of Close, 7/1/99:

o Dow Jones Industrial Average: 11,066.42 up 95.62, 0.87%

o Nasdaq Composite Index: 2,706.18 up 20.06, 0.75%

o S&P 500: 1,380.96 up 8.30, 0.60%

o TSC Internet: 640.15 up 23.49, 3.81%

o Russell 2000: 454.42 down 3.26, -0.71%

o 30-Year Treasury: 89 18/32, down 17/32, yield 6.013%

Companies in Today's Bulletin:

Yahoo! (YHOO:Nasdaq)

ABR Information Services (ABRX:Nasdaq)

Mirage Resorts (MIR:NYSE)

In Today's Bulletin:

o Asia/Pacific: Poised to Go Public
o Wrong! Rear Echelon Revelations: Cramer Smells A Rat
o Evening Update: Mirage Resorts Sees Quarter Earnings Well Below Estimates
o Bond Focus: Bonds Reverse Yesterday's Course, and Await Payrolls

Also on

Herb on TheStreet: *Extra* Why You Coulda, Woulda, Shoulda Seen Starbucks Coming

And has a senior financial exec of Lernout left?

The Invisible Mouth: See the Economy Run. Go, Fed, Go.

You gotta wonder why the Fed continues to pump away full force. Growth is soaring, and liquidity's making it happen.

Market Features: Freakishly Small May Payrolls Gain Complicates Forecasts for June

Depending on how much May is revised, there's a greater chance of an upside surprise in the June data. And that could unsettle the markets.

Wing Tips: Monsters of the Midway and Rooting Through the Regionals

Plus, we stand corrected on American.

Asia/Pacific: Poised to Go Public


Philip Segal

Special to

Companies in China have had a hard enough time making money in ordinarily profitable industries. So what are investors to make of the initial public offering of a Chinese company laboring in a field -- the Internet -- famous for huge losses?

The company in question is

, an Internet "portal" company which also runs the creatively named


sites. When goes public on the


(probably in mid-July), it will be the first Internet issue ever that concentrates its business on Greater China. The offering is expected to raise $68 million. Maybe more.

Like many Internet companies, lost a pile of money last year -- about $11 million. But as the Internet frenzy sweeps Asia, investors seem just as willing to dismiss this cumbersome concern as they were when American companies preceded them to cyberspace.

"It's hard to see what it has apart from a name -- China -- and what's a name worth?" asks Simon Cartledge, director at

Big Brains

, a Hong Kong consultancy specializing in information technology and telecoms issues in China.

That may be a little harsh. In addition to a name, has a high-profile U.S. underwriter in

Lehman Brothers

. It also has partnerships with

America Online


, which owns 10% of the company, and Hong Kong property group

New World Group

, which has laid claim to another 20%.

It also has the de facto backing of the government: The country's official newswire,

Xinhua News

, owns a chunk of the company.

Despite the hype and the connections, however, hasn't got much of a profile. By China's official, if imperfect, count, stands way down the list of portal popularity. The official

China Internet Network Information Center

puts at No. 17.



is at the top, followed in fifth place by

, which is partly owned by


(INTC) - Get Intel Corporation (INTC) Report


Also near the top is

, a joint venture partly owned by another arm of China's propaganda machine, the official

People's Daily Newspaper


Who has better connections in China, the

People's Daily



? That is something few foreign investors are likely to figure out. The turf wars and power struggles between different government bureaucracies make investing in China's state-backed assets somewhat of a crap shoot.

Even if


is the more powerful, the future may not necessarily be bright for


is, after all, a propaganda department -- and a sclerotic, Leninist one at that. Will party apparatchiks really be the best owners of what is supposed to be a dynamic, fast-changing business catering to the tastes of regular people?

That issue is already cropping up in many evaluations. Duncan Clark, a partner at Internet and telecoms consultancy

BDA (China)

in Shanghai, cautions that Chinese methodology for tracking site popularity isn't the most accurate. He uses an anecdotal method -- just observing how many emails come from each of the Chinese service providers -- and it's apparent that is way down the list of Chinese portals.

"Based on discussions with Internet service providers and content providers, hasn't been a player, really, in the portal market," he says. "It just doesn't have a brand name in China." He says people are more likely to use Sohoo, Yahoo! and


, another Chinese portal.

Analysts also caution that Internet advertising revenue, one of the drivers for portals, was a mere $3 million in China last year. And BDA's Clark says Net advertising will certainly grow in China, maybe to as high as $130 million over the next four years. But is raising an awful lot of money to snag a portion of that.

Perhaps the most troubling aspect of's offering, however, is that it chose to list on the Nasdaq. That highlights one of the most serious issues facing Asian markets. Like, they're not mature enough to attract the traffic.

Wrong! Rear Echelon Revelations: Cramer Smells A Rat


James J. Cramer


ABR Information Services


situation stinks to high heaven. All day today I heard a ton of innocent

explanations of why a stock worth no more than $25.50 closed at 90 Wednesday. Someone said it was a

Russell 2000

rebalancing gone awry. Another guy said that someone may have gotten wrong advice about how much ABRX had to be bought at the close. I suggested that perhaps someone bought the wrong company and got the symbol mixed up. I have seen all of these happen before.

But I now think all of these innocent theories are wrong. I think there may have been some chicanery here. I think that not because of the way the stock went out on the last day of the quarter but because of the way the stock was trading all of this week and some of last week. For weeks this stock had been trading at its intrinsic value of 25.5, the amount


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intended to pay you if you owned one of the 400,000 odd shares that weren't already tendered, for a couple of weeks. It was a foregone conclusion that it should never trade higher.

It then began to rally suspiciously on June 23, when it traded at 25 9/16 on 1000 shares. That's a teenie more than the company intended to pay.

Now, get this: The stock went out at 26 on June 24 on 3400 shares, and then spiked to 26.75 on June 25, on 20,200 shares. None of that buying makes sense.

It is entirely possible, right then, that someone saw this stock trading unnaturally and realized that you might be able to sell the stock short at that price, expecting to cover at 25.5 This would have been an illegal short, in that you could not borrow this stock. You could not get a locate, something that has to be done before you short a stock if you don't want to violate the law. (You could not borrow it to short it because all of the stock that was in the vaults around the Street had already been tendered and the rest was not in a margin account and could not be let out.)

Then on June 28, the stock explodes to 27.5 on 52,200 shares. Now, there can be no innocent explanation for that action. Who would possibly pay that much for something unless he deliberately wanted the stock higher for some purpose? Everyone who bought that day at that price could expect to lose $2, as you were guaranteed no more than 25.50.

It gets worse. On June 29, the day before the ridiculous close, this stock traded to 29 11/16, on 28,300. That's ludicrous. As


stocks are double counted, that's really only 14,150 shares that were bought, but every share was bought stupidly, unless, again, you wanted to take this stock higher, purposefully.

Of course, we all know now that the stock went out at 90, on huge volume, 273,500 shares, but the commentators made it out to sound like this was a last-minute splurge. This stock had been going up all day. People had been nibbling on the stock in the 30s all morning, which, again, is just as preposterous as 90 when you think about it. Thirty thousand shares gapped it to 60 with 10 minutes left. Another 10,000 shares in different little pieces then took it to 90 at the bell, where the notorious 87,000 shares traded in two lots after the close as well as several thousand other shares at that price. None of these buys made any economic sense either.

This simply could not have been an error. That's a pattern of persistent absurd buying.

Now, let's craft some sinister scenarios. Let's say you are a performance fund and you aren't doing so well. You chose not to tender your stock for 25.5, and then, for a minimal amount of buying pressure you walk this stock up systematically for days before the end of your quarter.

You then blitz the stock up in the last half hour. Your position rises in value immensely because of a small amount of buying and you get credit for a giant gain. That's a huge hit that could mask some other big losses.

You have the whole next quarter to make up for the loss that you may have generated.

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You may have been able to work with a friend, someone complicit, who knew to short it to you all of the way up in the last half-hour, so he could make a killing the next day when you walked away and the stock plummeted back to its natural level. You could work out some sort of illegal sharing arrangement with that short-seller to recoup some of that gain.

Here's another explanation, less sinister, but still with a culprit. Someone might have seen the action leading up to the 90 trade and said, "hey this is ridiculous, I am going to go short this over-rated stock."

Each day the stock goes higher, perhaps because someone wants it higher (first example) or perhaps because someone, wrongly, thinks something is going on. The short-seller can't find any stock to deliver (you have to provide that stock, which usually comes from stock loan) and he gets a buy-in notice. He frantically tries to buy back the stock paying absurd amounts, as the stock loan department that needs to deliver the stock to the buyers keeps threatening to buy the short-seller in. (That means go into the open market and buy the stock.) The stock doesn't come down and he fails to cover.

The short-seller stalls and stalls until this Wednesday when, finally, after the close, the firm that is supposed to deliver the stock just goes in and buys it at any price, which in this case is 90. The short is forcibly covered for a brutal loss. The short-seller has no choice. That's how buy-ins work.

The culprit here is the firm that did the buy-in. It is possible that the buy-in firm told one of his buddies, or his own desk, to get the stock in at all costs. That desk then ripped the short-seller's eyes out with that $90 trade, and covered this morning much lower. What a huge profit. (Remember 90 minus where you bought the stock back -- somewhere in the 20s, equals your gain.)

Does stuff like this happen? Heck, I had it happen to me. I was part of a brutal buy-in once for the old

National Community Bankshares

in Rutherford, N.J. I was short it at the time of the S&L crisis. I thought it would go bankrupt and I would not have to cover. One day I got a call from my firm's stock loan department saying that they could not find any more National Community shares to lend me, and that the firm that I had sold the stock to was threatening to do a buy-in in order to be able to deliver the shares I had sold. I stalled for days and days hoping the stock would come down and I could buy it in myself. But it started running up, as it is usually widely known when a short squeeze gets going. (People talk, stock loan departments talk.)

I watched in horror as the stock which I was short about 35,000 shares jumped from 14 to 17 in a matter of two days. On the third day, a big piece of stock, 35,000 shares, traded at 19 long after the market had closed. I had been bought in, unbeknownst to me. I saw the report that I had bought 35,000 shares on my run the next day. (You don't even get told about a buy-in until after it is done sometimes.) I was livid. I still won't talk to the guy who did it to me, and this was 10 years ago. They had paid 19 for me and I took a huge loss. The stock immediately dropped to 15 the next day. The seller of the shares was the desk that did the buy-in. They made four points on their short overnight.

I suspect that something like that may have happened here. Either the seller made out like a bandit (scenario two) or the buyer was a premeditated bandit (scenario one).

This situation demands an investigation. There was nothing innocent here. The Nasdaq and the


should be getting all of the trading records of people who traded this stock and be raising some questions. Right now.


James J. Cramer is manager of a hedge fund and co-founder of At time of publication, his fund had no positions in any stocks mentioned. 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: Mirage Resorts Sees Quarter Earnings Well Below Estimates


Heather Moore

Staff Reporter

Mirage Resorts


warned it sees second-quarter earnings of 7 cents to 10 cents a share, below the 21-analyst

First Call

forecast for 24 cents. The company, which earned 18 cents in the year-ago period, cited competition in the Las Vegas market, low table-games win percentages and a slow start with a new resort in Mississippi.

Inflow into U.S. equity funds for the week ended yesterday totaled $6.2 billion, with 55% going into growth funds, according to

AMG Data Services

. International funds reported inflow into all sectors but Latin America, and inflow accelerated into Asian emerging markets funds and Japan. Europe reported its first inflow in 15 weeks. Among other categories, taxable bond funds reported outflow of $260 million, municipal bond funds reported outflow of $119 million and money market funds reported outflow of $23.1 billion, its largest since Dec. 30, 1998.

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

Earnings/revenue reports and previews

ADAC Laboratories


reported a second-quarter loss of 39 cents a share, in a different millennium that the six-analyst prediction for a 18-cent profit. The company, which made 27 cents in the year-ago period, said it expects third-quarter revenue coming in 12% to 18% below second-quarter revenue. The company cited more stringent revenue recognition policies and increased competition in certain markets.

Advantage Learning Systems


said it expects to take a third-quarter charge of $400,000 related to its acquisition of

Generation 21 Learning Systems



(CAG) - Get Conagra Brands, Inc. Report

posted fourth-quarter earnings of 41 cents a share, on target with the 15-analyst forecast and above the year-ago 36 cents.



said it will take a 3-cent-a-share charge against second-quarter earnings to write off the cost of an unsuccessful well drilled offshore New Zealand.


(CAL) - Get Caleres, Inc. Report

said its June load factor rose 1% to 76%.

Day Runner


warned of a fourth-quarter loss of 14 cents to 18 cents a share, blaming tightened inventories. The five-analyst estimate called for earnings of 10 cents vs. the year-ago profit of 39 cents.

Food Lion


reported second-quarter earnings of 14 cents a share, in line with the 14-analyst estimate and a penny ahead of the year-ago figure.

HA-LO Industries


said it sees second-quarter earnings of 2 cents a share, which would miss the 10-analyst prediction for 17 cents and fall below the year-ago 9 cents. The company said its quarter revenue will fall short of expectations after some customers in Europe and South America deferred marketing programs.



said its June U.S. vehicles sales rose 4.9%. Separately,



said its sales rose 4.8%.


(UNF) - Get UniFirst Corporation Report

reported third-quarter earnings of 38 cents a share, missing the two-analyst forecast of 43 cents and falling below the year-ago 42 cents.

U.S.A. Floral Products


said it sees second-quarter earnings of 10 cents to 15 cents a share, including a gain from anti-dumping duties. The six-analyst forecast called for operating earnings of 26 cents vs. the year-ago 34 cents. The company cited global pricing pressure for the expected shortfall.

Mergers, acquisitions and joint ventures

Brazil's two biggest beverage companies,





, said they will merge. Brahma shareholders will receive one share of the combined company for each share held while Antarctica shareholders will receive 46.6 of a share in the new company for each share held.



agreed to acquire

ADFlex Solutions


for $34.2 million. Innovex also said it sees third-quarter earnings of 17 cents to 19 cents a share, which would miss the four-analyst forecast for 23 cents. The electrical components maker, which made 16 cents a year earlier, blamed a decline in demand for disk drives.


The Senate approved, 97-2,

Lawrence Summers


Robert Rubin's

successor to the


secretary post.

Bond Focus: Bonds Reverse Yesterday's Course, and Await Payrolls


David A. Gaffen

Staff Reporter

The bond market took it on the chin today, giving back about two-thirds of yesterday's gains. The

Federal Reserve

gave the market impetus to rally yesterday when it shifted back into neutral after raising interest rates by a quarter point, but that doesn't change the fact that economic data still show the economy's running like mad.

Treasuries came into the morning under water by almost a point, as a rout in European bond markets caused overseas portfolio managers to tar and feather the Treasury market. From there, things worsened -- the

National Association of Purchasing Management's

manufacturing survey increased to its highest level in almost two years, and bonds were suddenly off 1 18/32 just after 10 a.m. EDT. Lately the 30-year Treasury bond was down 14/32 to 89 18/32. The yield rose 4 basis points to 6.01%.

The NAPM "reaffirmed the fact that the economy is still just rolling along," said Roseanne Briggen, market strategist at

MCM Moneywatch

. "If you read the

Fed minutes

released today from the May meeting, their concern was employment being so tight. The Fed's statement after its announcement was somewhat soft, but they still could tighten again."

Yesterday's swift rally in both the stock and bond markets was a reaction to the Fed's announcement that they've removed their bias toward tightening rates, after shifting the fed funds target from 4.75% to 5%. But the Fed's practice had generally been to shift to neutral -- it's just that until now, the market wouldn't find out about the bias until after the following meeting.

The Fed isn't necessarily finished, because they believe the current pace of growth will eventually cause price or wage inflation. The June NAPM survey, which increased to 57 from 55.2 in May, is more evidence of economic strength. A reading of 50 indicates expansion in the manufacturing sector, and eight of the report's nine components came in at 50 or greater.

The employment component fell to 51.9 from 53.5, but NAPM officials said a reading above 47 is generally consistent with growth in manufacturing payrolls, which hasn't happened in a non-strike influenced month since March 1998. The June

employment report

will be released tomorrow at 8:30 a.m. EDT, with economists calling for 220,000 in new nonfarm payrolls, according to


. The market's also looking for a revision to May's slim 11,000 gain in payrolls.

Jobless claims

have remained at historically low levels, which augers for a strong report. Claims fell to 299,000 for last week, and the four-week moving average dropped to 307,000.

"If it's a strong report, we could really fall apart, and revisit some levels we saw earlier in the week," Briggen said, referring to about 6.11% on the long bond.

If today's NAPM report was the market's final straw, the first straws were European in nature. Selling in the European bond markets, a product of weakness in the euro, caused selling in the market even before the market got a chance to look at the NAPM report.

"From what we were able to identify, there was sympathy selling out of Europe," said Ken Logan, managing analyst at

Thomson Global Markets

. "The portfolios underwater on the Continent decided to sell some Treasuries."

A number of technical reasons that contributed to yesterday's rally were responsible for the lack of followthrough buying today. Briggen said profit-taking in the short end of the curve was witnessed. For investors who bought the June two-year note auction with a coupon of 5.75%, it's a smart move -- today the note yields 5.58%. Since the two-year trades in anticipation of changes in monetary policy, if it looks like the Fed's going to raise rates, higher yields could be on the horizon. In addition, month-end buying also contributed to the rally, but with uncertainty surrounding tomorrow's employment report, investors don't want to buy the market heavily just yet.

Today's minutes revealed the Fed voted 11-0 at the May 18 meeting to leave rates unchanged.


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